Category Archive for: International Trade [Return to Main]

Monday, May 14, 2007

Paul Krugman: Winners and Losers from Trade

Paul Krugman follows-up his column "Divided over Trade" (see the post below this one) with a discussion of the winners and losers from trade:

Notes on 5/14 Column, "Divided Over Trade", by Paul Krugman, Money Talks: A few notes on trade and wages.

Many people think that Economics 101 says that trade is good for everyone. Alas, it isn't so. Way back in 1941 Paul Samuelson and Wolfgang Stolper pointed out that even the most conventional economic analysis suggests that some group within a country - and possibly a large group - actually loses from trade. It's even in Wikipedia.

Intuitively, here's the logic. Imagine that America exports stuff that is produced mainly by college-educated workers, while those industries that compete with imports mainly employ less-educated workers. Now suppose the price of imports falls. Then in order for import-competing industries to cope, the wages of less-educated workers have to fall — in fact, they have to fall more than the price of imports, because other costs of import-competing production, namely the wages of highly educated workers, will actually rise. So if import prices fall, say, 10 percent, wages of less-educated workers will fall, say, 15 percent.

But don't these workers gain from cheaper imports? Yes, but not enough. Imports are only part of what people consume, so while wages fall more than import prices, the overall cost of living falls less than import prices — say, 15 percent fall in wages, only 5 percent fall in the cost of living. Trade reduces the real wages of low-education workers.

So why did people like me say in the '90s that globalization wasn't a big problem for U.S. workers? Because the numbers didn't look big enough. Bill Cline of the Institute for International Economics posted a pretty good overview of that discussion here.

Since then (Cline's numbers ran through 1993), however, the numbers have grown. You can get a sense of the changes from the World Trade Organization data. U.S. imports from China, Mexico and the "six Asian traders" went from about 3 percent of G.D.P. in 1995 to almost 5 percent in 2005. What's more, the center of gravity of those imports has shifted to the lower wage countries. Estimates of labor costs are calculated by the Bureau of Labor Statistics, Table 1 and p. 5 for China.

The growth of China's exports, in particular, has undermined one of the arguments I and others (including Cline) made for not worrying too much: we thought the low-wage manufacturing exporters would, as their own education levels increased, place less pressure on low-education workers here. Well, the original group of exporters did move "upscale" — but along came China (and to a lesser extent Mexico), taking their place and then some. The overall wage rate of U.S. trading partners relative to the U.S., calculated in that B.L.S. report, rose through 1990, but it has stagnated since then — and the index doesn't include China. Add that in, and our trade is increasingly with low-wage countries. So the problem has gotten bigger.

As I said in the article, however, the big problem is what to do about it. And a return to protectionism would just have too many negative effects.

Paul Krugman: Divided Over Trade

Paul Krugman discusses the recent trade deal and whether the inclusion of provisions such as labor standards will prove to be a substantial benefit to U.S. workers:

Divided Over Trade, by Paul Krugman, Commentary, NY Times: Nothing divides Democrats like international trade policy. That became clear last week, when the announcement of a deal on trade between Democratic leaders and the Bush administration caused many party activists to accuse the leadership of selling out.

The furor subsided a bit as details ... emerged... But the Democrats remain sharply divided between those who believe that globalization is driving down ... wages..., and those who believe that ... international  is ... essential... What makes this divide so agonizing is that both sides are right.

Fears that low-wage competition is driving down U.S. wages have a real basis in both theory and fact. When we import labor-intensive manufactured goods..., the result is reduced demand for less-educated American workers, which leads ... to lower wages... And no, cheap consumer goods at Wal-Mart aren’t adequate compensation.

So imports from the third world, although they make the United States as a whole richer, make tens of millions of Americans poorer. How much poorer? In the mid-1990s ... economists, myself included, crunched the numbers and concluded that the ... effects ... on the wages of less-educated Americans were modest, not more than a few percent.

But... We’re buying a lot more from third-world countries today... Trade still isn’t the main source of rising economic inequality, but it’s a bigger factor than it was. So there is a dark side to globalization. The question, however, is what to do about it.

Should we go back to old-fashioned protectionism? That would have ugly consequences:... other wealthy countries would follow suit, closing off poor nations’ access to world markets.

Where would that leave Bangladesh, which is able to survive ... only because it can export clothing and other labor-intensive products? Where would it leave India ... if barriers to trade ... went back up?

And where would it leave Mexico? Whatever you think of Nafta, undoing the agreement could ... have disastrous economic and political consequences south of the border.

Because of these concerns, even trade skeptics tend to shy away from ... outright protectionism, and to look for softer measures, which mainly come down to trying to push up foreign wages. The key element of the new trade deal is its inclusion of “labor standards”: countries ... will have to allow union organizing, while abolishing child and slave labor.

The Bush administration, by the way, opposed labor standards, not ... to keep imports cheap, ... it was afraid that America would end up being forced to improve its own labor policies. So the inclusion of these standards ... represents a real victory for workers.

Realistically, however, labor standards won’t do all that much for American workers. No matter how free third-world workers are to organize, they’re still going to be paid very little, and trade will continue to place pressure on U.S. wages.

So what’s the answer? I don’t think there is one, as long as the discussion is restricted to trade policy: all-out protectionism isn’t acceptable, and labor standards in trade agreements will help only a little.

By all means, let’s have strong labor standards in our pending trade agreements... But if Democrats really want to help American workers, they’ll have to do it with a pro-labor policy that relies on better tools than trade policy. Universal health care, paid for by taxing the economy’s winners, would be a good place to start.

Previous (4/30) column: Paul Krugman: Another Economic Disconnect
Next (5/18) column: Paul Krugman: Don’t Blame Bush

Thursday, May 10, 2007

Populists and Globalization

Looking for more debate about globalization, issues like whether to insist on environmental and labor standards as part of trade negotiations? Then you'll want to go read:

With the exception of a few quarrels here and there, I'm with Jamie. [Note: You may have to register at American Prospect, but it's a very short form and doesn't take long and all three articles are free.]

Replaying the "Globalization Numbers Game"

Not too long ago, I posted Dani Rodrik's response to my challenge to tell us what was wrong with estimates of the gains from trade, and I used a 2006 paper by Scott Bradford, Paul Grieco, and Gary Hufbauer, "The Payoff to America from Globalisation," cited in a recent Ben Bernanke speech as an example. Dani claimed that the gains the authors estimate overstate the true gains due to some of the modeling choices the authors make.

In the paper, the authors estimate the gains from trade raise incomes anywhere from $4,000 to $12,000 per household, but Rodrik raised several points challenging these estimates as too high.

At the end of the post, I promised to follow-up soon and as part of that I sent an email to the authors of the study offering them a chance to respond. Paul Grieco has has taken me up on the offer and his remarks are below. As he notes, an additional follow-up is expected from the other authors and I will post that when it becomes available:

Paul Grieco: First, let me say that I find Dani Rodrik's work interesting and compelling and I thank him for taking the time to comment on our paper. I also want to be very clear that these are my remarks alone, they do not necessarily represent the views of my coauthors or the IIE (now the Peterson Institute). They will be giving a more complete response on the Peterson website in a few days.

Rodrik makes the very good point that the results that come out of any empirical research are heavily dependent on the assumptions that go in. In producing the numbers in the papers we make lots of assumptions. We relied heavily on the work of others in pulling together estimates from a variety of sources. We tried to document our sources and our assumptions as carefully as possible. Many of the points which Rodrik brings up are actually explicitly addressed in the text. We believe the assumptions that we made were reasonable, although clearly others can disagree, I hope your readers will look at the paper and see for themselves.

I think Rodrik's critique fails to consider his own assumptions. Namely, he argues our numbers are too large, but fails to mention that his alternatives assume (rather than show) that a lot of the effects we try to capture don't exist (such as improved product variety, technological spillovers, and import competition, see box 2.1, page 66-67 of our paper). For example let's look at the back of the envelope number. He calculates the gains to be 0.25% of GDP compared to our lowest estimate of 3.4% of GDP.

Rodrik presents this as a ballpark estimate, but what does it assume? Among other things, it assumes that foreign and domestic goods are perfect substitutes, and that the US charges uniform tariffs on all imports. We all know that the US tariff schedule is far from uniform, instead some goods are have prohibitive tariffs, while others are tariff-free. This in and of itself can generate distortions that are much worse than what an "equivalent" uniform average tariff would produce. Perfect substitutability assumes away any gains from variety (among other things) and removes the possibility of meaningful import competition (since all goods are the same from the start). Neither of these assumptions seem very likely to me, and I feel fairly confident in saying they bias Rodrik's estimate downward. Given this, Rodrik's ballpark number is best understood as a lower bound on the gains from liberalization. As such, I'm not sure how it can serve as a reasonable reality check. In our paper, we explicitly say we are trying to account for gains which this number rules out by it's not much of a surprise that we get a bigger number.

Next there is the issue of CGE models. In our paper we do cite several CGE models (including one based on the GTAP model from Purdue), not just the one from the University of Michigan. Of course all of these models are built on a large number of assumptions. Having read the work, it is my belief that all of these researches take a lot of care in creating and documenting their models. The real learning comes from understanding how estimates change with changing assumptions. Rodrick seems to imply that a constant returns to scale model is a more realistic assumption, but I'm not sure why, since the world is full of examples of increasing returns to scale. For the record, Rodrick's preferred model omits services liberalization. Services are a huge part of the US economy today, so ignoring this sector must cause a downward bias.

My last comment is really just a technical issue. Rodrick states that, "Rose says 'belonging to a regional trade agreement raises bilateral trade by (exp(1.17)-1»)222%,' whereas Bradford et al. use 118%, without explanation."

Our paper is online here:, the sentence Rodrick is referring to is footnoted (footnote 60, page93):

The dependent variable was the natural log of bilateral trade, the regional FTA coefficient controlling for fixed country-pair effects is 0.78, 100*(exp(0.78)-1)= 118 percent. This is the smallest regional FTA coefficient of the three reported benchmark regressions.

I assume that Rodrick was looking at a different version of the paper where this footnote does not appear for some reason. Nonetheless I wanted to set the record straight.

If you look at table 1 of Rose (2003,, the .78 estimate is right in the table, just next to the 1.17 coefficient. The reasons we use .78 over 1.17 are pretty simple. It seems reasonable to us that country-pairings that naturally trade a lot will be more likely to form an FTA, and this would imply that the OLS and random effects estimators will be biased upwards, while the fixed effects estimator won't have this problem. Therefore, it's best to use the fixed effects estimator. It seems a little odd that here Rodrick, who says we are trying to inflate numbers, is now criticizing us for not using one we believe is biased upwards.

Update: Dani Rodrik responds (briefly).

Wednesday, May 09, 2007

"We Need Alan Blinder to Pull His Weight"

More blowback from the Alan Blinder article in the Washington Post. This is Clive Crook in the Financial Times:

Unfounded new fears on free trade, by Clive Crook, Commentary, Financial Times: ...Princeton’s Alan Blinder ... has changed his mind about liberal trade – kind of. He now finds that it is not always such a good thing. ...[I]n The Washington Post last weekend ... Mr Blinder says he is shocked, shocked, by the vigorous reaction he has aroused. He is being accused of apostasy. “Who, me? What did I say?” he asks.

However disingenuous the posture may be, Mr Blinder is right to be puzzled because, in one way, he is saying nothing new. His main point is that technological change is broadening and strengthening the disruptive effects of trade. ... Over the next few decades, millions of jobs will be offshorable. ...

Yet offshoring is just another kind of trade, as he notes. And trade is still good, he insists, for all the traditional reasons. ... Lately, though, Mr Blinder has been emphasising the downside. ... “These forces,” he points out, “don’t look so benign from the point of view of an American computer programmer or accountant”, whose job might be at risk from foreign competition for the first time.

That is true, but how benign did those forces look to factory workers 20 years ago? Do accountants have larger claims on our sympathies than steel workers? Mr Blinder used to argue that trade creates jobs as well as destroying them and raises living standards in the process. ... Those arguments were correct then and, in Mr Blinder’s view, still are. So, again, what has changed?

“There’s something new about the coming transition to service offshoring ...[it] will be large, lengthy and painful.” Very well, but what is wrong with “large”? If the effects of trade are advantageous, it is better if they are large. Why prefer small gains to big gains? “Lengthy” also seems fine. If ... the shift is stretched over several decades, as Mr Blinder expects, it may not be all that “painful”. The changes will merge into the ordinary rate of job churn...

Mr Blinder is right to draw attention to the potential scale of offshoring (and onshoring, ... this goes both ways). He has opened people’s eyes to how far-reaching a shift this may be. He is also right, in my view, to call for an array of policies aimed at maximising the benefits and minimising the adjustment costs of this Third Industrial Revolution, as he calls it. He wants better education and opportunities for retraining, “more science and engineering, more spending on R&D, keeping our capital markets big and vibrant, and not letting ourselves get locked into ‘sunset’ industries”. Amen to all that. But weren’t these policies sensible before? I recall Mr Blinder saying they were. ...

He says he wants to save free trade from itself. “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate.” Yes, that is always a risk. But is it really going to be more effective to chant “you’re right, free trade is bad for you”?

Let me suggest another approach. Keep on patiently explaining why, implausible as it seems to non-economists, liberal trade in goods and services really is good... Explain why, odd as it may seem, offshoring really is no different. Keep arguing for policies that widen the gains and help the victims, to be sure, but never concede those main points, or suppose they do not need defending. No question, it is thankless and repetitive work, but until it can be offshored, we need Alan Blinder to pull his weight.

Robert Samuelson: China's Trade Time Bomb

I'm weary of the free-trade argument today. If you're so inclined, have at it - I'm going to sit this one out:

China's Trade Time Bomb by Robert J. Samuelson, Commentary, Washington Post: It sometimes seems as if almost everything we buy comes from China: DVD players, computers, shoes, toys, socks. This is, of course, a myth. In 2006, imports from China totaled $288 billion, about 16 percent of all U.S. imports and equal to only 2 percent of America's $13.2 trillion economic output (gross domestic product). Does that mean we don't have a trade problem with China? Not exactly.

China is already the world's third-largest trading nation and seems destined to become the largest. On its present course, it threatens to wreck the entire post-World War II trading system. Constructed largely by the United States, that system has flourished because its benefits are widely shared. Since 1950, global trade has expanded by a factor of 25. By contrast, China's trade is mercantilist: It's designed to benefit China even if it harms its trading partners.

There's a huge gap in philosophy. By accident or design, China has embraced export-led economic growth. The centerpiece is a wildly undervalued exchange rate. ... The resulting competitive advantage props up exports, production and jobs. ...

Despite popular impressions, China's trade offensive hasn't yet seriously harmed most other economies. For example, ... that hasn't stymied job creation; the U.S. unemployment rate is 4.5 percent. And world economic growth has accelerated.

But what's been true in the past may not be true in the future. The huge U.S. trade deficits, fed by Americans' ravenous appetite for consumer goods and heavy borrowing against rising home values, stimulated economies elsewhere, including China's. Now that stimulus is fading as U.S. home prices weaken and consumers grow more cautious. For China to expand production, demand must come from its own consumers or other nations... There's the rub.

Update: PGL has lots more to say about this. As he says in an email, "OK, you outsourced that one to this Angrybear."

Continue reading "Robert Samuelson: China's Trade Time Bomb" »

Monday, May 07, 2007

Rodrik: The Globalization Numbers Game

Dani Rodrik responds to my challenge. This is how it's done:

The globalization numbers game, by Dani Rodrik: Many many years ago ..., I heard Gary Hufbauer tell an anecdote at a conference on international trade. A government economist is called in by his superior, who tells him "Look, I have to make a case for this policy in front of Congress, and I need a number real bad." The economist responds, "well, I haven't done a proper analysis, so I can give you a real bad number." Perhaps it was a true story based on Gary's own government experience.

I am reminded of this story by Mark Thoma's post, which focuses on the magnitude of the gains from globalization. He says "there's something important that's generally missing from the attacks on globalization's supporters, actual evidence." He refers to a Bernanke speech and at length to a paper which Bernanke cites by Bradford, Grieco, and Hufbauer (yes, the same Hufbauer). The Bradford et al. study argues that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household (or 3.4-10.1% of GDP). That is a whole chunk of change! Thoma writes:

Continue reading "Rodrik: The Globalization Numbers Game" »

Sunday, May 06, 2007

knzn: The Blinder Approach

knzn has questions for Alan Blinder:

The Blinder Approach, by knzn: OK, Alan Blinder, there’s something here I don’t understand. I get the point that things may get tough for a lot of American workers over the next 30 years. I get the point that this makes the case for providing better social insurance stronger than it used to be. I get the point that it makes the case for encouraging more research and development stronger than it used to be. I get the point that it makes the general case for facilitating more and better education and training stronger than it used to be. But here’s what I don’t get:

…we need to rethink our education system so that it turns out more people who are trained for the jobs that will remain in the United States. … many electronic service jobs will move offshore, whereas personal service jobs will not. Here are a few examples. Tax accounting is easily offshorable; onsite auditing is not. Computer programming is offshorable; computer repair is not. Architects could be endangered, but builders aren't. Were it not for stiff regulations, radiology would be offshorable; but pediatrics and geriatrics aren't. Lawyers who write contracts can do so at a distance and deliver them electronically; litigators who argue cases in court cannot.

So apparently we want to train people for onsite auditing, computer repair, building, pediatrics, geriatrics, litigation, and similar occupations. But why? Don’t we already have enough – or at least almost enough – auditors, computer repair people, builders, pediatricians, geriatricians, and litigators? Is there any reason to expect that offshoring will increase demand for those occupations? What model do you have in mind wherein foreign competition increases the demand for non-tradable services?

In my crass Mundell-Fleming conception, here’s what happens when offshoring occurs. Suppose a lot of people from India learn to do American tax accounting, computer programming, architecture, and so on, undercutting American service producers. A bunch of American accountants, programmers, architects, and such will lose their jobs. The Fed will notice the slack labor markets and cut interest rates. As a result, the dollar will depreciate, causing an increase in demand for some other American products. Which products, exactly, we don’t know, but they have to be products that are exportable – not auditing, computer repair, and building, and pediatrics. There will be excess demand for certain kinds of workers, but not, ultimately, for the categories of workers whose jobs can’t move offshore.

I grant you that we do not live in a small country with perfectly substitutable assets, so things won’t happen exactly the way I suggested. There will be a temporary demand for certain non-tradable services – specifically the ones that are interest-rate sensitive, like building. That, in fact, is already happening, or perhaps has just finished happening. But today I think one might be rather glad to have passed up the opportunity to train for a job in the construction industry. In the longer run, surely we cannot expect that foreigners will be willing to finance ever higher amounts of non-tradable services for Americans. Perhaps we can maintain a large trade deficit, but surely we can’t keep running ever larger trade deficits, to create ever greater demand for domestic non-tradable services.

So do we need to rethink our educational system? Perhaps, but as to how, exactly, I have no idea. I don’t understand why we would want to restructure it to turn out more people trained for non-tradable service jobs.

Saturday, May 05, 2007

Blinder: Free Trade's Great, but Offshoring Rattles Me

Continuing our discussion of globalization, this is Alan Blinder who made quite a splash when he predicted in a Foreign Affairs article that offshoring would cause major problems for American workers. Here he summarizes his concerns and discusses how to minimize the costs of to workers as globalization continues to alter the global distribution of jobs:

Free Trade's Great, but Offshoring Rattles Me, by Alan S. Blinder, Commentary, Washington Post: I'm a free trader down to my toes. ... Yet lately, I'm being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries ... to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.

When I say this, many of my fellow free-traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind? (Answer: I think not.) Have you forgotten about the basic economic gains from international trade? (Answer: No.) Are you advocating some form of protectionism? (Answer: No !) Aren't you giving aid and comfort to the enemies of free trade? (Answer: No, I'm trying to save free trade from itself.)

The reason for my alleged apostasy is that the nature of international trade is changing before our eyes. We used to think, roughly, that an item was tradable only if it could be put in a box and shipped. That's no longer true. ... It's electrons that move, not boxes. We're all familiar with call centers, but electronic service delivery has already extended to computer programming, a variety of engineering services, accounting, security analysis and a lot else. And much more is on the way.

Why do I say much more? Because two powerful, historical forces are driving these changes, and both are virtually certain to grow stronger over time.

Continue reading "Blinder: Free Trade's Great, but Offshoring Rattles Me" »

Friday, May 04, 2007

The Benefits from International Trade

Lately, the usual crowd has surfaced to cast aspersions at those who support enhanced globalization. But while there's no shortage of shrill attacks in much of the writing, there's something important that's generally missing from the attacks on globalization's supporters, actual evidence.

In a recent speech, Federal Reserve Chairman Ben Bernanke said:

How important is [international trade] for the health of our economy to trade actively with other countries? As best we can measure, it is critically important. According to one recent study that used four approaches to measuring the gains from trade, the increase in trade since World War II has boosted U.S. annual incomes on the order of $10,000 per household (Bradford, Grieco, and Hufbauer, 2006). The same study found that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household. Other research has found similar results. Our willingness to trade freely with the world is indeed an essential source of our prosperity--and I think it is safe to say that the importance of trade for us will continue to grow.

I was going to summarize the paper by Bradford, Grieco, and Hufbauer, "The Payoff to America from Globalisation," but I came across this op-ed from the Washington Post from June, 2005 from two of the three authors that explains the results in the paper very well, so there's no reason for me to do it again. Here's what they have to say:

The Payoff From Globalization, by Gary Clyde Hufbauer and Paul L.E. Grieco Washington Post, June 7, 2005: ...The "modern" debate over trade barriers can be traced to the 19th century. Then as now, the debate has been dominated by special interests (land barons vs. merchants in the 19th century; the AFL-CIO vs. the Chamber of Commerce today). There is no question that trade liberalization creates winners and losers. Affected citizens and companies have every right to plead their case.

But Congress should consider how freer trade affects the nation as a whole. Since World War II the United States has led the international quest to liberalize world trade and investment. With leadership from the White House, Congress has slashed the simple average tariff rate from 40 percent in 1946 to 4 percent today, and other industrial nations have done much the same. After a half-century of steady liberalization it is fair to ask, what do Americans have to show?

As it turns out, quite a lot. Using four different methods, we estimate that the combination of shrinking distances -- thanks to container ships, telecommunications and other new technologies -- and lower political barriers to international trade and investment have generated an increase in U.S. income of roughly $1 trillion a year (measured in 2003 dollars), or about 10 percent of gross domestic product. This translates to a gain in annual income of about $10,000 per household.

Unfortunately for the cause of continued liberalization, Americans do not receive this money as a check marked "payoff from globalization." Instead, the payoff is hidden within familiar channels: fatter paychecks, lower prices and better product choices (compare the telephones available now with the standard black model of 1980).

Nevertheless, each of our four methods uncovers a large payoff. First, we parse international data that correlate the expansion of international trade with economic growth. This shows that the increase in U.S. income sparked by more intense trade equates to 13.2 percent of GDP. In the second method, we calculate how lower tariffs stimulate U.S. productivity through competitive forces and bring greater product choices to U.S. producers and consumers. The estimate for these benefits comes to 8.6 percent of GDP. Third, we draw on a computable general equilibrium model to suggest how today's economy would react to the restrictive Smoot-Hawley trading environment of the 1930s. That exercise indicates an estimate of 7.3 percent more in GDP from liberal trade. Finally, we calculate the productivity benefits arising from use of imported components and find a benefit of 9.6 percent of GDP. While none of the four estimates is perfect, the broad result is clear: The benefits of trade and investment liberalization are positive and large.

Continue reading "The Benefits from International Trade" »

Tuesday, May 01, 2007

The China Syndrome

Paul Krugman responds to comments claiming that low U.S. investment is caused by money going overseas, to China in particular:

Paul Krugman, via email: Well, that's weird. I've gotten a lot of comment alleging that the reason for low investment in the US is that all the money is going overseas, especially to China - and quite a lot of the comment was vituperative: I'm an idiot, I don't anything about the real world, etc. etc. I've gotten accustomed to that sort of thing from the right - in fact, I feel like a failure if I don't get accused of being a liar and a traitor after each column - but what's going on here? Anyway, a note on the numbers. As I already pointed out at the Times, almost as much direct foreign investment is coming into the US as is going out. But what really amazes me is the China obsession. China is a huge export machine, and I take the impact of Chinese exports on US workers quite seriously. But it is not, repeat not, a major destination of US corporate investment. Look at the BEA numbers: China is only about 1 percent of the total stock of US direct investment abroad, less than $20 billion. Oh, and one fallacy I've seen confidently asserted is that FDI doesn't count retained earnings. Sorry, but it does. There are some real questions about mismeasurement of the overall investment position - dark matter and all that - but there's no way you can make the case that corporations are taking all their profits and putting it into China.

A summary of his comments from the Times is here: Globalization is Not the Cause of Low Business Investment.

Ben Bernanke: Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy

Ben Bernanke on the benefits and challenges of free trade. The speech covers:

Here's the speech itself. I expect this will convert all you doubters into enthusiastic supporters of the free trade agenda:

Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy, by Ben S. Bernanke, Chair, Federal Reserve Board: Trade is as old as humanity, or nearly so. Archaeological sites demonstrate that ancient peoples traded objects such as rare stones and shells across fairly long distances even in prehistoric times (Guisepi, 2000). Over the centuries, with stops and starts, the volume of trade has expanded exponentially, driven in large part by advances in transportation and communication technologies. Steamships replaced sailing ships; railroads succeeded canal barges; the telegraph supplanted the Pony Express. Today, in a world of container ships, jumbo jets, and the Internet, goods and many services are delivered faster and more cheaply (in inflation-adjusted terms) than ever before.1

Continue reading "Ben Bernanke: Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy" »

Sunday, April 29, 2007

Krugman: Distribution and Trade Policy

Paul Krugman adds a few more thoughts via email related to the recent trade policy discussion (fully covered here):

Paul Krugman: Another thought or two on distribution and trade policy:

The problem of losers from trade isn't new, obviously, either as a fact or concept. But if you look at the history of trade policy - say, in Matt Destler's book it's hard to avoid the sense that the issue has gotten bigger and harder. His final chapters have a definite sense both of nostalgia for the good old days and foreboding.

I'd put it like this: in the old days, when GATT negotiations were mainly with other advanced countries, the groups hurt tended to be highly specific and local - the left-handed widget makers of Northern South Dakota, worried about competition from their counterparts in Upper Lower Swabia. Economists could in good conscience argue that while individual groups were hurt by trade liberalization in their specific sector, the great majority of Americans benefitted from general trade liberalization. And politicians made trade deals by packaging together the interests of exporters, to offset the parochial interests of import-competing industries

But now we're talking about broad swaths of the population hurt by trade. It's a good bet that almost all US workers with a high school degree or less are hurt by Chinese manufactured exports, at least slightly. You could in principle put together win-win packages - say, trade liberalization together with an increase in the EITC paid for with higher taxes on high-income Americans, who come out winners from trade. But the reality is that we don't make those deals.

For those who like their jargon, by the way, I'm basically saying that the right model for thinking about this has gone from many-good specific factors to Heckscher-Ohlin.

I don't have answers to this. The moral case for open markets is their importance to poor countries: America would do OK even in a highly protectionist world, but Bangladesh wouldn't. The domestic politics of trade, however, are now very hard, and getting harder.

Update: Brad DeLong follows up with his solutions to this problem.

Was It All in Ohlin?

Given the recent interest in trade models, let me add this from Paul Krugman who knows a thing or two about this area of economics (I should note that it's a bit theoretical in spots, e.g. see figures 1 and 2, this is not the Krugman you read on the pages of the New York Times. However, even if the details of the graphs and other theoretical points are not completely clear to you, the larger points come through):

Was It All in Ohlin?, by Paul Krugman, October 1999: Let me begin with an embarrassing admission: until I began working on this paper, I had never actually read Ohlin's Interregional and International Trade. I suppose that my case was not that unusual: modern economists, trained to think in terms of crisp formal models, typically have little patience with the sprawling verbal expositions of a more leisurely epoch. To the extent that we care about intellectual history at all, we tend to rely on translators - on transitional figures like Paul Samuelson, who extracted models from the literary efforts of their predecessors. And let me also admit that reading Ohlin in the original is still not much fun: the MIT-trained economist in me keeps fidgeting impatiently, wondering when he will get to the point - that is, to the kernel of insight that ended up being grist for the mills of later modelers.

Continue reading "Was It All in Ohlin?" »

Saturday, April 28, 2007

On the Other Hand . . . . Rodrik versus Mankiw (Others Also Weigh In)

Dani Rodrik and Greg Mankiw are debating a couple of issues. (Update: Paul Krugman also comments on this debate, see the first update at the end of the post. Update: See the response from Greg Mankiw and and his follow-up. Update: Tyler Cowen and Kash Mansori add their thoughts. Update: David Altig too. Update: Paul Krugman adds more thoughts. Update: Two more from Dani Rodrik. Update: PGL at Angry Bear follows up. Update: Two more from Alex Tabarrok and Brad Setser)

The first is the effect, if any, of globalization of the aggregate price level versus its effects on relative prices (PGL at Angry Bear comments on this as well), and the second is how to present economic results to the public and policymakers. e.g. how much to qualify results when advocating for policies such as free trade. I want to focus more on the second issue, but I'll include both:

The debate started with this post by Daniel Drezner:

The greatest threat this blog has ever faced, by Daniel Drezner: ...I have to take issue with the central argument of this Rodrik post:

Imagine some change in the economy leaves Tom $3 richer and Jerry $2 poorer, and I ask you whether you approve of this change. Few economists, regardless of their political and philosophical orientation, would be able to give a straight answer without asking for more information.... In other words, most of us would care about the manner in which the distributional change occurred--i.e., about procedural fairness....

Yet when we teach comparative advantage and explain the gains from trade, we typically overlook this important conclusion. We expect our students to focus on the net gain triangles and disregard the rectangles of redistribution. ...

Continue reading "On the Other Hand . . . . Rodrik versus Mankiw (Others Also Weigh In)" »

Tuesday, April 24, 2007

Robert Shiller: The Taming of 'Speculative Capitalism'

Robert Shiller says Nicolas Sarkozy has wrong-headed ideas about how to insulate workers from the consequences of globalization:

The taming of 'speculative capitalism', by Robert Shiller, Project Syndicate: Nicolas Sarkozy, ...[a] contender in the French presidential election, recently lashed out against what he called "speculative capitalism," and says he wants to "moralize the financial zone" created by the euro. What does Sarkozy mean by "speculative capitalism?" Something immoral, apparently, but what? The term has rarely been used before, and seems to be redundant. After all, capitalism is practically a synonym for speculation, isn't it?

Sarkozy is expressing a wave of sentiment that is neither unique to his party nor to France. At stake with his comments are emerging ideas and attitudes that will inform the 21st century economy. So we should think hard about what "speculative capitalism" means.

Sarkozy has called free trade "a policy of naivete," and wants to take ... steps that would stand in the way of economic globalization. ... Protecting France from speculative capitalism seems to mean interfering with free trade to protect local jobs.

To be sure, Sarkozy is right to note the enormous risks that workers and their communities face in this rapidly globalizing world. But ... this ... should not mean protecting existing jobs come what may. ...

Concerns about free trade similar to Sarkozy's are gaining strength around the world. In an article last year in ... Foreign Affairs, Alan Blinder, a former adviser to President Bill Clinton and vice chair of the U.S. Federal Reserve Board, argued that the process of globalization has the potential to cause massive job loss in the future. Given that electronic communications technology has a powerful potential to replace employees with others who are thousands of miles away, we may now be seeing only the beginning of this process.

Blinder is absolutely right that the problem could get worse. Deniers of the problem -- such as economist Jagdish Baghwati -- cannot prove that the worst will not happen. We ought to prepare for the possibility of massive turmoil in our economies in coming years, even if we cannot prove that it will happen, just as we should take steps against global warming, even if some scientists doubt that it is a problem.

According to Blinder, governments should encourage education for jobs that are harder to outsource overseas. He wants the government to subsidize ... jobs ... which cannot be delivered over the Internet...

Subsidies, of course, interfere with free trade. But Blinder's solution appears to be a creative new idea, and one may think of legitimate justifications for the government to interfere with free markets this way. His idea certainly is more focused and theoretically sound than Sarkozy's plans to protect existing jobs. In fact, Blinder's proposal is only one of many possible government policies aimed at dealing with the Internet-age turmoil in the market for jobs and livelihoods.

Capitalist institutions include risk-management schemes that provide insurance, hedging and diversification. Government can promote the democratization of such institutions so that they protect people from the very risks that they are worrying most about. Such possibilities include livelihood insurance, home equity insurance, income-linked loans, and GDP-linked and home-price-linked securities.

Moreover, government can make our social insurance ... more incentive-compatible and better at managing risks -- and not just the risks of the extreme losers -- by, say, launching inequality-indexation of the tax system. And governments should improve our information infrastructure, so that financial contracts can better capture the outcomes of economic risks.

So Sarkozy shouldn't be lashing out against "speculative capitalism." On the contrary, he should be asking how capitalism can be developed even further, with new institutions in finance and insurance to deal with the very important problem that his campaign has highlighted.

Thursday, April 19, 2007

Kenneth Rogoff: Time for Change at the World Bank

Kenneth Rogoff wants changes in the selection process for the leadership at the World Bank and the International Monetary Fund:

The World Bank at bay, by Kenneth Rogoff, Commentary, Project Syndicate: Will World Bank president Paul Wolfowitz's troubles finally catalyse real change at the World Bank? Will there finally be an end to the archaic practice by which the president of the United States unilaterally appoints the head of the world's most important development agency?

Facing an extraordinary rebuke from the Bank's ministerial oversight committee and open revolt from his professional staff, Wolfowitz has faint hope of limping through the last three years of his term. ... At a time when the Bank has been emphasising high governance standards as the key to development, the recent revelation[s] ... have dealt a serious blow to the Bank's credibility.

Continue reading "Kenneth Rogoff: Time for Change at the World Bank" »

Wednesday, April 18, 2007

New Data Cause Economists to Reconsider Globalization

See here.

Sunday, April 15, 2007

Thomas Palley: Real IMF Reform

Thomas Palley sends along his thoughts on reform of the International Monetary Fund, something, as he notes in the email, "you have not yet posted anything on":

Real IMF Reform: Carpe Diem, by Thomas I. Palley: The International Monetary Fund (IMF) has been the focus of extended debate and criticism, yet reform has been hard to come by. Now, owing to changes in the global economy, the issue of reform has forced itself onto the official agenda. The Fund’s management has responded with its own reform proposals, but they are too narrow. Instead, the IMF should be pressured to adopt bolder reform that incorporates missing social concerns into its mission.

IMF critics have long charged its policies prejudice equitable global growth. Despite the seriousness of these charges, IMF reform has been near impossible. In times of economic crisis reform is viewed as too risky, while in good times the case for reform melts away on the grounds of why rock the boat. However, very occasionally an institution’s business model breaks down, creating an internally generated case for reform. This has now happened to the IMF.

Previously, developing countries had limited access to financial markets and had to pay high interest rates. That created an opportunity for the IMF, which borrowed low and lent to needy developing countries at favorable rates, thereby providing an income for the Fund and cheaper loans for countries. For Fund critics, the big drawback was the IMF required countries to adopt neo-liberal economic policies to qualify for loans.

This business model has now collapsed. Growth of global capital markets means countries can access private capital at reasonable interest rates and without IMF policy strictures. Additionally, huge U.S. trade deficits have enabled developing countries to run trade surpluses, obviating need for funding. Consequently, demand for IMF loans has fallen, thereby undermining the Fund’s purpose and financial viability.

The IMF is now trying to redesign its business model by proposing reform. However, its proposals do not go deep enough. In particular, they continue with the “silo” model of global governance whereby institutions act alone. A better model is the “matrix” model whereby institutions reinforce each other, which is what globalization needs.

The IMF has proposed two reforms. One is to increase developing country quota holdings and perhaps also representation rights in recognition of these countries’ increased contribution to global economic activity. The second is to transform the IMF into something akin to a global financial umpire. International economic integration means there can be adverse spillovers from country economic policies, particularly regarding exchange rates. Consequently, an arbiter is needed to help resolve policy disputes.

Both of these proposals deserve support. Politically, they recognize the new realities of the global economy. At the policy level, they seek to tackle the problem of strategic exchange rate under-valuation, whereby countries try to grow by draining demand from other countries.

However, the Fund refuses to recognize that globalization also creates adverse labor market spillovers. With the world increasingly one labor market owing to trade and outsourcing, labor conditions in one country can spillover and affect labor outcomes in another: hence, need for international labor standards also overseen by a global arbiter.

This is where the matrix model of governance enters. The International Labor Organization (ILO) oversees international labor standards, but the IMF (and the World Bank too) also has an important role to play by officially and actively supporting the ILO’s work. That means Fund policy advice should be obligated to encourage countries to comply with labor standards; Fund loan programs should not promote economic reforms that undermine labor standards; and Fund Article IV country reviews should spotlight failures to meet labor standards. Furthermore, countries borrowing from the Fund could be screened for compliance with labor standards. Those failing the screen might still be allowed to borrow, but they would require special approval and they would have to develop a strategy for future compliance.

Globalization is suffering from lack of attention to the social dimension. The IMF has resisted any responsibility for remedying this weakness, claiming it is not part of its mission. The reforms proposed by IMF management do nothing to change this stance. That should not be allowed.

Today’s global economic system was stitched together in the last quarter of the 20th century, a period of labor weakness and laissez-faire revival. Consequently, labor and social issues were left off the table. It is time to remedy that omission, and the reform process underway at the IMF provides a good place to start.

Tuesday, April 10, 2007

Martin Wolf: How to Promote Employment while Protecting the Low-Paid

Martin Wolf is worried that if we don't do a better job of protecting workers displaced by globalization and of sharing the gains from globalization more broadly, the global trading system will fail to live up to its potential:

How to promote employment while protecting the low-paid, by Martin Wolf, Commentary, Financial Times: There are two particularly significant facts about labour markets of the high-income countries over the past two to three decades: globalisation and declining shares of labour income in gross domestic product.

How are these phenomena related? What are the policy implications? The answers to these questions may well determine whether the backlash against globalisation...

The subject is the focus of a background chapter to the latest World Economic Outlook from the International Monetary Fund. It reaches four chief conclusions.

First, the globally engaged labour force has quadrupled over the past two decades, with the greatest impact coming from trade, not immigration.

Second, the shares of labour income in GDP have declined markedly across the high-income countries over this period.

Third, globalisation is among the causes of the declining share of labour income in GDP. But technology has been more important.

Finally, countries that have lowered the cost of labour to business and improved labour-market flexibility have generally experienced smaller declines in labour-income shares. ...

[W]hat are the policy conclusions? The ... most striking conclusion of this analysis has been the benefits of policies that promote employment. Insisting on high real wages for what, in consequence, become non-existent jobs is counter-productive. While incomes can be sustained through transfers, subsidised idleness is soul- destroying. French voters, please note.

The right policy, then, is to promote employment while augmenting the incomes of the low-paid or at least sharply reducing the taxation of labour. It is also to promote the highest quality of basic education across the labour force and provide good opportunities for motivated workers to upgrade their skills.

The right policy is to combine openness to trade with a politically acceptable sharing of the gains in high-income countries. The challenge is huge. But it is one at which we cannot afford to fail.

Thursday, April 05, 2007

Costs and Benefits of Preferential Trade Agreements

In this comment on Martin Wolf's column on the costs of preferential trading agreements (PTAs), Robert Wade notes that there is an additional cost imposed on undeveloped countries in many of these agreements, constraints on their development path that are built into the agreements.

Why would developing countries accept constraints on development as a condition of these agreements? One reason, of course, is to enhance trade but another is that trading agreements with the U.S. come with a large positive insurance externality, military protection from the U.S.:

Robert Wade: A comment on Martin’s general assessment of bilateral-regional trade agreements as compared with WTO agreements...

Like most economists assessing bilateral-regional trade agreements, Martin assesses them on the assumption that the objective of trade policy is to maximize trade... Hence the central issue is “trade creation vs. trade diversion”.... Martin rightly extends this standard framework of efficiency costs and benefits to include also the effects on inter-state competition and conflict.

But one should also assess trade agreements in terms of their impact on ... the diversification and upgrading of production over time, especially in the case of the “southern” partners. Different rules ... governing tariffs, foreign direct investment, intellectual property, the mobility of financial capital, public procurement, and the like - have different impacts on a country’s development trajectory, some being more constraining, more “locking in to existing comparative advantage”, than others.

As Kenneth Shadlen shows in an important article (“Exchanging development for market access?...”, Rev. Int. Pol. Econ. 12 (5), 2005, 750-75), preferential trade agreements involve the southern partner receiving better market access for existing exports, in return for “reforms” deep within its borders ... “Reforms” mean putting the government under new constraints not to use industrial policy instruments to accelerate production diversification and upgrading – instruments of the kind that most of the now developed countries used during their rapid development phase. Hence the risk of freezing the existing division of labour between the trade partners.

On the other hand [under] the WTO’s multilateral rules ... ... the powerful northern countries are a bit less able to close down this policy space and neutralize the competition from southern producers than they are in bilateral or regional agreements. This is one very good reason for supporting the WTO and discouraging the proliferation of PTAs. ...

If PTAs typically shrink policy space even more than the WTO agreements why are many governments rushing to sign such agreements with the US? In the case of the Singapore-US PTA the negotiations almost broke down over ... the US’s insistence that Singapore commit to never applying restrictions on the mobility of financial capital. In the end the Singapore government more or less acceded to the US demand, for the reason (so I was told by a leading Singapore participant) that Singapore’s prime concern was less with the economics ... than with the military-security impact: the government calculated that the agreement would help to tie the US into the region militarily. Presumably the South Korean government has been making a similar calculation ... as North Korea could explode on its doorstep and China-Taiwan could explode to the south. Also, of course, Korea ... has built up a highly competitive set of industries and world-spanning firms, with a huge R&D capability; so is much less likely to experience a freezing of existing comparative advantage than most developing countries.

A final point. Arguably the single biggest threat to the stability of the world trade system comes not from within the trade system (e.g. proliferation of preferential trade agreements) but from the lack of multilateral disciplines over the exchange rates and macroeconomic policies of the major economic states (G3)... I’ll elaborate at a later time.

Tuesday, April 03, 2007

Insider-Outsider Distortions and Trading Blocs

I think Martin Wolf has this right. What appears on the surface to be a series of free trade agreements betweent the U.S. and other countries is really a system of insider-outsider trade with all the distortions such preferential treatment brings about:

A Korean-American strand enters trade’s spaghetti bowl, by Martin Wolf, Commentary, Financial Times: ...This month marks the 60th anniversary of the General Agreement on Tariffs and Trade... It also sees the announcement of a “free trade agreement” between [the U.S.] and South Korea. The core of the Gatt was non-discrimination. The core of the new agreement is its opposite. ...

At a first glance, the new FTA does deliver a substantial opening between the world’s largest economy and its 11th largest: nearly 95 per cent of bilateral trade in consumer and industrial products is to become duty free within three years, with most remaining tariffs abolished within 10...

Why do I object? Is such trade liberalisation not precisely what most economists interested in trade believe in? The answer to this question is “yes and no”: yes, because liberal trade is desirable, but no, because this form of liberalisation is not necessarily a move towards liberal trade. As Jagdish Bhagwati of Columbia University has argued, “free trade agreements” should, instead, be called “preferential trade agreements”. I would prefer “discriminatory trade agreements”.

In this case, the US and South Korea agree to discriminate in favour of exporters or investors based in each other’s territory. The obvious potential economic cost of such an agreement is what Jacob Viner, the great inter-war trade economist, called “trade diversion”. In other words, the partners might shift from more competitive to less competitive suppliers. In this case, however, trade diversion may be modest, since these two countries are among the world’s most competitive suppliers of a wide range of goods and services.

A more significant economic cost, however, is systemic. The number of preferential trade agreements has exploded upwards in recent years... Other countries will be desperate to avoid the adverse effects upon them. This makes probable yet another jump in the prevalence of such agreements.

That will have at least two further economic consequences. First, an increasing proportion of the world’s trade is sure to be governed by the diverse rules of origins and special procedures of a host of discriminatory bilateral and plurilateral agreements. That guarantees an explosion in administrative complexity. Second, every further bilateral agreement will alter the degree of preference enjoyed by existing suppliers. That guarantees an explosion of business uncertainty. ...

The political consequences of this development are, however, at least as important. First, a company’s market access will depend increasingly on the power of its own government to lever open other markets rather than its competitiveness. Second, big powers will compete with one another to wrest more favourable terms for their own producers. The emergence of such power-driven trading blocs is a world away from the hopes of the founding fathers of the Gatt system. ... If the US, as the dominant economic player, makes discrimination a central principle of its own policy, how can it fail to become a global model, with predictable and disturbing results? ...

I am a long-run optimist on this. As the number of agreements explodes upwards some wise policymaker will surely ask why his or her country conducts trade policy through a hundred or more bilateral agreements. Why, he will ask, do we not have a single multilateral agreement, instead? He may even want a name for this new agreement. I know. Why not call it the “World Trade Organisation”?

Paul Krugman talked about this in 1992:

A Global Economy Is Not the Wave of the Future, by Paul Krugman, 1992: Where is our global economy headed...? The most fashionable script says that we are moving into an age of unprecedented international economic integration, that market technology, telecommunications, and faster transportation have shrunk the world, that borders are dissolving, and that We are about to see a globalization of business.

I'm reminded of an old South American joke that says Brazil is the country of the future, and always will be. ... What I would argue is that we're heading for regionalization, a breaking up of the world economy into blocs. ... [W]hile technology can integrate the world, whether it does so depends on politics. ... Political obstacles to economic integration beat technology every time. ...

Why are the political reasons for an integrated world economy so much weaker than the technological reasons? In an ideal world, most economists would agree, the free movement of goods, of services, of capital, of multinational enterprises, and probably of people is in the best interests of both the world economy and individual countries. But there is usually little connection between actual trade policy and what's good for a country. Trade policy is made in the real world of politics. And in that world, national welfare doesn't vote. Only interest groups vote.

Thus, well-organized interest groups, like producers, have more influence than disorganized groups like consumers. One example is our import quota on sugar. For the 250 million Americans who eat it, sugar is hidden in a variety of processed foods. Only the producers understand the importance of the quota. ...

So what will the next few years bring? I don't visualize a great trade war, nothing that dramatic. But I do see ... an inward turning of the world into trading blocs. They already exist in North America and the European Community, and, more obscurely, in the investment ties between Japan and some Pacific Rim countries.

Members of these trading blocs will claim that what they have done is not at the expense of their relations with the outside world. The Europeans say they are not creating Fortress Europe. We say that the North American Free Trade Area will not turn into Fortress NAFTA. Nor will the Japanese concede any emerging trade bloc.

But all that is nonsense. For the next 10 to 15 years, those on the inside of these blocs are going to have a stronger voice than those on the outside. ... It is inevitable that we will become more restrictive against trade from the outside. In fact, just by providing preferences for our neighbors, we will divert world trade from trade between blocs to trade inside blocs... 

One saving grace is we're not talking of a balkanization of the world. These trading blocs will be huge entities. The importance of free trade and the evils of protectionism are both usually overstated. Protectionism, for example, did not cause the Great Depression of the 1930s. And so we should not be swept up by the romance of mega trends, thinking that integration of the world's economy is inevitable. It isn't. A world without borders is a possibility, yes, but it is a possibility that depends on politics. ...

Update: See Ben Muse for quite a bit more on potential trade diversion and third party impacts arising from the trade agreement between the U.S. and Korea.

FRBSF: The U.S. Productivity Acceleration and the Current Account Deficit

Diego Valderrama of the San Francisco Fed looks at the relationship between productivity and the current account deficit. According to this Economic Letter, explanations of changes in the current account have generally omitted changes in productivity as a potential explanatory factor. However, this is "another factor to consider, which so far has received relatively little attention in the press and in policy circles." The paper argues the the doubling of productivity since 1996 "can potentially account for a large fraction of the current account increase through its impact on saving and investment":

The U.S. Productivity Acceleration and the Current Account Deficit, by Diego Valderrama, FRBSF Economic Letter: On March 14, the Bureau of Economic Analysis reported that the U.S. current account deficit for 2006 increased from the previous year to over 6% of GDP. This deficit reflects the difference between U.S. income and expenditures, and the additional indebtedness that the country needs to take on to cover this difference. As Figure 1 illustrates, the current account consists mainly of the trade balance, but it also includes the payments on returns from foreign U.S.-owned assets, net of the payments made to foreigners for returns on assets they own in the United States.

Figure 1: Current account deficit and trade balance

Though many economists and policymakers agree that a persistently high current account deficit, or worse, a growing one, could prove worrisome, there is much debate about what the likely path back toward balance will look like. Some argue that foreign investors' willingness to finance the deficit may shift abruptly, which would disrupt the U.S. economy (Valderrama 2006). Others think that the current situation is simply a result of market forces and that the return to balance will be gradual and orderly.

To disentangle the two points of view, it is important to consider the factors that may explain the current elevated level of the current account deficit. These include: the "saving glut," which characterizes the high saving rates observed in developing countries (particularly in Asia) that have pushed international interest rates lower, depressed U.S. saving, increased expenditures, and fueled borrowing from abroad; the depressed values of some foreign currencies relative to the dollar that have made U.S. imports relatively cheap, encouraged domestic expenditures, and thereby increased the trade and current account deficits; and the "twin deficits" story, wherein the current account deficit is a result of the growing U.S. budget deficit, which has reduced public saving and increased borrowing from abroad.

There is, however, another factor to consider, which so far has received relatively little attention in the press and in policy circles--the increase in the rate of growth in U.S. labor productivity since 1996, when the current account deficit was only about 1% of GDP. This Letter reviews the current facts about the current account deficit and its determinants, and describes the channels through which it is affected by an increase in trend labor productivity growth.

Continue reading "FRBSF: The U.S. Productivity Acceleration and the Current Account Deficit" »

Wednesday, March 28, 2007

Removing the Blinders on International Trade

David Wessel and Bob Davis of the Wall Street Journal give an update on Alan Blinder's views on globalization and his estimate that trade will put tens of millions of jobs at risk [Update: free link to article plus related data on jobs at risk and offshoring]:

Pain From Free Trade Spurs Second Thoughts, by David Wessel and Bob Davis, WSJ: For decades, Alan S. Blinder ... argued, along with most economists, that free trade enriches the U.S. and its trading partners, despite the harm it does to some workers. "Like 99% of economists since the days of Adam Smith, I am a free trader down to my toes," he wrote back in 2001. ...

Yet today Mr. Blinder has changed his message... Mr. Blinder ... remains an implacable opponent of tariffs and trade barriers. But now he is saying loudly that a new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk ... in the next decade or two. .... The job insecurity those workers face today is "only the tip of a very big iceberg," Mr. Blinder says.

The critique comes as .... skepticism about allowing an unfettered flow of goods, services, people and money across borders is intensifying... Some critics are going public with reservations they've long harbored quietly. Nobel laureate Paul Samuelson ... damns "economists' over-simple complacencies about globalization" and says rich-country workers aren't always winners from trade. He made that point in a 2004 essay that stunned colleagues...

Mr. Blinder's answer is not protectionism, a word he utters with ... contempt... Rather, Mr. Blinder still believes ... [n]ations prosper by focusing on things they do best -- their "comparative advantage" -- and trading with other nations with different strengths. He accepts the economic logic that U.S. trade with large low-wage countries like India and China will make all of them richer -- eventually. He acknowledges that trade can create jobs in the U.S. ... But he says the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge. ...

His critique puts Mr. Blinder in a minority among economists, most of whom emphasize the enormous gains from trade. "He's dead wrong," says Columbia University economist Jagdish Bhagwati... Mr. Bhagwati says that in highly skilled fields such as medicine, law and accounting, "If we do a real balance sheet, I have no doubt we're creating far more jobs than we're losing."

Mr. Blinder says that misses his point. The original Industrial Revolution, the move from farm to factory, unquestionably boosted living standards, but triggered an enormous change in "how and where people lived, how they educated their children, the organization of businesses, the form and practices of governments." He says today's trickle of jobs overseas, where they are tethered to the U.S. by fiber-optic cables, is the beginning of a change of similar dimensions, and American society needs similarly far-reaching changes to cope. "I'm trying to convince a bunch of economists who are deeply skeptical and hard to convince," he says. ...

When he talked about trade in the past, Mr. Blinder emphasized its great benefits. ... As a Clinton aide, he helped sell the North American Free Trade Agreement... He was silent when his former Princeton student, N. Gregory Mankiw, then chairman of President Bush's Council of Economic Advisers, unleashed a political firestorm by ... appearing indifferent to pain caused to those whose jobs go overseas. "Does it matter from an economic standpoint whether items produced abroad come on planes and ships or over fiber optic cables?" Mr. Mankiw said at a February 2004 briefing. "Well, no, the economics is basically the same....More things are tradable the past, and that's a good thing."

Mr. Blinder says he agreed with Mr. Mankiw's point that the economics of trade are the same however imports are delivered. But he'd begun to wonder if the technology that allowed English-speaking workers in India to do the jobs of American workers at lower wages was "a good thing" for many Americans...

Mr. Blinder began to muse about this in public. ... At the urging of former Clinton Treasury Secretary Robert Rubin, Mr. Blinder wrote an essay, "Offshoring: The Next Industrial Revolution?" published last year in Foreign Policy. ...

Offshore32907In that paper, he made a "guesstimate" that between 42 million and 56 million jobs were "potentially offshorable." Since then he has been refining those estimates, by painstakingly ranking 817 occupations ... to identify how likely each is to go overseas. From that, he derives his latest estimate that between 30 million and 40 million jobs are vulnerable. 

He says the most important divide is not, as commonly argued, between jobs that require a lot of education and those that don't. It's not simply that skilled jobs stay in the US and lesser-skilled jobs go to India or China. The important distinction is between services that must be done in the U.S. and those that can -- or will someday -- be delivered electronically with little degradation in quality. The more personal work of divorce lawyers isn't likely to go overseas, for instance, while some of the work of tax lawyers could be. Civil engineers, who have to be on site, could be in great demand in the U.S.; computer engineers might not be. ...

Mr. Blinder says there's an urgent need to retool America's education system so it trains young people for jobs likely to remain in the U.S. Just telling them to go to college to compete in the global economy is insufficient. ... It isn't how many years one spends in school that will matter, he says, it's choosing to learn the skills for jobs that cannot easily be delivered electronically from afar.

Similarly, he says any changes to the tax code should encourage employers to create jobs that are harder to perform overseas. ... Mr. Blinder says the focus should be on jobs with person-to-person contact, regardless of pay and skill levels -- from child day-care providers to physicians.

Mostly he wants to shock politicians, policy makers and other economists into realizing how big a change is coming and what new sectors it will reach. "This is something factory workers have understood for a generation," he says. "It's now coming down on the heads of highly educated, politically vocal people, and they're not going to take it."

Here's the Foreign Affairs article by Alan Blinder, "Offshoring: The Next Industrial Revolution?," (draft version in case link is blocked), and a summary of some of its contents is in "What Jobs are Safe from Offshoring?." Also, "The New Globalization" looks at the work of Blinder, Grossman, and others.

Friday, March 02, 2007

Bernanke: Globalization May Have Increased Inflation

Continuing with the post below this one... Recently, it was reported that the relationship between changes in the real economy and changes in the inflation rate is lower than it used to be, something discussed here. Below, Federal Reserve Chairman Ben Bernanke is reported as saying he agrees with these findings:

The relationship between slack in the economy and lower inflation is ''clearly lower'' than it used to be.

Another aspect of the recent debate over monetary policy concerns how globalization has affected inflation, and the Fed's ability to affect inflation through monetary policy. Here's Chairman Bernanke's view, a view that agrees with what I've been arguing:

Bernanke Says Globalization May Boost U.S. Inflation, Reuters: Global factors may on balance have boosted U.S. inflation, but globalization has not affected the ability of the Federal Reserve to influence U.S. financial conditions, Fed Chairman Ben Bernanke said on Friday.

''When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation in the United States in recent years; indeed the opposite may be true,'' he said in a speech at Stanford University. ...

The central bank chief said the Fed finds it difficult to pin down a fixed number for any natural rate of unemployment. ''There are a couple of problems that have emerged with using a fixed number like that for analyzing the macro-economy,'' he said.

The relationship between slack in the economy and lower inflation is ''clearly lower'' than it used to be, Bernanke said.

Bernanke said that globalization has not ''materially affected the ability'' of the Fed to influence U.S. financial conditions, ''nor has it led to significant changes in the process which determines the U.S. inflation rate.''

Overall, globalization has probably spurred inflation in the United States rather than lowered it because recent increases in energy and commodity use in developing countries such as China and India have pushed up prices for such goods, Bernanke said.

He noted a study that found that if the share of world trade and economic growth of non-industrial countries remained at its 2000 level, oil prices would have been as much as 40 percent lower in 2005 and metals prices as much as 10 percent lower.

''Accordingly, in the past several years, the effect of growth in developing economies on commodity prices has been a source of upward pressure on inflation in the United States and other industrial economies,'' he said.

At the same time, increased trade with China and other developing countries has led to slower growth in the prices of imported manufactured goods, Bernanke said.

He cited a study concluding that trade with China alone reduced annual import price inflation in the United States by about 1 percentage point over 1993-2002.

The Fed is devoting more resources and time to trying to understand the effect of increased global integration on inflation and the central bank's ability to maintain price stability and ensure low unemployment, Bernanke said. ...

Update: Here is the speech, "Globalization and Monetary Policy."

Update 2: Here are a few quotes from the speech at Stanford with some of the discussion of the supporting research, e.g. the work on the "global output gap hypothesis" that is part of the recent discussion about the changing relationship between domestic real activity and inflation. One reason we ,ight see a declining relationship between the output gap and inflation is that the relevant concept of the output gap has changed while our measurement of the gap - domestic output minus domestic potential output (which is shaky in any case) - has not. Thus, it is not that the output gap and inflation are unrelated, i.e. that the Phillips curve is dead, but rather the appropriate definition of the gap to use in assessing the relationship has changed. There are quite a few more references and a lot more discussion in the speech itself:

The empirical literature supports the view that U.S. monetary policy retains its ability to influence longer-term rates and other asset prices. Indeed, research on U.S. bond yields across the whole spectrum of maturities finds that all yields respond significantly to unanticipated changes in the Fed’s short-term interest-rate target and that the size and pattern of these responses has not changed much over time (Kuttner, 2001; Andersen and others, 2005; and Faust and others, 2006). Empirical studies also find that U.S. monetary policy actions retain a powerful effect on domestic stock prices.


I draw two conclusions... First, the globalization of financial markets has not materially reduced the ability of the Federal Reserve to influence financial conditions in the United States. But, second, globalization has added a dimension of complexity to the analysis of financial conditions and their determinants, which monetary policy makers must take into account.


International factors might affect domestic inflation through several related channels. First, the expansion of trade may cause domestic inflation to depend to a greater extent on the prices of imported goods--not only because imported goods enter the consumer basket or (in the case of imported intermediate goods) affect the costs of domestic production, but because competition with imports affects the pricing power of domestic producers. Second, competitive pressures engendered by globalization could affect the inflation process by increasing productivity growth, thereby reducing costs, or by reducing markups. Third, to the extent that some prices are set in internationally integrated markets, pressures on resource utilization in foreign economies could be relevant to domestic inflation.

Some analysts might object to the proposition that globalization affects the inflation process at all on the grounds that the structural changes that globalization engenders can affect only the relative prices of goods and services; in contrast, inflation--the rate of change of the overall price level--must ultimately be determined solely by monetary policy (Ball, 2006). Certainly, monetary policy determines inflation in the long run, and the central bank must take responsibility for the inflation outcomes generated by its policies. ...

However, the conclusion that inflation is determined only by monetary policy choices need not hold in the short-to-medium run.


In a globalized economy, the level of resource utilization in the world economy is another potential influence on domestic inflation. Standard analyses of inflation based on the concept of a Phillips curve assign a role in inflation determination to the domestic output gap--the difference between the economy’s potential output and its actual production. According to this theory, the existence of slack in the economy makes it more difficult for producers to raise prices and for workers to win higher wages, with the result that inflation slows. These conventional analyses have considered only the possible link between domestic inflation and the domestic output gap. But in an increasingly integrated world economy, one may well ask whether a global output gap can be meaningfully defined and measured and, if it can, whether it affects domestic inflation. In other words, all else being equal, would a booming world economy increase the potential for inflationary pressures within the United States?

In principle, with the domestic determinants of inflation held constant, reduced slack in the global economy could increase domestic inflation for a time if it led to higher prices for some traded goods and services relative to the prices of goods and services that are not usually traded. For example, suppose that the United States produces personal computers both for export and for domestic use, and that more-rapid growth abroad increases the world demand for computers. Stronger global demand for computers raises the prices that U.S. producers can charge their foreign customers. Moreover, because all computer producers are facing a stronger global market, U.S. producers can charge more for their output at home as well. If producers of many goods face increases in worldwide demand, the net effect could be higher inflation in the United States, even though there may be no measurable effect on the prices of U.S. imports.

The idea is intriguing but again, unfortunately, the evidence is so far inconclusive. Early work, including some done at the Federal Reserve Bank of Boston, found no effect of global demand conditions on U.S. inflation, as did most of the subsequent research. Recently, however, several researchers affiliated with the Bank for International Settlements (BIS) have reported results favorable to the global output gap hypothesis (Borio and Filardo, 2006).

Thursday, March 01, 2007

Holes in the Safety Net

The "curity" part of flexicurity needs improvement:

Federal Aid Does Little For Free Trade's Losers, by Deborah Solomon, WSJ: For more than 80 years, the people of Webb Furniture crafted wooden ... furniture... In January, under pressure from Chinese imports, Webb shuttered its Galax plant and fired all 309 employees.

Tonya Graber lost more than her job... The single mother also lost health insurance for herself and her 12-year-old son. Under a government program aimed at helping workers harmed by trade, Ms. Graber was eligible for federally subsidized health insurance, but she couldn't afford it.

She isn't alone. The Health Coverage Tax Credit, tucked into a 2002 trade bill to win support in Congress, is supposed to cushion the blow to factory workers hurt by imports by paying 65% of the cost of health insurance. ... More than four years after the program began, just 11% of those potentially eligible for the subsidy are taking it...

"It's just not realistic to say that a laid-off worker who's uninsured is going to come up with 35% of the premium," says Stan Dorn, who has studied the program at the Urban Institute...

A common political compromise in Washington involves keeping trade barriers low in exchange for programs compensating those hurt by imports. Free-trade advocates are generally happy to make such a compromise. They figure the winners from trade ... can afford, through the government, to help compensate the losers.

The problem is that compensation programs often add bureaucracy without helping many people. Even if the health-insurance assistance program were working well, it would aid only a fraction of those who lose their jobs. The Labor Department must certify that workers have lost their jobs to imports from certain countries or to a shift in production there. Most workers in ... service industries whose jobs are sent overseas don't qualify.

Another struggling program is wage insurance, designed for workers over 50 who lose their jobs because of trade and then take a lower-paying job. The government makes up half the difference in wages, up to $10,000 a year, but it requires that workers prove they don't have "easily transferable skills." Some can't do that.

The issue: Should Washington give up on such programs, or should it expand them and try to make them work better? For the moment, people on both sides on Capitol Hill say President Bush will need to beef up programs for those hurt by imports if he wants congressional backing for new trade legislation. ...

"There has to be more cushioning for people caught in the maws of free trade," says Sen. Charles Schumer, a New York Democrat who has criticized China's trade policy. "The fact that TAA has not done the job gives those who want to build walls around the U.S. greater currency." ...

On average, according to the Internal Revenue Service, [health] insurance costs $720 a month, with the federal government picking up $468, or 65%, of the cost and the former employee paying the $252 remainder. ...

The administration acknowledges problems. The White House Office of Management and Budget has called the program "not performing," and cited as a reason "the affordability of coverage to potential recipients."... The Senate Finance Committee chairman, Max Baucus of Montana, says he plans to introduce legislation this year "to make this benefit work better." ...

Tuesday, February 27, 2007

Japan's Food Security

Is Japan's protection of its agricultural industry justified by the fact that it is an island nation, or should Japan drop its worries about food security and end the subsidies it gives to domestic farmers? First, here's Malcolm Cook of the Lowy Institute for International Policy in Australia writing for Project Syndicate. He's hopeful Japan's protectionist tendencies in agriculture are subsiding, and that Japan will lead the way for others to relax their agricultural protections. An editorial from the Japan Times follows and gives additional perspective: 

Japan is showing the way forward for agricultural free trade, by Malcom Cook, Project Syndicate: Last year was a bad one for free trade. The Doha Round was supposed to make agriculture the centerpiece of negotiations... But instead of breathing life into free trade in food, rural protectionism in rich countries seems to have killed the Doha Round... Most galling, agriculture is a small and declining part of these "rich club" economies...

Continue reading "Japan's Food Security" »

Saturday, February 24, 2007

Bill Gates: Open the Doors to More High-Skill Immigration

Bill Gates continues his crusade to allow more high-skilled immigrants into the U.S.:

How to Keep the U.S. Competitive, by Bill Gates, Commentary, Washington Post: ...Innovation is the source of U.S. economic leadership and the foundation for our competitiveness in the global economy. Government investment in research, strong intellectual property laws and efficient capital markets are among the reasons that America has for decades been best at transforming new ideas into successful businesses.

The most important factor is our workforce. Scientists and engineers trained in U.S. universities -- the world's best -- have pioneered key technologies such as the microprocessor, creating industries and generating millions of high-paying jobs.

But our status as the world's center for new ideas cannot be taken for granted. Other governments are waking up to the vital role innovation plays in competitiveness. ...

Two steps are critical. First, we must demand strong schools so that young Americans enter the workforce with the math, science and problem-solving skills they need to succeed in the knowledge economy. We must also make it easier for foreign-born scientists and engineers to work for U.S. companies. ...

Our schools can do better. Last year, I visited High Tech High in San Diego; it's an amazing school where educators have augmented traditional teaching methods with a rigorous, project-centered curriculum. Students there know they're expected to go on to college. This combination is working: 100 percent of High Tech High graduates are accepted into college, and 29 percent major in math or science, compared with the national average of 17 percent.

To remain competitive in the global economy, we must build on the success of such schools...

American competitiveness also requires immigration reforms that reflect the importance of highly skilled foreign-born employees. Demand for specialized technical skills has long exceeded the supply of native-born workers with advanced degrees, and scientists and engineers from other countries fill this gap.

This issue has reached a crisis point. Computer science employment is growing by nearly 100,000 jobs annually. But at the same time studies show that there is a dramatic decline in the number of students graduating with computer science degrees.

The United States provides 65,000 temporary H-1B visas each year to make up this shortfall -- not nearly enough to fill open technical positions.

Permanent residency regulations compound this problem. Temporary employees wait five years or longer for a green card. During that time they can't change jobs, which limits their opportunities to contribute to their employer's success and overall economic growth.

Last year, reform on this issue stalled as Congress struggled to address border security and undocumented immigration. As lawmakers grapple with those important issues once again, I urge them to support changes to the H-1B visa program that allow American businesses to hire foreign-born scientists and engineers when they can't find the homegrown talent they need. This program has strong wage protections for U.S. workers: Like other companies, Microsoft pays H-1B and U.S. employees the same high levels...

Reforming the green card program to make it easier to retain highly skilled professionals is also necessary. These employees are vital to U.S. competitiveness, and we should welcome their contribution to U.S. economic growth.

We should also encourage foreign students to stay here after they graduate. Half of this country's doctoral candidates in computer science come from abroad. It's not in our national interest to educate them here but send them home...

During the past 30 years, U.S. innovation has been the catalyst for the digital information revolution. If the United States is to remain a global economic leader, we must foster an environment that enables a new generation to dream up innovations, regardless of where they were born. Talent in this country is not the problem -- the issue is political will.

On High Tech, the fact that more graduates major in math and science in college than at other schools (29% versus 17%) is not, in and of itself, evidence that these schools work since a high degree of selectivity bias is likely present (those who like math and science are more likely to enroll in a "High Tech High" than other students, the web site says they get 3,000 applications for 300 slots). I agree completely with the message on education, but worry that instead of building upon what works, we are too ready to tear it all down and start over. We have a Gates Foundation small schools initiative here in Eugene that broke an existing high school into three smaller specialty schools (an International High School, a school specializing in Invention, Design, Engineering, Arts, & Science, and North Eugene Academy of Arts). If it works, great, but these are kids lives we are playing with and if it doesn't work and outcomes deteriorate, the price of innovation, the risk, becomes very localized and very steep for those students who participate in the failed experiments (and it's not always voluntary). I wish there was a better way to spread the risk of these experiments across the population rather than localizing it in schools that are already, for the most part, having troubles.

As for immigration, I am generally supportive of open door policies. However, I do want to point out that there is another solution for Gates and others. They believe that there is plenty of talent in the U.S., that's not the problem, it's just that workers lack the training they need. Microsoft could provide the training itself instead of free-riding on the educational system. It takes a little longer and costs more, of course, but consistent with advocates of privatization and efficient markets, it forces Microsoft to internalize the costs of training its workers, particularly specialized training. But I can't blame Microsoft for wanting to avoid these costs if it can, and for wanting to increase the supply of labor as much as possible by opening the borders to more high-skill immigration.

The shortage of U.S. graduates in this area may be because students have no certainty that specialized skills in these areas will retain their value in the future, a consequence of changes in technology that undermine existing skills over time, digital technology that allows collaborative work to be performed outside of the U.S., and the prospect of more temporary visas being issued in the future.

My observation is that there is a large set of talented students who respond strongly to expected employment prospects when they choose a major, though there is, of course, a time-delay between the appearance of shortages and surpluses in particular areas and changes in the number of majors. But the effect is there. If U.S. students perceive that an investment in computer science training relative to investing their time elsewhere will have the largest long-run payoff, any shortage will take care of itself. [And, as noted in comments, access to education may not be equal so that another way to increase supply is to increase educational opportunities within the U.S.]

In the long-run, due to technology and globalization and to comparative advantage, trying to close doors to high-skilled workers is, for the most part, a losing battle. We can create artificial barriers to foreign competition and steer our students in particular directions but there is a danger that in doing so, we set them up for a bigger fall later. If the walls keeping out foreign competition cannot be maintained in a digital age, and if we artificially direct students to particular occupations, once the walls do come down people employed in these areas will be very exposed and in danger of a large fall in income and employment prospects due to the increased competition. For that reason, I think we are better off letting the walls come down now, within reason of course, and allowing prices direct our students to the places they will, so far as markets can predict, be most highly valued in the future.

Update: Dean Baker also comments in Bill Gates Comes to the Coward's Corner. PGL too.

Thursday, February 22, 2007

How Secure is Global Capitalism's Future?

Timothy Garton Ash of Oxford University and a senior fellow at the Hoover Institution at Stanford University says that Karl Marx "was prescient" in his description of global capitalism:

Will capitalism fall victim to its own success?, by Timothy Garton Ash, Commentary, LA Times: What is the elephant in all our rooms? The global triumph of capitalism. Democracy is fiercely disputed. Freedom is under threat, even in old democracies like Britain. Western supremacy is on the skids. But everyone does capitalism.

Americans and Europeans do it. Indians do it. Russian oligarchs and Saudi princes do it. Even Chinese communists do it. And now the members of Israel's oldest kibbutz, that last best hope of egalitarian socialism, have voted for salaries based on individual performance. Karl Marx is turning in his grave. Or perhaps not, because some of his writings eerily foreshadowed our era of globalized capitalism. His prescription failed, but his description was prescient.

What, after all, are the big ideological alternatives? Hugo Chavez's "21st century socialism" still looks like, at most, a regional phenomenon best practiced in oil-rich states. Islamism — billed as democratic capitalism's great competitor in a new ideological struggle — offers no alternative economic system (aside from the peculiarities of Islamic finance) and does not appeal beyond the Muslim umma. Most anti-globalists are better at pointing out the failings of global capitalism than they are at suggesting systemic alternatives. "Capitalism should be replaced by something nicer," read a placard at a May Day demonstration...

Does the lack of any clear ideological alternative mean that capitalism's triumph is secure? Far from it. For a start, the history of capitalism hardly supports the view that it is an automatically self-correcting system. ...[G]lobal markets are now more than ever constantly out of equilibrium — and teetering on the edge of a larger disequilibrium. Again and again, capitalism has needed the visible hands of political, fiscal and legal correction to complement the invisible hand of the market.

And the bigger it gets, the harder it can fall. An oil tanker is more stable than a dinghy, but if the tanker's internal bulkheads are breached and the oil starts swilling from side to side in a storm, you have the makings of a major disaster. Increasingly, the world's capital is like oil in the holds of one giant tanker, with ever fewer internal bulkheads to stop it from swilling around.

Then there is inequality. One feature of globalized capitalism seems to be that it rewards its high performers disproportionately. What will be the political effects of having a small group of super-rich people in China, Russia and India or other countries where the majority are super-poor? In more developed economies, such as Britain and the U.S., ... if a lot of middle-class people begin to feel that they are personally losing out as a few fund managers get stinking rich and jobs are outsourced to India, you may have a backlash. Watch Lou Dobbs on CNN for a taste of the rhetoric to come.

Above all, though, there is the inescapable dilemma that this planet cannot sustain 6.5 billion people living like today's middle-class in its rich north. In just a few decades, we would use up fossil fuels that took about 400 million years to accrete — and change Earth's climate as a result. Sustainability may be a gray and boring word, but achieving it is the biggest single challenge to global capitalism today. However ingenious modern capitalists are in finding alternative technologies ... somewhere down the line richer consumers will have to settle for less rather than ever more.

Marx thought capitalism would have a problem finding consumers for the goods that improving techniques of production enabled it to churn out. Instead, it has become expert in a new branch of manufacturing: the manufacture of desires. It's that core logic of ever-expanding desires that is unsustainable on a global scale. But are we prepared to abandon it?

We may be happy to insulate our lofts, recycle our newspapers and bicycle to work, but are we ready to settle for less so others can have more? Am I? Are you?

Tuesday, February 20, 2007

Robert Reich: Minimum Half Median

Robert Reich is trying to broker a deal: renewed trade authority for the president in return for labor standards on future trade deals:

A Labor Standard for Future Trade Deals: Minimum Half Median, by Robert Reich: The Bushies want to renew the President's authority to negotiate trade deals... This gives House and Senate Dems an opportunity to win a long-sought Democratic goal -- putting labor standards into all future trade deals.

But what sort of labor standard? If workers in developing nations were required to have the same, or even nearly, the level of wages and working conditions as Americans, jobs wouldn't go to developing nations. This would be a back-door form of protectionism.

Here's a better idea. First, borrow from standards already issued by the International Labor Organization -- barring slave labor, forced labor, and the labor of young children under 12. ILO standards also recognize the ... right of all workers to form unions. ...

Step two: Encourage developing nations to raise their labor standards as their economies grow. The easiest way to do this is to require that they set a minimum wage that's half their median wage. With this ... standard in place, more of their people will share the gains from trade. ...

Market fundamentalists will object that establishing any minimum wage in a developing nation will force some poor workers out of jobs and into the black market. But that's what market fundamentalists argued almost seventy years ago when America first established our own minimum wage. A minimum wage -- like minimum health and safety standards -- is the hallmark of a civilized society.

The biggest hurdle is that this "minimum half median" standard will force the United States to set and keep our own minimum wage at half our median -- which would be about $7.50 in today's dollars...

This seems reasonable. For many decades, America's minimum wage was roughly half its median wage; only since the late 1970s has it fallen much lower than that. ...

Monday, February 19, 2007

"The Globally Integrated Enterprise"

An email says:

You might wish to discuss this article on your blog. The article traces the development of MNC’s up to the present. It is a celebration of the MNCs and their positive impact on globalization.

Unfortunately, Palisiano (CEO of IBM) does not address the issue of corporate power in distorting the market place and in controlling governments themselves (think K Street). Nor does he seriously address the rising global inequality of wealth (think sweat shop labor).

Nor does he address the issue of global warming, environmental decay, and resource depletion—and the ability of MNC’s to cast doubt on the seriousness of these issues. All of these issues are the dark underside of globalization, on which I tend to focus. He frames the discussion in such a way as to avoid these issues—most economists follow his lead.

Anyway, the article is worth discussing. Most economists would agree with Palisano. ...

I'm a bit rushed until much later today and can't do much with this, so, quickly, here's the beginning and end of the article along with a link to the whole thing. Hopefully, some of you can provide analysis:

The Globally Integrated Enterprise, by Samuel J. Palmisano, Foreign Affairs: Beyond Multinational The multinational corporation (MNC), often seen as a primary agent of globalization, is taking on a new form, one that is promising for both business and society. From a business perspective, this new kind of enterprise is best understood as “global” rather than “multinational.”

Continue reading ""The Globally Integrated Enterprise"" »

Wednesday, February 14, 2007

Edward Prescott: 'Competitive Cooperation'

 Edward Prescott, winner of the 2004 Nobel Prize in Economics, defends globalization:

'Competitive Cooperation' by, Edward C. Prescott, Commentary, WSJ: Of all the thankless jobs that economists set for themselves when it comes to educating people about economics, the notion that society is better off if some industries are allowed to wither, their workers lose their jobs, and investors lose their capital -- all in the name of the greater glory of globalization -- surely ranks near the top. This is counterintuitive to many people (politicians among them), because they view it the government's economic responsibility to protect U.S. industry, employment and wealth against the forces of foreign competition. If the government has any economic role at all, surely this must be it.

Actually, no. Government has a higher calling ..., which is to provide the opportunity for people to seek their livelihood on their own terms, in open international markets, with as little interference from government as possible. That doesn't mean we shouldn't provide short-term social insurance policies to aid those displaced by foreign competition, but the purpose of that aid should be to prepare workers, not protect them. ...

[B]roadly speaking -- and these broad operating principles matter -- those countries that open their borders to international competition are those countries with the highest per capita income. ...

How to explain this phenomenon? The answer lies predominantly with competition ... [I]t is useful to consider the example of the U.S., which, from its early days, created wealth from the healthy competition among businesses and industries in its member states. ...

This same competitive cooperation has been firing the economic engine of Europe for 50 years... And there is other evidence throughout the world for the benefit of international openness. Like the U.S., Australia is also a tale of competition among member states... The five wealthy countries of Eastern Asia -- Taiwan, Singapore, Japan, South Korea and Hong Kong -- were not so well off just a few decades ago, but their subsequent commitment to export markets and international competition put them on an upward trajectory that has improved the lives of millions of people.

And what of Latin America? Unfortunately, the region provides a case study in the perils of protectionism. ... [There is] much evidence to support ... that competitive barriers are to blame for Latin America's retarded growth. ...

Of course, many other factors account for marginal differences in productivity and wealth among countries that are already wealthy -- tax rates being key among those factors -- but they are comparative "frosting on the cake," and the cake in this case is the institutional commitment to international competition. ...

Protectionism is seductive, but countries that succumb to its allure will soon have their economic hearts broken. Conversely, countries that commit to competitive borders will ensure a brighter economic future... This lesson should not be lost on the U.S., the paragon of competitive growth, where politicians and policy makers are contemplating whether to construct more protective barriers. It is openness that gives people the opportunity to use their entrepreneurial talents to create social surplus, rather than using those talents to protect what they already have (or to protect rents, as economists like to say). Social surplus begets a rising standard of living, which begets growth, which begets social surplus, and so on. Rent protection stops growth cold and keeps people poor.

People in all countries are motivated to improve their condition, and all countries have their share of talented risk-takers, but without the promise that a competitive system brings, that motivation and those talents will only lie dormant. ...

Wednesday, February 07, 2007

Kenneth Rogoff: Why Hasn't the Dollar Crashed Yet?

Ken Rogoff looks at "the world's largest foreign aid program," foreign loans to the U.S., why the dollar hasn't collapsed under increasing pressure from the trade deficit, and the risks ahead:

Betting with the house's money, by Kenneth Rogoff, Project Syndicate: Many people have been asking why the dollar hasn't crashed yet. Will the United States ever face a bill for the string of massive trade deficits...? ...[S]taggeringly, US borrowing now soaks up more than two-thirds of the combined excess savings of all the surplus countries in the world...

Foreigners are hardly reaping great returns on investing in the US. On the contrary, they typically get significantly lower returns than Americans get on their investments abroad. ...[T]he central banks of Japan and China are holding almost two trillion dollars worth of low-interest bonds. A very large share of these are US treasury bonds and mortgages. This enormous subsidy to American taxpayers is, in many ways, the world's largest foreign aid program. ...

Most sober analysts have long been projecting a steady trend decline in the dollar... So why hasn't more adjustment taken place already? The first answer, of course, is that the trade-weighted dollar has fallen - by more than 15% in real terms since its peak in early 2002. Yet the US deficits have persisted, and even risen, since then.

The real driving force has been two-fold. First and foremost, America's government and consumers have been engaged in a never-ending consumption binge. On the consumer side, this is quite understandable. ...

Overall, after almost 25 years of stunning prosperity, punctuated by only two mild recessions, most Americans feel pretty confident about their economic situation. ... So it is not surprising that private consumption continues to hold up... People have enjoyed such huge capital gains over the past decade that most feel like gamblers on a long winning streak. By now, they see themselves as playing with the house's (or their houses') money.

It is less easy to rationalise why the US government is continuing to run budget deficits despite a cyclical boom. When a fiscally responsible government launches a war, it typically cuts back on other domestic expenditures and raises taxes. The Bush administration did the opposite. It may not be good economics, but the strategy proved to be good politics, for a time. Unfortunately, it is unlikely the new Democratic majority in Congress will do much about it.

Of course, it takes two to tango. In order for the US economy to run deficits with the world, other countries must be willing to ... supply ... savings. Ben Bernanke ... once famously pinned the whole US current account deficit on a "global savings glut". But it would be more accurate to say that there is global investment shortfall, with investment trending downwards despite the upward trend in global growth.

This investment shortfall is due to many factors, but perhaps the main one is ... substantial medium-term institutional roadblocks to investment in many developing countries, where long-term returns now seem to be by far the highest. The net result is that money is being parked temporarily in low-yield investments in the US, although this cannot be the long-run trend.

What then is future of the dollar? As long as the status quo persists, with strong global growth and stunning macroeconomic stability, the US can continue to borrow and run trade deficits without immediate consequence. Over time, the dollar will still decline, but perhaps by no more than a couple of percent a year. Nevertheless, it is not hard to imagine scenarios in which the dollar collapses. Nuclear terrorism, a slowdown in China, or a sharp escalation of violence in the Middle East could all blow the lid off the current economic dynamic. ...

In sum, the fact that the US trade balance has defied gravity for so many years has made it possible for the dollar to do so, too. But some day, the US may well have to pay the bill for its spendthrift ways. When that day arrives, Americans had better pray that their creditors will be as happy to accept dollars as they are now.

Update: Kenneth Rogoff continues to worry about the stability of the global financial system. This is from the Financial Times:

No grand plans, but the financial system needs fixing, by Kenneth Rogoff, Commentary, Financial Times: What ever happened to all the grandiose plans for improving the global financial architecture? Up until a few years back, leading policy economists seemed to be tripping over themselves to come up with blueprints for radical change. Particularly popular were plans for new global institutions... More modest plans (such as mine) merely called for a sweeping restructuring of the major existing multilateral financial institutions, the International Monetary Fund and the World Bank.

Over the past couple of years, however, all introspection appears to have vanished. Instead, the policy community has developed a smug belief that enhanced macroeconomic stability at the national level combined with continuing financial innovation at the international level have obviated any need to tinker with the system. ... There is no problem that markets cannot solve.

Really? How well would markets handle the fallout from a sharp slowdown in India or China? How would they react to a dirty nuclear bomb in a US city..., and a sudden reluctance on the part of global investors to keep financing America’s 800-plus billion dollar current account deficit? Or a rapid escalation of conflict in the Middle East that encompassed Iran and Saudi Arabia? ...[C]ontrary to market perceptions, global central banks have only very limited instruments for dealing with a genuinely sharp rise in global volatility, particularly one that is geo-politically induced.

True, it is not clear that any of the grand plans of the past couple of decades would better equip the world economy to deal with such catastrophic shifts. The typical grand plan was far too simplistic and heavy-handed... But just because most grand plans were far too simplistic does not mean we should dismiss the deeper problems that they aimed to address. ...

The real shame with the disappearance of grand plans is that they had provided a valuable reservoir of ideas to spur major improvements in the world’s existing multilateral financial institutions. ...

We should bemoan the world’s lack of interest in grand plans to improve the financial architecture, but not because any of them was necessarily perfect. The problem, rather, is a lack of the purpose and energy needed to sustain even more modest, and unambiguously positive, reforms. Which means, of course, that after the next round of crises, we shall be deluged with even more and even grander plans.

Wednesday, January 31, 2007

The "Davos Dilemma"

Can the divide between the world's political and economic forces be bridged? Martin Wolf has some possibilities:

A divided world of economic success and political turmoil, by Martin Wolf, Commentary, Financial Times: The world's economy is in excellent shape, but its politics is disturbing. ..-. The question is whether and how this divergence might end. ...

One possible outcome might be the exact opposite of conventional wisdom: economic disappointment and political stability. ... Today, the underpricing of risk and the combination of low interest rates with fast growth almost invite economic blunders. Meanwhile, the world's political leaders, aware of the risks of conflict and reliant on their people's prosperity for retaining power, may well continue to muddle through. This surprising outcome is quite possible.

A second alternative is that the economic and political tracks would continue in their separate directions. The reason for this would be that, far from being distinct, the contrasting economics and politics are two faces of just one globalising world. ...

The fact that economics is making our world more interdependent and connected, while politics remains national or local, makes the contrast between economics and politics inevitable. ...

It is plausible, therefore, that political disarray and economic success will continue in tandem, the challenge being to avoid the emergence of too wide a gap between the two. For, as we learned in the first half of the 20th century, a big enough backlash is capable of causing devastation. In a nuclear age, that devastation would be greater still. ...

A third possibility is that the politics overwhelms the economics, as it did between 1914 and 1945 and in the communist "second world" and much of the so-called "third world" for much longer. An attack on Iran - a much-discussed possibility in Davos - would bring far closer the clash of civilisations... feared by so many... In that case, the economic optimism of today would prove unfounded - possibly destroyed by a world of $150-a-barrel oil in the aftermath of the closing of the straits of Hormuz through which so much of the world's oil flows.

Yet there is also a far more comforting possibility: the economics overwhelms the politics. One of the stories of our era is the way in which vast countries such as China and India are orienting their politics around the goal of prosperity. This forces them to seek domestic and global stability and accept international openness and mutual dependence. They see no benefit in international conflict. It is surely possible that this view of national priorities will take hold in more of the world, including the Middle East. ...

In such a world, the issues discussed in Davos - climate change, the Doha round and African development - might be handled successfully. The difficulties of collective action are profound. But ..., the less credible are unilateral approaches to a resolution, the more likely are co-operative ones.

This year's "Davos dilemma" - the contrast between the world's favourable economics and troublesome politics - is clear enough. But its resolution is not. A range of possible outcomes, from the perverse and catastrophic to the uncomfortable and even benign, is conceivable. The outcome is not inevitable. We can choose. ...

Tuesday, January 30, 2007

FRB Dallas: Does Foreign Direct Investment Help Emerging Economies?

This Economic Letter from Anil Kumar of the Dallas Fed asks whether FDI helps developing countries grow. With a bit of qualification, the author finds the answer is yes:

Does Foreign Direct Investment Help Emerging Economies?, by Anil Kumar, Economic Letter, FRB Dallas: The gap between the world’s rich and poor countries largely comes down to the financial and physical assets that create wealth. Developed economies possess more of this capital than developing ones, and what they have usually incorporates more advanced technologies. The implication is clear: A key aspect of economic advancement lies in poorer nations’ capacity to acquire more capital and scale the technological ladder. Emerging economies undertake some capital formation on their own, but in this era of globalization, they increasingly rely on foreign capital.

Indeed, total capital flows to developing economies have skyrocketed from $104 billion in 1980 to $472 billion in 2005.[1] The foreign capital has the potential to deliver enormous benefits to developing nations. Besides helping bridge the gap between savings and investment in capital-scarce economies, capital often brings with it modern technology and encourages development of more mature financial sectors. Capital flows have proven effective in promoting growth and productivity in countries that have enough skilled workers and infrastructure. Some economists believe capital flows also help discipline governments’ macroeconomic policies (see box titled “Does Financial Globalization Shape Fiscal Policy?”).

Capital flows come in three primary forms:

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Hal Varian's Answer to Larry Summers

Hal Varian, in response to Larry Summers' column on the steps that must be taken "If America is to maintain its leadership in life sciences," emails:

My answer to Larry Summers: What Goes Abroad Usually Comes Back, With Benefits

Econ 1 trade theory says: invest in those areas in which you have a comparative advantage. I think that you can make the case that we have a comparative advantage in this area [biotech], but of course, the argument should be made.

Here’s the column:

What Goes Abroad Usually Comes Back, With Benefits, by Hal Varian, Commentary, NY Times, March 11, 2004: The Jan. 31 issue of The Economist described the consequences of high-tech jobs moving overseas.

According to the story, "with the trans-Atlantic shift in R&D goes many high-value jobs, as well as a greater share of the industry's profits." This trend has led to an "increasing concern" in the industry, with some executives speaking out against the outsourcing trend.

Old news, you might say. The press is filled with articles about high-tech jobs being outsourced to India.

The twist here is that the article is about biotech research jobs being outsourced to the United States from Europe. But the language is eerily familiar: replace "biotech" with "infotech" and switch the roles of Europe and America and this story could pass for yet another Silicon Valley requiem.

Articles like this should remind us that trade is a two-way street.

The money paid to foreign producers, whether businesses or workers, typically comes back home to buy domestic goods and services, thereby generating domestic employment. That is true whether it is European companies paying American biotech researchers, or American companies paying Indian programmers.

Think about it. If Oracle sends $10,000 abroad to pay an Indian programmer, then that money either finds its way back to the United States or it doesn't. If it comes back, it can be used to buy American goods and services, employing American workers. If it doesn't come back then it's even better from the viewpoint of the country: we've sent them paper, while they've sent us valuable goods and services.

Yes, these days it's more likely bits than paper, and maybe they are sending us more services than goods. And perhaps the way the money comes back is via a purchase of Treasury bonds or other financial securities.

But the same principle applies. If the income from the Treasury bonds is used to buy something produced in the United States, it creates jobs. If the money is never spent in the United States, we've gotten something for nothing.

The political problem with trade is simply this: when the dollars flow offshore, it is easy to identify those who are hurt. But when the dollars flow back, it is much more difficult to discern the beneficiaries.

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Saturday, January 27, 2007

A Smaller Share of Larger World Markets

Daniel Gross says that as the rest of the world develops we shouldn't be surprised - or alarmed - that the U.S. is losing market share in financial services and other industries. Because it's a natural consequence of global development, there is no need to relax the regulation of financial markets to preserve competitiveness as some are advocating:

The U.S. Is Losing Market Share. So What?, by Daniel Gross, Economic View, NY Times: Last week, Mayor Michael R. Bloomberg and Senator Charles E. Schumer released a report that warned of New York’s decline as a global financial capital. ...[T]he report, by the consulting firm McKinsey & Company, suggested solutions as diverse as easing regulation on publicly held companies and changing visa requirements so investment banks can more easily recruit foreign math whizzes.

But the report, which focused on domestic issues like securities regulation, overlooked a major economic trend. The United States is losing market share in the global economy, and that is not necessarily a bad thing. ...

For much of the 20th century, China, India and Russia did not participate in the global economic system. As they modernize..., they will grow more rapidly than established economies. ...

Economists note that the United States continues to play an anchoring, even dominant, role in global financial services... In this sphere, the United States is losing out more to European capitals than to Shanghai — and for reasons that have less to do with regulation and more to do with geography and geopolitics.

The euro zone has expanded in recent years to include more countries, thus increasing the appeal of the currency. ... Meanwhile, the capital that the United States exports to China, Russia, India and the Persian Gulf is increasingly being used to develop local financial markets. “It’s not entirely surprising that a certain share of financial activity is migrating to foreign geographical locations where savings growth is taking place,” Mr. Setser said.

Add it up, and the United States, while still the world’s largest single economic power, is clearly no longer the sole superpower. ... Ultimately, the decline of economic pre-eminence may be more damaging psychologically than economically. ...

More broadly, the fact that economies that were closed to outside investment a generation ago are now creating systems of market capitalism should be seen as a victory for the United States, not a defeat. “Many of the countries that are doing well are mimicking the best of what America has stood for — globalization and the export of the American capital markets culture,” said Mr. O’Neill at Goldman Sachs. “There’s nothing that New York and U.S. policies can do about it unless they want to roll back globalization.”

Wednesday, January 24, 2007

Why Globalization is Opposed

Deepak Lal of UCLA gives his theory of why globalization is opposed by the cultural nationalists in the third world and the New Dirigistes in the West:

Why globalising capitalism is hated, by Deepak Lal, Commentary, Financial Times (free): Globalising capitalism is opposed by two major groups - the cultural nationalists in the third world, who fear the westernisation it may bring and the New Dirigistes, proponents of the “third way’” in the West who bear the ancient hatred of capitalism on their sleeves. Why this continuing hatred of, and guilt about, a system which promises unprecedented global prosperity? ...

Whilst ... maverick capitalists existed in all the ancient agrarian Eurasian civilisations, it was only in one that they came to be given their head, ... eventually becoming socially and politically acceptable. This marked the emergence of capitalism as an economic institution which led to the great divergence between the West and the Rest.

My contention ... is that the Great Divergence resulted from a legal revolution in the 11th century instigated by Pope Gregory VII who, in 1075, put the Church above the State and, through the resulting Church-State, created the whole legal and administrative infrastructure required by a full-fledged market economy. ... The 11th century Papal revolution, by creating the church-state, provided a legal bulwark and administrative system whose reach, unlike most of the political states, covered the whole of Western Christendom. It allowed the novelty seeking and risk-taking capitalists to pursue securely their enterprise over a larger space and with myriads of strangers, thus initiating the economic system which has changed the world.

This Papal revolution which changed the West’s ‘material’ beliefs was preceded and precipitated by an earlier 6th century revolution of Pope Gregory the Great which changed the West’s ‘cosmological’ beliefs ( on ‘how one should live’) from the communalism common throughout Eurasia to individualism, particularly in the domestic domain concerning sex and marriage. By promoting marriages based on the universal but ephemeral emotion of love, it went against the common Eurasian pattern of arranged marriages, which eschewed a fickle emotion’s threat to the families needed for settled agriculture. To counter the threat unleashed by individualism..., the Christian Church created a fierce guilt culture which provided its moral moorings, until the Darwinian and Freudian revolutions destroyed its bases of God and Guilt.

These twin Papal revolutions have cast a long shadow. Though temporally conjoined, the change in ‘cosmological’ beliefs promoting individualism is not necessary for the change in ‘material’ beliefs promoting capitalism. It is the latter that globalisation is spreading through the world...

The capitalism thereby promoted has been under attack since the romantic revolt against the enlightenment and its ‘disenchantment of the world’. The arguments have been mainly moral and aesthetic. For both the cultural nationalists and the New Dirigistes, globalisation is seen as a Faustian pact where prosperity is bought at the cost of losing one’s soul. However, unlike their 19th century predecessors, the New Dirigistes can no longer appeal to a socialist utopia to provide a middle way between the creative destruction of capitalism and the settled unchanging way of life in attune with Nature of their agrarian past. They now seek to humanise capitalism through regulation and social and moral paternalism. The demoralisation of societies perceived as accompanying the rise of globalising capitalism has been wrongly attributed to the instrument of their prosperity, capitalism, rather than the growing moral vacuum in the West, which they themselves have promoted, and which has destroyed the West’s traditional and conventional moral moorings.

The moral cement of non-monotheistic Eurasian societies was provided by conventions and traditions transmitted to the young through the moral emotions of shame and guilt. ... The West’s current ‘cosmological’ beliefs ... are incoherent - a mish mash of Enlightenment ideals of individual self-realisation, standards of competitive success in an acquisitive society, and a residual of Christian belief in transcendental salvation.

It is the global transfer of this demoralisation of the West, particularly in the domestic domain, that the cultural nationalists most fear. Eurasia’s wounded civilisations had three responses to the Western imperial impact. The first, like the Japanese, was to accept the material beliefs of the West, whilst keeping their cosmological beliefs. The second, embodied by Gandhi and the current Islamists, was to eschew modernisation as it would lead to westernisation. The third, and most common, was to find a middle way between tradition and modernity though some form of socialism - the extreme Enlightenment version followed by Stalinist Russia and Maoist China, or the gentler Fabian version...

The failure of this path has at last led the two largest Eurasian civilisations, India and China, to follow the Japanese path by recognising that globalising capitalism offers them the means for prosperity without losing their souls. So, it is in the lands where Islamists hold sway and among the New Dirigistes of the West, that hatred of globalising capitalism still remains for essentially atavistic reasons.

Comments so far are not favorable:

tom s.: He lost me at the first two sentences. ...Why would I give any time to someone who starts off saying that the issue is my fear and hate? ... If he was interested in addressing me he would not start off in such an insulting manner; therefore he is not addressing me; therefore I will not read the rest of what he has to say.

nanni: I beg to differ. Among my people, globalisation has negative connotations because it takes away power from the individuals. As a consequences, the communality of daily life has become more and more frustrating and aggressive. ...

dissent: I've noticed that rightwing ideologues often argue against their ideological opponents by ... imagin[ing] the feeling their opponents must, in their view, have, then deride them for it. Often no one has that feeling, it is a strawman argument...

save_the_rustbelt: This guy is really impressed with himself, and gee whiz, he can use a lot of big words. In non-academic terms, he is a pompous windbag.

dale: this is a level of analysis surpassed over 150 years ago. are there still folks who do not see that modernity, in both its cultural form and its economic form is highly ambivalent?

String Quintet in C major: What a load of pretentious, loaded bollocks. The whole thing is ripe for fisking, but one can´t be bothered. ...

Ninjaplease: "Why this continuing hatred of, and guilt about, a system which promises unprecedented global prosperity? ..." Hahahahahhaha! Ah yes, please parade out some more promises. Do you remember the promises, promises... I Doooooo ...

evagrius: I'm curious about the Papal references. While I think the changes resulting from Gregory VII actions resulted in a more "unified" Western Europe by establishing better distinctions between Church and State, I'm not so sure Gregory the Great, who was a monk, had any role in establishing what is now known as "romantic love". From what I remember, "romantic love" came about much later, around the 11-1200's with the troubadors, influenced by Moslem love poetry and music originating from the Indian/Persian area. As for Gregory VII, he might have strenghtened the Church in its struggle against the numerous number of nobility who wanted more power and domination but I don't think that he was the main reason for the establishment of a more universal "market". I would rather put that to the growing influence of cities and the establishment of universities which created a cosmopolitan class of wandering scholars, poets, etc; who, speaking a universal tongue, Latin, were able to travel and communicate over great distances. In any case, neither action by the Popes in question, destroyed the "cosmological beliefs" of the societies they lived in. Those beliefs were destroyed quite a while later. Given all that, the gist of his argument is rather weak. He does not show why material prosperity, ( which as recent events are showing comes at the great price of environmental destruction, pollution, etc; as well as social disruption and loss of human cultures and societies), is any great boon to those who are still, more or less, living in what could be called traditional societies. I'm curious as to his own relation with the culture he seems to be from. Given his name, I take it that he is from India. I wonder what his relations are with the cultures, traditions and beliefs of India.

yan: Another attempt to revive European exceptionalism as explanation for the Industrial Revolution, this time in the form of some rather tangential papal reforms and their impacts on the mentalities in the West. I'm more inclined to give credence to Weber's Protestant ethic than to this fanciful fabrication, although neither is really a historically rigorous explanation.

It is particularly interesting that "Great Divergence" is capitalized in an attempt to engage with the ongoing academic dialogue on the subject. While I don't agree with the full explanations that Pomeranz advances for the Great Divergence, he is extremely convincing on two fronts. First, every major theory of European exceptionalism that has been proposed in the course of the last 150 years is refuted by a presentation of very detailed comparative evidence. Second, he demonstrates that access to coal was simply a matter of good fortune and coal was a sine qua non for industrialization.

(For those not up to date on the latest in economic history the book I am referring to and the one the above author is obliquely criticizing is Kenneth Pomeranz's The Great Divergence: China, Europe and the Making of the Modern World Economy.)

Monday, January 22, 2007

Has the World Decoupled from the U.S.?

Is the rest of  the world heavily dependent on the fate of the U.S. economy, or can other countries, for the most part, withstand a housing led slowdown in the U.S.?:

The Global Question: Who Needs the U.S.?, by Peter Gumbel, Time: ...Nicole Leibinger-Kammüller ..., chief executive of Trumpf, a family-owned machine-tool firm in Germany, has watched orders from the critical U.S. market slow significantly in the past few months. But while the housing-bled U.S. economy has been sluggish, and the dollar weak, it's all proving quite manageable. "We can feel the U.S. slowdown, but it's not unsettling. There's no crash," Leibinger-Kammüller says. Trumpf's sales of its metal-cutting machines elsewhere--to Saudi Arabia, to Singapore and especially in Germany--continue to rack up double-digit growth rates. ...

Economists and policymakers ... have been furiously debating whether the world has "decoupled" from the U.S. economy. The U.S. constitutes about 28% of global gross domestic product (GDP) as measured in dollars, and it accounted for one-fifth of worldwide growth from 2000 to 2006. When the U.S. faltered in the past, the rest of the world staggered. And certainly there are signs of fatigue. A cooling housing market slowed U.S. GDP growth to 2% in the third quarter...

Jim O'Neill, London-based head of global economic research for Goldman Sachs, says that even if the U.S. economy remains soft for much of the year, "we're pretty confident that the rest of the world will withstand it." ... At the German Engineering Federation in Frankfurt, chief economist Ralph Wiechers concurs. "It used to be that the U.S. economy supported the world economy," he says. "Now it's the other way around." ...

Still, even the biggest optimists concede that nobody would escape unscathed if the U.S. economy were to hit a wall. Its big local trading partners, Mexico and Canada, would probably be hurt the most, but the reverberations would be felt worldwide. The key bone of contention is the extent of the suffering.

Those who dispute the decoupling theory point to the seemingly insatiable appetite of American consumers for imported goods, which has been a critical driver of the world's economic expansion. ...

Stephen Roach ... has long warned about the dangers of flagging U.S. demand. Now he's concerned too about signs he sees of a possible Chinese slowdown--one reason why he thinks global growth this year will be "significantly below what most are expecting."

So will it be a "happy slowdown," as Goldman's O'Neill predicts, or a meltdown? You can have your own debate; in the meantime, here are some of the key issues:

THE U.S.: GO YANKEES What economists are struggling to predict is how pervasive the impact of this housing slowdown will be on the rest of the U.S. economy, and abroad. Perhaps most surprising, American consumers are continuing to spend...

ASIA: SPENDERS WANTED Purchases by Asia's rising middle class have made the region far less dependent on exports to the U.S. to power the economy. Today only 16.5% of Asia's exports are sold in the U.S., down from 25.5% in 1993. Yet there are significant regional differences. ...

EUROPE: HOLD ON It's the euro that has so far borne the brunt of the dollar's decline: it rose about 10% last year against the greenback. A stronger currency makes European exports more expensive for foreign buyers. But that hasn't prevented Germany from notching up its biggest trade surplus since the fall of the Berlin Wall 16 years ago. The good news is that buoyant exports have boosted business confidence in Europe's biggest economy and led to an unexpectedly strong increase in domestic demand...

Can Germany take the load off the U.S. and the rest of Europe? Growth in the 13 nations that have adopted the euro is expected to be 2.6% in 2006, unusually strong for the growth-challenged Continent... "Europe is going to have a great year," reckons Harvard professor Kenneth Rogoff, former chief economist at the International Monetary Fund...

Sunday, January 21, 2007

Does Financial Liberalization Help Developing Countries?

This commentary by Gerard Baker makes the claim that developing countries that allowed the most financial liberalization have seen the best economic performance in terms of moderation in the variability of inflation and output:

It is the liberation of markets and the opening-up of choice that lie at the root of the transformation. The deregulation of financial markets over the Anglo-Saxon world in the 1980s had a damping effect on the fluctuations of the business cycle. These changes gave consumers a vast range of financial instruments (credit cards, home equity loans) that enabled them to match their spending with changes in their incomes over long periods. ... The economies that took the most aggressive measures to free their markets reaped the biggest rewards.

I noted that the evidence for this claim that financial liberalization stabilized developing economics is scant (e.g. below it states "Nor, on balance, has liberalization of capital flows stabilized consumption") and there remains quite a bit of uncertainty and ongoing research on the source of the Great Moderation.

This Project Syndicate piece by Dani Rodrik of Harvard continues the discussion on whether financial liberalization is a key factor in generating higher growth and stability for developing countries. He argues that there is little evidence that financial liberalization is beneficial:

The False Promise of Financial Liberalization, by Dani Rodrik, Project Syndicate: Something is amiss in the world of finance. The problem is not another financial meltdown in an emerging market, with the predictable contagion that engulfs neighboring countries. Even the most exposed countries handled the last round of financial shocks, in May and June 2006, relatively comfortably. Instead, the problem ... is ... that relatively calm times have helped reveal: the predicted benefits of financial globalization are nowhere to be seen.

Financial globalization is a recent phenomenon. One could trace its beginnings to the 1970’s, when recycled petrodollars fueled large capital inflows to developing nations. But it was only around 1990 that most emerging markets threw caution to the wind and removed controls on private portfolio and bank flows. Private capital flows have exploded since, dwarfing trade in goods and services. So the world has experienced true financial globalization only for 15 years or so.

Freeing up capital flows had an inexorable logic – or so it seemed. Developing nations, the argument went, have plenty of investment opportunities, but are short of savings. Foreign capital inflows would allow them to draw on the savings of rich countries, increase their investment rates, and stimulate growth. In addition, financial globalization would allow poor nations to smooth out the boom-and-bust cycles associated with temporary terms-of-trade shocks and other bouts of bad luck. Finally, exposure to the discipline of financial markets would make it harder for profligate governments to misbehave.

But things have not worked out according to plan. Research at the IMF, of all places, as well as by independent scholars documents a number of puzzles and paradoxes. For example, it is difficult to find evidence that countries that freed up capital flows have experienced sustained economic growth as a result. In fact, many emerging markets experienced declines in investment rates. Nor, on balance, has liberalization of capital flows stabilized consumption.

Most intriguingly, the countries that have done the best in recent years are those that relied the least on foreign financing. China ... has a huge current-account surplus, which means that it is a net lender.... Among other high-growth countries, Vietnam’s current account is essentially balanced, and India has only a small deficit. Latin America, Argentina and Brazil have been running comfortable external surpluses recently. In fact, their new-found resilience to capital-market shocks is due in no small part to their becoming net lenders to the rest of the world, after years as net borrowers.

To understand what is going on, we need a different explanation of what keeps investment and growth low in most poor nations. Whereas the standard story – the one that motivated the drive to liberalize capital flows – is that developing countries are saving-constrained, the fact that capital is moving outward rather than inward in the most successful developing countries suggests that the constraint lies elsewhere. Most likely, the real constraint lies on the investment side.

The main problem seems to be the paucity of entrepreneurship and low propensity to invest in plant and equipment ..., especially to raise output of products that can be traded on world markets...

When countries suffer from low investment demand, freeing up capital inflows does not do much good. What businesses in these countries need is not necessarily more finance, but the expectation of larger profits for their owners. In fact, capital inflows can make things worse, because they tend to appreciate the domestic currency and make production in export activities less profitable...

Thus, the pattern in emerging market economies that liberalized capital inflows has been lower investment in the modern sectors of the economy, and eventually slower economic growth (once the consumption boom associated with the capital inflows plays out). By contrast, countries like China and India, which avoided a surge of capital inflows, managed to maintain highly competitive domestic currencies, and thereby kept profitability and investment high.

The lesson for countries that have not yet made the leap to financial globalization is clear: beware. Nothing can kill growth more effectively than an uncompetitive currency, and there is no faster route to currency appreciation than a surge in capital inflows.

For those countries that have already made the leap, the choices are more difficult. Managing the exchange rate becomes much more difficult when capital is free to come and go as it pleases. But it is not impossible...

Given all the effort that the world’s “emerging markets” have devoted to shielding themselves from financial volatility, they have reason to ask: where in the world is the upside of financial liberalization? That is a question all of us should consider.

I believe in markets and their ability to coordinate economic activity. But we have to pay attention to the evidence. If the evidence just isn't there that opening markets aids economic growth and stability, then promoting open markets for developing countries based upon the belief that markets are always and everywhere the best solution to problems of economic development and coordination is counterproductive. Such advocacy threatens, when success does not follow more open markets, to undermine support for the free-market institutions the advocates of open markets are generally promoting. A better approach would be to drop the ideological promotion of free markets, accept that markets can fail, and figure out what market failure is leading to the sub-par performance of these policies.

Saturday, January 20, 2007

Helping Displaced Workers

The Economist looks at the winners and losers from globalization and how the losers might be compensated:

In the shadow of prosperity, The Economist (open link): Nestled among the wooded Blue Ridge mountains in Virginia's far south-west, Galax is ... home to ... a huddle of textile and furniture factories. Over the past few years, globalisation has hit hard. Unable to compete with Mexican and then Chinese competition, the town's old industries have withered, taking thousands of jobs with them. Last year ...[t]hree big factories closed their doors... More than 1,000 people, around one-sixth of the town's workforce, lost their jobs.

Galax then acquired an “Economic Crisis Strike Force” for displaced workers... [T]he Strike Force helps people apply for Trade Adjustment Assistance (TAA), the government support America offers to those deemed to have lost their jobs to global competition. TAA includes up to two years of unemployment benefits while retraining, temporary subsidies to help pay medical insurance and, for those over 50, a short-term top-up to any lower-paying new job. The centre also co-ordinates more basic help, from child care to food banks run by private charities.

Thousands of people have walked through its doors in the past nine months, many several times. Around one-third of those laid off last year are being retrained. ... For some, particularly those in their 50s, the future looks bleak. At 59, Paul Rotan sees little chance of finding another job with health insurance, but he is still six years away from qualifying for Medicare... He is terrified of what will happen in June when the temporary public subsidies for his health insurance end.

But other, mainly younger, workers are already better off. After 19 years in a textile factory, Bobby Edwards has retrained as a radiologist. ... Few of these people are enthusiastic about globalisation. “No one trusts China around here,” is a common refrain. But government help has cushioned the shock. “I'd be lost if they weren't here,” says Mr Rotan, nodding towards the centre's staff.

In the neat world of economics text-books the downside of globalisation looks much like Galax. Low-skilled workers in a rich country, such as America, suffer when trade expands with a poorer country with plenty of much cheaper low-skilled workers, such as China

If labour markets are efficient in the rich country the displaced workers should find new jobs, but their wages will probably fall. Although the country overall gains handsomely, these people are often worse off. Hence the case for redistributing some of trade's gains and compensating the low-skilled losers. ...

One study suggests that, during the 1980s-90s, 65% of manufacturing workers in America who lost their jobs to freer trade were employed two years later, but most took a pay cut. A quarter suffered pay losses of more than 30%. ...

How much to spend? Nonetheless, help for displaced workers has always been modest compared with the gains from trade. ... The United States spends around $1 billion a year on helping trade-displaced workers. But the economy overall, by one estimate, gains $1 trillion a year from freer trade. ...

Public scepticism about trade is rising in both rich countries and poor. A host of big economic shifts, such as rising income inequality, are blamed on global integration. ... America's elections last November brought in a clutch of lawmakers deeply opposed to freer trade. To control this backlash, globalisation's champions are keen to appear more sensitive to the losers.

Already, some shifts are evident. One of the first bills introduced in the Democrat-controlled Senate is a big expansion of TAA, covering not merely manufacturing workers but also service workers whose jobs have been “offshored”, and offering help not just to individual factories, but to whole industries. ... The fate of the current bill is uncertain, but the Democrats have stressed that their support for future trade agreements depends on more help for workers who lose out. ...

But cause and effect may not be so obvious. ... To judge by the number of people receiving TAA, the [displacement is low]...: fewer than 120,000 workers were deemed eligible for it in 2005. In the much bigger services sector, the share is lower still. For all the hoopla about offshoring, the best estimates suggest that only about 1m American service-sector jobs have actually moved overseas. In short, trade's role in job losses is much smaller than the public angst suggests.

Most economists have long held that technology, rather than globalisation, is the main cause of the rising gap between the pay of the high- and low-skilled. But some argue that the distinctions between trade and technology are increasingly irrelevant. ... (see article).

In the 21st century competition between firms and industries, ... is becoming less important than competition between individual tasks within firms in different countries. Whether he is employed in a furniture company or a hospital, the American data-processor will be competing against someone from Bangalore. Rather than affecting entire industries, or whole factories, global competition will affect individual jobs—skilled as much as unskilled.

Such a shift helps explain the popular nervousness about globalisation. Many more workers are worried that their jobs will be at risk. That, in turn, increases the political appeal of assisting trade's losers. ...

An alluring Danish model As a result, it may be better to focus on policies which improve job prospects for all workers. In Europe, Denmark has led the way. The Danish system of “flexicurity” appears to offer the best of both worlds: dynamic labour markets and low unemployment coupled with generous support for those who lose their jobs. ...

Employers hire and dismiss people at will. Around a quarter of the workforce is unemployed at some point in any year. But the jobless enjoy generous welfare benefits while they look for work, around 80% of their previous wage on average. To ensure this does not deter people from finding new jobs, the Danes oblige the unemployed to be trained and to look diligently for work. ...

But Denmark's approach has evolved over decades and cannot easily be copied. Besides, it is extremely expensive. ... Denmark ... spends more than 5% of GDP on the unemployed, including almost 2% of GDP on its “active” training and job-search programmes. ...

For America, which currently spends a mere 0.16% of GDP on such “active” labour-market policies, the idea of Danish-style “flexicurity” is more a slogan than a serious suggestion. ...

An alternative approach is to give displaced workers a subsidy if they are forced into a lower-paying job. Such “wage insurance” already exists in a modest form on both sides of the Atlantic. ... Since 2002 America's TAA has offered wage insurance to any trade-displaced worker over 50: the government pays half the difference between the old and new wage for two years, up to a maximum of $10,000.

Getting other things right These experiments are too new to evaluate. But in theory wage insurance is appealing. It helps soothe workers' fears that they will suddenly lose income, but also keeps labour markets flexible by encouraging people to find a new job quickly. Many on America's centre-left see it as the key to maintaining political support for trade.

The proposed expansion of TAA would make any trade-displaced worker over 40 eligible for wage insurance. And more ideas are floating around Washington's think-tanks. ...

As public fears of globalisation rise, so will the political appeal of these schemes. But they will have less impact than getting other, more basic, policies right. Globalisation underscores the need for a flexible, dynamic labour market and a well-educated, adaptable workforce. And a worker whose health care is not tied to his job will be less worried about trade than one for whom job loss also spells the loss of medical insurance. The tasks of ... reforming health care ... and improving education ... are far more important than any amount of experimentation with wage insurance or retraining schemes. If politicians really want to respond to the worries caused by globalisation, those are still the best places to start.

In an earlier section, after explaining how an older worker relies heavily on the TAA program, and how a younger worker benefited from retraining ("government help has cushioned the shock"), the article turns to economic theory and concludes: "Although the country overall gains handsomely, [displaced workers] are often worse off. Hence the case for redistributing some of trade's gains and compensating the ... losers." Thus, the article cites both theory and evidence in favor of programs that help displaced workers.

In addition, the article finds further support for the wage insurance component of TAA because it can help with labor market flexibility. The first paragraph of the last section says "wage insurance is appealing. It ... keeps labour markets flexible..." The third paragraph says "Globalisation underscores the need for a flexible ... labour market..." The conclusion? "The tasks of ... reforming health care ... and improving education ... are far more important than any amount of experimentation with wage insurance." Thus, wage insurance is appealing, it's needed, and that leads to the conclusion that it's not very important. I can't explain why the article spends so much time building a strong case for helping displaced workers, then is dismissive of programs that do just that in the final paragraph.

One final point, there is no need to distinguish between workers displaced by technology and those displaced by globalization when talking about which workers deserve help. But both are a form of structural change and cause workers to be hurt for reasons that have nothing to do with their own abilities and effort, they are just unlucky enough to be employed in the wrong industry, and wage insurance and other programs should apply in either case.

Monday, January 15, 2007

An Interview with Joseph Stiglitz

Here are parts of an interview with Joseph Stiglitz from AlterNet:

Globalization Has Increased the Wealth Gap, by Terrence McNally, AlterNet: ...

You write, "...Economists believe incentives matter. There are strong incentives -- and enormous opportunities -- to shape political processes and the economic system in ways that generate profits for some at the expense of the many." Not news to a lot of us, but can you say a few words about that?

JS: ...[E]conomic globalization has outpaced political globalization. Because we are more interdependent, there's a greater need to take collective action and work together. But our political institutions and our mindsets have not really kept pace. We do have certain international political institutions, but they are very removed from democratic processes.

The World Trade Organization and the like --?

JS: Exactly. There's been a heavy engagement in these institutions by the multinational corporations who know how to shape the policies in ways that benefit themselves.

The WTO was basically created by them, wasn't it?

JS: Not really. The idea that you would have a rule of law in international trade is a very old idea, and actually ...

-- not the notion perhaps, but it's always seemed to me that the system of secret tribunals, for instance, in which a corporation is basically able to take a government to court, was set up to serve the multinationals.

JS: Very much so. But I want to point out that this is not inherent in globalization. The idea that a rule of law would govern international trade relations is a very important idea that many idealists thought was good. Back in the '20s one of the factors that contributed to the Great Recession was a series of trade wars, and one of the ideas behind the establishment of the WTO was to try to prevent that from ever happening again.

But you're exactly right; the agenda got seized. ...

Continue reading "An Interview with Joseph Stiglitz" »

Sunday, January 14, 2007

The Split over Trade Is Not Confined to Democrats

There has been attempt after attempt to portray the trade issue as an area where Democrats are deeply divided, and there has been much written about how Democrats will stifle trade and hurt the economy now that they are in power.

But the split is not unique to Democrats. As with immigration, Republicans are no less divided on this issue. First, the article about Democrats:

The Coming Democratic War on Free Trade, by Steve Chapman, Real Clear Politics: It's an elementary axiom of economics that if Person A sells something to Person B, it's good for each of them. Otherwise, why would they bother? It should follow that if Country A sells something to Country B, both again benefit. But Democrats have turned against that basic insight. They think if Americans buy something from abroad, it makes us worse off, and they want to protect us from such folly.

"Free," when modifying "trade," is a four-letter word on the left. Bill Clinton favored breaking down barriers to international commerce, but the idea has lost favor in the Democratic party... The American Prospect, a liberal magazine, reports with glee that "every single newly elected Democratic senator is a critic of free-trade orthodoxy."

Among the most vocal critics of open commerce is Sen. Sherrod Brown of Ohio, who ... vows not to vote for any agreement that doesn't impose strong labor and environmental standards on our trading partners. Brown reflects the views of labor unions... Demanding the imposition of American-style labor and environmental standards on poor nations is merely a ruse for rejecting trade liberalization altogether. ... Likewise with environmental rules. ...

Trade opponents retort that the job growth has been a hollow victory, because the rich are getting richer and everyone else is getting poorer. But the facts indicate otherwise. As economist Alan Reynolds notes in a new study for the Cato Institute..., the Census Bureau calculates that ... income has risen just as fast among the bottom 40 percent of households as it has among the top 40 percent. ...

Brown and others cling to the superstition that we can get rich by sealing ourselves off from the world and paying each other high prices for products made entirely in the U.S. of A. If they manage to erect new barriers to trade, we'll learn once again that protectionism is nothing but fool's gold.

Saying that '"Free," when modifying "trade," is a four-letter word on the left' is a misrepresentation. It's a misrepresentation because the same division appears on both sides of the political aisle, and because many Democrats favor free trade. More on this in a moment, but this is not the only argument the author makes that is misleading. For example, the author cites The American Prospect as gleeful that "every single newly elected Democratic senator is a critic of free-trade orthodoxy." But here's Robert Reich writing in American Prospect, and there are many more examples like this:

Continue reading "The Split over Trade Is Not Confined to Democrats" »

Tuesday, January 09, 2007

Is the High Rate of Worldwide Economic Growth Sustainable?

Martin Wolf discusses the sustainability of high rates of economic growth in both developed and developing countries:

Globalisation’s future is the big long-term question, by Martin Wolf, Commentary, Financial Times: ... Let us ask ... a ... question: how strong and sustainable is the underlying dynamic of the world economy? As Lawrence Summers noted in his most recent column ..., the world economy in aggregate grew more during the past five years than in any five-year period since the second world war. Growth is not merely strong. It is also widely shared. In 2006, ... the economies of the high-income countries probably grew by 3.1 per cent,... Meanwhile, the economies of the developing countries ... expanded by 7.0 per cent, after 6.6 per cent in 2005 and 7.2 per cent in 2004.

This performance has occurred in spite of significant economic and political shocks: the collapse of the stock market bubble in 2000, the terrorist attacks of September 11 2001, wars in Afghanistan and Iraq, the continued uncertainty about future large-scale terrorism, the jump in oil prices, protectionist rhetoric in a number of high-income economies and a breakdown in the Doha round of multilateral trade talks. ...

[T]he underlying engine of the world economy is immensely powerful. ... Today’s world economy is being driven by four closely interconnected forces: technological innovation...; entry into the world economy of the vast majority of human beings ...; the “catch-up” process in these economies; and the integration of global markets in goods, services and capital that we call globalisation...

To these forces should be added the background condition of monetary stability. ... The implication of this perspective is that any slowdown – or “mid-cycle correction” – will be short-term and shallow. Not only would the underlying dynamic remain but such a slowdown would trigger offsetting forces, including more relaxed monetary policies and, in all probability, lower oil prices, as well.

Unfortunately, there is an alternative perspective. It is that much of the world suffers from a huge surplus of savings over investment. ... The effort at absorbing this surplus has had two closely interconnected consequences: the first has been the emergence of the so-called “global imbalances” in which the US has absorbed about three-quarters of the excess savings of the rest of the world; the second has been a long period of relaxed monetary policy, particularly in Japan and the eurozone, but also for some time in the US as well. This, it is argued, has had powerful effects on asset prices, particularly house prices in a number of high-income countries. Strong house prices have, in turn, sustained demand at high levels...

The more persuasive is this “liquidity” story, the more plausible it becomes that the correction is going to be more painful than conventional wisdom believes. ... How then does one assess prospects? Provided the broad story of economic dynamism remains credible, the world economy will probably overcome temporary difficulties...

So how plausible is maintenance of the underlying dynamic? For economic policy, this raises two big questions: the first is whether inflation will be contained; the second is whether globalisation will be sustained. On the former, there is no reason to forget what we have so painfully learned. On the latter, however, there is greater uncertainty.

One reason for this is that even a relatively mild slowdown might shift policy in high-income countries, especially in the US, in a much more protectionist direction. The widespread perception that the majority of the population has not been gaining from recent growth makes that outcome more likely... An open economy will become unsustainable if a majority concludes it is against its interests.

Even more important are the fragile political underpinnings of global economic integration: the US is on the verge of what may ultimately prove the most significant defeat in its history; an attack on Iran looks possible; and North Korea has become a nuclear power. Above all, we live in a world marked by shifting relative power and religious and political turmoil in much of the Islamic world.

The big question then is not whether there will be some correction – even, at worst, a US recession... The world economy should be able to survive such a jolt, provided its underlying dynamism remains in place. What matters far more is the future of economic globalisation. On that we can hope, but cannot be confident. Its viability will depend on wise leadership – a commodity, as usual, in frighteningly small supply.

Saturday, January 06, 2007

China and the Trade Deficit

Yesterday Michael Spence, the 2001 Nobel laureate in economics, a senior fellow at the Hoover Institution, and a professor emeritus at Stanford University discussed out trade deficit with China. Here's what he had to say followed by the reactions of Brad DeLong and Brad Setser.

First, the editorial:

We Are All in It Together, by Michael Spence, Commentary, WSJ: In 2005, the People's Bank of China ... accumulated $200 billion of additional reserves and is well on its way to holding $1 trillion of reserves... The accumulation ... was the policy action that caused the value of the yuan to remain stable relative to the dollar.

Casual conversation and commentary lead most Americans to think that this accumulation of reserves corresponds to a large trade surplus in China, achieved by holding the value of their currency down. In fact, the Chinese trade surplus is not that large. It is well under 5% of GDP, smaller in percentage terms than the U.S. trade deficit.

The accumulation of reserves in China is not primarily a trade-surplus issue. In 2005, China's trade surplus was $50 billion. Net inbound foreign direct investment was another $50 billion. And then, notwithstanding capital controls, there was an additional, largely unwanted net capital inflow of $100 billion. ...

The combination ... (adding up to $200 billion) would have put strong upward pressure on the value of the currency, risking a sudden and steep loss of competitiveness. To prevent this China bought foreign and largely dollar-denominated assets. ...

China has modest inflation and a reasonable balance between demand and capacity, but is out of external balance. The policy is to maintain internal balance while simultaneously moving toward external balance without losing growth. This involves letting the exchange rate rise but at a measured pace, reducing the excessively high rate of domestic saving and stimulating domestic consumption to take up the slack created by any loss ... in exports. ...

Chinese policy makers understand that holding the exchange rate down and preventing this shifting mix runs the risk of locking the economy into a labor intensive export mode for too long. Letting the currency rise will put the right kind of pressure on the economy to evolve as incomes rise. ...[T]here is a lively internal debate about what the right speed is. ...

The U.S. position on China is politically driven and is partly right and partly incoherent.

Continue reading "China and the Trade Deficit" »

Thursday, January 04, 2007

Globalization, Wages, and Jumping J-Curves

Jagdish Bhagwati of Columbia University defends globalization in this commentary from the Financial Times:

Technology, not globalisation, drives wages down, by Jagdish Bhagwati, Commentary, Financial Times [open link]: We have recently witnessed a flurry of comment in the US on the long-running stagnation of wages. Many believe that the future livelihood of the “middle class” is also at risk.

Lou Dobbs ..., the ... Economic Policy Institute and nearly all the Democrats newly elected to Congress believe that globalisation has much to do with the economic distress of the working and middle classes. Therefore they ... want to lean on the door – even to close it – on trade with poor countries and occasionally on unskilled immigration from them.

Proponents of globalisation ... find themselves in a politically implausible position: they typically ... accept this “distributional” critique of globalisation – yet nonetheless propose that those adversely affected should accept globalisation but be aided...

As it happens, globalisation’s supporters are on firmer ground than they fear. Examine the common arguments linking globalisation to the distributional distress and little survives.

First, all empirical studies, including those done by some of today’s top trade economists (such as Paul Krugman ... and Robert Feenstra ...), show that the adverse effect of trade on wages is not substantial. ...

Second, the same goes for ... studies by the best labour economists regarding the ... influx of unskilled illegal immigrants into the US. The latest study by George Borjas and Larry Katz ... also shows a virtually negligible impact on workers’ wages, once necessary adjustments are made.

Can it be that globalisation has reduced the bargaining ability of workers and thus put a downward pressure on wages? I strongly doubt this. First, the argument is not relevant when employers and workers are in a competitive market and workers must be paid the going wage. As it happens, fewer than 10 per cent of workers in the private sector in the US are now unionised.

Second, if it is claimed that acceleration in globalisation has decimated union membership, that is dubious. The decline in unionisation has been going on for longer than the past two decades of globalisation ...

Has the outflow of direct foreign investment ... contributed to a decline in wages? As I look at the data, the US has received about as much equity investment as it has lost over the past two decades. One cannot just look at one side of the ledger.

The culprit is not globalisation but labour-saving technical change that puts pressure on the wages of the unskilled. Technical change prompts continual economies in the use of unskilled labour. Much empirical argumentation and evidence exists on this. ...

Such technical change is quickly spreading through the system. This naturally creates, in the short-run, pressure on the jobs and wages of the workers being displaced.

But we know from past experience that we usually get a J-curve where, as increased productivity takes hold, it will ... lead to higher wages. So why has there been no such significant effect in the statistics on wages for almost two decades?

I suspect that the answer lies in the intensity of displacement of unskilled labour by information technology-based change and in the fact that this process is continuous now – unlike discrete changes caused by past inventions such as the steam engine. Before the workers get on to the rising part of the J-curve, they run into yet more such technical change, so that the working class gets to go from one declining segment of the J-curve to another.

The pressure on wages becomes relentless, lasting over longer periods than in earlier experience with unskilled labour-saving technical change. But this technical change, which proceeds like a tsunami, has nothing to do with globalisation.

Wednesday, January 03, 2007

The Austrians versus the Neo-Cons on International Trade

We hear a lot about the division among factions in the Democratic Party, the Rubinites and the populists in particular, over issues involving international trade. The implication is that divisions on the right, if they exist at all, are much smaller. But as this shows there is a large divide between the Austrians and the Neo-Cons on this issue:

Yellow Journalism at The Weekly Standard, by By Robert P. Murphy, Ludwig von Mises Institute: Critics of the welfare-warfare state are no fans of the magazine The Weekly Standard. Bill Kristol and its other regular contributors are among the most hawkish of neoconservatives out there. Yet these "right wingers" are also bad on economics too, even though the average person would probably consider them to be laissez-faire.

Of course, there is no real contradiction here: if the federal government (at least with Republicans in control) is good at fixing foreign cultures, then why not use it to improve the economy at home, too?

Today's case study is Irwin Stelzer's recent piece, "Worry About OPEC, Not China." Although international trade can get complicated, especially when fiat currencies are involved, Stelzer manages to pack an impressive amount of nonsense into a fairly short article. I offer this critique to shed some light on these confusing issues.

Continue reading "The Austrians versus the Neo-Cons on International Trade" »

Saturday, December 30, 2006

Exchange Rate Clubs and the Monetary Approach

There is a long comment by Ronald McKinnon on the link between exchange rates and international adjustment at Martin Wolf's blog at the Financial Times. This is a shortened version, just a part of the section at the end -- there's quite a bit more at the (open) link given above:

Exchange Rate Clubs and the Monetary Approach Specialists in exchange rate economics fall into two distinct clubs: A and B. Members of Club A, by far the larger group, have been brought up since they were undergraduates on the elasticities model of the balance of trade. Besides being algebraically tractable, the microeconomics of this model seem intuitively plausible. With nominal export prices 'sticky' in each country’s currency in the short run, the relative price effects of a depreciation in the nominal exchange rate seem to go in the right direction for reducing a trade deficit. The depreciating country’s exports become cheaper in world markets and it sells more, and its imports become more expensive in the domestic currency so it buys less, so the trade balance allegedly improves. Members of Club A focus on this link between the real, i.e., inflation - adjusted, exchange rate and the real trade balance. ...

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Sunday, December 17, 2006

The Other Side of the Export Coin

Nouriel Roubini dissects Ben Bernanke's recent comment that China's currency policy amounts to an "export subsidy" for Chinese firms and notes it could just as easily be termed an "import subsidy" for the U.S. He also talks about the wisdom of Bernanke raising the issue in the first place:

Is China Subsidizing its Exports or Subsidizing US Imports? By Nouriel Roubini: Is China subsidizing its exports or subsidizing US imports? In his written remarks - but not in his actual speech in Beijing - Bernanke urged China to stop subsidizing its exports via a weak RMB (see also Brad Setser's comments...). He could have as well said that China is subsidizing US imports of Chinese goods, thus keeping Wal-Mart prices and US inflation lower than otherwise. Of course, from an economic point of view subsidizing exports is equivalent to subsidizing imports. But - from a political economy of protectionism perspective - speaking of export subsidies is putting the blame on "unfair" Chinese policies rather than recognizing, as the term "import subsidy" would have conveyed, that this Chinese currency policy is highly beneficial to US consumers and that it is keeping US inflation lower than otherwise.

Also speaking of "export subsidies" in the context of currency policy is loaded and dangerous: export subsidies are illegal within the WTO rules. And arguing that a weak currency is effectively an export "subsidy" could even give legal cover to those in the US who may pursue protectionist legal action against China because of its alleged export "subsidies". This is not an idle threat: when I was at the White House's CEA in the late 1990s we had to fight non-stop bone-headed protectionist proposals by the Dept. of Commerce ... to change US "dumping" rules to include low import prices due to the weakening currency values of some of our trading partners (for example the Asian currencies in crisis). ...

Friday, December 15, 2006

Bernanke: Pegged Renminbi an "Effective Subsidy"

Ben Bernanke stirs up a little controversy by first planning to tell China in a speech that its undervalued currency amounts to an "effective subsidy" for exporters, then softening the language when the speech is actually delivered:

Bernanke backs off from ‘subsidy’ accusation, by Kshrina Guha, Financial Times: Ben Bernanke ... stepped into a political minefield on Friday when he released remarks branding China’s undervalued currency an “effective subsidy” for its exporters which was distorting patterns of production and trade. In what looked to be a last minute bid to avoid controversy, Mr Bernanke then dropped the phrase from his speech to the Chinese Academy of Social sciences, using the less inflammatory term “distortion” instead.

Mr Bernanke’s original text talked about “the effective subsidy that an undervalued currency provides for Chinese firms that focus on exporting rather than producing for the domestic market.” This phrase – even though not finally uttered by the Fed chief – is likely to be seized on by US manufacturers who have long pressed US government agencies to make the same determination in trade cases.

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