Notes, etc., to "The End of Influence"

Note to p. 102: "nationwide chains of bankruptcies and defaults, shuttered factories, high unemployment, and falling production—and it is those things that are to be really feared for their own sake..."

Economists like Maurice Obstfeld and Barry Eichengreen who have traced the causation of the 1997-8 East Asian and other financial crises attribute them to this vicious circle by which currency value depreciation brought on by fear of a recession magnifies the economy's debt overhang and produces the recession. Had the vicious circle not been started--had the IMF intervened at the beginning to keep the won at 900 to the dollar--there would have been no problem. (And in the long run an IMF intervention to fix the won at 900 to the dollar at the end of 1997 would have been very cheap: the won had recovered in value to 1100 to the dollar by 2000 and to 900 to the dollar in 2007 just before the start of the most recent financial disaster, which has sent its value downward again.)

Note to p. 55. U.S. Treasury Press Releases Upon Conclusion of FOMC Meetings

This is the Clinton administration form of the press release. All administrations since the 1970s have been anxious to establish (i) that the Federal Reserve is an independent agency (ii) whose independence the administration respects, yet (iii) there is no difference of opinion in appropriate economic policy between the administration and its Federal Reserve.

UNFINISHED Note to p. 98: "China recycled the dollars... [some into] the debts of Freddie Mac and Fannie Mae..."

According to the China Daily (9 Dec. 08, between $400 and $500 billion.

Note to p. 53: "The 'committee to save the world'..."

Time cover, February 15, 1999.

Note to p. 52: "Dani Rodrik.... 'Why can't industrial policy be the same? It's beyond me...'"

Dani Rodrik:

Consider... policy interventions targeted on a loosely-defined set of market imperfections... implemented by bureaucrats... overseen by politicians... corruption and rent-seeking... powerful groups and lobbies.... [Y]ou react by saying “these are all reasons why governments should stay away from industrial policy.” But... I have in mind... education, health, social insurance, and macroeconomic stabilization.... Interventions in each one of the conventional areas I just listed are justified by market failures that are widely felt to exist, although rarely documented... bureaucrats... powerful groups and lobbies.... [Yet] debates in these policy areas are rarely ever about whether the government should be involved; they are about how.... Why can't industrial policy be the same? It's beyond me...

UNFINISHED Note to p. 96: "Chinese value-added for China's exports at under one-third, up from one-fifth..."

Estimates for current value added range between 25% and 50%. Business Week (4.20.08) opts for one third; The Economist 1.3.09 offers some estimates; Koopman,Wange and Wei, “How much of Chinese exports is really made in China” offers a new method for estimating and a discussion of the problems with all other approaches, VoxEU, 8.8.08.

Note to p. 94: "That comes to over $30,000 per U.S. household..."

Brad Stetser, who commands great respect on these matters, reports that in 2008 the U.S. net asset position continued to deteriorate significantly, and that the best guess is that it reached a negative $4.3 trillion. See Brad Stetser (2009), "The 2008 US Net International Investment Position", Follow the Money (June 26):

For a long time, large US trade and current account deficits didn’t push up the total amount the United States owed to the world, at least not if the market value of US investment abroad was netted against the market value of foreign investment in the US. The net international investment position of the US stayed around negative $2 trillion even as the US chalked up $500 billion, $600 billion even $700 billion annual deficits, defying those who projected that rising deficits would put the US external debt on an unsustainable trajectory.

Why? The euro's rise pushed up the value of US investments in Europe. The US external position actually benefits from a falling dollar, as most US liabilities are in dollars while many US assets are not. And foreign equities did better than US equities.

Those who argued that the US was attracting funds because it was the best place in the world to invest generally forgot to note that during the period when the US deficit was rising the US was consistently doing better on its investments abroad than foreigners were doing on their investment in the US.

That changed in 2008. The US borrowed $505 billion from the world. The dollar’s rise reduced the value of US investment abroad by $685 billion ($583 billion without including direct investment). Foreign portfolio equity investments in the US fell in value by about $1.3 trillion. But US portfolio equity investments abroad fell in value by about $1.9 trillion. Add in changes in the value of US and foreign bonds and changes in market prices reduced the value of US portfolio investment abroad by $720 billion more than the changes in market prices reduced the value of foreign portfolio investment in the US. The size of that total losses rises if changes in the market value of US and foreign direct investment are also factored in. All told, changes in market prices (other than exchange rate changes) led to a $1.7 trillion deterioration in the United States net investment position.

Combine those valuation changes with ongoing US borrowing and the net international investment position deteriorated in a rather dramatic fashion. The US NIIP — the blue line in the following graph — deteriorated by $2.5 trillion if FDI is valued at market prices...

Note to p. 93: "More than 70% of that $7 trillion has been added since 2000..."

See Pierre-Olivier Gourinchas and Hélène Rey (2005), "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege" (Cambridge: NBER).

Note to p. 91: The U.S. Trade Deficit Over Time

Graph from Calculated Risk http://www.calculatedriskblog.com/2009/01/us-trade-deficit-graphs.html; Data from the Department of Commerce, Bureau of Economic Analysis.

Note to pp. 87-89: Edwin Truman attempts to walk a tightrope...

[F]oreign governments must hold high-yielding bond and equity stakes in corporations whose operations are located in other countries, and must exercise due control over management, but must also be constrained to, as Truman puts it:

reduce the probability that the government owners of sovereign wealth funds… seek to exercise "undue influence" over the decisions of financial institutions in which they have significant stakes…

This is a task for supervisors and regulators, of whom it is:

reasonable to ask… what procedures they have in place…

to ensure that the non-market-actor owners act like normal profit-seeking investors. This does:

complicate the enforcement of U.S. securities laws. But this is a fact of life…. The challenge… is how to make the world safer for sovereign wealth funds and maintain our own, open market-based regime in which private-sector actors are the major players…

Truman’s answer is to:

agree upon a set of best practices, or a standard, for sovereign wealth funds to make them more accountable…. Transparency has a large part to play in establishing such accountability, but it is only part of the game. Based upon the "scoreboard" for 33 sovereign wealth funds that I have developed, I am confident that the union of the actual practices of those funds provides an appropriate framework for a set of best practices…

Why is he confident? Because:

at least one sovereign wealth fund currently, voluntarily complies with each of the 25 elements in the scoreboard…

We are much less optimistic that these large government-owned wealth accumulations can be so curbed. Nevertheless, he makes as powerful a case as we believe can be made. See Truman (2005), "Postponing Global Adjustment: An Analysis of the Pending Adjustment of Global Imbalances"; (2006), a href="http://www.iie.com/publications/interstitial.cfm?ResearchID=635">"The Case for an International Reserve Diversification Standard" ; (2007), "Sovereign Wealth Funds: The Need for Greater Transparency and Accountability"; (2008a), "The Management of China's International Reserves and Its Sovereign Wealth Funds"; (2008b), "A Blueprint for Sovereign Wealth Fund Best Practices; (2008c), "Sovereign Wealth Funds: New Challenges from a Changing Landscape"; (2008d), "Sovereign Wealth Funds: The Challenge for Japan".

Note to p. 72: "Dani Rodrik argues..."

See Dani Rodrik, ed. (2003), In Search of Prosperity: Analytic Narratives on Economic Growth (Princeton: Princeton University Press).

Note to p. 75: "As William Easterly points out..."

Much of Easterly's best work on this question is part of a firey, entertaining, and extremely instructive extended debate with Dani Rodrik. The place to start is with: William Easterly (2009), "How Ethnic Profiling Explains Dani Rodrik’s Fondness for Industrial Policy." Aidwatch (May 14) http://aidwatchers.com/2009/05/how-ethnic-profiling-explains-dani-rodrik’s-fondness-for-industrial-policy/.

Note to p. 84: "When the funds are transferred... they will purchase more and not less of real economic ownership..."

That the funds will be transferred from government bonds to corporate ownership positions and that they will then be used not just for return but to assist in the globalization fo Chinese companies and in inward technology transfer is certain. See, for example, Chinese Prime Minister Wen Jiabao in the Financial Times, July 22, 2009. The other point is a bit more subtle. One likely long-lasting consequence of the 2007-2010 financial crisis is that risky assets worldwide will be at a discount to safe assets--and China's enormous foreign exchange reserves have hitherto been invested in the world's safest assets.

Note to p. 67: "Dutch Disease..."

See Paul Krugman (1987), “The Narrow Moving Band, the Dutch Disease, and the Competitive Consequences of Mrs. Thatcher,” Journal of Development Economics 27:1 pp, 2-50.

MISSING: Note to p. 68: Most recent updated SWF and other asset numbers...

MISSING

Note to p. 70: Walt Whitman Rostow

See W.W. Rostow (1980), The World Economy: History and Prospect (Austin: University of Texas Press).

Note to p. 65: "Andrew Rozanov..."

Andrew Rozanov (2005), "Who Holds the Wealth of Nations?" Central Banking Journal 15:4.

Note to p. 56: "Paul Krugman mused... that even if neoliberalism was false in theory it could still be made true or true enough in practice..."

Paul Krugman:

[While] economists have argued with each other over whether [central bank] monetary policy can [from a theoretical perspective]… be used to get an economy out of a recession, central banks have repeatedly gone ahead and used it to do just that—so effectively in fact that the idea of a prolonged economic slump… became implausible…

Note to p. 47: "if mine is high, I am a servant of Wall Street..."

Wyatt C. Wells (1994), Economist in an Uncertain World: Arthur Burns and the Federal Reserve (New York: Columbia University Press).

Note to p. 45: "Economist Alfred Kahn... argued for the deregulation..."

See Thomas McCraw (1984), Prophets of Regulation (Cambridge: Harvard University Press).

Note to p. 48: "As conservative Republican economist Martin Feldstein..."

Martin Feldstein (1980), "Introduction" to The American Economy in Transition (Chicago: University of Chicago for NBER).

Note to p. 49: "The sociologist T.H. Marshall..."

T.H. Marshall (1950), Citizenship and Social Class (New York: Pluto Press).

Note to p. 44: "critics like University of Maryland economist Mancur Olson..."

See Mancur Olson (1982), The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (New Haven: Yale University Press); Jonathan Rauch (1994), Demosclerosis: The Silent Killer of American Government (New York: Crown Books).

Note to p. 43: "The mixed economy had always had its enemies..."

See Rick Perlstein (2001), Before the Storm: Barry Goldwater and the Unmaking of the American Consensus: (New York: Hill and Wang:9780809028597).

Note to p. 51: "David Stockman argued furiously..."

See William Grieder (1982), The Education of David Stockman (Boston: Atlantic Monthly Press).

Note to p. 41: "The United States followed its own road to the mixed economy..."

A large and very good literature starting with Werner Sombart (1906), Why Is There No Socialism in the United States, to which a most recent and impressive contribution is TonY Judt (2009), "What Is Living and Dead in Social Democracy?" *New York Review of Books 56:20 (December 17) http://www.nybooks.com/articles/23519, stresses the gulf between western Europe's confident and assertive social democracy and the smaller and somewhat shamefaced social insurance state and programs in the United States.

We think, as we note before, that too much can be made of this gap: both sides of the North Atlantic did follow what we see as broadly similar trajectories, especially when you recognize the role that national borders between north and south and west and east Europe have played in creating European countries with much more homogeneous populations in wealth than in the entire continent-spanning United States.

Still worth reading after is Daniel Bell (1960), "The End of Ideology in the West," in The End of Ideology (Cambridge: Harvard University Press).

Note to p. 27: "yet here were governments owning large amounts of wealth..."

Edwin Truman of the Peterson Institute for International Economics was among the first and has been the most effective worrier about what the rise of these government-owned asset accumulations means for the global economic system. His recommendation is that governments be urged to adopt [A Blueprint for Sovereign Wealth Fund Best Practices](A Blueprint for Sovereign Wealth Fund Best Practices).

Note to p. 29: "Drucker was certain that America was going to see..."

Peter F. Drucker (1976), The Unseen Revolution: How Pension Fund Socialism Came to America (New York: Harper Collins: 9780060110970).

Note to p. 38: "It was in the long run inevitable..."

J. H. Clapham (1938), *An Economic History of Modern Britain" (Cambridge: Cambridge University Press).

Note to p. 35: "The Mixed Economy..."

A term popularized by MIT economist Paul Samuelson as neither centrally-planned nor laissez-faire market but a genuine "third way." See W. Robert Brazelton (1977), "Samuelson's Principles of Economics in 1948 and 1973," Journal of Economic Education 8:2 (Spring), pp. 115-117; Herbert Giersch (1993), Openness for Prosperity (Cambridge: MIT Press).

Note to p. 36: "Some were less successful. The British Labour Party..."

See Samuel Brittan (1983), The Role and Limits of Government: Essays in Political Economy (Minnepolis: University of Minnesota); Barry Eichengreen (2008), The European Economy since 1945: Coordinated Capitalism and Beyond (Princeton: Princeton University Press: 9780691138480).

Note to p. 38: "For other countries, such as France..."

See Barry Eichengreen (2008), The European Economy since 1945: Coordinated Capitalism and Beyond (Princeton: Princeton University Press: 9780691138480); Stephen S. Cohen (1969), Modern Capitalist Planning: The French Model (London: Weidenfeld and Nicholson); Warren C. Baum (1958), The French Economy and the State (Princeton: Princeton University Press); David S. Landes (1951), "French Business and the Businessman: A Social and Cultural Analysis," in E. M. Earle, ed. (1951), Modern France (Princeton: Princeton University Press), pp. 334-53.

Note to p. 26: "some of America's most serious analysts of Chinese politics say that they are scared... populist mobilization..."

For example, see Susan Shirk (2007), China: Fragile Superpower: How China's Internal Politics Could Derail Its Peaceful Rise : (Oxford: Oxford University PressL 0195306090).

Note to p. 28: "Experience has shown that diverting attention from market return..."

See, for example, Alicia Munnell (2007), "Should Public Plans Engage in Social Investing?" (Boston: Boston College Center for Retirement Research).

Note to p. 25: "balance of financial terror..."

Brad Setser traces Lawrence Summers's use of this term to "early 2004." J. Bradford DeLong thinks he remembers it being used a couple of years earlier.

Note to p. 25: "Luo Ping, director general at the China Banking Regulatory Commission, put it clearly and vividly..."

See Financial Times 12 Feb. 2009.

"Except for US Treasuries, what can you hold?… For everyone, including China, it is the only option…" Mr. Luo whose English tends towards the colloquial added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do…”

Erratum to p. 25: John Judis on Norman Angell's "The Great Illusion"

John Judis emails:

On pg. 25, three lines from bottom, Norman Angel's book is Norman Angell, "The Great Illusion," not "The Grand Illusion" (which was the movie; and also a book of mine from 1992). I also don't think it was published in 1907, I've come across 1910, 1911 and 1913.

http://books.google.com/books?id=HiKuvZ8NYDgC&dq=norman+angell+great+illusion&source=gbs_navlinks_s

Note to p. 23: "the brain-twisting transfer problem question...

The go-to place for information on the U.S.-China balance of financial terror and on China's reserve and other accumulations used to be the weblog of Brad Setser, "Follow the Money". Setser is now working for the Obama administration, and we have not found anything since as useful and informative.

Note to p. 22. "The American government... confiscated private German holdings in the US in 1917..."

See New York Times, 24 Oct. 1917; Mira Wilkins (2004), The History of Foreign Investment in the United States, 1914-1945 (Cambridge: Harvard University Press: 0674013085), reviewed by Michael Edelstein at http://eh.net/bookreviews/library/0894; William Harvey Reeves (1954), "Is Confiscation of Enemy Assets in the National Interest of the United States?" Virginia Law Review 40:8, pp. 1029-1060.

Note to p. 22. "Luxembourg is home to another $703 billion..."

See U.S. Treasury et al. (2008), "Report on Foreign Portfolio Holdings of U.S. Securities as of June 30, 2007": http://www.treas.gov/tic/fpis.shtml.

Note to p. 18: "Only after Britain had sold off the family silver..."

One of the most fascinating undercurrents in Winston Churchill's (1947) six-volume memoir History of World War II is the tension between Churchill's wish to express gratitude for the selfless and ample aid given by Roosevelt to Britain before Pearl Harbor and Churchill's wish that that aid had been even more ample and more selfless. But even if Franklin Roosevelt had wished in the end to send American boys to storm the beaches of Normandy to preserve the British Empire as it had been in 1939, no other American power-holder would have so wished. And Roosevelt also did not.

Note to p. 20. "hundred dollar bills..."

See US Treasury: (2003), "Use and Counterfeiting of United States Currency Abroad": .

Note to p. 19: "Will the United States be similarly squeezed?..."

The United States's trajectory is unique in that it has become a debtor nation before it has lost its military, technological, economic, and indeed financial preeminence. Previous transitions to the extent that they are analogous--Holland to Britain in 1700 and Britain to the U.S. in 1914 come to mind--have seen military power pass first, then technological, then economic broadly-speaking, and financial last, with the previous leader retaining large net foreign asset holdings for further decades. That the financial stability of the world's military and technological superpower already depends on maintaining the confidence of foreign bondholders is something new under the sun. So far there are no signs that that confidence is in any question--indeed, the sharp strengthening of the U.S. dollar and the sharp fall in long-term Treasury rates when the financial crisis intensified in the fall of 2008 is powerful evidence that that confidence is not even in question.

Note to p. 13: "What would replace that system..."

Relevant here are Charles Kindleberger's worries that the Great Depression was, in some deep sense, the result of a failed transition in international economic "hegemony" from Britain to the United States. See Peter Temin (2003), "Obituary for Charles P. Kindleberger," EH.Net.

Note to p. 15: "They have cut back on interventions to affect market outcomes..."

This is the standard story as to what has happened in OECD political economy since the Reagan-Thatcher revolution of the early 1980s. It is, however, contested. See Steven Vogel (1998), Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries (Ithaca: Cornell University Press).

Note to p. 16: "Edmund Andrews quotes Alan Greenspan's testimony..."

See Edmund Andrews (2008), "Greenspan Concedes Error on Regulation," New York Times (October 23).

Note to p. 12: "The United States got something, too..."

Missing from this paragraph is the point that the United States not only got a high (and unsustainable) level of consumption from the capital inflow from countries abroad pursuing policies of undervalued currencies and export-led development, but the United States gained political and strategic benefits as well. Serving as the global economy's balance wheel and importer of last resort does boost the wealth and strength of those interests in other countries that want to trade with America. The hope is that these interests will also be interested in world peace and democracy, and be able to exert their political will domestically.

The history of U.S.-British relations since 1845 from the British point of view suggests that there is something to this: run an open world economy and the rising superpower across the ocean to the west may in the long run become your friend rather than your master, or at least your friendly master.

Note to p. 12: "the opportunity... to shift its own economy into what should have been the 'sectors of the future'..."

This is the basic rationale for international trade--that it allows an economy to offload to others those sectors in which its labor and capital and organizations are (relatively) unproductive and focus instead on those sectors in which its labor and capital and organizations are (relatively) more productive. That is the underlying logic of Ricardian comparative advantage.

It is easy to argue that up through 2000 that increased global integration was a major win for the United States, not only raising current consumption levels but boosting long-run growth as well by allowing the U.S. to shift resources into high-tech computing and communications. See, for example, Greg Linden, Jason Dedrick and Kenneth L. Kraemer (2009), "Innovation and Job Creation in a Global Economy: The Case of Apple’s iPod" (Irvine: U.C. Irvine Personal Computing Industry Center).

It is much more difficult to argue that the post-2000 increase in integration was to the long-run benefit of the U.S.: innovation in mortgage finance and in other derivatives no longer looks to be the industry of the future. See Simon Johnson (2009), "The Quiet Coup," Atlantic Monthly (May).

Note to p. 11: "Whenever market outcomes in industry after industry after industry are significantly shaped by the policies of national governments supporting their champions, it creates a severe system problem..."

A point most strenously and effectively argued over the past generation by Jagdish Bhagwati. See, for example, Jagdish Bhagwati (1989), Protectionism (Cambridge: MIT Press: 9780262521505).

Note to p. 9. "fully half of economic growth... comes from technological and organizational progress..."

The classic studies of the amount of economic growth due not to more workers or more capital are Moses Abramovitz (1956), "Resource and Output Trends in the United States Since 1870," American Economic Review 46:2 Papers and Proceedings (May), pp. 5-23: http://www.jstor.org/stable/1910656; Robert M. Solow (1957), "Technical Change and the Aggregate Production Function," Review of Economics and Statistics 39:3, pp. 312–320.

Back before technological and organizational progress was a first-order factor in economic growth--back before the start of the nineteenth century, say--you could argue with a straight face that decentralized competitive markets would indeed produce the best of all possible economic worlds. The "system of natural liberty" that provided individuals with complete legal title to all chattel and real property and allowed them to trade with each other without hindrance would perform the triple functions of (a) making sure that the goods produced went to those who valued them the most, (b) making sure that everything produced would be valued at more in expectation than its resource cost, and (c) making sure that cost-effective ways of boosting society's productive capabilities would be profitable, hence likely to be undertaken. See Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations (London: Strahan and Cadell). (With distortions produced by an unequal distribution of income being the principal fly from a utilitarian standpoint in the system-of-natural-liberty soup.)

But once technological and organizational progress becomes the first-order factor in economic growth--accounting for two-thirds of long-run growth in incomes, productivity levels, and living standards in the U.S. today--this theoretical congruence and harmony between private profits and public utility evaporates. See, for example, Paul Romer (1990), "Endogenous Technical Change," Journal of Political Economy.

As a historical curiosity, there are some signs that Adam Smith knew or should have known that the spread of ideas and inventions was about to become a key factor in economic growth, and Smith certainly knew about and was very interested in John Roebuck's local Carron Ironworks, in Falkirk, Scotland. See Michael Perelman (2000), The Invention of Capitalism: Classical Political Economy and the Secret History of Primitive Accumulation (Durham, NC: Duke University Press: 9780822324911); Charles Kindleberger (1976), "The Historical Background: Adam Smith and the Industrial Revolution," in Thomas Wilson and Andrew S. Skinner (1976), The Market and the State: essays in Honour of Adam Smith (Oxford: Clarendon Press); Gavin Kennedy (2005), Adam Smith’s Lost Legacy (London: Palgrave Macmillan).