Grasping Reality with Both Hands

Kevin O'Rourke Praises the IMF WEO

Kevin writes:

The second draft of history: Economic historians and others interested in the Great Depression still turn to the economic publications of the League of Nations as a basic source for understanding the economic catastrophe of the 1930s.... [T]he publications of today’s international organisations, such as the IMF’s World Economic Outlook which was published in full last week, will also serve as a first port of call for the historians of decades hence. So: how are they shaping up Extremely well, is my reaction after having finally given the April WEO the attention it deserves. This is essential reading for people seeking a global overview of the crisis,  and advice as to how to get out of it...

G-20 Meeting Forecast

1. Obama will tell the G-20 leaders what they ought to do.
2. They will complain.
3. They will do about half of it.
4. That they do half of it will be an extraordinarily good outcome--the best episode of international policy coordination since Bretton Woods itself.
5. Will them doing half of what they ought to do be good enough? Ah, that is the question

If we judge the Obama administration based on performance relative to the difficulty of the dive, I think their scores are good: 9.7, 9.3, 8.7, 9.1, and a 4.4 from the East German judge...

Glurk!

I knew in the back of my mind that this was going on. But I had never seen these charts before:

De-imbalancing the globe.

Jeebus save us! This is a $700 billion negative shock to foreign exports.

Notes on the Atlantic Economy

February 27, 1881: The New York Times:

O'Rourke and Williamson:

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Chiswick and Hatton:

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Williamson:

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Irwin:

Memo Question for March 18: The Atlantic Economy

Mar 18: Weekly memo question: The economies settled from northwestern Europe--the United States, Canada, Australia, New Zealand--were all resource rich. So why did they industrialize early? Why didn't they simply become gigantic Denmarks, shipping agricultural and other resource-based products to the European industral powers in return for manufactures?

Ten More Days to Eat Roquefort...

Felix Salmon:

Roquefort Math - Finance Blog - Felix Salmon - Market Movers - Portfolio.com: We're just ten short days away from R-Day -- the day at which tariffs on imported Roquefort surge to 300%, and the incomparable French sheep's-milk blue becomes, to all intents and purposes, unavailable in the USA.... Isn't repealing this tariff a no-brainer for the food-friendly Obama administration? Why hasn't it been done yet?

In Which Clive Crook Succumbs to the High Broderism, I Think

UPDATED:

Paul Krugman makes an intellectually honest argument against the buy-America provisions that almost made it into the Obama fiscal boost program:

Protectionism and stimulus (wonkish) - Paul Krugman Blog: Should we be upset about the buy-American provisions in the stimulus bill? Is there an economic case for such provisions? The answer is yes and yes. And I do think it’s important to be honest about the second yes....

[Under p]rotectionism... each country produces goods in which it has a comparative disadvantage, and consumes too little of imported goods... under normal conditions that’s the end of the story. But these are not normal conditions. We’re in the midst of a global slump.... [T]here are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt... this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole.... [I]f each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment.... Yes, trade would be more distorted, which is a cost; but the distortion caused by a severely underemployed world economy would be reduced....

What’s the counter-argument? Don’t say that any theory which has good things to say about protectionism must be wrong: that’s theology, not economics. The right argument, I think, is... [e]verything I’ve just said applies only when the world is stuck in a liquidity trap... [not] the normal situation. And if we go all protectionist, that will shatter the hard-won achievements of 70 years of trade negotiations — and it might take decades to put Humpty-Dumpty back together again.

And Clive Crook attacks Paul for being... intellectually dishonest. Clive Crook on Paul Krugman:

Politics is damaging the credibility of economics: Economists are failing to express anything resembling consensus on the most basic questions of economic policy.... I had thought they would at least agree that raising trade barriers at a time like this must be a bad idea. Then I read Paul Krugman, Nobel laureate, Princeton professor, and New York Times columnist...

But the column Crook cites--the one above--does say that raising trade barriers at a time like this is a bad idea.

Crook goes on:

[Krugman] explain[s] that raising tariffs – though perhaps unwise for other reasons – “can make the world better off”. “There is a short-run case for protectionism,” he went on, “and that case will increase in force if we don’t have an effective economic recovery programme.” What are his readers to make of this?

Well, they are supposed to read Paul Krugman. Theen they would understand that on those exceptional cases when the world is in a liquidity trap it faces a fiscal policy coordination problem. Trade barriers, Krugman says, lessen that problem--but their (momentary, transitory) advantages do not offset their (persistent, permanent) drawbacks.

Crook, however, goes on:

This impression of disarray... is not the fault of economics.... It is a mostly false impression created by some of its leading public intellectuals, Mr Krugman among them.... If you wish to know what Mr Krugman thinks on any policy question, do not read his scholarly writings; see which policies are advocated by the progressive wing of the Democratic party. Mr Krugman agrees with liberal Democrats about most things, and for the rest gives as much cover as the discipline of economics can provide – which, given its scientific limitations, is plenty. He does this even on matters where, if his scholarly work is any guide, the economics is firmly against his allies. Liberal Democrats are protectionists. Mr Krugman is not, but politics comes first...

Once again, more slowly now: Krugman's column asks the question: "Should we be upset about the buy-America provisions in the stimulus?" And Krugman's answer is: "Yes, we should be upset."

Now just what in the Eternal and Holy Name of The One Who Is is going on here?

In the second half of the column things become less muddy. Crook's first targets in the column are elsewhere. But Crook has succumbed to the High Broderism--he cannot be "unbalanced," he cannot attack a right-winger like Robert Barro for what Barro does say without also attacking a left-winger like Paul Krugman--albeit for what Paul Krugman does not say.

Let's roll the videotape for the second half of Crook's column. Remember: Crook misleads when he says that Krugman supports trade barriers. But Barro surely does oppose the stimulus package:

Clive Crook - Politics is damaging the credibility of economics: [M]ost economists believe that a powerful fiscal stimulus is both possible and desirable in present circumstances, and that the best stimulus would include big increases in public spending. Yet recently, Robert Barro, a scholar with conservative sympathies, wrote in the Wall Street Journal that this view was an appeal to “magic”. The problem is... that... both [Krugman and Barro] set the consensus [of the economics profession] aside so carelessly.... [They] destroy the credibility of their own discipline.... They narrow or deny the common ground. Why does this matter? Because the views of readers inclined to one side or the other are further polarised; and in the middle, those of no decided allegiance conclude that economics is bunk...

And then Crook shifts to his second target: the internet:

The web, for all its blessings, is an aggravating factor. Many of the most successful economics blogs promote communication within political groupings, not across them. On the web you best build an audience by organising a claque and stroking its prejudices. Extend elaborate courtesy to people you agree with and boorish contempt to those who do not get it. Celebrate exasperation and incivility as marks of intellectual authenticity – an attitude easier to tolerate in teenagers under hormonal stress than in professors at world-class universities. Consensus economics does exist. The Obama administration and the Federal Reserve are trying to apply it. The economics professoriate has an obligation to criticise and improve those policies. But if politics is allowed to split the discipline, and communication across that divide continues to break down, the science of economics will forfeit what little respect it still commands.

And here we have to say: "Huh?"

Robert Barro's article is not in a web publication: it is in newsprint on the op-ed page of the Wall Street Journal, which was a den of right-wing wingnuttery for decades before the world wide web was even a gleam in Tim Berners Lee's eye. That Robert Bartley and Paul Gigot have always regarded their editorial task as to degrade the stream of discourse about economic policy is a shame. But it is not the internet's fault.

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UPDATE: Clive Crook responds:

Dismal science, revisited - Clive Crook: I think Paul is disingenuous (there I go again, more hysterics) when he says that the blog-post in question makes it clear he is not in favour of acting on the short-run argument for protection. You be the judge. In my view, he says it is all very complicated. He kind of supports free trade in an ideal world--that would be an Econ 101 world--but there are circumstances, which happen to be very like today's circumstances, in which protection could make sense. This "needs to be taken seriously", and the case gets stronger if optimal macro co-ordination is not forthcoming (which it won't be). Ask any Democratic congressman what Paul's advice on "Buy American" is. The answer will not be, "Don't do it." It will be, "The most brilliant economist I know of thinks there's a case"...

To which one must observe how Krugman starts:

Protectionism and stimulus (wonkish): Should we be upset about the buy-American provisions in the stimulus bill? Is there an economic case for such provisions? The answer is yes and yes...

And how Krugman ends:

Don’t say that any theory which has good things to say about protectionism must be wrong: that’s theology, not economics. The right argument, I think, is in terms of political economy. Everything I’ve just said applies only when the world is stuck in a liquidity trap; that’s where we are now, but it won’t be the normal situation. And if we go all protectionist, that will shatter the hard-won achievements of 70 years of trade negotiations — and it might take decades to put Humpty-Dumpty back together again. But there is a short-run case for protectionism — and that case will increase in force if we don’t have an effective economic recovery program.

I think Henry Farrell gets it right:

Are blogs ruining economic debate?: I suspect that Crook’s main beef with Krugman isn’t with polarization, but with the particulars of Krugman’s suggestion that the case for free trade is a qualified rather than an absolute one. Crook more or less accuses Krugman of being a dishonest partisan hack for saying this. However, from my limited understanding, Krugman is making claims that are reasonable ones within the internal debate among economists. Certainly, Crook doesn’t provide any contrary evidence. Thus, I suspect that Krugman’s perceived crime was to express these qualifications in the agora rather than in closed session. Which is to say that the ‘consensus’ that Krugman is setting aside so ‘carelessly’ is a political one – the shibboleth that free trade is an Unqualified Good Thing – rather than a seamless consensus that emerges from the underlying academic debates...

Ah. The Weaker Version of "Buy America" Is Not Quite Toothless After All...

Alan Beattie in Washington, Peter Smith in Sydney and Mure Dickie in Tokyo for the FT:

World wary of softer Buy American plan: US trade partners reacted warily on Thursday after the US Senate tried to head off an international trade conflict by voting to soften the controversial Buy American provisions in the near-$900bn economic stimulus bill. Late on Wednesday night, the Senate narrowed the provisions, which require that federal money be spent on goods from US companies, to ensure they would be compatible with US commitments under existing trade treaties....

The US is a signatory to the World Trade Organisation’s agreement on government procurement, under which it has committed itself to open certain goods and services to international tender. It also has more wide-ranging commitments under the North American Free Trade Agreement to Canada and Mexico. But even the narrower provision, which is similar to one in the House of Representatives, would still permit the US to exclude non-signatories to the WTO agreement, such as China, Brazil and India, from certain parts of its spending...

Well then, it's time for China, Brazil, and India to sign the WTO agreement on government procurement, isn't it?

The Senate and "Buy America"

By my reading this gelds the "buy America" provision completely--that its force came from the fact that trade agreements were not self-enforcing, and this makes them so. But I am not a trade lawyer:

Senate approves softened ‘Buy American’ plan: WASHINGTON, Feb 4: The US Senate voted on Wednesday to soften a ”Buy American” plan in its $900bn stimulus bill after President Barack Obama expressed concern the original language could trigger a trade war. Senators, on a voice vote, approved an amendment requiring that provisions that upset Canada, the European Union and other trading partners be ”applied in a manner consistent with US obligations under international agreements.”

The underlying Senate bill had required that all public works projects funded by the stimulus package use only US-made iron, steel and manufactured goods -- potentially putting the United States in violation of its commitments under the North American Free Trade Agreement and the World Trade Organisation’s government procurement agreement. Obama, asked about the Buy American provisions in television interviews on Tuesday, said the United States had to be careful not to include any provisions in the stimulus bill that could ”trigger a trade war.” ”I think it would be a mistake ... at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade,” Obama said....

The House of Representatives included a Buy American provision for US-made iron and steel in its $825bn stimulus package last week, triggering an intense effort by other business groups to have it removed or watered down before the final bill reaches Obama’s desk. John Bruton, the EU ambassador to the United States, told Reuters in an interview this week that approval of the measure would damage Obama’s global leadership and could lead to a string of protectionist measures around the world. Canada’s ambassador to the United States, Michael Wilson, also has urged Congress to drop the provision.

Senator Byron Dorgan, a North Dakota Democrat who crafted the Senate’s original Buy American measure, worked with Senate Finance Committee Chairman Max Baucus, a Montana Democrat, to come up with the new language. ”I share President Obama’s goal, which is to create as many US jobs as possible, consistent with our international trade agreements,” Dorgan said in a statement. White House spokesman Robert Gibbs said Obama supported Buy American provisions already in US law that give preferences to domestic manufacturers in public works projects, but wanted to avoid an expansion that violates trade commitments...

"Buy American": A Very Bad Move in the Stimulus Package

In addition to being bad economics, demonstrating in his first month that the Obama Administration's word is not good--that it will keep treaties only when it feels like doing so--would be a very bad start for the foreign policy of the Obama administration. Pacta sunt servanda.

John Ibbitson:

Global trade wars or voter revolt? Let Obama's difficult decisions begin: he toxic "buy American" provisions in the economic stimulus package currently before the Senate pose a crucial test for Barack Obama's young administration. To prevent a cascade of tariff protection that would ultimately hurt his own workers and his own country's economy, Mr. Obama must find some way to strip the protectionist clauses that infect the American Recovery and Reinvestment Act. Yet, politically, that might be impossible....

"Buy American" violates the North American free-trade agreement, but Mr. Obama has vowed to renegotiate or, failing that, rip up NAFTA, so has little stake in coming to its defence. And he would be overriding protectionist provisions put in the bill by his own Democratic Party.

The President has said the time has come to make "difficult decisions." This is one of them. Even economists who strongly support the stimulus package are dismayed by the protectionist measures contained within it. "It looks like a very bad thing in the bill," said economist Brad DeLong, who worked on trade issues in the Clinton administration and teaches at University of California, Berkeley. "Pressure from the Canadian government saying, 'Do you really want to do this?' is important." Canadian officials have, in fact, been working behind the scenes to keep protectionist measures out of the economic stimulus package. But they failed to stop the House version of the bill from including a provision banning the use of anything other than American-made iron and steel in projects funded by the stimulus package...

If there's little excess capacity in the U.S. steel industry--so that the price of steel is high enough to induce people to look outside for suppliers--then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost--in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great. "Buy American" seems mostly designed to allow the steel producers to collude and push their profits up--at the expense of American taxpayers.

Could Obama add a signing statement to the stimulus bill stating that the "Buy American" provisions conflict with our NAFTA and WTO treaty obligations and hence are void? I am not a trade lawyer, but my suspicion is no: neither NAFTA nor the WTO are self-executing, so any actions they call for or block are supposed to be implemented through duly passed acts of congress. Of course, NAFTA and the WTO are also treaties that are supposed to be kept.

If Obama did declare the "Buy America" provisions null and void in a signing statement, people could sue in U.S. courts to carry them out--and IMHO likely win. Then foreign governments could take the case to the NAFTA and WTO dispute-resolution forums--and IMHO certainly win. Better to strip the provisions from the bill now, or in conference.

Marx: The Future Results of British Rule in India

Memo to self: make the 210a students read this:

Karl Marx (1853),"The Future Results of British Rule in India," New York Daily Tribune (August 8): The political unity... imposed by the British sword, will now be strengthened and perpetuated by the electric telegraph. The native army, organized and trained by the British drill-sergeant, was the sine qua non of Indian self-emancipation, and of India ceasing to be the prey of the first foreign intruder. The free press, introduced for the first time into Asiatic society, and managed principally by the common offspring of Hindoos and Europeans, is a new and powerful agent of reconstruction.... From the Indian natives, reluctantly and sparingly educated at Calcutta, under English superintendence, a fresh class is springing up, endowed with the requirements for government and imbued with European science. Steam has brought India into regular and rapid communication with Europe, has connected its chief ports with those of the whole south-eastern ocean.... The day is not far distant when, by a combination of railways and steam-vessels, the distance between England and India, measured by time, will be shortened to eight days, and when that once fabulous country will thus be actually annexed to the Western world.

The ruling classes of Great Britain have had, till now, but an accidental, transitory and exceptional interest in the progress of India. The aristocracy wanted to conquer it, the moneyocracy to plunder it, and the millocracy to undersell it. But now the ... millocracy have discovered that the transformation of India into a reproductive country has become of vital importance to them, and that, to that end, it is necessary, above all, to gift her with means of irrigation and of internal communication. They intend now drawing a net of railroads over India. And they will do it....

I know that the English millocracy intend to endow India with railways with the exclusive view of extracting at diminished expenses the cotton and other raw materials for their manufactures. But when you have once introduced machinery into the locomotion of a country, which possesses iron and coals, you are unable to withhold it from its fabrication. You cannot maintain a net of railways over an immense country without introducing all those industrial processes necessary to meet the immediate and current wants of railway locomotion, and out of which there must grow the application of machinery to those branches of industry not immediately connected with railways. The railway-system will therefore become, in India, truly the forerunner of modern industry. This is the more certain as the Hindoos are allowed by British authorities themselves to possess particular aptitude. for accommodating themselves to entirely new labor, and acquiring the requisite knowledge of machinery. Ample proof of this fact is afforded by the capacities and expertness of the native engineers in the Calcutta mint, where they have been for years employed in working the steam machinery, by the natives attached to the several steam engines in the Burdwan coal districts, and by other instances. Mr. Campbell himself, greatly influenced as he is by the prejudices of the East India Company, is obliged to avow “that the great mass of the Indian people possesses a great industrial energy, is well fitted to accumulate capital, and remarkable for a mathematical clearness of head and talent for figures and exact sciences.” “Their intellects,” he says, “are excellent.”

Modern industry, resulting from the railway system, will dissolve the hereditary divisions of labor, upon which rest the Indian castes, those decisive impediments to Indian progress and Indian power.

All the English bourgeoisie may be forced to do will neither emancipate nor materially mend the social condition of the mass of the people, depending not only on the development of the productive powers, but on their appropriation by the people. But what they will not fail to do is to lay down the material premises for both. Has the bourgeoisie ever done more? Has it ever effected a progress without dragging individuals and people through blood and dirt, through misery and degradation?...

The devastating effects of English industry, when contemplated with regard to India, a country as vast as Europe, and containing 150 millions of acres, are palpable and confounding. But we must not forget... [t]he bourgeois period of history has to create the material basis of the new world — on the one hand universal intercourse founded upon the mutual dependency of mankind, and the means of that intercourse; on the other hand the development of the productive powers of man and the transformation of material production into a scientific domination of natural agencies. Bourgeois industry and commerce create these material conditions of a new world in the same way as geological revolutions have created the surface of the earth. When a great social revolution shall have mastered the results of the bourgeois epoch, the market of the world and the modern powers of production, and subjected them to the common control of the most advanced peoples, then only will human progress cease to resemble that hideous, pagan idol, who would not drink the nectar but from the skulls of the slain.

Talking Points for Asia Trip

Talking Points for Asia Trip

Governance:

• America has only one president at a time.
• The genius of the British Empire was that Britain used its time as the world's hyperpower to make a world in which Britain could live comfortably after other superpowers had arisen.
• Richard Cheney and George W. Bush are not geniuses.
• Barack H. Obama and Joe Biden ate not fools.

International Trade:

• In the United States we--that is, my faction within the Democratic Party--have lost the argument over whether trade is good for America's middle class.
• This is very frustrating: trade is good for America's middle class.
• But the era of increasing globalization has also been an era of rapidly-increasing income inequality--and people think that there is a connection.
• So for the next decade free trade will have to be sold within the U.S. as part of broader foreign policy--free trade as a soft-power tool for security and global environmental goals.
• Nevertheless, the Obama-Biden administration is certain to be better on free trade than the Cheney-Bush administration.

Financial Crisis:

• Since 1844 and the Westminstet debate over the renewal of the Bank of England charter, it has been accepted doctrine that avoiding deep depression requires that central banks keep financial assets from collapsing.
• At least one price is too important to be left to the market.
• Delicate issues of moral hazard: seek also to minimize "Greenspan puts."
• Kindleberger: the lender-of-last-resort must always arrive, but its arrival must never be relied on in advance; this is a tricky business.
• Usually central banks can manage asset prices in a crisis sufficiently by managing the price of duration--buying safe but longer-term assets in exchange for cash that served as reserves and means of payment.
• Sometimes not: default, risk, information. What then?
• Keynes:
• Government spending.
• Tax cuts.
• Danger: debt accumulation can crack government's status as provider of safe assets...
• Bernanke--and Trichet, and King
• Making it up as they go.

Global Imbalances:

• All the issues of global imbalances we used to worry about remain.
• As do all the long-run global warming issues.
• As do all the long-run global aging issues.

James Hamilton Calls for Quantitative Monetary Easing

He writes:

Econbrowser: The new, improved fed funds market: Yet another week of institutional changes that render all those nice macroeconomic texts and professors' lecture notes obsolete. The interest rate at which banks lend their Federal Reserve deposits to one another overnight is known as the fed funds rate. For the last 20 years, U.S. monetary policy has been primarily implemented by setting a target for this interest rate.... The Fed announced on Tuesday that it will raise the interest rate it pays on both required reserves and excess reserves to the level of the target itself, currently 1.0%.

My first reaction was, How in the world could that work? Why would any bank lend fed funds to another bank at a rate less than 1%, exposing itself to the associated overnight counterparty risk, when it could earn 1% on those same reserves risk free from the Fed just by holding on to them?... [T]he effective fed funds rate reported for Thursday-- the first day of the new regime-- was 0.23%. So much for that theory. But what's going on?... [T]he GSEs and some international institutions also have accounts with the Fed. But unlike regular banks, these institutions earn no interest on those reserves.... [T]he FDIC that banks pay a fee to the FDIC of 75 basis points on fed funds borrowed in exchange for a guarantee from the FDIC that those unsecured loans will be repaid.... [Y]ou get a floor for the fed funds rate somewhere below 25 basis points under the new system....

This means a couple of things for Fed watchers. First, fed funds futures contracts... are primarily an indicator of how these institutional factors play out... signal little or nothing about future prospects for the target. Second, the target itself has become largely irrelevant.... There's surely no benefit whatever to trying to achieve an even lower value for the effective fed funds rate....

What we need is some near-term inflation, for which the relevant instrument is not the fed funds rate but instead quantitative expansion of the Fed's balance sheet. I continue to have concerns about implementing the latter in the form of expansion of excess reserves, which ballooned by another quarter trillion dollars in the week ended November 5. Instead, I would urge the Fed to be buying outstanding long-term U.S. Treasuries and short-term foreign securities outright in unsterilized purchases, with the goal of achieving an expansion of currency held by the public, depreciation of the currency, and arresting the commodity price declines...

The Economics of Covert Actions

Ray Fisman features Arindrajit Dube, Ethan Kaplan, and Suresh Naidu:

Forensic economists examine the effects of CIA-led coups on the stock market: In 1951, Jacobo Árbenz Gúzman became Guatemala's second democratically elected president. Árbenz's authoritarian predecessors had been very sympathetic to... the United Fruit Co.... Once in office, Presidente Árbenz sought to take it all back, nationalizing UFC's Guatemalan assets and redistributing them to the poor.

But UFC had friends in very high places—the assistant secretary of state for inter-American affairs, John Moor Cabot, was the brother of UFC President Thomas Cabot. The secretary of state himself, John Foster Dulles, had done legal work for UFC, and his brother Allen Dulles was director of the CIA and also on UFC's board. Thanks to the Freedom of Information Act, we now know that the various Cabots and Dulleses had a series of top-secret meetings in which they decided that Árbenz had to go and sponsored a coup that drove Árbenz from office in 1954.

With a U.S. puppet back in the president's mansion, UFC's profits were safe. But it appears the company wasn't the only beneficiary of this Cold War cloak-and-dagger diplomacy.... By tracking the stock prices of UFC and other politically vulnerable firms in the months leading up to CIA-staged coups in Guatemala, Chile, Cuba, and Iran, the researchers provide evidence that someone—perhaps one of the Dulleses, Cabots, or others in the know—was trading stocks based on classified information of these coups-in-the-making....

Dube, Kaplan, and Naidu examine how the stock market reacted to events that no Wall Street trader should have known about: top-secret meetings of the coup-plotting cabals at CIA headquarters and presidential approvals of CIA-organized invasions.... These meetings and authorizations were all highly classified, however, and since you can't trade on information you don't have, UFC's stock price shouldn't have budged until the coup actually took place and the investing world learned of the regime change.

Unless, that is, some of the Cabots, Dulleses, or other insiders were using their privileged information to profit personally from a future coup....

For example, in the week that President Eisenhower gave full approval to Operation PBFortune to overthrow Árbenz, UFC's price went up by 3.8 percent; the stock market overall was flat that week. In all, shares of coup-affected companies went up by a total of 10 percent following top-secret authorizations, swamping the 3.5 percent gain that came immediately in the coups' aftermaths....

The CIA-led invasion of Cuba is referred to these days as the Bay of Pigs fiasco for a reason, and whoever was trading on insider knowledge seemed to place his bets accordingly—the pre-invasion increase in American Sugar's stock price was much lower than the gains for companies affected by the other, successful coups in the study.

What Is Going on in Argentina

James Attwood and Drew Benson of Bloomberg:

Bloomberg.com: Economy: Argentine Bonds, Stocks Sink as Takeover Fuels Default Concerns : Oct. 22 (Bloomberg) -- Argentina's bonds and stocks plunged for a second day as a planned government takeover of $29 billion of pension funds stoked concern the South American country is headed for its second default this decade. President Cristina Fernandez de Kirchner's bid to seize the private funds is undermining investor confidence that was already faltering as prices on the country's commodity exports tumbled and a five-year-old economic expansion began to sputter. The last time the government sought to tap workers' savings to help finance debt payments was in 2001, just before it halted payments on $95 billion of bonds. It's the final of many nails in the coffin from an institutional investor perspective,'' Bill Rudman, who helps manage $3 billion of emerging-market equity at WestLB Mellon Asset Management in London. Argentina isdisappearing into irrelevance,'' he said.

The yield on the government's 8.28 percent bonds due in 2033 surged 3.2 percentage points to 27.91 percent at 10:10 a.m. in New York, according to JPMorgan Chase & Co. The bonds yielded 12.16 percent a month ago. The price dropped 4.11 cents to 25 cents on the dollar, leaving it down 11.91 cents in the past two days. The benchmark Merval stock index plunged 7.2 percent, extending its decline this week to 20 percent. The private retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show. The government's proposal to take control of 10 funds, including units of London-based HSBC Holdings Plc and Bilbao, Spain-based Banco Bilbao Vizcaya Argentaria SA, still needs congressional approval. BBVA fell 6.5 percent in Madrid....

Amado Boudou, the head of Argentina's social security administration, said yesterday the government will keep the same investment mix for the funds, with 60 percent in bonds and 10 percent in stocks. He called the privately run system an ``enormous error.'' About 55 percent of the 94.4 billion pesos ($29.3 billion) held by the private pension funds is invested in government debt.... A takeover would allow the Fernandez administration to write off the sovereign bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors....

Seven years ago, as the government tried in vain to stave off a debt default, it pressured the pension funds to participate in bond swaps that pushed forward repayment dates. That December, strapped for cash to pay salaries, it ordered the funds to transfer $3.2 billion in bank deposits to state-owned Banco de la Nacion...

Pranab Bardhan Is Teaching Paul Krugman's International Trade Models...

...right now, in Evans 608-7.

John McCain Is Dishonorable, Dishonest, Underbriefed, and Ignorant

Paul Krugman:

We're number what?: [T]oday, John McCain declared that “the fundamentals of our economy are strong” — and also explained that we’re “the most innovative, the most productive, the greatest exporter, the greatest importer.” Exactly why we’re boasting about being the biggest importer isn’t clear — not to get all mercantilist, but buying a bunch of stuff isn’t a great achievement. And last I looked, we weren’t the greatest exporter; that distinction went either to the European Union, or, if you restrict yourself to countries, Germany...

China's Industrial Policy--and America's

James Fallows:

China Makes, The World Takes: [D]eals like those struck at the Sheraton Four Points have been mainly good for all parties. Chinese families have new opportunities in life. American customers have wider choices. American investors have better returns. But, of course, there are complications....

In a world of frictionless, completely globalized trade, people on average would all be richer--but every society would include a wider range of class, comfort, and well-being than it now does. Those with the most marketable global talents would be richer, because they could sell to the largest possible market. Everyone else would be poorer, because of competition from a billions-strong labor pool. With no trade barriers, there would be no reason why the average person in, say, Holland would be better off than the average one in India. Each society would contain a cross section of the world’s whole income distribution—yet its people would have to live within the same national borders.

We’re nowhere near that point. But the increasing integration of the American and Chinese economies pushes both countries toward it. This is more or less all good for China, but not all good for America. It means economic benefits mainly for those who have already succeeded, a harder path up for those who are already at a disadvantage, and further strain on the already weakened sense of fellow feeling and shared opportunity that allows a society as diverse and unequal as America’s to cohere.

A further problem is that China’s business and governmental leaders are all too aware of how the smiley curve affects them. Yes, it’s better to have jobs that pay $1,000 a year than none at all. But it would be better still to have jobs that pay many times as much and are at more desirable positions along the curve. If the United States were in China’s position, it would be doing everything possible to bring more high-value work within its borders—and that, of course, is what China is trying to do. Everywhere you turn you see an illustration.

Just a few: In the far north of China, Intel has just agreed to build a major chip-fabrication plant, with high-end engineering and design jobs, not just seats on the assembly line. In Beijing, both Microsoft and Google have opened genuine research centers, not just offices to serve the local market. Down in Shenzhen, Liam Casey’s company is creating industrial-design centers, where products will be conceived, not just snapped together. What was recently a factory zone in Shanghai is being gentrified; local authorities are pushing factories to relocate 10 miles away, so their buildings can be turned into white-collar engineering and design centers.

At the moment, most jobs I’ve seen the young women in the factories perform have not been “taken” from America, because in America these assembly-type tasks would be done by machines. But the Chinese goal is, of course, to build toward something more lucrative.

Many people I have spoken with say that the climb will be slow for Chinese industries....

American complaints about the RMB, about subsidies, and about other Chinese practices have this in common: They assume that the solution to long-term tensions in the trading relationship lies in changes on China’s side. I think that assumption is naive. If the United States is unhappy with the effects of its interaction with China, that’s America’s problem, not China’s. To i magine that the United States can stop China from pursuing its own economic ambitions through nagging, threats, or enticement is to fool ourselves. If a country does not like the terms of its business dealings with the world, it needs to change its own policies, not expect the world to change. China has done just that, to its own benefit—and, up until now, to America’s.

Are we uncomfortable with the America that is being shaped by global economic forces? The inequality? The sense of entitlement for some? Of stifled opportunity for others? The widespread fear that today’s trends—borrowing, consuming, looking inward, using up infrastructure—will make it hard to stay ahead tomorrow, particularly in regard to China? If so, those trends themselves, and the American choices behind them, are what Americans can address. They’re not China’s problem, and they’re not the fault of anyone in Shenzhen.

Gains from Trade

James Fallows on who benefits most from China's manufacturing boom:

China Makes, The World Takes: Has the move to China been good for American companies? The answer would seemingly have to be yes—otherwise, why would they go there? It is conceivable that bad partnerships, stolen intellectual property, dilution of brand name, logistics nightmares, or other difficulties have given many companies a sour view of outsourcing; I have heard examples in each category from foreign executives. But the more interesting theme I have heard from them, which explains why they are willing to surmount the inconveniences, involves something called the “smiley curve.”

The curve is named for the U-shaped arc of the 1970s-era smiley-face icon, and it runs from the beginning to the end of a product’s creation and sale. At the beginning is the company’s brand: HP, Siemens, Dell, Nokia, Apple. Next comes the idea for the product: an iPod, a new computer, a camera phone. After that is high-level industrial design—the conceiving of how the product will look and work. Then the detailed engineering design for how it will be made. Then the necessary components. Then the actual manufacture and assembly. Then the shipping and distribution. Then retail sales. And, finally, service contracts and sales of parts and accessories.

The significance is that China’s activity is in the middle stages—manufacturing, plus some component supply and engineering design—but America’s is at the two ends, and those are where the money is. The smiley curve, which shows the profitability or value added at each stage, starts high for branding and product concept, swoops down for manufacturing, and rises again in the retail and servicing stages. The simple way to put this—that the real money is in brand name, plus retail—may sound obvious, but its implications are illuminating.

At each factory I visited, I asked managers to estimate how much of a product’s sales price ended up in whose hands. The strength of the brand name was the most important variable. If a product is unusual enough and its brand name attractive enough, it could command so high a price that the retailer might keep half the revenue. (Think: an Armani suit, a Starbucks latte.) Most electronics products are now subject to much fiercer price competition, since it is so easy for shoppers to find bargains on the Internet. Therefore the generic Windows-style laptops I saw in one modern factory might go for around $1,000 in the United States, with the retailer keeping less than $50.

Where does the rest of the money go? The manager of that factory guessed that Intel and Microsoft together would collect about $300, and that the makers of the display screen, the disk-storage devices, and other electronic components [in Malaysia, Korea, and elsewhere outside China] might get $150 or so apiece. The keyboard makers would get $15 or $20; FedEx or UPS would get slightly less. When all other costs were accounted for, perhaps $30 to $40—3 to 4 percent of the total—would stay in China with the factory owners and the young women on the assembly lines.

Other examples: A carrying case for an audio device from a big-name Western company retails for just under $30. That company pays the Chinese supplier $6 per case, of which about half goes for materials. The other $24 stays with the big-name company. An earphone-like accessory for another U.S.-brand audio device also retails for about $30. Of this, I was told, $3 stayed in China. I saw a set of high-end Ethernet connecting cables. The cables are sold, with identical specifications but in three different kinds of packaging, in three forms in the United States: as a specialty product, as a house brand in a nationwide office-supply store, and with no brand over eBay. The retail prices are $29.95 for the specialty brand, $19.95 in the chain store, and $15.95 on eBay. The Shenzhen-area company that makes them gets $2 apiece.

In case the point isn’t clear: Chinese workers making $1,000 a year have been helping American designers, marketers, engineers, and retailers making $1,000 a week (and up) earn even more. Plus, they have helped shareholders of U.S.-based companies.

Notes for PEIS 101 Guest Lecture: August 15, 2008

GLOBALIZATION AND ITS DISCONTENTS

What was traded: 1500 and before:

• Silks, gems
• Spices
• Slaves
• Knowledge (but very slowly: 500 years from China to Europe): spaghetti, compass, printing, gunpowder

What was traded: 1500 to 1800: add:

• Textiles
• Sugar
• Intoxicants (coffee, tea, chocolate, tobacco, opium)
• Slaves (industrial plantation slavery: middle passage)

All due to the ocean-going caravel; digression on Zheng He

What was traded: 1800-1870: add:

• Cotton
  • Consequence: U.S. Civl War (300K dead of 1.2M white southerners; 300K dead of 6M white northerners and Blacks; same number maimed)

What was traded: 1870-today: add:

• All staple commodities that don't spoil
• the iron-hulled ocean going steamship
• the submarine telegraph cable

---

How cheap is trade today?:

• A standard container, 5500 cubic feet
• An iPhone, worth $200, in a box 1/32 of a cubic foot
• One container can carry $35M in iPhones
• Costs $8000 to ship a container across the Pacific (used to be $3000)

---

Economic Growth:

• Current U.S.: $25/hr ($2008)
• U.S. 1900: $3/hr ($2008)
• U.S. 1800: $1/hr ($2008)

Today: You can buy 80,000 calories of potatoes from a day's wages at $1 an hour

• 1700 Beijing: 2000 calories purchased with a day's wage
• 1700 Leipzig: 3000 calories purchased with a day's wage
• 1700 London: 8000 oat calories, but only 3500 wheat calories

International income differentials on the order of 2-1

Today:

• U.S.: $25
• Coastal China: $6
• Interior China: $3
• India: $2
• Ethiopia, etc.: $1

---

Post-WWII Development Strategies:

• Soviet (seems a good idea because no Great Depression in the Soviet Union, and Soviet victory over the Nazis in WWII)
• "Commanding Heights"
• Import substitution
• Independence as a magic bullet

All failures

---

The Washington Consensus:

• Maximize economic contact--eliminate trade barriers
• Minimize regulation--an excuse for bureaucracy and bribery
• Shrink the state--outside of East Asia and maybe western Europe, emerging market economies can establish property rights and enforce contracts, and that is pretty much all they should dare try to do...

---

Rodrik:

• Regulatory arbitrage on health and safety--race to the bottom
• Capital mobility: is the constraint savings, or investment demand?
• Perverse savings flows
• Needed: global scale institutions (like the EU, only more so)

---

Immigration:

U.S.:

• 300M people
• 150M workers

Mexico:

• 100M people
• 35M workers
• Of whom, 9M in U.S.

Winners from immigration:

• Mexican migrants bigtime
• Mexican stay-at-homes (remittances, larger farms)
• American businesses
• American consumers
• American workers who become straw bosses

Losers:

• Past legal immigrants
• African-American males with little education

PE 101 Guest Lecture: Non-Powerpoints: August 14, 2008

GLOBALIZATION AND ITS DISCONTENTS

What was traded: 1500 and before:

• Silks, gems
• Spices
• Slaves
• Knowledge (but very slowly: 500 years from China to Europe): spaghetti, compass, printing, gunpowder

What was traded: 1500 to 1800: add:

• Textiles
• Sugar
• Intoxicants (coffee, tea, chocolate, tobacco, opium)
• Slaves (industrial plantation slavery: middle passage)

All due to the ocean-going caravel; digression on Zheng He

What was traded: 1800-1870: add:

• Cotton
  • Consequence: U.S. Civl War (300K dead of 1.2M white southerners; 300K dead of 6M white northerners and Blacks; same number maimed)

What was traded: 1870-today: add:

• All staple commodities that don't spoil
• the iron-hulled ocean going steamship
• the submarine telegraph cable

---

How cheap is trade today?:

• A standard container, 5500 cubic feet
• An iPhone, worth $200, in a box 1/32 of a cubic foot
• One container can carry $35M in iPhones
• Costs $8000 to ship a container across the Pacific (used to be $3000)

---

Economic Growth:

• Current U.S.: $25/hr ($2008)
• U.S. 1900: $3/hr ($2008)
• U.S. 1800: $1/hr ($2008)

Today: You can buy 80,000 calories of potatoes from a day's wages at $1 an hour

• 1700 Beijing: 2000 calories purchased with a day's wage
• 1700 Leipzig: 3000 calories purchased with a day's wage
• 1700 London: 8000 oat calories, but only 3500 wheat calories

International income differentials on the order of 2-1

Today:

• U.S.: $25
• Coastal China: $6
• Interior China: $3
• India: $2
• Ethiopia, etc.: $1

---

Post-WWII Development Strategies:

• Soviet (seems a good idea because no Great Depression in the Soviet Union, and Soviet victory over the Nazis in WWII)
• "Commanding Heights"
• Import substitution
• Independence as a magic bullet

All failures

---

The Washington Consensus:

• Maximize economic contact--eliminate trade barriers
• Minimize regulation--an excuse for bureaucracy and bribery
• Shrink the state--outside of East Asia and maybe western Europe, emerging market economies can establish property rights and enforce contracts, and that is pretty much all they should dare try to do...

---

Rodrik:

• Regulatory arbitrage on health and safety--race to the bottom
• Capital mobility: is the constraint savings, or investment demand?
• Perverse savings flows
• Needed: global scale institutions (like the EU, only more so)

---

Immigration:

U.S.:

• 300M people
• 150M workers

Mexico:

• 100M people
• 35M workers
• Of whom, 9M in U.S.

Winners from immigration:

• Mexican migrants bigtime
• Mexican stay-at-homes (remittances, larger farms)
• American businesses
• American consumers
• American workers who become straw bosses

Losers:

• Past legal immigrants
• African-American males with little education

Brad DeLong's Guest PE 101 Lectures, August 2008

Class Topics:

• W Aug 13: Twentieth-century political economy
• Th Aug 14: The discontents of globalization
• F Aug 15: The coming of the second gilded age

Background Readings:

• Dani Rodrik (2008), "The Death of the Globalisation Consensus".
• Dani Rodrik (2008), "Globalization Anxiety as Mass Hysteria?".
• Ricardo Hausmann, Dani Rodrik, and Charles F. Sabel (2007), "Reconfiguring Industrial Policy: A Framework with an Application to South Africa" http://ksghome.harvard.edu/~drodrik/Reconfiguring%20Industrial%20Policy%20August%2031%20final.pdf.
• Dani Rodrik and Arvind Subramanian (2008), "Why Did Financial Globalization Disappoint?"http://ksghome.harvard.edu/~drodrik/Why_Did_FG_Disappoint_March_24_2008.pdf.
• Dani Rodrik (2007), "How to Save Globalization from Its Cheerleaders" http://ksghome.harvard.edu/~drodrik/Saving%20globalization.pdf
• Claudia Goldin and Lawrence Katz (2007), "Long-Run Changes in the Wage Structure: Narrowing, Widening, Polarizing" http://www.economics.harvard.edu/faculty/goldin/files/GoldinKatz_Brookings.pdf
• Chye-Ching Huang and Chad Stone (2008), "Average Income in 2006 up $60,000 for Top 1 Percent of Households, Just $430 for Bottom 90 Percent".

---

http://tinyurl.com/682bbw

The Stupid Rays!! It Burnses Us!! It Burnses!!

Jphn Cochrane's pushback against those University of Chicago faculty who are suddenly shocked, shocked to discover that they have an Economics Department now that it looks like they might be able to poach some money out of it reminds me that I never posted this from--Dan Drezner, upon reading something truly awful:

danieldrezner.com: In the Chronicle of Higher Education, Mathew H. Gendle engages in one of the more useless acts of self-flagellation about globalization I've seen in quite a while...

The truly scary thing is that Mathew H. Gendle seems to genuinely believe that it would be a good thing to diminish demand for products made in developing countries, and genuinely believes that most clothes he buys are made by exploited child- or slave-labor. Yet he keeps buying them anyway because he has "a mortgage and child-care expenses." A stupid little Nietzschean wannabe who eagerly indulges in what he believes to be grave moral turpitude in order to save a few bucks.

But the stupidity rayses--they are too much for us. We--Daniel and I--and the Precious of course--must hide from the stupidity rayses that burnes. We must hide deep beneath the rootses of the mountains, and eat raw fishses...

In and Out of the Bubble

Mark Thoma tells us to go read Edward Glaeser, who starts out travelling to Bangalore in the bubble:

Economist's View: "Is Geography Destiny?": A trip to India once meant a saffron-scented experience of the exotic. Today, going to Bangalore means a trip to a First World city built on modern technology. Business travelers can fly from Chicago to Shanghai and experience a pretty homogenous world of identically furnished high-rise offices and business hotels and frequent flyer clubs. And you can always get your preferred breakfast beverage: The sun never sets on the Starbucks mermaid.

But the [bubble that is the] flat world experienced by the globe-trotting management consultant is only the wealthiest and most air-conditioned sliver.... Place is powerful indeed.... Life expectancy in Sweden and Japan is over 80, while life expectancy in Zimbabwe is under 45....

[G]eographic determinism does have some clear limits. It can provide at best a partial explanation for the variety of language and religion, which is the heart and soul of cultural diversity.... [N]o aspects of physical landscape can explain why 71% of Americans, but only 11% of Danes, believe in the devil. ...

But nature is far less innocent in the geography of health. Malaria has been pushed back toward the tropics, but there it remains.... Global inequality is falling as the once-poor nations of India and China become wealthier, but income inequality within... nations is rising.... Within America, the heterogeneity of real estate prices and education levels across metropolitan areas is rising, but racial segregation is falling...

Why Weren't Interest Groups in Favor of Freer Trade Mobilized?

Paul Krugman meditates on the collapse of the Doha Round:

Dead Doha - Paul Krugman: It’s over — which is neither a surprise nor a catastrophe. Trade negotiations aren’t driven by economists’ calculations of welfare gains; they’re driven by enlightened mercantilism, what has come to be known as GATT-think. If trade negotiators want to take on well-entrenched interest groups, they have to find countervailing interest groups with an interest in liberalization. That never happened in this round; instead, we had a rather pathetic attempt to cast trade negotiations as, yes, part of the Global War on Terror ™. No surprise, then, that the thing didn’t work. Meanwhile, existing agreements stand. This isn’t Smoot-Hawley; it isn’t even the 2002 Bush steel tariff. Life, and trade, will go on.

Me, I remember Glenn Hubbard, Larry Lindsey, Greg Mankiw, and company all saying that Bush had to impose his steel tariffs in 2002 as a price for getting fast-track authority so that he could successfully complete... the Doha Round.

China and Walmart: Champions of Equality?

Like many people, I am still somewhat puzzled and confused by Christian Broda and John Romalis:

China and cheap imports: Champions of equality: The U.S. presidential campaign has sometimes sounded like a contest to prove who despises trade the most.... This public debate has taken for granted that inequality... has risen as a result of globalisation. But has it really?.... How rich you are depends on two things: how much money you have and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also double, then you are no better off. Unfortunately, the conventional wisdom on US inequality is based on official measures that only look at the first....

Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005..... Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!

Poor families in America spend a larger share of their income on goods whose prices are directly affected by trade... the higher your income, the more you spend on services, which are less subject to competition from abroad....

This trend can partly be explained by China. In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most.... The expansion of superstores – like Wal-Mart and Target – has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops at much lower prices....

What is really worrying is that, despite these facts, we have had a backlash against China and Wal-Mart in America.... We need to remind politicians and the public that the gains from trade are broadly shared. Every time the discussion over trade is diverted towards the problems facing specific producers, be they farmers in France or textile workers in the U.S., we miss the central point. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford...

Let's run through the Heckscher-Ohlin logic:

Set the prices of luxuries as numeraire. Then the relationship between changes in log wages w and profits log r depends on changes in the log price p of necessities and on the shares of capital in the production of luxuries and necessities according to:

This means that the change in the wages of workers as a function of the change in the prices of necessities will be:

The real incomes of wage-earners depend not just on what happens to wages but what happens to the prices of things they buy, and so if a share θ_w of their income is spent on necessities:

And here's the catch. The necessities-share θ_w of wage-earners has to be less than one, but the change in log wages is greater than the change in log prices. So wage earners' real income goes in the same direction as necessities prices--no matter how fast the prices of necessities are falling:

When Broda and Romalis assert that trade is causing the prices of tradeable necessities to fall rapidly, they are either (a) breaking the H-O framework in some way, or (b) implicitly asserting that capital is the scarce factor in the United States and thus the factor of production whose returns are reduced by globalization.

It is not clear to me how they propose to break the H-O framework. And I do not find (b) plausible.

I prefer http://www.j-bradford-delong.net/2008_pdf/20080530_stolper to break the H-O framework in a Smithian division-of-labor direction: asserting that the scarce factors that lose from trade are organizational and technological expertise and that there is substantial implicit and explicit cross-ownership of factors that together make trade nearly win-win. But I don't see Broda and Romalis going there...

DeLong: Why We Should Presume Free Trade Is Win-Win: A Multisector Stolper-Samuelson Finger Exercise

J. Bradford DeLong (2008), "Why We Should Presume Free Trade Is Win-Win: A Multisector Stolper-Samuelson Finger Exercise"

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Puzzles in the Economics and Politics of Trade

Felix Salmon is puzzled by Roger Lowenstein:

The Economics and Politics of Trade: More subtly, but also more substantively, it's hard to know what to make of this:

in recent years, Congress soured on trade. Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, laments, "The consensus is gone." Even some economists have begun to suggest that trade is playing a major role in widening the income gap between rich Americans and poor -- especially as more of our imports now originate in low-wage countries...

All discussions of the victims of trade ignore the considerable benefits: the exports we sell and the lower prices for consumers at home. Since poorer Americans spend a higher proportion of their incomes on low-wage imports (shoes from China, for instance), trade can also be seen as favoring the less well off.

Who are these economists who think that imports from low-wage countries are exacerbating US inequality? Lowenstein doesn't say. He doesn't even spell out their argument - maybe it's meant to be self-evident that poor Americans are the same as the "minority of Americans in threatened industries" whom Lowenstein says are the only people who benefit from protectionism. I might be misreading the article, but the impression I get is that Lowenstein thinks his anonymous economists are wrong, and that globalization doesn't exacerbate inequality within the US. The problem is, he never quite comes out and make that case. My gut feeling is that globalization, at the margin, decreases inequality between countries while slightly increasing inequality within countries.... A smart take on trade and globalization might well involve going forwards with the Doha round while at the same time doing a lot of work on reinforcing a social safety net which is currently failing a lot of blue-collar Americans. Just scaling back the protectionist farm bill would free up an enormous amount of money to spend on retraining, wage insurance, and other means of softening the blow to globalization's losers. And reducing agricultural tariffs would help reduce food inflation, too.

But of course these things don't fall cleanly on the left-right political spectrum that Lowenstein talks about.... The big problem is electoral politics: no one wants to antagonize the sugar and orange-juice lobby in Florida, or the corn lobby in Iowa. This isn't a case of left-wing politics versus right-wing politics, it's a case of economics versus politics. And, as usually happens in such cases, politics, at the moment, is winning...

Dani Rodrik is puzzled by--various of his past selves, I guess:

Dani Rodrik's weblog: Stolper-Samuelson for the real world: Warning: This is a long and wonkish entry, aiming at self-comprehension, and the product of one too many long plane ride. The Stolper-Samuelson theorem... [has] a version... that is remarkably general and powerful. It says that regardless of the number of goods and factors, at least one factor of production must experience a decline in real income from trade as long as trade induces the relative price of some domestically produced good(s) to fall (and as long as the productivity benefits from trade are restricted to the traditional, inter-sectoral allocative efficiency improvements, about which more later).... The stark implication is that someone will lose, even if the nation as a whole becomes richer.... The loser in question could be the wealthiest group in the land. But if the [imported] good in question is highly intensive in unskilled labor, there is a strong presumption that it is unskilled workers who will be worse off.  And before you curse economic theory, note that this is really accounting--not economics at all.

I have been thinking about this result in connection with Broda and Romalis's remarkable finding that:

the rise of Chinese trade has helped reduce the relative price index of the poor by around 0.3 percentage points per year. This effect alone can offset around 30 percent of the rise in official inequality we have seen over this period.

The puzzle here, at least on the face of it, is that one would expect China's trade to have had the largest price impact on labor-intensive goods. And if so, wages of unskilled workers must have fallen even more, along the lines of the Stolper-Samuelson logic sketched out above. Can we still say that trade with China has helped reduce U.S. inequality?...

[If my] line of reasoning is correct, the main threat to workers is not a Stolper-Samuelson type permanent compression in wages, but the more temporary (and limited) wage losses incurred by displaced workers.  This is the kind of problem that wage insurance is ideally suited for.

Transparency...

From Deborah Solomon:

Real Time Economics: Paulson to Putin: You Say Potato, I Say Sovereign Wealth Fund: Treasury Secretary Henry Paulson, in Russia for high-level talks with top officials, found himself locked in a game of semantics with Prime Minister Vladimir Putin.

Paulson, at a meeting in the Kremlin that was open to reporters, told Putin his discussions with Russian Finance Minister Alexei Kudrin were productive, including their talks about Russia’s sovereign wealth fund.

“We don’t have a sovereign wealth fund,” Putin interrupted, telling Paulson that he must be confusing Russia with someone else.

Russia is sitting on vast reserves of money, buoyed by rising oil and gas prices, and is looking for places to invest those resources. While there’s no dictionary definition of a sovereign-wealth fund, they are generally described as government-owned or controlled assets that are often invested overseas...

Sovereign Wealth Funds are Non-Market (or Quasi-Market) Actors in a Global Market Economy

Non-market actors in a market economy: a historical parable:

Trade around the Indian Ocean before 1500 was a largely peaceful, stable process. Empires, kingdoms, sultanates, and emirates ruled the lands around the ocean, but they did not have the naval strength or the orientation to even think of trying to control the ocean's trade. Pirates were pirates--but only attacked weak targets, and needed bases, and for the land-based kingdoms providing bases for pirates disrupted their own trade.

Then came 1500, and a new entity appeared in the Indian Ocean: the Portuguese seaborne empire.

The European Seaborne Empires I: "To Serve God, to Win Glory for the King, and to Become Rich

From David Abernethy (2000), The Dynamics of Global Dominance: European Overseas Empires 1415-1980 (New Haven: Yale), p. 242 ff: Malacca... located on the Malayan side of the narrow strait... the principal center for maritime trade among Indian Ocean emporia, the Spice Islands, and China.... Because of monsoonal winds, vessels sailing from the Indian Ocean to China (and vice versa) had to lay over for a few months before continuing the journey. An alternative was for ships to unload their wares in Malacca, returning to their respective home ports with goods from the others' ships as well as gold, spices, and precious woods from the offshore islands. The city and strait of Malacca were extraordinarily cosmopolitan places....

The Chinese government's impact on Malacca was far more limited in scope and duration than might be expected given the country's wealth and size. Zheng He's armada of hugh junks, with thousands of well-armed soldiers aboard, was designed to ensure attention and respectful deference to China's rulers from elites elsewhere.... But the admiral was unwilling to use the military might at his disposal to conquer Malacca, there being no plans to administer distant lands.... The emperor politely received the king of Malacca when the king later journeyed to Beijing, bearing tribute. But assertion of China's superior political status was made by the inferior party visiting the Celestial Court, not by the latter reaching out aggressively beyond its borders....

China's private sector had a more substantial and long-lasting impact on Malacca... the existence... of a separate section of the city reserved for Chinese merchants.... That many Chinese merchants in Malacca were long-term residents did not signify that they were overseas agents of Chinese power... they tried to avoid contact with Chinese officials rather than to work with them.... The Chinese did not carry a missionary religion to Malacca because they had none....

Arabs visited Malacca as long-distance merchants, staying in a quarter of the town set aside for Muslims.... [T]hey did bring a missionary religion.... Malacca's rulers had been Muslim for about a century before the Portuguese arrived. One may thus speak of an alliance between Arab mercantile and religious interests resembling the European pattern. But Arabs in teh Indian Ocean basin were not like Europeans. First, they were not... agents of a polity eager to assert itself overseas.... Their prospects for profitable trade were most favorable if none of [the Arab city states] advanced political claims beyond its immediate domain. Traders and sailors moved on monsoonal winds from one trading center to another, intermediaries among several autonomous units rather than agents of any particular one....

The limited, functionally diffuse character of Chinese and Arab/Muslim relations with Malacca posed an isoluble dilemma for the city's sultan when he encountered Europeans.... The sultan faced toward Mecca when praying and toward Beijing when oferring tribute. But for quite different reasons he could count on neither to help counter the new foe....

As Muslim merchants predicted, the Portuguese launched a tripole assault on Malacca. The city was captured in 1511... fifteen hundred soldiers... Viceroy Afonso d'Alburquerque... permanent political control.... Construction of a stone fortress was begun as soon as the battle was won, and it was kept well supplied with soldiers and cannon. The city was a Portuguese possession until the Dutch took it in the seventeenth century... an integral part of a grand scheme to capture gains from Indian Ocean trade. Political control of enclaves throughout the ocean basin was considered a necesary as well as desirable mans to an economic end. Albuquerque appealed to the profit motive as explicitly as one could: "If we take this trade of Malacca out of [the Moors'] hands, Cairo and Mecca are entirely ruined, and to Venice will no spiceries go except that which her merchants go and buy in Portugal."...

[R]eligious dimension.... Albuquerque waited to launch his attack until the day of Saint James.... Non-Muslims were spared following the battle. But "of the Moors, [including] women and children, there died by the sword an infinite number, for no quarter was given to any of them.".... The Portuguese were unlike the Chinese and Arabs in the number and variety of sectoral institutions at their disposal, in the stretch of these institutions far from their home base, and in the way agents of different sectors worked together.... Portugal's grand strategy in the Indian Ocean was to capture gans from a lucrative seaborne trade that had functioned for a long time. Malacca was valued as an enclave... profits literally floated past in the form of ships carryhg spices, precious stones, textiles, chinaware, carvings, and so on through a narrow strait. There was no economic or strategic reason for Albuquerque to invade the Malayan interior.... Not until the nineteenth century did Europeans consider the Malayan interior worthy of their attention. Under British direction, exports from rich tin mines were increased and rubber plantations laid out... a plant Europeans had found in the New [World]... a mode of production perfected earlier in the Americas...

Paul Krugman: Iron resolution

Iron resolution: Chinese steelmakers have agreed to a 96 percent increase in the price they pay for Australian iron ore. One interesting point about this case is that, as I understand it, iron ore isn’t traded on an international exchange; trade takes place through bilateral deals between producers and consumers. In other words, there isn’t any easy way to speculate on future iron ore prices. Yet ore prices are surging like oil prices. A bit more evidence against the speculative frenzy hypothesis.

Hawley-Smoot Tariff Day

I missed Hawley-Smoot Tariff Day.

Eric Rauchway writres:

Asinine. « The Edge of the American West: On this day in 1930 the Smoot-Hawley Tariff became law. I swear when I was in eighth grade it was the Hawley-Smoot Tariff. Apparently the forces of Smoot have ensured that he takes pride of place. Or maybe it’s the forces of Hawley who have ensured that Smoot takes the brunt of blame...

A tariff is a revenue bill. And revenue bills must originate in the House of Representatives. (Although what "originate" means when procedure allows amendments in the nature of substitutes I do not know.) So it is Hawley-Smoot.

Eric goes on:

Because the law is virtually synonymous with a Bad Thing. Remember this Golden Television Moment? There’s Gore (yes, younger and thinner; so was I then) with his portrait of Smoot and Hawley, explaining Tariffs are Bad.... [T]here is a general consensus that the Smoot-Hawley Tariff was bad. It prevented other countries from trading to the U.S. at a time when that might have kept them out of depression, and it probably wouldn’t have hurt the U.S. either. Instead the renewed American commitment to protectionism prompted increases in other countries’ tariffs....

If you want to know how a law generally regarded as “asinine” got passed, you might look at Barry Eichengreen’s paper.

And then he flogs his excellent little book:

If you want to know who called it “asinine,” and who predicted this kind of problem eleven years before it occurred, and other exciting stuff about the Great Depression and the New Deal, you know where to look. (Yes, I know you can find out using Google. But really, you should buy the book. Unless it would be a hardship for you. Otherwise, buy it. Please? Pretty please?)

Washington Post Death Spiral Watch

Robert Samuelson:

A Vote for McBama: [Barack Obama's] actual agenda is highly partisan and undermines many of his stated goals. He wants to stimulate economic growth, but his hostility toward trade agreements threatens export-led growth (which is now beginning). He advocates greater energy independence but pretends this can occur without more domestic drilling for oil and natural gas.... Obama's clever campaign strategy would put him in a bind as president. Championing centrism would disappoint many ardent Democrats. Pleasing them would betray his conciliating image. The fact that he has so far straddled the contradiction may confirm his political skills and the quiet aid received from the media, which helped him by virtually ignoring the blatant contradictions...

These are, as we all know, extremely weak examples of "high partisanship" and "blatant contradiction." Energy independence does not require subsidizing domestic drilling if it is a subordinate goal in the context of moving toward a less carbon-based economy. Whether we get export-led growth depends 100% on the value of the dollar and 0% on whether we conclude new trade agreements.

Samuelson knows that these are extremely weak examples of "blatant contradiction" and "high partisanship." But you try to delude your readers with the ammunition you have, not the ammunition you wish you had.

Why oh why can't we have a better press corps?

Making the Case for Globalization

Source: Thomas Piketty and Emmanuel Saez, via Wall Street Journal

Mark Thoma reads Tyler Cowen:

Economist's View: "This Global Show Must Go On": Tyler Cowen on globalization:

This Global Show Must Go On, by Tyler Cowen, Economic View, NY Times: The last 20 years have brought the world more trade, more globalization and more economic growth than in any previous such period in history. ... More than 400 million Chinese climbed out of poverty between 1990 and 2004... India has become a rapidly growing economy, the middle class in Brazil and Mexico is flourishing, and recent successes of Ghana and Tanzania show that parts of Africa may be turning the corner as well.

Despite these enormous advances, however, there is a backlash against globalization... Ordinary people often question the benefits of international trade, and now many intellectuals are turning more skeptical.... The globalization process has had its bumps, of course, as reflected recently by rising commodity prices... Countries like China have become richer so fast that global production of energy and food have been unable to match the pace.... Trade advocates focus on the benefits of goods arriving from abroad, like luxury shoes from Italy or computer chips from Taiwan. But new ideas are the real prize. By 2010, China will have more Ph.D. scientists and engineers than the United States. These professionals are... are creators, whose ideas are likely to improve the lives of ordinary Americans, not just the business elites. ...

We urgently need new biotechnologies, a cure for AIDS and a cleaner energy infrastructure, to name just a few. Trade is part of the path toward achieving those ends. A wealthier China and India also mean higher potential rewards for Americans and others.... A product or idea that might have been marketed just to the United States and to Europe 20 years ago could be sold to billions more in the future....

Christian Broda and John Romalis... cheap imports from China have benefited the American poor disproportionately.... Despite all these gains, the prevailing intellectual tendency these days is to apologize for free trade. A common claim is that trade liberalization should proceed only if it is accompanied by new policies to retrain displaced workers or otherwise ameliorate the consequences of economic volatility. Yes, the benefits of a good safety net are well established, but globalization is not the primary source of trouble for most American workers....

What’s really happening is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature.... One approach is to appease these sentiments by backing away from trade just a bit, or by managing it, so as to limit the backlash.... It is wrong to play down the costs of globalization, but the reality is that we’ve been playing down its benefits for a long time. Politicians already pander to Americans’ suspicion of foreigners. There is no need for the rest of us to jump on this bandwagon. Instead, we need more awareness of the cosmopolitan benefits of trade and the often hidden — but no less real — gains for ordinary Americans....

Mark comments:

I agree on the benefits from trade. But I... [believe] the net impact on the welfare of middle and lower income households... is more negative than Tyler indicates... I am more convinced than he is that maintaining political support for increased openness will require that the gains from trade and technological change be shared more equitably, and that economic risk be dispersed... through... enhanced social insurance.

We can, as Tyler is doing, try to convince people they are wrong.... But I don't think they are going to be convinced by the Wal-Mart argument. Over the longer run... education... fix health care, and... "bad banking practices"... structural issues... but that will take time.... [Now] we also need to listen to what people are telling us and address their concerns, and they do not believe that the economy as it is currently functioning is working for them. Telling people they just don't understand how much trade benefits them is just as likely to produce a negative backlash as it is to convince people that their views are wrong.

But if their views are wrong, we are under an obligation to try to convince them that their views are wrong--that globalization is at most a bit player in the rise in inequality within the United States, if it is in fact true that it is at most a bit player. Tyler has three arguments that this is the case. First, the biggest benefits of globalization for the world as a whole come from bringing more minds up to speed at the technology research frontier and thus from faster global economic growth--something that is not a driver of increasing inequality in the world economy's post-industrial core but instead an all-boats-lifting rising tide. Second, that the distributional impact of globalization for the world as a whole is positive, not negative--it is poor people in China, India, Indonesia, and Mexico who gain the most. Third, that there is something wrong with the Stolper-Samuelson intuition--which Dani Rodrik put best, somewhere I cannot now find--that freeing up trade must create losers and that trade can have big benefits only if it creates big losers.

Let me pass over the first two (as I don't have anything terribly original to say right now) and focus on the third, which I have thought about before: http://www.j-bradford-delong.net/2008_pdf/20080530_stolper. Let me summarize:

In the neoclassical Heckscher-Ohlin-Vanek framework, freeing up trade is good for owners of "abundant" factors of production in the trading country and bad for owners of "scarce" factors. The efficiency gains from trade--the increase in the size of the pie--goes roughly with the square of the differences in factor proportions between countries, but the redistributive gains and losses go roughly linearly with the differences in factor productions. Thus for freeing up trade to be bad for the greater part of the citizens in the country, two things must all be true:

• The bulk of the people must have little "ownership" of the abundant factors which reap the gains from freeing up trade--their income must depend overwhelmingly on the returns to the "scarce" factors of production.
• The differences in factor proportions that generate the possibility of gains from trade must be small in order to make efficiency gains small relative to redistributional shifts.

The argument as applied to the United States cannot be that differences in factor proportions are small: differences in capital-labor ratios across the U.S. in China are on the order of 20-to-1. So the argument must be that the abundant factors of production are things like capital, organization, and technology, which have concentrated ownership. The scarce factor of production is labor. Hence free trade will be bad for the majority of voters because their incomes depend only on returns to the "scarce" factor--and those returns will drop with free trade. This goes against the likelihood that the trully scarce factors of production tend to be, well, scarce. and so not many potential voters will own a lot of them.

But in actual fact to argue that the incomes and living standards of the bulk of Americans depend on the real wages of raw labor and of raw labor alone seems to me to be equally implausible. A very large number of factors give Americans a substantial stake in the returns to--a degree of "ownership" of--the "scarce" factors. First there is the government, which is the property of all but which raises its money by disproportionately taxing the incomes of the "scarce" factors (for that is, after all, where the money is). Second, there are all the degree of formal and informal cross-ownership institutions like labor rent sharing, efficiency wages, local monopolies, and other deviations from perfect competition that give all stakeholders rather than formal equity owners alone a share in the value of the capital, the technology, and the organization: we are all stakeholders in Wal-Mart, if only through the pressure its competition exerts on other businesses' prices.

I suspect that we are, right now, seeing the peak of anti-globalization economic agitation in the United States. The fall in the real value of the dollar against European currencies and its coming real value fall against Asian currencies mean that export and import-competing sectors are likely to be expanding their employment rapidly over the next several years. It would be a pity if a look back deranged our policy going forward, especially if it is because trade is perceived to be a problem by politicians even though it has ceased to be perceived as a problem by voters.

The trade deficit has turned very oily lately - The Curious Capitalist - Justin Fox - Economy - Markets - Business - TIME

Justin Fox looks at a graph:

And writes:

The trade deficit has turned very oily lately: The U.S. economy remains globally competitive and may even be headed for a trade surplus ex-oil within the next few years, barring another investment bubble like houses or tech stocks. And... that our addiction to oil is costing us big-time. Whether that cost is something we really ought to worry about depends on whether the current high oil price is the artifact of an investment bubble or a sign of things to come...

Two quibbles.

First, we ought to worry about our addiction to oil even if the oil price drops a lot in the near future. Even if we don't pay for oil at the pump, we pay for it in terms of the additional global warming disaster risk we assume.

Second, this "competitive"--the U.S. can have an export surplus if the dollar drops far enough. It may be "competitive" at a lower standard of living than other countries, but "competitive" and "uncompetitive" are not clarifying adjectives in this discussion.

Trade and Distribution: A Multisector Stolper-Samuelson Finger Exercise

Here: preliminary and incomplete http://www.j-bradford-delong.net/2008_pdf/20080530_stolper.

The beginning:

One of the basic building blocks of the political economy of international trade is the Stolper-Samuelson result: the shift from no trade to free trade is good for the owners of the abundant factor of production, but bad for the owners of the scarce factor of production.

This accounts for why support for free trade tends to be stronger in democratic than in authoritarian regimes. The scarce factor of production tends to be, well, scarce. Hence not many potential voters own a lot of it. Hence the political support for trade protection in any system of government that gives weight to broad as opposed to strong preferences will tend to produce trade liberalization.

In the United States, and to some degree in western Europe, things are widely thought to be different--or so the argument goes, The abundant factors of production are things like capital, organization, and technology, which have concentrated ownership. The scarce factor of production is labor. Hence free trade tends to be politically unpopular because it is not in the interest of the majority of potential voters.

This argument of an inconsistency between free trade and the well-being of the majority of potential voters rests substantially on the two-factor example of the Stolper-Samuelson result. The theory does not fare too well when we generalize to a situation in which there are a number of different factors...

---

Somebody must have done this before. But I cannot find it anywhere...

DeLong: Capital and Its Complements

J. Bradford DeLong (2008), "Capital and Its Complements: International Capital Mobility and Economic Growth in the Twenty-First Century" http://www.j-bradford-delong.net/2008_pdf/20080521_capital.pdf

The old "write a paper to figure out what you think about an issue" trick has gone wrong: I still don't know what I think about the issues at hand...

Things Middle-Aged White People Do (Flooring Edition)

One of the things that middle-aged white people do is that they gradually, room by room, pay someone to replace the 1980 wall-to-wall carpeting that came with the house with stained oak floors. And then they have to buy oriental carpets to put on top of the new oak floor to render the overwhelming bulk of it invisible.

"Why not just put oak down around the edge of the room?" I asked. "And leave plywood where the rugs are going to go?"

"You think you are funny," said one of our floor guys, "and I laugh because you are paying me. But if you ever buy new construction, check--especially it the rugs are tacked down, and especially always check if there are runners on the stairs."

Oh.

So we journey to the Macy's Furniture Warehouse Outlet at 1200 Whipple Road in Union City:

View Larger Map

And we discover that in the past five years the number of handmade oriental carpets at 1200 Whipple Road has greatly shrunk--instead, they now have lots of very attractive (and attractively priced) machine-made Karastans. Nevertheless, we return with 220 square feet of carpet: a "Ziegmahal" and a "Khyber"--and no real idea of what tradition the rugs come out of: to my knowledge "Khyber" is not a rug-making tradition, and I can find no trace of "Ziegmahal" anywhere.

But making them took a lot of work http://www.jacobsenrugs.com/effort.htm, and they should wear like iron.

DeLong on the Dollar--and Other Things--on Bloomberg Radio

Tom Keene's show:

Bloomberg Podcasts: DeLong Expects Dollar to Fall Versus Asian Currencies: May 20 (Bloomberg) -- Bradford DeLong, an economics professor at the University of California, Berkeley, talks with Bloomberg's Tom Keene in San Francisco about the outlook for the U.S. dollar versus Asian currencies, Federal Reserve monetary policy and the battle between Democratic U.S. presidential candidates Hillary Clinton and Barack Obama.

http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vKpRex1Ueuy0.mp3

Bloomberg San Francisco Bureau at Pier 3

Do we have wifi? Yes! We have wifi! Does it connect to the net? Yes!!

I am stunned and awed by the Bloomberg San Francisco bureau--they have been in it since February. It is amazing what you can do with an old cargo terminal/wearhouse built out over San Francisco Bay... with a few coats of paint... and some hardwood flooring... and more miles of gigabit ethernet cabling than I have ever seen in my life... and teh scuba divers to lay the foundations for the elevators...

Wow! I suppose that two-thirds of the time it must be either dark or foggy, but the remaining third it is absolutely glorious!

Here to do Tom Keene's show: http://www.bloomberg.com/tvradio/podcast/ontheeconomy.html

And to do a panel on exchange rates:

FX panel discussion on 5/20: "Dollar Weakness and Financial Crisis: A Bloomberg Panel": 4PM, Bloomberg San Francisco Bureau (Pier 3, SF, 94111): In this historic year, Bloomberg L.P. brings together two top, but different minds to discuss the interdependencies of the economy, credit and foreign exchange markets. Particular focus will be made on the imbalance of Pacific Rim and European capital flows. Moderated by Thomas Keene, host of Bloomberg on the Economy, the seminar will address recent dollar strength as LIBOR spreads...attempt to narrow.

Panelists: J. Bradford DeLong, Professor of Economics, University of California at Berkeley; Robert Sinche, Head of Strategy: Global Rates, FX & Commodities, Bank of America

Gains from Trade Once Again

Mark Thoma muses about relative income--that perhaps much of American unease about globalization is the fact that the ability to buy cheap goods at Walmart doesn't balance out the belief that somebody somewhere is unfairly becoming immensely rich as the result of the process:

Mark Thoma: If they deserved $25 but only received $10, they might object. Thus, while trade may have benefited lower income households by lowering prices on the goods they are likely to consume... that doesn't mean they won't be frustrated if they aren't receiving what they view as a fair share of the gains from globalization.... Couple that with the rise in inequality, loss of health care and retirement benefits, decreased job security, etc., and it's easy to see why workers might not feel as though they have been adequately compensated for the change in labor market conditions and economic security that they have endured...

He is commenting on James Surowiecki, who writes:

The Free-Trade Paradox, by James Surowiecki, The New Yorker: [The Democratic] primary race... has looked like a contest over who hates free trade more... The candidates are trying to win the favor of unions and blue-collar voters in states like Ohio and West Virginia, of course, but their positions also reflect a widespread belief that free trade with developing countries, and with China in particular, is a kind of scam perpetrated by the wealthy, who reap the benefits while ordinary Americans bear the cost.... [I]t’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries... free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers--a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods--clothes, shoes, and the like--whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on--that are less subject to competition from abroad.... [T]he reality is that if we toughen our trade relations with China the benefits will be enjoyed by a few, since only a small percentage of Americans now work for companies that compete directly with Chinese manufacturers, while average Americans will feel the pain--in the form of higher prices--far more quickly and more directly than rich Americans will...

We teach the 2 goods, 2 factors of production, 2 countries model because it is easy--but it has never been clear to me that the intuitions generated there transfer over to the more complicated real world at all.

DeLong Smackdown Watch: John Yoo's Torture Memo and Academic Freedom

David Levine writes:

The Torture Memo: The Torture Memo and Academic Freedom: Consider Professor Left, on leave at CEA, who went on national TV to argue that a rise in the minimum wage would not reduce employment, increase prices, or harm small business's profits. Professor Left knew that at least one of these effects was essentially certain to occur, but had a political job to do.

Consider Professor Right who, a few years later, went on national TV to argue that a cut in capital gains tax rates would raise tax revenues. He knew full well that the short-term boost in tax revenue will be overwhelmed by revenue cuts in later years. He hid that fact on TV, in Congressional testimony, and in memos to executive branch decision-makers.

Professor Center is more mainstream than his colleagues on the left and right. He goes on national TV to argue that a free trade pact will increase U.S. employment. In fact, Professor Center believes unemployment will be roughly unchanged as it is largely determined by the Federal Reserve. Employment will probably be lower, Prof. Center believes, because the free trade pact might increase employment with the trading partners and reduce immigration to the United States.

Assume that each policy in fact had (somewhat predictable) harmful consequences: job loss for minority teens, massive budget deficits, and a financial crisis in the southern trading partners that reduced their ability to purchase U.S. exports. Was it professional misconduct to push these policies while declining to mention (and sometimes implictly denying) the downsides? Do those recommendations disqualify the professors from teaching? Would it matter if the economists had line authority and made policy decisions, or were trusted advisors who were very influential with both parties, not just standard wonk advisors?

I mention these cases not to defend Professor Yoo or the despicable U.S. policy of torture. I mention these cases to suggest the issues of academics acting as political advisors and decision-makers are tough.

I agree that the questions are tough. I do think that:

• Left-wing economists should not say that minimum-wage increases would neither (a) decrease employment, (b) rise prices, nor (c) diminish profits.
• Right-wing economists should not say that capital gains tax rates would raise tax revenues--unless they in fact do believe that the short-term boost in tax revenues outweighs properly-discounted revenue losses in the out-years.
• Centrist economists should not say that free trade will boost U.S. employment--unless they believe that free trade will make the country richer and so actually boost labor supply and demand.

But neither left-wing, right-wing, nor centrist economists say such things in the classroom: in the classroom we all teach what we believe. At what point do violations of intellectual integrity by economists under message discipline become grave enough to warrant some kind of sanctions--that is not a question I know the answer to. I think that there is a line that should not be crossed, and that some form of responsibility for line-crossing would be a good thing, but I am not at all sure where the line is or what the sanctions should be.

Barack Obama and the Colombian Free Trade Agreement

A highly-respected John McCain-supporting economist encountered on the north side of Evans Hall suggests that Obama's position on the Colombia free trade agreement is worse than McCain's position on the gas tax holiday. He has a point. Here is Don Pedro from the Economists for Obama weblog:

Economists for Obama: The Colombian Free Trade Agreement, Again: Although I can't vouch for the specific figures cited, I think this NY Times article has it generally right. Obama, Hillary, and leading Congressional Democrats all say that their single objection to the Colombia trade pact is that Colombia needs to do more to prevent killings of union members. But as the article notes, Colombia has been a violent place all around--murder rates of union members in 2007 were actually way below the murder rate for the population at large. And the murders of union members were only related to union activity in a minority of cases. On top of that, the murder rate has declined dramatially in recent years, and the government has convicted many of the killers of union members.

As I noted in an earlier post, polls show that the trade agreement is overwhelmingly popular in Colombia. I think this is because Colombians recognize that the accord will help lift many of the country's people out of poverty. I think it's almost impossible to imagine that the agreement passes during this election year, but I hope President Obama pushes for its approval.

By the way, as someone with professional and personal connections to Colombia, I often wish I had a good reference to point people to in order to explain what the FARC guerrilla group there is about. I still don't have any suggestions in English, but today Spain's El Pais had this very good article in Spanish, which gives a good description of the FARC, emphasizing the key point, which is that while decades ago the group had populist/leftist ideals, it is now basically a criminal enterprise that funds itself through drug trafficking and kidnapping.

I think Don Pedro has it right. The Colombian government should be under severe pressure to punish murderers of union activists, yes, but blocking a FTA that Colombia seems to want relatively badly seems to me to be the wrong sort of pressure to apply.

Menzie Chinn Watches the Turnaround of the U.S. Current Account

The U.S. current account turns around:

How far does it have to turn around? One unresolved issue is how much of the oil trade deficit will ever have to be repaid--if oil wealth is going to be invested in the U.S. in dollars in order to give princelings and dictators a political-risk insurance policy, the oil part never has to be "paid back" in a foreign-exchange sense. If foreign oil wealth is going to be used to buy imports of capital goods and raw materials from the U.S., to fuel industrialization, the answer is quite different...

Paul Collier Wants More and Bigger Agribusinesses

He writes, over at Martin Wolf's place at the Financial Times:

FT.com | The Economists’ Forum | Food crisis is a chance to reform global agriculture: Paul Collier: The sharp increase in the world price of staple foods is an inconvenience for consumers in the rich world, but for consumers in the poorest countries, especially in Africa, it is a catastrophe. Despite the predominance of peasant agriculture, most African countries are net food importers and food accounts for over half of the budget of low-income households. This is the result of decades of agricultural stagnation combined with growing populations. Although many of the net purchasers are rural, evidently the problem is at its most intense in the urban slums. These slums are political powder kegs and so rising food prices have already triggered riots. Indeed, they sow the seeds of an ugly and destructive populist politics.

Why have food prices rocketed? Paradoxically, this squeeze on the poorest has come about as a result of the success of globalization in reducing world poverty. As China develops, helped by its massive exports to our markets, millions of Chinese households have started to eat better. Better means not just more food but more meat, the new luxury. But to produce a kilo of meat takes six kilos of grain. Livestock reared for meat to be consumed in Asia are now eating the grain that would previously have been eaten by the African poor. So what is the remedy?

The best solution to a problem is often not closely related to its cause (a proposition that that might be recognized in the climate change debate). China’s long march to prosperity is something to celebrate. The remedy to high food prices is to increase food supply, something that is entirely feasible. The most realistic way to raise global supply is to replicate the Brazilian model of large, technologically sophisticated agro-companies supplying for the world market. To give one remarkable example, the time between harvesting one crop and planting the next, in effect the downtime for land, has been reduced an astounding thirty minutes. There are still many areas of the world that have good land which could be used far more productively if it was properly managed by large companies. For example, almost 90% of Mozambique’s land, an enormous area, is idle.

Unfortunately, large-scale commercial agriculture is unromantic. We laud the production style of the peasant: environmentally sustainable and human in scale. In respect of manufacturing and services we grew out of this fantasy years ago, but in agriculture it continues to contaminate our policies. In Europe and Japan huge public resources have been devoted to propping up small farms. The best that can be said for these policies is that we can afford them. In Africa, which cannot afford them, development agencies have oriented their entire efforts on agricultural development to peasant style production. As a result, Africa has less large-scale commercial agriculture than it had fifty years ago. Unfortunately, peasant farming is generally not well-suited to innovation and investment: the result has been that African agriculture has fallen further and further behind the advancing productivity frontier of the globalized commercial model. Indeed, during the present phase of high prices the FAO is worried that African peasants are likely to reduce their production because they cannot finance the increased cost of fertilizer inputs. While there are partial solutions to this problem through subsidies and credit schemes, large scale commercial agriculture simply does not face this problem: if output prices rise by more than input prices, production will be expanded because credit lines are well-established.

Our longstanding agricultural romanticism has been compounded by our new-found environmental romanticism. In the United States fears of climate change have been manipulated by shrewd interests to produce grotesquely inefficient subsidies for bio-fuel. Around a third of American grain production has rapidly been diverted into energy production. This switch demonstrates both the superb responsiveness of the market to price signals, and the shameful power of subsidy-hunting lobby groups. Given the depth of anti-Americanism in Europe it is, of course, fashionable to criticize the American folly with bio-fuels. But Europe has its equivalent follies.

First, the European Commission is now imitating the American bio-fuels policy. At present the programme is small enough to be unimportant, but we need to pull it back before it does real damage. We have surely learnt enough about European agriculture to realize how important it is to kill this incipient scam before we are engulfed by it. But the true European equivalent of America’s folly with bio-fuels is the ban on GM. Europe’s distinctive and deep-seated fears of science have been manipulated by the agricultural lobby into yet another form of protectionism. The ban on both the production and import of genetically modified crops has obviously retarded productivity growth in European agriculture: again, the best that can be said of it is that we are rich enough to afford such folly. But Europe is a major agricultural producer, so the cumulative consequence of this reduction in the growth of productivity has most surely rebounded onto world food markets. Further, and most cruelly, as an unintended side-effect the ban has terrified African governments into themselves banning genetic modification in case by growing modified crops they would permanently be shut out of selling to European markets. Africa definitely cannot afford this self-denial. It needs all the help it can possibly get from genetic modification. Not only is Africa currently being hit by rising food prices, over the longer term it will face climatic deterioration in the context of a rapidly growing population.

While the policies needed for the long term have been befuddled by romanticism, the short term global response has been pure beggar-thy-neighbour. It is easier for urban slum dwellers to riot than for farmers: riots need streets, not fields. And so, in the internal tussles between the interests of poor consumers and poor producers, the interests of consumers have prevailed. Governments in grain-exporting countries have swung prices in favour of their consumers and against their farmers by banning exports. These responses further politicize and fragment an already confused global food market. They increase the risks of investing in commercial-scale food production and drive up prices further in the food-importing countries. Unfortunately, trade in agriculture has been the main economic activity to have resisted being subject to global rules. We need stronger and fairer globalization, not less of it.

Globalization 1.0

Paul Krugman reads books on his Kindle:

Fruits of globalization: [A] book recommendation: I’m reading Dan Koeppel’s Banana at Bedtime (yes, on my Kindle), and it’s great. Right now I’m in the midst of the rise of the modern banana trade, and of United Fruit.

One message from this story is that globalization as a profound source of change is nothing new. In fact, the combination of things that made the widespread consumption of bananas in America possible — railroads, steamships, refrigeration, and, not least, regime change often backed by American military might — where do you think banana republics came from? — makes containerization and the Washington Consensus look low-key by comparison...

Eichengreen (1997): The Baring Crisis in a Mexican Mirror

Barry Eichengreen (1997), "The Baring Crisis in a Mexican Mirror" http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1031&context=iber/cider:

Conventional wisdom has it that the Mexican crisis of 1994-5 was "the first financial crisis of the 21st century." In this paper I argue that it may be better understood as the last financial crisis of the 19th. The crisis in Mexico exhibits striking similarities to the Baring Crisis of 1890, an event that did much to shape modern opinion about the causes and consequences of financial crises and the role for official management.

Parallels between the two episodes are extensive.... Mexico was the benchmark for investors in emerging markets in the 1990s (it was the single largest borrower, and the spreads it commanded set the floor for other borrowers), Argentina, the country whose financial difficulties ignited the Baring Crisis, was commended to investors as "The United States of South America"... the single most important destination for British capital outside the United States and the British Empire... the wheels of international finance were greased by declining interest rates worldwide, associated with Goschen's debt conversion in the 1880s and recession- induced cuts in interest rates by the Federal Reserve in the 1990s. In both cases investors who had been slow to join the bandwagon climbed on board in the final stages of the boom.

While foreign borrowing was portrayed as financing investment in productive capacity, in both cases capital inflows fueled rising levels of consumption. Foreign capital flowed through the banking system, and bank lending financed purchases of luxury imports as well as capital goods. Governments failed to boost their savings to offset dissaving by the private sector. In both cases powerful opposition existed to the government in power, leaving officials reluctant to tighten monetary and fiscal policy for fear of alienating their core constituencies. Hence, they did little to damp down the impact on the economy of international capital flows.

But increased demand did not automatically elicit increased supply. Investment in capacity took time to translate into improved export performance.... Political shocks (strikes and an incipient coup in Buenos Aires in 1889-90, the Chiapas revolt and Colosio assassination in 1994) then raised doubts about the ability of the government to carry out adjustment. Better-informed investors grew wary significantly in advance of the crisis.

The crisis itself drove the Argentine government, like the Mexican government after it, to the brink of default. The fallout destabilized the banking system. It provoked a major recession. And it spilled over to other countries. In 1995 the Tequila Effect was felt in Argentina, Brazil, Thailand and Hong Kong. In the wake of the Baring Crisis, interest rates rose in Brazil, Uruguay, Venezuela and Turkey. Countries as far afield as Australia and New Zealand found it difficult to access external finance....

At the same time there are important differences.... Monetary and fiscal excesses were more clearly evident in Argentina in the 1880s than in Mexico in the 1990s.... In 1995 the Clinton Administration and the IMF saw the need to help Mexico avert a suspension of debt-service... in 1994 there was no single financial institution as exposed as Baring Brothers. In 1890 the fear was for the stability of financial markets in the First World, not the Third. Where the U.S. government's first reaction in 1994 was to assemble financial aid for Mexico, in 1890 the Bank of England and the British Government arranged a rescue fund for Baring Brothers, not for Argentina....

Where the Bank of England could make arrangements with other financial institutions before news of Baring's difficulties became public, the 1995 crisis was a very public affair....

In a sense, then, the Mexican crisis is both the last financial crisis of the 19th century and the first financial crisis of the 21st. Its implications resemble those of the Baring Crisis.... But today's international financial today being even more nimble and decentralized than that of the 1880s, it anticipates the kind of crises that will become increasingly prevalent in the 21st century....

Information on the recent Mexican episode is abundant, and interpretations abound. Hence, I assume that the reader is familiar with the outlines of the Mexican crisis. I concentrate mainly on Argentina in the 1880s, providing just as much information on the Mexican crisis as is needed to place the comparison in relief...

Econ 101b: April 23: The Chinese Economy

April 23: The Chinese Economy

Notes: Slides: http://delong.typepad.com/delongslides/2008/04/econ-101b-april.html; Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080423_091349.mp3

Readings:

• Barry Eichengreen,"China's Exchange Rate Regime: The Long and Short of It" http://www.econ.berkeley.edu/~eichengr/research/short.pdf
• C. Fred Bergsten, "The Dollar and the Renminbi" http://www.iie.com/publications/papers/paper.cfm?ResearchID=747
• Institute for International Economics, "China: The Balance Sheet" http://www.petersoninstitute.org/publications/chapters_preview/04648/01pa04648.pdf

April 21: Econ 101b: Why Is Asia Gambling on Bretton Woods II?

April 21: Why Is Asia Gambling on Bretton Woods II?

Notes: Slides: http://delong.typepad.com/delongslides/2008/04/econ-101b-april.html; Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080421_091146.mp3

Readings:

• Barry Eichengreen,"China's Exchange Rate Regime: The Long and Short of It" http://www.econ.berkeley.edu/~eichengr/research/short.pdf
• C. Fred Bergsten, "The Dollar and the Renminbi" http://www.iie.com/publications/papers/paper.cfm?ResearchID=747
• Institute for International Economics, "China: The Balance Sheet" http://www.petersoninstitute.org/publications/chapters_preview/04648/01pa04648.pdf

April 16: Econ 101b: Risks of International Financial Crisis II

April 16: Risks of International Financial Crisis II

• Notes: Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080416_122152.mp3. Slides: http://delong.typepad.com/delongslides/2008/04/april-16-2008-l.html

• International Financial Crises Problem Set Clean Version. Due April 23