Irish Confusion: [S]tandard Keynesian models, open-economy version, tell a very clear story about what happens when a country pegs its exchange rate at a level that leaves its industry uncompetitive. The country doesn’t stay depressed forever: high unemployment leads to actual or at least relative deflation, which gradually improves cost-competitiveness, which leads to rising net exports and gradual expansion. In the long run, full employment is restored; it’s just that in the long run we’re all, well, you get the picture.
That was Keynes’s whole point in The Economic Consequences of Mr. Churchill — not that the return to gold at too high a parity would mean depression forever, but that it would subject Britain to years of unnecessary suffering.
Seeing some growth in Ireland, then, is not at all a refutation of Keynesian economics — it’s exactly what you’d expect, given that Ireland is in fact gradually achieving an “internal devaluation” via relative deflation. What would have posed an intellectual puzzle would have been a rapid bounceback to full employment. And that isn’t happening.
Global crisis: Policy failure on a massive scale: MAYBE everything will turn out all right…. As each day passes, however, frustration grows. Leaders in America and Europe are dallying with failure on an epic scale.... America and Europe are flailing because their leaders are failing. They seem to be too small for the tasks at hand, too petty, and too myopic.
The challenges facing Europe and America are big, but they're not mysterious. In Europe, the issues are sovereign debt, vulnerable banks, and a poorly designed currency area. It's not tricky to see what must be done…. European leaders know what they need to do. They have been slow to do it for two reasons. First, the magnitude of the commitment necessary to save the union is uncertain…. And second, the distribution of the costs of the commitment is uncertain, and no individual entity wants to pay a penny more than is necessary. The concerns are understandable, but this thrift is fundamentally wrong in the context of the current crisis….
In America, the situation is more ridiculous still. The economy is vulnerable. New data continue to reveal just how weak growth was in the second quarter. The economy may scarcely have expanded at a 1% annual pace. Unsurprisingly, job growth was too slow to keep up with a growing labour force, and the unemployment rate began rising again…. Washington seems practically excited to stamp out optimism. Congress has spent the first month of the third quarter dangling the prospect of a full blown fiscal crisis over the heads of American firms and households…. [W]hile tens of millions of workers are un- or underemployed and wages flat, the government is doing its absolute best to kill the latest growth rebound in its crib. It is shocking.
Again, it's not like the correct policy path is incredibly complicated. Here, I'll sum it up in three quick steps:
Don't cause a major crisis.
Do spend more and tax less for the next year or so.
D* Do spend less and tax more after that.
See? That's really easy! If you wanted to move up to more complicated ideas, you could talk about using the opportunity of record low borrowing costs to make needed, long-overdue investments in critical American infrastructure. Instead, Congress seems determined to convince the world that America shouldn't be allowed to borrow at all, except at highly punitive rates…. It's inexcusable. And it is a direct result of a leadership in Washington that is too small-minded to see the danger it's courting by recklessly pursuing a foolish ideological agenda.
Right now, Angela Merkel doesn't look like the leader Europe needs to spare it a wrenching crisis. Jean-Claude Trichet looks like the wrong man in the wrong place at the wrong time. Barack Obama looks like a man who picked a fight he couldn't finish. John Boehner looks to be too worried for his political future to cow a caucus apparently hungry for catastrophe….
Maybe everything will turn out all right. Shame on the leaders of Europe and America for working so diligently to ensure that it doesn't.
The Problem With Christine Lagarde : Lagarde is explicitly being put forward as someone who can represent the interests of the eurozone.... The founding assumption for the eurozone in 1999, which became a myth during the early 2000s, is that eurozone countries would converge in terms of productivity levels.... In that view of Europe, it did not much matter if some countries within the eurozone ran current account surpluses while others ran large deficits. The deficit countries could finance themselves with loans from the surplus countries, the reasoning went, because they would use the money for productive investments and economic growth would allow them to keep their debt levels relative to GDP under control.
None of this happened. The productivity gains were seen more in Germany and some other North European countries; unit labor costs, reflecting the net effect of productivity gains and real wage increases, rose sharply in Mediterranean Europe. And French, German and other “core” banks facilitated this divergence with a surge in lending to both consumers and governments in the periphery – convincing themselves, shareholders, and regulators that this was low risk.
Most of this is not Ms. Lagarde’s fault, of course.... But the bigger issue that more recently she and the French authorities in general have been at the forefront of efforts to deny there is any deep problem and to resist a systematic solution. France worked long and hard to prevent increases in bank capital during the recently concluded Basel III negotiations.... Low bank capital creates serious systemic financial risk for Europe and the world.
From my perspective, the big problem with Christine Lagarde as head of the IMF is that she is very likely to step the IMF away from its current--correct--technocratic position that the global economy needs easier money and more government spending in the core and replace it with Euro-austeric policy nostrum snake oil, to the world's impoverishment. I think that this is behind Martin Wolf's worries too, but he focuses more on procedure:
Europe should not control the IMF: Gone are past promises of an open selection [for IMF Managing Director]. The Europeans insist on the principle that what we have we hold. The ancien régime survives. Mme. Lagarde is a perfectly respectable candidate. She is French, almost a requirement, it often seems, for the European head of an international institution.... [S]he is not a perfect candidate: her economics are limited. If she were to become head of the organisation she would have to rely on the advice of those around her. If she were to get the job, it would be essential for whoever replaces John Lipsky, the American first deputy managing director, who is due to depart in August, to be a first-rate economist.
I remember back in 1993 the garbage thrown at then-Treasury Secretary Lloyd Bentsen when he said--quite reasonably--a stronger yen would be in America's interest...
We have not grown up at all in eighteen years.
Christina Romer:
A Strong Dollar Isn’t Always a Good Thing: AT a recent news conference, Ben S. Bernanke, the Federal Reserve chairman, was asked about the falling dollar. He parried the question, saying that the Treasury secretary was the government’s spokesman on the exchange rate — and, of course, that the United States favors a strong dollar.... Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.
Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market.... [A]ll that “the exchange rate is the purview of the Treasury” means is that no official other the Treasury secretary is supposed to talk about it (and even he isn’t supposed to say very much). That strikes me as a shame. Perhaps if government officials could talk about the exchange rate forthrightly, there would be more understanding of the issues and more rational policy discussions....
Paul Krugman: Making Things in America: I don’t want to suggest that everything is wonderful about U.S. manufacturing. So far, the job gains are modest, and many new manufacturing jobs don’t offer good pay or benefits. The manufacturing revival isn’t going to make health reform unnecessary or obviate the need for a strong social safety net. Still, better to have those jobs than none at all. Which brings me to those right-wing critics.
First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed. Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker. A few months ago, Paul Ryan, the chairman of the House Budget Committee, berated Ben Bernanke for failing to tighten monetary policy, declaring: “There is nothing more insidious that a country can do to its citizens than debase its currency.” If Mr. Bernanke had given in to that kind of pressure, manufacturing would have continued its relentless decline.
And then there’s the matter of the auto industry, which probably would have imploded if President Obama hadn’t stepped in to rescue General Motors and Chrysler. For those companies would almost surely have gone into liquidation, closing all their factories. And this liquidation would have undermined the rest of America’s auto industry, as essential suppliers went under, too. Hundreds of thousands of jobs were at stake. Yet Mr. Obama was fiercely denounced for taking action. One Republican congressman declared the auto rescue part of the administration’s “war on capitalism.” Another insisted that when government gets involved in a company, “the disaster that follows is predictable.” Not so much, it turns out.
So while we still have a deeply troubled economy, one piece of good news is that Americans are, once again, starting to actually make things. And we’re doing that thanks, in large part, to the fact that the Fed and the Obama administration ignored very bad advice from right-wingers — ideologues who still, in the face of all the evidence, claim to know something about creating prosperity.
Moderator: Paul Blustein - Nonresident Fellow, Global Economy and Development, The Brookings Institution
Panelists:
Charles Dallara - Directory, Institute of International Finance
Yasheng Huang - Professor of Political Economy, MIT Sloan School of Management
Y.V. Reddy - Former Governor, The Reserve Bank of India, currently University of Hyderabad
Joseph Stiglitz - University Professor, Columbia University, Nobel Laureate
Discussants:
Brad Delong - Professor of Economics, University of California
Yu Yongding - Director, Chinese Academy of Social Sciences
The Architecture of Asis: Comment
Let me pick up some threads that I think have been implicit in most of what has been said in this session. It has, however, been said politely. I will be less polite—as befits a Dismal Scientist. I will make the four points that I think need to be made about the architecture of Asian economies
Asia, both East Asia and South Asia, have been more expansionary in their policy mixes in the aftermath financial crisis than have the developed economies of the North Atlantic. Asian policies—both expansionary Keynesian and expansionary monetarist—have worked. They have been remarkably successful in cushioning the crisis and restarting growth. North Atlantic policy makers and academics should take note. To my dismay and somewhat to my horror, by and large they have not. The fact that the Asian countries' recipes for dealing with the crisis have been more successful than those of the North Atlantic—and perhaps deserve some imitation—is not part of the North Atlantic debate. Why not? The reasons escape me.
I have just complimented Asia. Now let me warn it. Asia is now riding high. Among not so much us Dismal Scientists but among others elsewhere in the great wide world we hear others—policymakers, public intellectuals, politicians—saying that it has now been revealed that the economic policy doctrines of the North Atlantic were simply the emperor's new clothes. North Atlantic economists, I hear people say, may indeed have forgotten a great deal and may indeed have been distracted by a great deal in the runup to the financial crisis—but most of all North Atlantic economists were simply wrong. Thus I hear that Asia does not have much to learn from the accumulated human capital of economists. I hear that Asia does not have much to learn from the experience of the North Atlantic. This is, I think, a big mistake. Economists did know a great deal about financial crises and how to deal with them. It is embarrassing when Larry Summers, asked for an example of useful economics, names a book published in 1873: Walter Bagehot's Lombard Street. The cutting-edge economics of macroeconomics of 1873 is indeed our new and relevant economic thinking. That this is so means that we economists are in significant trouble. Nevertheless, we do know something—or at least those of us who know our Bagehot know something.
Asia should listen to what we know. Ignorance by Asia of the context and history of financial crises may well lead to hubris, which is then followed by nemesis. Nemesis can arrive for one or both of two reasons. First, Asian growth is now rapid. Asian expectations are now extrapolative. Everybody buying assets in Asia expects the current growth pattern to continue, perhaps for 20 years, perhaps for 10 years, perhaps only for 5, but they all expect it to continue. Thus they all price that continuance of rapid growth into asset prices. To the extent that there are bears who have been cautious their cautious portfolios have been outperformed by and will be outperformed by others. And, according to Charlie Kindleberger's precept that nothing so deranges your mind as to watch your friends become rich, the bears are shifting to extrapolative expectations as well. And there will be a slowdown in Asian growth at some point. At the moment it is catch-up growth; easy transfer of well-established technologies, relatively easy boosting of savings rates, relatively straightforward acquisition of human capital. Catch-up growth inevitably slows when it reaches the limits of physical capital accumulation, expands to more difficult and sophisticated levels of education, reaches for technologies that are harder to transfer. The slowdown may be 5 years away, it may be 10, it may be 20. It is unlikely to be more. When it comes, whenever it comes, it will hit Asian economies that will be expecting and pricing further rapid growth. And when the slowdown comes, asset prices will then fall far and fall fast.
Remember global imbalances? Not so very many years from now Beijing alone will have 40 trillion yuan invested in dollar-denominated assets. Some day exchange rates will move. When they do, those 40 trillion will be worth 30 trillion or 25 trillion or 20 trillion Renminbi. Those 40 trillion have been borrowed from the good burghers of Shanghai. The good burghers of Shanghai will want them back. When the slowdown comes and they want their money back, 20 or 15 or 10 trillion renminbi of it simply will not be there. Asset prices will then move far and move fast. Asset prices that move far and fast are recipes for financial crisis.
Well before Walter Bagehot there was Jean-Baptiste Say. Say did not really want to be an academic economist. He wanted to be a policymaker. He wanted to be a finance minister. In fact, Jean-Baptiste Say was special assistant to French Secretary of the Treasury Étienne Clavier during the First French Republic. But then his boss was purged, arrested, imprisoned, tortured, sentenced to death, and cheated the guillotine by suiciding in his cell the night before his planned execution. Somehow, Say escaped with not only his life but also his freedom and even his property. Say decided it was a good idea to retire to the countryside and write books of economics. Say decided not to play the high-stakes game of French politics and government any more.
Back in 1829 Say wrote one of the very first analyses of the very first industrial depression, the bust of the British canal boom of the early 1820s. The lesson Say drew was that a financial crisis was the only time in which Say's Law was false: when supply did not create its demand. In the aftermath of a financial crisis, you see, the private sector could not by itself create the safe and liquid financial assets of appropriate duration that the economy wanted to hold. At other times it could—and as long as the private sector was happy holding the existing stock of financial assets income for one would become demand for the products made by another which would become income for a third, and supply would indeed create its own demand. But in the aftermath of a financial crisis what the classical economists called a "general glut" of idle factories and high unemployment was indeed possible.
It turned out that Say was right. Ever since whenever depressions have become deep the odds are that it has been because of a financial crisis. That financial crisis deranged the private sector's ability to settle its own kind of internal financial arrangements via the creation of credit.
Thus whenever these asset prices in Asia move far and fast—either because the dollar has collapsed, or because East Asian growth has slowed markedly, or because of both—these movements of asset prices are the things that generate financial crises and shake the foundations of trust needed for the private sector to do the financial intermediation to make Say's Law true in practice (even thought it is not true in theory).
Back in 2005 we economists were discussing where the next financial crisis might emerge. Back then such discussions settled on the conclusion that the next big financial crisis to appear was likely to be the result of global imbalances in savings and investment. You could call that a "dollar crisis" if you focused on the deficit country. You could call it a "reorientation of Asian development crisis" if you focused on the surplus countries. Whatever you called it, it was the same thing.
That crisis is still out there.
That crisis is still possible.
The success of Asia in surmounting this last crisis says little about its ability to surmount the next one.
And that potential next crisis—in its potential at least a larger crisis than the one we have just been through—is now six years closer.
I wonder if that’s a comparison that would make Dani cringe? I hope not. It’s meant as a compliment.
Published in 1944, after a turbulent 30 years, The Great Transformation was Polanyi’s way of grabbing capitalism by the neck and sticking its nose in the mess it made. After a turbulent few years in the OECD economy, and a more turbulent decade or two in emerging markets, Dani does something similar. His argument: Ever freer trade has little growth benefit, and robs poor countries of the chance to develop industry in the same way as their rich cousins. Ever freer capital flows, meanwhile, can be blamed for volatility and financial crises in emerging markets. Both are incompatible with the twin goals of sovereignty and democracy.
I buy the bulk of what Dani has to say, though I’m not sure that I believe his prescriptions will work for the poorest areas of the planet, most of all sub-Saharan Africa. His prescriptions seem to require a much more coherent state, and professional bureaucracy, and stable polity, than most nations can boast. In this third-best environment, could Asia-style industrial and growth policy cause more harm than good?... The arguments seem to hold more force for middle income countries — the Turkeys and Perus and South Africas of the world — than for the Ugandas and Liberias...
I felt a different lack in Dani's book: the "industrial policy" prescriptions Dani recommends were the ideology underpinning the disastrous post-WWII economic policies of the Southern Cone of South America--and underpinning the the professed growth strategies of post-WWII initial African leaders like Ghana, Zambia, and Kenya. Dani would say, correctly, that these countries' governments preached but did not practice. But that simply kicks the can down the road: we need a theory not of market failure--we understand that well--but of government failure to understand why policy ideologies that work very well in western Europe and eastern Asia have a strong tendency to fail elsewhere.
The Progressive Economics Forum » Gloomy Days Ahead?: I attended an interesting forum on the economic outlook yesterday afternoon. Organized by Canada 2020, the speakers were noted US economist Brad DeLong (UCal Berkley, former senior Treasury official under Clinton, and Paul Krugman soul mate on macro issues at least), and our own David Dodge (who needs no intro.).
De Long’s main focus was on the US, and his key point was that - to his consternation and surprise - continued very high unemployment and an economy operating well below potential are now failing to prompt an appropriate textbook macro-economic response. The original stimulus package was too small, and further stimulus is not on the table as the US focus turns to fiscal austerity. Meanwhile central banks are desperately seeking exit strategies from extraordinary monetary policy measures which helped save the day after the financial crisis. Ditto in Europe. That adds up to continued stagnation for most of the advanced industrial world.
Dodge did not directly challenge this rather gloomy outlook. He did, however, argue that fiscal restraint today - while perhaps a bad idea in macro terms - is needed to restore confidence that there will be restraint in place down the road. He conceded, however, that the US will not get the help that Canada got in the 1990s in the form of falling interest rates and rising exports which helped offset the macro impacts of deep spending cuts.
DeLong and Dodge agreed that the current global economic situation remains extremely fragile, noting that the big crisis they had both expected before the Great Recession - a possible financial crisis precipitated by global financial imbalances and the huge US current account deficit - could yet take place. If there is hope on that front, it is that China will see the need to shift to at least some degree to domestic demand driven growth, and will see currency appreciation as a tool to fight a growing inflation problem. Absent that, and rebalancing will have to be via sharp cuts to US consumption which will sink the recovery.
In some brief remarks on Canada, DeLong pointed to our obvious symptoms of Dutch Disease and counseled us to stave off the loss of manufacturing capacity by sequestering high resource rents in a sovereign wealth fund invested outside the country on the Norwegian model.
Needless to say, Dodge dodged that one.
I am always bad at remembering what was said--the adrenaline rush of being in front of a crowd seems to make me very bad at transferring short-term into long-term memories--but I thought that Dodge agreed that handling the current oil price shock via the Norwegian model would be a good thing for Canada, but that there were major difficulties caused by the structure of Canadian federalism: a federal Canadian excise tax on energy exports to fund a SWF invested abroad would be viewed as--and would be--a confiscation of the government of the Province of Alberta's resource holdings for the benefit of the voters of Ontario...
And Bank of Canada Governor Carney assured me at dinner that the amount of snow falling outside was not unusual for Ottawa in mid-March, and that I should return to Ottawa during their two weeks a year of summer sometime, and told a story about how Robert Zoellick's security team had not felt up to dealing with the polar bear threat...
Noahpinion: Is trade really always efficient?:
I'm a bit late to the party on Greg Mankiw's column about trade.... Mankiw's case for trade is the textbook one.... Trade is good because it is a voluntary exchange, and voluntary exchanges benefit the people who do them (or else they would not have chosen to carry out the exchange). Hence, trade liberalization is always good, Q.E.D.... [P]eople seem to agree (and agree with Mankiw) on one basic point: The efficiency of trade is not in question. Only the distributional effects of trade are in question. But to me, this seems highly non-obvious....
The question is: Since trade is a voluntary exchange,why would a country choose to trade if it were harming itself by doing so?
Answer #1: Externalities. As Angus so pithily points out, "People, the United States is not a person!" Trades are undertaken not by countries, but by individuals within those countries. Negative externalities, as every Econ 101 student knows, happen when an exchange between two people causes harm to a third. In the case of trade, the third person who is harmed may be in one of the countries that is engaging in trade.... [T]here would have to be some pretty big externalities for protectionism to actually be better than free trade in the aggregate. But certain types of trade could easily lead to reductions in overall economic efficiency. Unless every country could be persuaded to tax or otherwise mitigate the externality, liberalizing these types of trade could be a mistake, regardless of distributional effects.
Answer #2: Dynamic Inconsistency.... For most individual decisions, it seems unlikely that dynamic inconsistency outweighs the benefits of voluntary exchange. Addictive drugs are one of only a handful of plausible exceptions. But again, a country is not a person. A country's decision-making process may be far more prone to dynamic inconsistency than an individual's. This could throw a wrench into the "trade is always good" argument....
Notice that neither of these exceptions are arguments for autarky, or even for across-the-board trade restrictions. They are arguments that certain instances of trade liberalization may cause efficiency losses.
Mankiw does not address either of these theoretical possibilities. As far as he is concerned, the case for trade's efficiency is iron-clad in all cases.... I am against giving this sort of free pass. The supposed consensus that trade is always efficient to me smacks a bit of golden-age-ism and false consensus. You hear again and again that trade (or, at least, the efficiency aspect) is the one issue that economists have settled. But if a consensus exists, it is a result of politics and opinion, not because economic theories make an iron-clad case for the efficiency of trade. Theoretical exceptions do exist, and to ignore this fact (as we do) probably just makes people less trustful of economists in general.
In his recent commentary, Professor Mankiw explained the gains from trade even more simply than is done in textbooks. Your driveway is covered in deep snow. Its removal is worth $40 to you. The boy next door, currently engrossed with a game on his Xbox, would give up the game and shovel your driveway for any payment exceeding $20. So if you pay him $30 to shovel your driveway, you will both be better off by $10. Overall social welfare is unambiguously enhanced.... As far as economists are concerned, how can anyone argue with that?...
Now let us think again about... manufactured scarves.... [M]any Americans might balk at the lower-priced scarf if it were offered not by an American but by a low-cost manufacturer in Shanghai or Bangladesh. This nationalist sentiment sets many noneconomists apart from most economists. In their work, economists are typically are not nationalistic. National boundaries mean little to them.... I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade.... Alan Blinder wrote:
I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?... That is why I am going public with my concerns now. If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome.
And Mark Thoma:
Saying that everyone could be made better off with increased international trade is not the same as people actually being made better off. There are winners and losers from increased international trade, and while I agree that the gains exceed the losses in almost all cases, the gains haven't been distributed in a way that leaves everyone, or even most everyone, better off (see, e.g., widening inequality and where the costs of these kinds of adjustments fall). When some people are made better off and others made worse off at the same time, economists cannot say it is unambiguously better or worse. If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners
The 787 has more foreign-made content — 30% — than any other Boeing plane.... That compares with just over 5% in the company's workhorse 747 airliner. Boeing's goal, it seems, was to convert its storied aircraft factory near Seattle to a mere assembly plant, bolting together modules designed and produced elsewhere as though from kits. The drawbacks of this approach emerged early. Some of the pieces manufactured by far-flung suppliers didn't fit together. Some subcontractors couldn't meet their output quotas, creating huge production logjams when critical parts weren't available in the necessary sequence. Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints. Some then farmed out their engineering to their own subcontractors, Mike Bair, the former head of the 787 program, said at a meeting of business leaders in Washington state in 2007. That further reduced Boeing's ability to supervise design and manufacture. At least one major supplier didn't even have an engineering department when it won its contract, according to an analysis of the 787 by the European consortium Airbus, Boeing's top global competitor.
Boeing executives now admit that the company's aggressive outsourcing put it in partnership with suppliers that weren't up to the job. They say Boeing didn't recognize that sending so much work abroad would demand more intensive management from the home plant, not less. "We gave work to people that had never really done this kind of technology before, and then we didn't provide the oversight that was necessary," Jim Albaugh, the company's commercial aviation chief, told business students at Seattle University last month. "In hindsight, we spent a lot more money in trying to recover than we ever would have spent if we tried to keep many of the key technologies closer to Boeing. The pendulum swung too far."...
That's not to say that outsourcing never makes sense — it's a good way to make use of the precision skills of specialty manufacturers, which would be costly to duplicate. But Boeing's experience shows that it's folly to think that every dollar spent on outsourcing means a cost savings on the finished product.Boeing can't say it wasn't warned. As early as 2001, L.J. Hart-Smith, a Boeing senior technical fellow, produced a prescient analysis projecting that excessive outsourcing would raise Boeing's costs and steer profits to its subcontractors. Among the least profitable jobs in aircraft manufacturing, he pointed out, is final assembly — the job Boeing proposed to retain. But its subcontractors would benefit from free technical assistance from Boeing if they ran into problems, and would hang on to the highly profitable business of producing spare parts over the decades-long life of the aircraft. Their work would be almost risk-free, Hart-Smith observed, because if they ran into really insuperable problems they would simply be bought out by Boeing.
What do you know? In 2009, Boeing spent about $1 billion in cash and credit to take over the underperforming fuselage manufacturing plant of Vought Aircraft Industries, which had contributed to the years of delays. "I didn't dream all this up," Hart-Smith, who is retired, told me from his home in his native Australia. "I'd lived it at Douglas Aircraft.... I warned Boeing not to make the same mistake. Everybody there seemed to get the message, except top management....
Albaugh and other executives acknowledge that they've blundered. "We didn't want to make the investment that needed to be made, and we asked our partners to make that investment," Albaugh told his Seattle University audience. The company now recognizes that "we need to know how to do every major system on the airplane better than our suppliers do." One would have thought that the management of the world's leading aircraft manufacturer would know that going in, before handing over millions of dollars of work to companies that couldn't turn out a Tab A that fit reliably into Slot A. On-the-job training for senior executives, it seems, can be very expensive.
The temperate 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 industrial powers in return for manufactures?
"An astute and well-told account of a law more often invoked than understood, Irwin's examination of the Smoot-Hawley Act explains how--for good or ill--Congress lost its credibility as a maker of trade law. A valuable book for anyone who wants to understand the Great Depression and whether it could come back."
--Eric Rauchway, author of Blessed Among Nations and The Great Depression and the New Deal: A Very Short Introduction
"Douglas Irwin's elegant and sophisticated account of the Smoot-Hawley Tariff clears up some powerful and persistent myths. As Irwin shows, the tariff didn't begin with congressional logrolling (though that contributed substantially to the eventual outcome), it didn't cause the stock market panic of October 1929, and it didn't cause the Great Depression (but neither did it counteract deflation from abroad as some Keynesians and monetarists have claimed). And many of the book's details are fascinating and even bizarrely amusing."
--Harold James, Princeton University
"Economists and economic historians have closely examined the Smoot-Hawley Tariff over the past few decades, but no one before Douglas Irwin has pulled together such a wide-ranging body of evidence to give us a solid and detailed understanding of the passage and impact of the bill. Understanding the Great Depression has become even more important since the global financial crisis, and that makes this book very timely. Brief, accessible, and clear, Peddling Protectionism should appeal to a wide range of readers."
--Robert Whaples, Wake Forest University
"It would not surprise me if this became the definitive economic history of the Smoot-Hawley Tariff. Synthesizing and fleshing out the best research and nicely connecting economics and politics, Peddling Protectionism provides a fuller accounting of, and a deeper perspective on, what is arguably the best-known U.S. tariff of the twentieth century."
--Kris Mitchener, Leavey School of Business, Santa Clara University
Damned if I can think of who the "Keynesians and monetarists" are who claimed that Smoot-Hawley was stimulative by "counteract[ing] deflation from abroad." I was always taught by Keynesians and monetarists that Smoot-Hawley and retaliative moves by other countries together administered a contractionary supply shock to the world economy--although not one big enough to make the Great Depression great...
Ryan Avent gets puzzled as he tries to work his way through the causes of unemployment:
Labour markets: Sticky, sticky wages | The Economist: what we see is a two-track labour market. Workers who never lost their jobs... have potentially enjoyed pay increases. But... jobless workers... have struggled to find work and who can generally only do so at a significant wage cut relative to their previous pay.... I mentioned a few explanations ventured by Rob Shimer....
One big issue is the problem that nominal wages aren't very flexible in a downward direction. Another issue could be that since existing firms aren't motivated to hire new and cheap workers, new firms are needed to absorb jobless workers, but new firm creation is hampered by tight credit conditions. Mr Shimer also speculated that unemployed workers could somehow be different—uniquely unskilled or improperly skilled—or they could be pinned in place by housing conditions in particularly bad job markets....
Why wouldn't firms swap out older, more expensive workers for the cheaper unemployed ones available to them? One possibility is that firms are worried about the disruptive impact of such workforce turnover and have decided that it's better to keep employing existing labour at existing wages...
Bingo. That appears to be the answer--that has been the rule for nearly two centuries: firms are scared that swapping out their current workforce for a new one or even cutting nominal wages by threatening to swap out their current workforce for a new one is devastating for worker morale and thus productivity.
The answer is, as Ryan points out, that the currently-unemployed need new or expanding firms to hire them, and:
Robert Hall argues that credit conditions remain tight for new businesses, who are the big job creators.
Or it could be that jobless workers are simply much less productive than those who continue to work.... But... why [did] firms [have] them on payrolls before the recession[?]... The data seem not to point toward structural factors as the primary driver of unemployment.
Perhaps the problem is a shortfall in demand, which is preventing existing firms from expanding. It could be that the real interest rate simply isn't low enough to induce firms to invest in new plants and equipment--investments that would produce corresponding jobs.
It is at this point that Ryan should have noted that nominal demand is now 8% below its pre-2008 trend. Surely if something were to suddenly and quickly without harming worker morale reduce the level of nominal wages by 8%--so that real demand were back at its trend--we would magically discover that all those "low-productivity" workers were very employable.
Well lo and behold, that is how it worked in the Great Depression. Exchange rate depreciation is--if you are a small open economy--an extremely easy way of reducing your nominal wages in world prices without harming worker morale.
Could there possibly be any reason to think that things are working any differently today?
"Huh?!" is Greg Ip's reaction to Sebastian Mallaby of the Council on Foreign Relations, which has indeed fallen on sad times:
QE2 and the Fed: QE is unconventional monetary policy, but it is monetary policy nonetheless. When either conventional or unconventional monetary policy eases, certain things are supposed to happen: long-term yields fall, stocks rise, the exchange rate declines. All of which is happening now. If the Fed had just cut the Federal funds rate from 3.5% to 2.75% (roughly the equivalent of what its $600 billion in Treasury purchases should achieve), we should have expected exactly the same results, without [Mallaby's] sturm und drang about currency wars.... [C]urrency manipulation... unsterilised foreign-exchange intervention, for example, such as the Swiss National Bank and Bank of Japan.... But that’s not what the Fed is doing. It is simply trying to do to long-term rates what it has already done with short-term rates....
I think [Mallaby's confusion] stems from a misconception of what QE does.... Purchasing bonds with newly-created bank reserves will only expand the overall domestic supply of credit if banks on-lend the extra reserves. That is not happening.... Nor does QE create foreign liquidity; the Fed can do many things, but printing foreign currency is not one of them....
The Fed does not create Brazilian reals: but it may make investors willing to pay more for real-denominated assets. Before foreign countries try to resist that, they should first ask if they should. Many of these countries need to reorient their economies from exports to domestic demand. A higher currency helps. And if it’s happening too quickly, they can use macroprudential regulation at home....
One thing other countries should not do is ask America to leave unused one of the few effective policy tools it has left to stimulate the domestic economy. The world needs higher unemployment and deflation in America like a hole in the head.
Indeed. If there was one big lesson from 2008-2009, it is that the rest of the world has an even greater interest in full employment in America than America does.
China can no longer plead poverty: Of course, the city has pockets of poverty. And Shanghai is not China, where 150m people (out of a total Chinese population of more than 1.3bn) still live on less than $2 a day. Even so, China’s insistence that it is a poor, developing nation is beginning to wear a little thin. This, after all, is a country that is sitting on more than $2,500bn worth of foreign reserves. In important ways, China is now a rich nation. But its insistence that it is still a “developing country” has become a shield to protect itself against vital political and economic changes that matter profoundly to the rest of the world...
China can still plead poverty. What China cannot do is ignore that it is now a great economic power, and as a great economic power it can no longer make its own internal policy decisions without any consideration of their consequences for the world at large.
...as far as the costs of shipping non-spoilable non-urgent commodities, that is.
Ethan Zuckerman:
…My heart’s in Accra: [T]he cost of shipping water from a bottling plant in Yaqara, Fiji to Cambridge, Massachusetts. I was interested in unpacking the everyday mystery of container shipping – how is it possible that we can sell a product for a couple of dollars a bottle despite shipping it 8,000 miles around the world – and in the odd idea that atoms might be more mobile than bits, as we get lots more Fiji water in the US than Fijian music, movies or news.
My estimate then was that... it would cost $0.21 for a liter bottle of Fiji water to make the 8,000 mile journey.... a small fraction of the retail price of a bottle of “premium” imported bottled water....
I got a few details wrong.... That comes out to $0.18 per liter.... These new figures come from my new favorite toy, Maersk’s online shipping rates calculator.... To use Maersk’s calculator, you need to register with the site, download a client browser certificate and accept three server certificates from Maersk before you can access their secure site. But once you do, it’s just a few short clicks before you can calculate the cost of shipping a 20′ container of “umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and parts thereof” (yes, that’s one of the available categories, along with “bone and meal”, “ores, slag and ash” and “straw, esparto, other plaiting materials and articles of straw, esparto, other plaiting materials) from Auckland to Dubai: $2451.02.
The main thing I’ve found playing with Maersk’s calendar: distance doesn’t matter as much as demand. Americans buy a lot of atoms from China. The Chinese don’t buy nearly as many from the US. A 40′ container filled with household goods, shipped from Shanghai to Houston, TX costs $6169.93. Reverse the trip and ship the same container from Houston to Shanghai and the cost is $3631.07....
As I poke through these maps, schedules and tariffs, I feel like I’m glimpsing a secret world... the sense that these routes and rates, the infrastructure that supports an economy where transPacific bottled water is possible, are the ley lines of globalization, radiating a mysterious and sinister power.
From: J. Bradford DeLong, Chair, Political Economy Major
To: Political Economy Majors and Other Interested Students
Subject: Blum Center Lecture: Jan de Vries: Does Globalization Relieve Poverty? Comparing 19th Century and Contemporary Globalization Processes
I have to teach Monday afternoon, or I would go, but our very own Jan de Vries is speaking Monday at 2 PM on the Plaza Level of the brand-new Blum Hall on Northside about globalization and poverty in historical perspective.
It will certainly be worth hearing--and Berkeley's newest building is also worth checking out.
Jan de Vries is Sidney Hellman Ehrman Professor of History and Economics here at the University of California. He is also a Past President of the Economic History Assocation, and was Vice Provost for Academic Affairs of the University of California at Berkeley.
Indeed. Exchange rate depreciation is the best solution to a country that has priced itself out of export markets. I wonder why Steve Pearlstein doesn't say that a weaker dollar is in America's interest?
Matthew Yglesias comments:
Yglesias » Pearlstein on Wage Cuts: [A] lot of people are going to despite today’s Steven Pearlstein column advocating lower wages for American workers especially since he throws in a gratuitous paragraph suggesting that highly compensated newspaper columnists are the reason the US outperformed the USSR. But this is the paragraph with analytic weight:
Which brings us back to the story of GM’s Orion plant. There are lots of reasons why American companies like GM have lost market share (yes, I wrote about currency manipulation last week), but one is that in too many industries, our labor costs are now too high to be globally competitive. Reducing wages and benefits in those industries would not only help to create and save jobs, but would also force a further reduction in consumption and living standards that is necessary to bring the U.S. economy back into balance....
Pearlstein... [does not] understand that Yuan revaluation is the same thing as lower wages for American workers.... [I]f dollars become less valuable relative to other important currencies, our real compensation declines. By the same token, if the Federal Reserve succeeds in raising the price level, our real compensation declines. These are all related concepts.... [O]f the three, nominal wage cuts are... least attractive.... If you force nominal wage cuts on an indebted population, you get an unbalanced deflation where existing debt obligations come to consume a larger and larger share of income. Alternatively, if you reduce real compensation via currency devaluation or higher inflation you reduce income and debt alike, allowing us to dig out of the balance sheet hole more quickly.
It is getting to the point where I don't believe that Matthew Yglesias wasn't an economics major...
Summers’ departure opens door for new ideas: Given that Congress appears to have abandoned any pretence of a serious debate on what needs to be done to restore America’s declining economic competitiveness, the move will doubtless come as an intellectual liberation for Mr Summers. The bigger question is whether Mr Summers’ departure offers Mr Obama his own opportunity for intellectual liberation.
There is barely an economist in the world who would deny that Mr Summers has a bigger brain than they do. Nor, in spite of valid criticisms of how the politics has been conducted, would most dispute the fact that the Obama administration’s handling of the bank bail-out and fiscal stimulus was indispensable to preventing another Great Depression. Mr Summers was the architect.
These are high marks. Yet many of Mr Summers’ very same admirers have also become his detractors. Put simply, they see him as the face of a paradigm that has outlived its usefulness – the view that globalisation is an unmixed blessing for the US economy, and that America’s disappearing manufacturing jobs will be replaced by high-value jobs in the service sector. Things do not appear to be working out that way.
Take Applied Materials, a big US manufacturing company, which earlier this year shifted its chief technology officer and research and development operations to China. The company said it needed its R&D to be close to the source of its manufacturing operations and to its biggest future market. This is the opposite of what is supposed to happen. America was meant to keep the high-end jobs at home, while China would get all the low-value added production.
But in practice researchers benefit from proximity to the production processes, which require constant trial and error. A cursory look at the US’s trade deficit illustrates the trend. Far from importing low cost manufactured goods, the US is buying high-tech stuff from such countries as China and Brazil, including aircraft engines, computers, turbines and heavy duty trucks. And it is exporting growing volumes of low-tech stuff, including pulp and paper, oil seeds and other commodities. People who lose their jobs in the US are on average moving to jobs that pay roughly a fifth less than their previous jobs. Others are having difficulty finding any jobs at all.
That trend has only been accelerated by the Great Recession.... America is not producing new jobs in anything like the quality or the quantity it needs to replace the high-end jobs it is losing. Mr Summers’ exit therefore offers Mr Obama an unusually important chance to think radically about the kind of economic legacy he wishes to leave.
Speculation has focused on whether Mr Obama will choose somebody from the business community to counter the growing distemper corporate America feels towards his administration. It has also focused on whether the job will be taken by a woman. Ann Mulcahy, the former chief executive of Xerox, has been mentioned as has Laura Tyson, who held the job in the 1990s.
A bolder choice would be Jeff Immelt, the chief executive of GE, who is one of the few corporate leaders to have worried openly about America’s declining competitiveness. As the head of a company that has done as much offshoring as any, Mr Immelt knows what is driving the reduction of America’s productive capacity. Presumably, therefore, he would have some ideas about how to reverse it. Somebody must.
The summer after my first year of graduate school I went back for the last extended time to my parents' home in Washington DC. Joe Pechman, IIRC, got me a desk at the Brookings Institution. And I spent the summer reading as widely as I could and having coffee with Edward Bernstein.
Eric Rauchway:
Keynes’s conference and Morgenthau’s dream: Keynes looks arrogantly at the camera. The qualities of authority, brilliance, and suavity, which Keynes had in personal abundance, were if not lacking then widely distributed among the American delegation: on substantive matters Morgenthau deferred to his assistant Harry Dexter White, who had a better grasp of economics than Morgenthau, and on matters requiring tact White deferred to his assistant Edward Bernstein, who was less likely to say “shit” in public than White. Keynes meanwhile was everywhere, radiating influence from his room at the center of the Mount Washington Hotel, chairing the committee to charter the World Bank but also frequently leading the discussions on the International Monetary Fund; starting informal seminars on economic theory with the delegates he respected and making racist jokes at the expense of those he did not; lining up the best of the hotel wine cellar to host a dinner marking the five hundredth anniversary of an understanding between New College Oxford and King’s College Cambridge. Although suffering from a cardiac ailment that would at length kill him, under the ministrations of his wife and amid the stimulus of the discussions he exhibited extraordinary energy. Keynes disliked going to America, explaining himself, and Jews: yet one night after dinner at the New Hampshire conference he got so excited about the prospect of illustrating a concept to Morgenthau that he charged precipitously up the hotel stairs, giving himself a heart attack that was erroneously reported as fatal in some of the international papers....
[H]ad Keynes fallen prey to his own heart and perished on the hotel stairs, Keynesianism would have survived him and Bretton Woods would have been established as a system anyway.... Bretton Woods would have survived Keynes because Keynes had already won the war of ideas... by 1944 his complaints had become the common foundation for a functional peace, and other ideas he had developed over the subsequent quarter century—about monetary policy, about regulating exchange rates, about the important role an international fund could play in permitting national governments to respond effectively to economic crisis—had adherents throughout the world. But in part Bretton Woods would have survived Keynes because... its underlying assumptions could have been, and indeed were, derived from other intellectual and political traditions.... Morgenthau came from an American tradition—a farm tradition, a free-trading tradition, a Democratic party tradition—to which these ideas about the management of money came readily. And given the need to get an eventual Bretton Woods agreement through the United States Congress, the compatibility of the international system with the Democratic party tradition mattered at least as much as the persuasive powers of a British sybarite—or so Dean Acheson found as he piloted the legislation through the Capitol.
Thus if we want to understand how Bretton Woods happened and why it worked, we need to understand not only the intellectual revolution of Keynesianism and its effects on the policymaking world, but also the American political tradition to which mid-century Democrats were heir, a tradition older than the New Deal...
The Enduring Influence of Ireland’s 1987 Adjustment: When I was a junior economist in short trousers, the first research I ever did was inspired by Ireland’s successful 1987-89 fiscal adjustment. Many international researchers looked at Ireland and decided that our successful adjustment stemmed from consumers stepping into the breach filled by the government spending cuts. The story was that increased consumer confidence, fueled by expectations of lower future taxes, was the key to the recovery.
From the research I did on this topic (both on my own and with John Bradley) I came away fairly convinced that this was not what had happened. Rather, the 1987 boom seemed to be fueled more by strong exports to the UK thanks to Nigel Lawson’s tax cutting exercise.
However, Ireland’s 1987 experience continues to pop up in discussions of fiscal austerity. I have to admit that I’ve not been too impressed by Alberto Alesina’s work (here and here) on how fiscal adjustment can be expansionary—work that has had a lot of influence this year. Well, sure enough, Paul Krugman now cites work from Arjun Jayadev and Mike Konczal showing that the only country that ever cut its way to growth in a slump was, you guessed it, Ireland in 1987. The power of this datapoint endures.
Munchau On Germany: Munchau On Germany
Wolfgang Munchau has some not-so-nice things to say about the German economic situation. He notes that so far, at least, Germany’s growth simply reflects recovery from an unusually deep slump: “So far, this looks like classic dead-cat bounce.” He also stresses the role of German undervaluation; this is a big problem, and I agree that it’s at the heart of the eurozone’s troubles.
Also today: Clive Crook says sensible things about monetary and fiscal policy. They’re more or less the same things he has spent months trashing me for saying, but I welcome him back to the light.
Dani Rodrik's weblog: The most telling chart I have seen in a long time: Here is what seems to have happened: For all its faults, IS promoted rapid structural change. Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones. So much for the inherent inefficiency of IS policies!
Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor. The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services. In other words, the WC ended up promoting the wrong kind of structural change.
This account reinforces the centrality of structural change in driving rapid economic growth. It should also cause us to be wary of productivity studies that focus on what is happening within manufacturing alone. After all, productivity within manufacturing can be stellar, but if manufacturing or other high productivity sectors as a whole are rapidly shedding labor, economy-wide productivity performance will be disappointing.
Samuel Brittan - Are these hardships necessary?: The government’s real case is that an expansionary monetary policy will not only offset any contractionary influence of the forthcoming Budget, in the way outlined by Mervyn King in his Mansion House speech, but gradually erode the existing output gap. I would buy this if the Bank rate were 5 or 6 per cent. But it is a much more dubious proposition when it is already near its minimum level at ½ per cent. Of course, “quantitative easing” – jargon for the Bank injecting money into the economy by unusually large purchases of securities – might help. But it is an untried weapon. We could live with an old-time religion Conservative Budget if the rest of the world stayed with sensible demand management. The real harm is that the British government has tipped the balance in favour of ill-timed financial austerity at gatherings such as the Group of 20. Even then there is some hope that the more pragmatic German and French leaders may make their austerity a matter of words more than deeds. And all is not lost so long as the Obama administration and China’s leaders stick to quasi-Keynesian policies.
looking only at current and projected debt levels, it becomes hard to distinguish the countries that markets are worried about from the countries markets are not worried about.
So the message for the debt-heads is that it's not just debt levels that matter. What else matters?:
History may matter as well ..., countries of most concern are those that have defaulted more frequently in the past. (See Carmen M. Reinhart and Kenneth Rogoff, This Time is Different...) None of those defaults are recent, but there were defaults that occurred during the Great Depression. That is relevant to the present because the financial shocks of the past few years are among the biggest that have happened since that time.
When was the last time the US defaulted?
Finally:
While there is some risk that Europe's sovereign debt crisis could get much worse, the most likely outcome is that it will not. In that case, its effects on the U.S. economy are likely to be small.
Let's really hope they don't mean it. Let's really hope that they are bullshitting us.
Brand-spanking-new British Prime Minister David Cameron and Swedish Prime Minister Fredrik Reinfeldt:
Reining in Europe’s deficits is first step: We first met in Stockholm three years ago. Our discussions were all about issues such as education and climate change. The economy barely came up. But then the world was shaken by an economic catastrophe that toppled banks, destroyed businesses and ruined countless livelihoods. The wreckage is clear in Europe today: unemployment has risen by more than 7m; almost €150bn has been wiped off European Union output; average EU debt levels have risen to almost 80 per cent of gross domestic product. By any measure, these are shocking statistics.
So when we meet in Brussels on Thursday, the economy will dominate discussions. We are agreed there are four clear steps we need to take to ensure that Europe thrives and prospers.
First we need to get a grip on our debts. Because Sweden has been living within its means it is one of the member states that has weathered the crisis best. In Britain, on the other hand, the new coalition government has inherited the largest budget deficit of any EU country. Next week George Osborne, the chancellor, will set out a comprehensive plan to tackle the UK’s deficit in an emergency Budget. There are difficult decisions to make but it is essential governments cut back on unnecessary spending. We have to accept there are things we can no longer afford. Both of us are determined to work with other leaders to achieve a consistent approach across the EU...
The krona in dollars:
Can anyone say what shape the Swedish economy would be in today had they not depreciated their currency against the dollar by 30% in 2008? Yes? You there, in the back, in the blue shirt...
Lord Skidelsky has things to say as well:
Once again we must ask: ‘Who governs?’: In one sense, next week’s emergency Budget is simply the logical working out of an intellectual theorem... that market economies are always at, or rapidly return to, full employment... that a stimulus, whether fiscal or monetary, cannot improve on the existing situation. All that increased government spending does is to withdraw money from the private sector; all that printing money does is to cause inflation. These propositions are a re-run of the famous “Treasury view” of 1929....
[But] politicians clamouring for cuts in public spending do not cite Chicago University economists. They talk about the need to restore “confidence in the markets”. The argument here is that deficits do positive harm by destroying business confidence... fear of higher taxes, fear of default, fear of inflation.... The parallel with what happened in 1931 is irresistible. In February of that year, Philip Snowden, the Labour government’s chancellor of the exchequer, set up the May Committee to recommend cuts in public spending. The committee projected a budget deficit of £120m, later raised to £170m, the latter figure amounting to about 5 per cent of gross domestic product, and proposed raising taxes and reducing spending to “balance the budget”.... Keynes was one of the very few who stood out against the herd.... When the Conservative-Liberal coalition that had succeeded the Labour government introduced an emergency budget in September 1931, Keynes again stood out against the chorus of approval. The budget was, he wrote, “replete with folly and injustice”. He explained to an American correspondent that “every person in this country of super-asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come and triumphantly announces how, by refraining from every form of economic activity, we can all become prosperous again.”
Conservative spokesmen often claim that fiscal consolidation causes economies to recover. If so, the effect of the outbreak of public frugality in 1931 was curiously roundabout. Cuts in salaries produced a “mutiny” of naval ratings at Invergordon, suggesting that the empire was crumbling. This was enough to force Britain off the gold standard. A combination of sterling depreciation and lower interest rates revived exports and started a housing boom. But there was never a complete recovery until the war. Such evidence for the success of the cuts is the stuff of castles in the sky.
We are about to embark on a momentous experiment to discover which of the two stories about the economy is true...
I doubt it, actually: I think that Cameron and Reinfeldt are cynical enough to talk about the importance of moving immediately to budget balance while public-spirited enough to delay "fiscal consolidation" for years and years.
Cassandra Redeemed: The main argument about demography is that patterns of saving and borrowing are age-related... Franco Modigliani... Milton Friedman.... [S]aving and borrowing patterns are (like most economic processes) nonlinear, that is they have a “U” or inverted “U” form (Joseph Rowntree was the first to notice this in his late 19th-century studies on poverty in the U.K.). So very, very young societies (like Niger or Uganda, with median population ages under 20) have a huge problem saving, since the youth dependency ratio is massive. At the other end, countries like Germany, Japan and Italy (median ages all around 45) save heavily, and borrow relatively little (in the private, household and corporate sectors). What will happen as they age further is an empirical question and open to debate, since it may well be that as median ages rise further their situation can become symmetrical with that of Uganda or Niger (only in this case with the elderly dependency ratio being the critical factor)....
Italy is simply Germany or Japan without the industrial competitiveness. As a result there is a permanent demand deficiency which the government steps in to try and fill (which is why government debt to G.D.P. is over 100 percent)....
Now, the “younger” societies (this term is evidently relative) are those with median ages still under 40. This is where we can see the credit-driven housing booms – the U.K., the U.S., the Baltics, Spain, Ireland etc. It should be striking that there is not one case of a society with a median age over 42 having a housing bubble (ever). Societies like Greece, Portugal, Hungary etc. are... are aging, and domestic demand is weakening as a driver of growth. Like Italy they are not sufficiently competitive, and hence there is political pressure to pump up demand via the fiscal deficit route.... Basically, the problem of the euro is not one of fiscal deficits, but of lack of competitiveness in many peripheral economies... and the fact that, basically for demographic reasons, the economies which make up the zone are not converging.
Paul Krugman is reduced to psychology, and writes:
The Seductiveness Of Demands For Pain: Mark Thoma is astonished at Raghuram Rajan’s... desire to find some argument... for raising interest rates even though unemployment is near 10 percent.... I realized... I’d seen something like this before. Back in the summer of 2008, as the world was sliding into recession, Ken Rogoff demanded that the Fed and the ECB raise rates because of rising commodity prices and inflationary pressure in developing countries. Again, it was very hard to understand what model lay behind the demand. And let me throw Jeff Sachs into the mix... the recent Sachs op-ed calling for fiscal austerity now now now, in which he claims that fiscal expansion has had all sorts of negative effects that are, in fact, completely absent from the data.
What’s going on here? I don’t think you can resort to class-warfare arguments. What I think is happening is that we’re seeing the deep seductiveness, for many economists (and others), of taking what sounds like a tough-minded position in favor of inflicting pain.... Calling for austerity and tight money feels courageous, tough-minded, and virtuous; it allows the economist making such calls to take the pose of a Serious Person standing firm against the easy-money guys.
Yes, I know that’s insulting. But what’s so striking is that in all three cases I’ve cited you had highly trained economists — that is, people who have spent their whole lives arguing in terms of carefully laid out models — making arguments that aren’t backed by any model I can see... at a time when we really need clarity of thought, they’re adding to the intellectual murk...
Back a year and more ago, when the Richard Posners and the Robert Lucases were arguing that Larry Summers and Christy Romer were lying frauds for believing that expansionary fiscal policy could cushion the recession, when Eugene Fama was saying that it was arithmetically impossible for fiscal (and--although he did not realize that his argument implied this--monetary) policy to affect unemployment, when Luigi Zingales was claiming that because the problem was in the banks it couldn't be eased by having the government spending money, it was quite clear to me that you had a bunch of people who had never done their homework--intellectually lazy people whom, as Posner later admitted, had never even read John Maynard Keynes or the others who grappled with how a market economy could fall into something like a Great Depression, and who as a result were making Econ 1-level conceptual errors all over the place.
But that definitely is not the case with Rogoff, Sachs, and Rajan: they are all very smart, intellectually omnivorous, unblinkered by knee-jerk ideology, pragmatic, and definitely unlazy. They are not people whose thought processes are likely to be as muddy and murky as Paul suspects that they are.
I think that something different is going on--that Rajan, Rogoff, and Sachs are groping for the macroeconomic model that John Stuart Mill laid out in 1829 supercharged by a set of hypotheses about government debt. Back in 1829 Mill wrote:
Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells... there may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible. This is always actually the case, in those periods which are described as periods of general excess.... In order to render the argument for the impossibility of an excess of all commodities applicable... money must itself be considered as a commodity... those who have, at periods such as we have described, affirmed that there was an excess of all commodities, never pretended that money was one of these commodities.... What it amounted to was, that persons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute... the result is, that all commodities fall in price, or become unsaleable.... [A]s there may be a temporary excess of any one article considered separately, so may there of commodities generally, not in consequence of over-production, but of a want of commercial confidence...
The needed supercharging takes place in two stages:
the replacement of the word "money" in Mill's 1829 "Of the Influence of Consumption on Production" in his Essays on Some Unsettled Questions in Political Economy with the phrase "assets thought to be high-quality and AAA": what is in excess demand right now is not liquidity--not balances to conduct current transactions--but rather quality--places to stash that part of your wealth that you want to be certain will still be there in a way.
the observation that the only AAA assets around now are the debts of governments thought to have credible long-run plans for managing their deficits.
In such a model, the great fear of Rajan, Rogoff, and Sachs--given the current excess demand for AAA assets and the concommitant excess supply of goods and services--is that governments thought to be fiscally responsible over the long run will lose that status, that their debt will decline in quality, that as a result the supply of AAA assets will shrink, that the excess demand for AAA assets will concomitantly increase, and that increased excess demand carries with it an increased excess supply of goods and services. (At this point Nick Rowe will chime in and say all this is imprecise: that Malinvaud's Theory of Unemployment Reconsidered says important things about how such a scenario plays out that Mill did not understand and that I am ignoring, and he will be correct.) First priority is to restore confidence that those governments whose debts are currently AAA will maintain that status. Second priority is to push more economies back across the line to long-run fiscal stability and so push their assets back into the AAA category and so increase the supply of such assets and diminish excess demand for them. And both of those require fiscal austerity now, because we are dealing with panic and confidence.
The argument, in short, is that if markets demanded that central bankers paint themselves blue, stand on their heads, and sing "Sweet Adeline" in chorus before they would trust that the debts of North Atlantic governments will stay AAA-quality, the proper monetary policy would be for central bankers to paint themselves blue, to stand on their heads, and to sing "Sweet Adeline" in chorus. But, the argument goes, markets aren't demanding that: they are demanding fiscal austerity.
And here is where I lose the thread of what I think is the Rajan, Rogoff, and Sachs argument. I see no signs that markets are demanding this austerity. I see no signs that cutting this year's deficit will boost the prices of American, British, German, or Japanese government bonds by any but a trivial amount. And I see no signs that increasing this year's deficit will lower the prices of American, British, German, or Japanese government bonds by any but a trivial amount. The argument that bond prices are not rational expectations has no bite here--because we are taking government bond prices not as rational forecasts but as thermometers of market panic, and even (especially) when asset prices are not rational forecasts they are still good thermometers of sentiment.
Not that I know what the right model is. Paul Krugman writes:
The Global Transmission of European Austerity: Some thoughts on the fiscal austerity mania now sweeping Europe: is anyone thinking seriously about how this affects the rest of the world, the US included? We do have a framework for thinking about this issue: the Mundell-Fleming model. And according to that model (does anyone still learn this stuff?), fiscal contraction in one country under floating exchange rates is in fact contractionary for the world as a hole. The reason is that fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)
Now, the situation is complicated by the fact that monetary policy is up against the zero lower bound. Nonetheless, something much like this transmission mechanism seems to be happening right now, with the weakness of the euro turning eurozone fiscal contraction into a global problem. Folks, this is getting ugly. And the US needs to be thinking about how to insulate itself from European masochism.
Conventional Mundell-Fleming at the lower bound would suggest two effects: (a) the exchange rate stays the same (the uncovered interest parity condition doesn't change), (b) European demand for U.S. products falls (as Europe sinks deeper into depression). But the sum of these two effects on the U.S. is small.
If you talk to European great-and-goods, they expect fiscal austerity to strengthen the euro--fiscal austerity is supposed to make markets less worried about the riskiness of European governments' debt, and so make people more willing to hold them. It's not clear that you can write down a consistent model in which this works, but it is not clear the world behaves according to a consistent model.
What explains the continued extraordinary high prices of U.S. Treasury securities given a massively disfunctional U.S. political system and Republican Party?
Is global demand for dollar assets in a safe haven the equivalent of a rocket jetpack for the U.S. economy, or are we waiting for a Wile E. Coyote moment?
Sovereign debt concerns have rocked many economies in recent months. Fundamentally, countries with large twin deficits are most vulnerable because they have to rely heavily on foreign investors to finance their government budget gaps. Based on these criteria, the US is right up there with the most vulnerable economies. So why are Treasury yields trading below 3.6 per cent?... 1 – Inflation trends remain very low. Core CPI was flat in Q1 and the y/y trend now looks set to dip below 1%. 2 – Fed has been very slow to embrace the cyclical recovery and shift to a more neutral policy stance. The “extended” language is a green light for bond investors to remain in carry trades. 3 – Treasuries and the dollar have benefited from safe haven flows....
But there may be a real conondrum elsewhere, in “the fact that the unsustainable fiscal outlook is not triggering higher risk premiums.”... [T]herein lies the major difference between the peripheral European countries and the US — the US simply has more time to address its fiscal problems... "partly an outcome of greater credibility of US policy, but even more importantly it is a function of US growth dynamics. The latter is a key differentiating factor between the US and peripheral Europe.... The US is achieving some degree of fiscal consolidation via growth, rather than via painful austerity as is the case in the European periphery. While cyclical forces are likely to push bond yields higher, they will be going up for the “right reasons”, and at a pace that is unlikely to derail the recovery."
Can you say "exorbitant privilege?" I think you can.
http://www.wisdeo.com/articles/view_post/3036: The official explanation for seizing the devices at the airport never did make sense: On the face of it, Israel's decision Saturday night to allow iPads to be brought into the country was a straightforward reversal of a sensibly cautious import policy.... But... [no] experts outside (or, for that matter, inside) Israel... [bought] the explanation that the ministry was concerned that a device that used American Wi-Fi power standards... could harm the country's wireless networks.... Time magazine on Tuesday picked up a line of reasoning floated five days earlier....
It is worth noting that Apple's Israeli distributor, iDigital, is run by Chemi Peres, the hyper-entrepreneurial son of Israeli President Shimon Peres. Clearly, iDigital wants its lucrative cut of every iPad brought into the country — which it will undoubtedly receive when a modified European version of the iPad is approved for import over the next two or three months. But in the meantime, iDigital can't make money off the slow trickle of iPads entering the country via private citizens, tourists and international businessmen....
[E]ven Israeli ministers can be influenced by the weight of international opinion.... The order to lift the ban came from Communications Minister Moshe Kahlon... [who now claims that he had] not been apprised of the initial decision to ban the iPad...
Initial commentary from presenter Brad DeLong of Berkeley stressed that American political and economic governance was too overwrought with immediate internal issues and consequence to favor adding in new initiatives of major dimension. Chrystia Freeland of the Financial Times expected that now is not the moment to expect the US to think about “non-US solutions;” the critical US political issue is unemployment and the principal stance is defensive. Brad Delong asked rhetorically, “If the US can’t even manage the economy on behalf of its own citizens, what chance is there it could do so for the partial benefit of the citizens of Canada?”
Yet, intra-NAFTA trade was in decline. Expectations for the of re- invigoration of NAFTA had to take account of the fact it would take a major effort to get the US to live up to its existing treaty obligations under NAFTA, though there is at least some acknowledgment politically the US has been in violation of obligations to Canada on both softwood lumber and Buy America. Preoccupation with US political and institutional gridlock meant there was little discussion of whether agreements could be negotiated for greater convergence in regulations and standards affecting finance and trade in goods and services.
Response from discussants and the floor pushed back against what appeared as laconic and inward-looking detachment from the challenges of international reality.
David Emerson stressed the over-arching fact of America’s competitive erosion in the globalizing world economy. He laid a lot of blame at the door of the role of money in US politics, arguing that this had made the US so protectionist, and contributed to counter-productive border thickening. Strengthening globally efficient North American supply chains in a more vigorous NAFTA is essential to restoring the competitive position of all North America.
He described the effects of globalization in positioning China in particular to “take us on.” The challenge argued for essential collaboration on such issues as climate change among North Americans, and in response to an observation from Pierre-Marc Johnson, possibly among North America and the EU. However, it was underlined by Brad de Long and others that there should be no question of an alliance against China.
China could be effectively engaged in a positive way from a North American platform, possibly in coordination with EU partners, though the “realist” view was that the US would actually prefer to opt for a G-2 relationship of its own with China.
Chrystia Freeland expected the environment to be an increasing point of tension between the US and Canada. David Emerson agreed that the “geo-politics” of the environment/natural resources swirl of issues could become more fractious before there is a strategic convergence on North American solutions, but that the logic of the argument in favor of a North America- wide approach to shared problems would become increasingly apparent politically.
As these issues are also driving global agendas, discussion took up with interest the potential significance of the proposition in the Dobell paper that North America could indeed be a “first mover” on such questions in global discussion and eventual resolution – similar to Ambassador Pickering’s proposal the two countries seek to identify “project-models.”
This led to the recommendation North American coordination also take place on the larger trilateral basis including Mexico, across a range of economic and infrastructural policies, a theme that was taken up in subsequent panels.
The National Interest: PAST ECONOMIC cataclysms have led to dramatic changes in international financial arrangements. The Great Depression knocked the world off the gold standard. The economic turmoil of the late 1960s and early 1970s led to the collapse of Bretton Woods. Will the current crisis bring about similar changes? Berkeley professors Stephen S. Cohen and Brad DeLong argue in The End of Influence: What Happens When Other Countries Have the Money, that since the end of the Second World War, it has been the locomotive of the United States that has propelled the global economy and kept it on its tracks.
The basic pact was that America would act as the underwriter of world prosperity, allowing other countries to keep their currencies undervalued and thus promote economic development through export-led growth. Foreign countries were not only granted access to the enormous U.S. market, they were provided with liquid markets and a reasonably stable currency in which to invest their excess savings. The United States used its financial muscle to push free-market policies like open trade on the rest of the world. It was this economic Pax Americana that enabled Europe to rebuild after World War II, Japan and the countries of East Asia to industrialize, and China to take off.
In return, Americans got a lot of cheap goods from abroad and were collectively allowed to live beyond their means. For in order to provide a market for all these export-heavy countries, someone had to do the importing. The United States was thus constantly compelled to run current-account deficits, driving it further and further into debt. It was only a matter of time before this economic engine ran out of steam. This is a new take on an old problem that was first identified back in the early 1960s by Robert Triffin, a Belgian-American economist at Yale who wrote about Europe’s accumulation of dollars. Because the system carried the seeds of its own destruction, it came to be known as the Triffin paradox.
Many people have predicted that this unstable arrangement (which has lasted much longer than anyone anticipated because new countries keep buying into the system) would eventually result in a calamitous decline in the dollar that would then cripple America. This has not happened nor, according to DeLong and Cohen, is it likely to. Holders of the dollar have few alternatives and a fall in the currency would not be a disaster for the U.S. economy. Instead, they believe that the whole setup will end not with a bang but a whimper as the American ability to lead the world economy progressively slips, its cultural hegemony diminishes and support for the free-market policies it has championed begins to erode.
At one point in their book, the authors draw a comparison between the position of Britain in the early twentieth century and the current position of the United States. I was surprised that they did not make more of the parallels. Through much of the nineteenth century Britain was the linchpin of the world financial system. It was the capital supplier of last resort during crises and acted countercyclically as the economic locomotive for the world. But, almost bankrupted by the First World War, it was no longer able to fulfill that function after 1919. The mantle of leadership should have passed to the United States. But American leaders were too parochial and insular to seize the opportunity. Thus, during the 1920s and 1930s, the United States was unwilling to lead and Britain unable.
American economic historian Charles Kindleberger used to argue that ultimately the Great Depression happened because of this failure of economic leadership on the world stage. He believed that a well-functioning global economy required one country to act as the leader, in effect to do more than its fair share of keeping the global economy moving, fully recognizing that smaller countries will freeload off of its efforts. If we are at a similar transition point in world leadership, if the United States has indeed been knocked off its pedestal in much the same way as was Britain in the early twentieth century, it does not bode well for the ability of the global economy to navigate its next storm.
MOST OF the books initially published about the financial crisis were by financial journalists documenting exactly what happened. A second wave by economists that tries to bring an analytical perspective to the events is now arriving in bookstores. The economics profession has clearly been shaken by its failure to anticipate the astounding vulnerability of the financial system and the steepness of the economic downturn that followed the banking collapse. Many of the books about the current crisis thus end with a call to arms for a more grounded approach to economic theorizing, one that is less abstract and more anchored in the real world—a return, they all say, to the methods of John Maynard Keynes.
In 1930, Keynes, in an essay entitled “Economic Possibilities for Our Grandchildren,” wrote that he looked forward to the time when “economists could manage to get themselves thought of as humble, competent people, on a level with dentists.”
We are clearly still a long way away from that point, I fear, and we may never reach it. Our grasp of the way the economy functions and what to do when it breaks down is still significantly less than our still-imperfect knowledge of human anatomy. Our understanding of the economy is likely more akin to our even-murkier grasp of the human mind with its unfathomable processes, its bizarre synaptic firings.
Perhaps the best economists can achieve, therefore (in the present state of the discipline), is to be thought of as on par with psychologists. They are most useful when, like Reinhart and Rogoff or DeLong and Cohen, they contribute to our knowledge of how the world actually works. In the instances when those in the economics profession are called upon to tell us what we should do, like good clinical psychologists, they need to be modest about the cures they promise, recognizing that their advice is quite often mixed up with their own values and set of prejudices. They can be most helpful when, rather than lecturing us, they act as a sensible sounding board and give us the tools for thinking through our problems on our own.
Liaquat Ahamed is the author of Lords of Finance: The Bankers Who Broke the World (Penguin Press, 2009).
Capital Export, Elasticity Pessimism, and the Renminbi: I think it would be useful for me to explain how I think about the current China syndrome, and why I believe that most of the responses I hear are missing the point. In what follows, I’ll focus on three questions: the macroeconomics of Chinese currency intervention, the fallacies of elasticity pessimism (which I’ll explain when I get there), and the political economy issue of how to deal with Chinese intransigence.
I. Macroeconomics of intervention: Let me start with a proposition: the right way to think about China’s exchange rate is, initially, not to think about the exchange rate. Instead, you should focus on China’s currency intervention, in which the government buys foreign assets and sells domestic assets, on a massive scale.... [W]hat the Chinese government is doing here is engaging in massive capital export – artificially creating a huge deficit in China’s capital account. It’s able to do this in part because capital controls inhibit offsetting private capital inflows; but the key point is that China has a de facto policy of forcing capital flows out of the country... exporting savings to the rest of the world. In normal times, you could argue that this policy provides benefits to the rest of the world, by reducing borrowing costs (although given what we did with those capital inflows, maybe not). But these aren’t normal times. We’re currently living in a world in which both central banks and governments are unable or unwilling to pursue sufficiently expansionary policies to eliminate mass unemployment; so it’s a paradox of thrift world, in which anyone who tries to save more reduces demand, reduces employment, and – because investment responds to excess capacity – ends up actually reducing investment. By exporting savings to the rest of the world, via an artificial current account surplus, China is making all of us poorer. Notice that I didn’t mention the value of the renminbi at all in this account. It’s there implicitly: a weak renminbi is the mechanism through which China’s capital-export policy gets translated into physical exports of goods. But you want to keep your eye on the ball: it’s the artificial capital exports that are the driving force here. What this means, in particular, is that you can disregard people who offer calculations suggesting that by some criterion – say, Balassa-Samuelson adjusted purchasing power parity – the renminbi isn’t undervalued...
Needless to say, Paul Krugman is right: if China saves less and spends more, its capital exports drop. As its capital exports drop, its savers' demand for dollars in exchange for renminbi fall--and the value of the dollar falls relative to the renminbi. A revaluation of the renminbi is not an alternative to an increase in Chinese spending but rather part of the process of making that increase in spending come about.
Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances. “We should take out the baseball bat on Paul Krugman -- I mean I think that the advice is completely wrong,” Roach said in an Bloomberg Television interview in Beijing when asked about Krugman’s call, characterized as akin to taking a baseball bat to China. “We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said.
Two points. First, Mr Krugman's advice to China isn't wrong; it's right. China's currency is undervalued, and I think everyone (including the Chinese, but evidently excluding Mr Roach), thinks that an orderly appreciation of the renminbi would be a net benefit to China. Where I disagree with Mr Krugman is in his advice to America. The currency issue isn't a big enough problem to be worth the risks associated with an aggressive American push to get China to revalue. Secondly, I think it's very inappropriate to wish violence on anyone, and particularly on a very good economist who is just arguing for what he believes. That's a poor way to conduct discourse, though it's probably a good way to get invited back on a television show.
Paul Krugman replies to Roach:
Steve Roach Goes Batty: I really don’t understand Roach’s argument here; he seems to have subscribed to the Underpants Gnomes theory of trade balances:
Increase savings
?????
Exports!
To be honest, sometimes I feel that I’ve spent most of my adult life knocking down the same misunderstanding, over and over again. I wrote about more or less the same issue more than 20 years ago:
There is a widespread view that world payments imbalances can be remedied through increased demand in surplus countries and reduced demand in deficit countries, without any need for real exchange rate changes. In fact shifts in demand and real exchange rate adjustment are necessary complements, not substitutes....
What I wonder here is how Roach — or anyone thinks that increased savings would help right now. What would cause an attempt to increase savings to be translated into increased investment, or an improved trade balance, as opposed to simply a more depressed economy. Yes, I know that macroeconomics at the zero lower bound is different from the normal scene — but how can an economist as good as Steve Roach not get that after more or less two years in a liquidity trap?
Daniel Drezner appears to get a great many things wrong:
Daniel W. Drezner: So I see Paul Krugman has thrown his lot in with the neoconservatives who disdain multilateral institutions and prefer bellicose unilateralism when they confront a frustrating international situation. His op-ed today is about China's currency manipulation... he closes with... "In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent."
Whoa there, big fella!! That's a nice but very selective reading of international economic history you have there. It's certainly true that the dollar was overvalued back in 1971. What Krugman forgets to mention -- and see if this sounds familiar -- is that the Johnson and Nixon administrations contributed to this problem via a guns-and-butter fiscal policy. They pursued the Vietnam War, approved massive increases in social spending, and refused to raise taxes to pay for it. This macroeconomic policy created inflationary expectations and a "dollar glut." Foreign exchange markets to expect the dollar to depreciate over time. Other countries intervened to maintain the dollar's value -- not because they wanted to, but because they were complying with the Bretton Woods system of fixed exchange rates...
I count four big howlers:
Paul Krugman is not a neoconservative.
There is no no multilateral institution that manages exchange rates within which the U.S. could work.
The current overvaluation of the dollar vis-a-vis the renminbi is in no wise due to large current U.S. budget deficits.
At the start of the 1970s other countries kept their pegs to the dollar rather than revaluing not because they were obliged by treaty to do so but because they wanted to: they had rejected U.S. requests for revaluation under Bretton Woods procedures.
The EMF as camel’s nose: As Charlemagne himself notes (he seems to think this supports his position: I’m not sure why), the German proposal is resulting in howls of outrage from the president of the Bundesbank and Germany’s representative at the ECB. Both of them seem to be doing their very best impressions of 19th century gold-standard ‘suffering is good’ ultras.... The international price is likely to be higher still. Germany has sought for decades to resist French calls for EU-level ‘economic government,’ fearing that any such initiative would have substantial intra-state fiscal transfers.... Now, not only are the camel’s hairy nostrils snuffling eagerly around the tent’s interior, but the front legs and the forward hump have found their way in too. What is surprising is that it is Germany, rather than France, which pulled the tent-flap open....
The IMF usually has maximal bargaining power at a country’s moment of crisis – it typically cares far less about whether the country makes it through than the country itself does, and hence can extract harsh conditions in return for aid. But – as we have seen with the Greek crisis – EU member states are far less able to simulate indifference when one of their own is in real trouble, both because member states are clubby, involved in iterated bargains etc, and because any real crisis is likely to be highly contagious (especially within the eurozone). In other words, the bargaining power of other EU member states (and of any purported EMF) is quite limited. If Greece really starts going down the tubes, Germany faces the unpalatable choice of either helping out or abandoning the system that it, more than any other member state, created. In short – any EMF, unlike the IMF, needs (a) to concentrate on preventing countries getting into trouble rather than dealing with them when they are already in trouble, and (b) deal with the fact that any country in trouble likely has significant clout in the architecture overseeing it. From my sense of the EU integration process, and of the rough bargaining strengths of the actors involved, I imagine that any final bargain will emphasize forward-looking measures, which are intended to forestall problems before they arise. Unhappily for Bundesbank disciplinarians, these are likely to rely more on carrots than sticks – it is clear from previous experience with the Growth and Stability Pact that threats of harsh punishment are not sufficient to produce virtue if these threats are not credible. We can expect moderate levels of fiscal transfers (likely ratcheting up over time), aimed at helping ease the pain of adjustment, together with admonishments (and withdrawal of goodies) for those who fail to live up to their promises.... So yes – the Greek crisis is plausibly a very significant step indeed in EU integration (whether for good or bad, I am not going to speculate, since even if I am right, it would depend heavily on the detail).
For the first time in my life I have shown up at a conference where I am supposed to be on a panel, and don't yet know what I am going to say.
I have four hours...
On the other hand, something called the "Third Floor Lab" has an open--and very rapid--wifi connection available...
Here is a try:
The Mess in Baja Canada
J. Bradford DeLong
Professor of Economics, U.C. Berkeley
Research Associate, NBER
March 12, 2010
Who Manages What, or What Manages Whom?
”I do not claim to have controlled events,” said nineteenth-century American president Abraham Lincoln, “but rather freely confess that events have controlled me...” The title of this panel, “Managing the Economic Arena,” seems to me to suffer from at least a touch of hubris. If we could manage the economic arena well, thirteen million more than are unemployed or underemployed in normal times of the citizens of the United States would not be unemployed or underemployed. The gap between the level of U.S. production and what two years ago we were expecting it to be would not be more than $1,000,000,000,000 a year, and Mexico—a bystander—and Canada—a good actor as far as financial regulation and the avoidance of irrational exuberance and its crashes is concerned—would not be now suffering from a depression almost as deep as that of the United States. We cannot manage the economic arena. Rather, it manages us. The best we can do is react to what it feeds us, and somehow eat what is set before us.
There is another dimension along which the claim that we are here to discuss “Managing the Economic Arena” is highly misleading. It presumes that the U.S. government is a rational or semi-rational actor, able to formulate public policies that advance the ideal and material interests of the median voter sitting between the Rio Grande and the True North Strong and Free (adjusted for how wealth, logrolling, and intensity of preferences enter into policy decisions). That is false. U.S. governance is broken.
That U.S. governance is broken has been perhaps the most consistent thread in this conference to date. But there has been little sense, in my viw at least, that people here have grasped how broken it is. So let me pile on by adding two more examples:
The views in October 2008 of how to deal with the gathering depression held by senior economic advisors to the Obama campaign—people like Larry Summers and Berkeley’s own Christy Romer—by senior advisors to the McCain campaign—people like Mark Zandi and Douglas Holtz-Eakin—and technocrats in office like Hank Paulson and Tim Geithner and Ben Bernanke—were all very similar. No matter whether Obama or McCain were to win the presidency the odds were very heavy that policies would be very similar and in fact very similar to those that we have seen: large banking recapitalizations, large federal support for asset prices with the side-effect of unfortunately enriching many of the bad-actor bankers, extraordinary expansionary monetary interventions by the Federal Reserve, and a substantial additional deficit spending program divided between government purchases and tax cuts. But how many of you would say, looking at Washington today, that there is substantial bipartisan agreement on the contours of anti-depression policy? Nevertheless, that is the reality, as a little thought about the meaning of the fact that Barack Obama could not find a better candidate for Fed Chair or a better candidate for Treasury Secretary than already-in-office Ben Bernanke and Tim Geithner would reveal. Partisan claims of large differences between the likely policies of administrations are simply Kabuki Theater. Yet the Kabuki Theater of partisan Washington has the side-effect of making the U.S. Government’s ability to act very small.
The United States’s health care system right now wastes about $1,000,000,000,000 a year, with rather more wasted on the private side than the publicly-funded side, in that we spend much more money than other North Atlantic economies and yet have a health care system that does rather less to cure disease and ensure long and healthy lives. $400,000,000,000 a year of this comes from higher doctors’ salaries in the U.S. relative to average wages in the country. $300,000,000,000 a year of this comes from unnecessary, inappropriate, ineffective, and positively harmful care prescribed by doctors who fear malpractice liability, have sweetheart deals with those entities with which they subcontract, or simply do not know what treatment protocols are worth doing. $300,000,000,000 a year is spent in administration as insurance companies play the game of trying to pass the costs of paying for treatment of the sick off to somebody else. When he was Governor of Massachusetts, Republican politician Mitt Romney constructed—and passed with bipartisan support—a health care plan. Now Barack Obama has thrown his weight behind a Senate health care bill that is, in its essentials, Mitt Romney’s health care plan. Yet this plan may well not pass because it will not get a single Republican vote in the Senate—even though the only reason the new Republican Senator from Massachusetts, Scott Brown, can think of for voting against it is that it doesn’t do anything for the voters of Massachusetts because Mitt Romney already got them everything it does.
When the United States will not even formulate policies that advance the ideal and material interests of its own citizens, what chance is there to get it to rationally consider and weigh the interests of the citizens of Canada and Mexico as well? Effectively none.
Canada’s Agenda, and Mexico’s
It thus seems to me to be an error to suppose that Canada and Mexico can have any material impact on U.S. government policy. The interests of Canadians and Mexicans are simply not of first-order importance in the interests of U.S. citizens. And the interests of U.S. citizens are not of first-order importance in shaping the decisions of and policies enacted by Washington politicians. Joint rational management of our common North American home is simply not on the menu. So the agenda for Canada—and Mexico—is to attempt to figure out how to (very partially) manage a United States that cannot manage itself.
Canada has and major economic interests in the good behavior of the United States. It wants to see: (i) a healthy and growing U.S. economy, (ii) a U.S. that performs the further role of being a benevolent conductor of the open global trading system, (iii) a U.S. economy that in any event remains open to imports from Canada and so lets Canada continue to participate in the economies of scale of continent-wide economic integration, and (iv), as Ambassador Gottleib said this morning, Canada seeks a U.S. that joins rather than sits on the sidelines in the efforts to manage our energy future and control global warming—an extraordinary interest to Canada and to the United States too.
Mexico similarly has five major economic interests in the good behavior of the United States. It wants to see: (i) a healthy and growing U.S. economy, (ii) a U.S. that performs the further role of being a benevolent conductor of the open global trading system, (ii) a U.S. economy that in ny event remains open to imports from Mexico and so lets Mexico continue to participate in the economies of scale of continent-wide economic integration, (iv) a U.S. that greatly diminishes its appetites for illegal drugs shipped from Mexico—and (v) a U.S. that is at least willing to follow a policy of benign neglect with respect to the flow of working-age Mexicans north across the border (and then back and forth to visit their families and retire).
As far as Canada’s (i) and (ii) are concerned, it cannot “manage.” It can—along with the rest of the world community—support U.S. policies that produce prosperity and an open global trading system, but these policies are even more in the interest of U.S. citizens than of Canadian systems, and it is hard to see how any form of Canadian influence could make a difference.
(iv) is also outside the bounds of effective action. I believe that effective action against global warming will begin when three of the four potential twenty-first century superpowers regard forward motion on energy and environmental issues as in their vital interest. Western Europe already does. The U.S., at least the U.S. political system, does not. At the moment China and India do not. But they will. There are still two billion near subsistence farmers living in the great river valleys of East and South Asia: Yellow, Yangtze, Mekong, Brahmaputra, Ganges, Punjab, and Indus. Global warming means other more of less rain and snow in those watersheds. If it means more, some fraction of two billion people will see their homes washed away and their relatives drowned, If it means less, some fraction of two billion people will start to starve. Neither is something that governments in Beijing or Delhi can ignore. And when China and India realize that they are on the front lines of global warming’s impact on human populations because of the vulnerability of their poor who don’t have many options, they will swing into line. And when they do, the U.S. will concur. This may be of the most long-run importance to Canada, but it is hard to see how Canadian action can be decisive.
For Canada, then, the policy levers attach to (iii), which is essentially attempting to induce the U.S. to live up to its NAFTA obligations. And here, once again, things are very difficult.
Ambassador Pickering said earlier that he was a “wild-eyed optimist” and as evidence for his claim that optimism was warranted on very sticky and difficult issues, he pointed out that we had made, by working vary hard, “real progress” on “softwood lumber and ‘Buy America’.”
As best as I can see, the “progress” that has been made is that now the United States admits that it should feel slightly guilty about its failure to honor its NAFTA treaty obligations, rather than continue to brazenly violate them without a thought. In my view, Ambassador Pickering was claiming that the glass was half full when it is not clear to me that there is still a glass at all.
And Mexico raises a whole additional set of issues, which I cannot get into here without overrunning not just my time but everybody else’s time as well...
The Solution
The solution? Conquest, of course. It eliminates the border. It would mean that the Federal Reserve Bank of Kansas City could move its annual summer conference from the second-rate mountain resort that is Jackson Hole to the first-rate mountain resort that is Lake Louise. And it would change the median voter from being the guy with a Ford pickup truck listening to country music outside of Nashville to a nurse-practitioner in Ottawa. All three of these things seem to be good.
Conversely, if conquest is felt unseemly, there is another precedent to consider. In 1660 the governing body of Cromwell’s Commonwealth of Great Britain reconstituted itself as the Long Parliament of the House of Stuart, and sent congratulations to King Charles II Stuart on the twelfth year of his reign. The U.S. Congress could rename itself the Parliament of the Dominion of Baja Canada and seek regularization through the appointment of a proper Governor-General by Elizabeth II Windsor. We could even do it with 50 votes in the Senate through Reconciliation--for it would certainly have substantially budgetary implications.
Reviving the American Empire: America will still be a leader, perhaps the leader, but no longer the boss,” said Stephen S. Cohen, a Senior Fellow at the Center for American Progress, professor at University of California, Berkeley, and co-author of The End of Influence: When Other Countries Have the Money at a CAP event last Friday on America’s global position. Cohen was joined by co-author J. Bradford DeLong, fellow professor at U.C. Berkeley and Nina Hachigian, Senior Fellow at CAP and co-author of The Next American Century: How the U.S. Can Thrive as Other Powers Rise.
The inevitable “rebalancing of powers in the global economy” has generated conflicting book titles that steer the American public in one of two ways: The End of Influence or The Next American Century, said CAP Executive Vice President Sarah Rosen Wartell, who introduced the event. This polar view on America’s global standing depicts our future as either dire or promising with little room in between. If we want to influence change, Wartell said, we need to ask, “how do we shape that future ourselves?”
The United States emerged as the dominant economic, cultural, and military power in the world after World War II. As other nations began to develop, moving from agriculture to industry, they needed someone to buy their end products. Peasants in developing countries have little purchasing power, so the United States stepped in and bought “stuff” from all over the world, said Cohen. “We got the government out of the economy” and bought half of China’s GDP. “We imported so much more than we exported that now we cannot pay it off.”
The “United States, which had been a capital surplus high-savings country,” has become the world’s biggest borrower, said DeLong and the U.S. government is the world’s second biggest borrower. Seventy percent of our current debt happened since 2000. Rising income inequality created a negative cultural pattern where people “overleveraged” themselves to financially compete with one another, and all of this constrained the economic power of the United States and its government in a way that we hadn’t felt since 1917. DeLong suggests that this will be the “end of market liberalism,” which could turn the United States into a “normal country” without absolute power.
For the “past 10 years we fumbled our ability to move into the real industries of the future,” said DeLong. Finance became our major economic industry instead of electronic or bio-technological innovation. The best and the brightest chose to work for the financial sector instead of medicine, science, and engineering. We outsourced so much opportunity that we are no longer leaders in high tech or other industries we pioneered. This stunted innovation, and only served to increase the income gap.
DeLong suggested that the Obama administration can begin to fix this dilemma by appointing “competent economists” to the Federal Reserve Board to reduce and eliminate global imbalances that trap the United States and China in financial terror.
“Ninety-eight percent of economists think a weaker dollar will help the economy,” but it is a difficult sentiment to express without being seen as treasonous, Cohen explained. The value of the dollar must drop in order for us to save more. Our goods will become cheaper, we will export more, and bring down the trade deficit. But, at the same time, as we stopped importing from growing industrial economies, we might seen to be abandoning them and isolating ourselves.
Such isolation is impossible as the “world is getting smaller” because of globalization and communication, said DeLong. People all over the world will ask, why are the United States’ upper and middle classes so rich while we are so poor? This question coupled with the planet’s resource scarcities is the key political problem of the next 50 years.
The United States can no longer mobilize the resources we once could for the greater global good. Despite this fact and the macabre title of Cohen and DeLong’s book, the “end of American influence is nowhere on the horizon,” according to Hachigian. United States leadership is still “desperately needed” as no other powers are ready to take charge. We are experiencing a decline relative to rising powers such as China and India, but we’re coming off “such a high base” that doomsday is not near. Moreover, the answers to the most pressing problems for Americans are through collaboration with other powers. The United States should be brokering and facilitating consensus building on important issues such as climate change. That global leadership combined with cultural hegemony that declines at a much slower pace than cash “makes us quite influential.”
The Wasted Opportunity « The Baseline Scenario: I thoroughly enjoyed reading The End of Influence by Stephen Cohen and Brad DeLong.*For one thing, it’s not specifically about the financial crisis (although that does play a role), so you don’t have to read the nineteenth explanation of how a CDO works or what a NINJA loan is. For another, it’s short–only 150 pages, and small pages at that–and easy to read, so it will probably jump your queue of books to read and you can cross it off your list in just a couple of hours.
Despite being a short book, it’s about a lot of things. The most obvious is the much-bemoaned fact that the U.S. is now a huge debtor nation and is unlikely to maintain its status as the world’s importer of last resort indefinitely, and what that all means. The most central, however, is probably the global shift away economic neoliberalism–the idea that governments should withdraw from the economic sphere and allow free market forces to work their magic, symbolized by the recent effort to convince sovereign wealth funds to behave like ordinary, return-seeking institutional investors (see pages 85-89). Cohen and DeLong show that the last few decades of neoliberalism are really just a historical blip and that most of history–including most of the post-World War II–saw plenty of government intervention, even industrial policy, in countries like France (TGV, Airbus, etc.) and the United States (via the Pentagon). They see a resurgence of industrial policy all around the world (although it never really went away–see China, for example), and even if it often ends badly, it is something we will have to reckon with.
If the book isn’t centrally about the financial sector and the financial crisis, though, they still have a minor starring role. In their account, the recent period in which developing countries wanted to lend us their dollar surpluses gave us a great opportunity: “It gave America the opportunity, while absorbing more and more routine manufacturing from Asia at the expense of those same industries at home,” to shift its own economy into what should have been the ’sectors of the future.’” Instead, though we shifted our economy into finance. “The freedom of action that the United States enjoyed because it had the money was squandered” (pp. 12-13).
Cohen and DeLong recount (in admirably condensed form) the charges generally leveled against the financial sector, but they also point out something that often is overlooked:
[Finance] had achieved the cultural dominance that so often goes hand-in-hand with economic dominance: its gigantism and ubiquity, its tonic impact on the entire economy, its fabulous success, the sheer gushing of money, its generous funding fo elected politicians, its seconding of its top executives to top posts throughout the regulatory apparatus of government, and its simple and powerful message of ‘let the market work its magic.’ It was so easy (pp. 112-13).
Cohen and DeLong do not make the financial sector the sole villain in their story. Another one is inequality: “Faced with stagnant incomes, seeing themselves falling behind those above them on the income scale, and spending their evenings watching Lifestyles of the Rich and Famous, what did the average American family do?” (p. 107). They worked more, and they borrowed more.
So where do we go from here? Although their book is all about the decline of U.S. financial power, Cohen and DeLong are far from prophets of doom. America simply needs to become a little bit more like a normal country–only a little, because we are still the world’s largest economy and its only superpower. “A drop in the value of the dollar, even a big drop, is not the end of the American economy” (p. 100). We don’t have as much weight to throw around in international meetings. I agree.
This is me talking now, not Cohen and DeLong: There is a lot of hand-wringing over global imbalances, but the answer is quite simple: the dollar needs to fall. Imported goods will get more expensive, but domestic goods won’t, and we’ll adapt. We won’t be able to dictate to the world as much as we used to, but frankly that’s a good thing, given how many other parts of the world we have messed up in our history and how wrong our extreme free market ideas turned out to be. In the long, long, long term, maybe the United States will become just another country–a larger, somewhat richer version of Canada, or Belgium, or Denmark, or something like that. We could do a lot worse.
Stephen S. Cohen, Senior Fellow, Center for American Progress; Professor, University of California, Berkeley; author, The End of Influence
J. Bradford DeLong, Professor, University of California, Berkeley; co-author, The End of Influence
Nina Hachigian, Senior Fellow, Center for American Progress
Moderated by:
Bruce Stokes, International Economics Columnist, National Journal; Fellow, German Marshall Fund
The Agenda on National Review Online: Stephen S. Cohen and J. Bradford DeLong have just published The End of Influence, and it's excellent. Cohen and DeLong are both left-of-center, yet they occupy the technocratic end of the progressive movement, which explains their obvious sympathy for the aspirations of economic neoliberalism.
One of the central virtues of the book is the sustained attention Cohen and DeLong give to some of the lazy assumptions we make about the American economy: they note that while postwar mixed economy model of the United States was very different from the models that took root in Europe, it was just as statist and interventionist. My takeaway is that the conflict over U.S. political economy is better understood as a conflict between rival industrial policies, one centered on spurring the growth of the defense industries and the Sunbelt and another centered on old-line manufacturing and the Rustbelt, than as a battle between libertarians and social democrats.
The key driver for Cohen and DeLong has been large American trade deficits that have poured resources into oil-producing states and East Asia's manufacturing powerhouses. Rather than consume the dollars they earn, these states have increasingly placed them in large state-controlled sovereign wealth funds that are becoming a crucial source of investment capital for firms around the world. The question is, will these sovereign wealth funds behave like conventional private funds that aim to maximize returns — or will they seek to serve other national interests?
I wrote a far-from-flawless and rather pessimistic column on the book, which focuses on how the decline of American economic power is leading us to a new global equilibrium in which beggar-thy-neighbor mercantilism will become even more pervasive. I think of myself as a fairly upbeat person, but I can't imagine a worse state of affairs, not least because it will exacerbate the risk of great power conflict.
All in all, this is a really terrific book that does an excellent job of cutting through the confusion surrounding the broader meaning of the financial crisis, etc. If there is a bright high schooler or young adult in your family, this would make a great present. It helps that the book is mercifully short, weighing in at just over 150 pages.
When even one person likes your book so much, you feel as though it was all worth doing. Thanx.
Brad DeLong's New Book Showed Up On My Kindle This Morning: On the one hand, forgetting that I ordered Brad's new book, The End Of Influence, a month or so ago and having it show up magically on my Kindle this morning is a little scary. On the other hand, forgetting that I ordered Brad's new book, The End of Influence, a month or so ago and having it show up magically on my Kindle this morning is wonderful. I almost want to say "Thank you, Thing," like they did in the Adams Family when Thing got the mail each day.
When you have the money--and "you" are a big, economically and culturally vital nation--you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly--though, hopefully, in quiet, nonconfrontational ways. An you lose influence--the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others. As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don't. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country. For America, this will be a shock: American has not been a normal country for a long, long time.
One of our first readers demands: "more articulation about what this decline in influence really portends for the near-term middle distance, and a game plan to capitalize on the shifts in current. But, hell, that's what you'll tell us about on Terry Gross..."
Alas! That is not what we will tell you about on Terry Gross. That is what we do not know--if we knew, we would have written a big book rather than a little book.
Our blurbs:
James Fallows:The End of Influence is timely, convincing, practical-minded, and very well written> If you want a way to understand our economic predicament and the real choices ahead, this is an excellent place to start.
Romano Prodi: I started reading this book and could not stop until I arrived at the last sentence. Really splendid: rigorous, scientifically perfect, and politically accurate.
Robert Reich: In this splendid little book, Stephen Cohen and Brad DeLong real one big truth: There's no returning to the neoliberal order of deregulation, privatization, free markets, and free trade that captured the minds and hearts of American policymakers over the last three decades. America is broke, and must now face a much messier world in which governments--especially those controlling lots of savings--are intent on playing a different game.
Stephen S. Cohen and J. Bradford DeLong (2010), 