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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.

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June 30, 2005

A Deficit-Reduction Reprieve For Italy

A Fistful of Euros gave the heads-up on this story a few days ago.  Now it's official.  From EurActiv.com:

The Commission has recommended giving Italy until 2007 to bring its deficit below the 3% limit. The excessive deficit procedure is unenforceable in practice, says an economist from a Brussels-based think tank...

In a move expected to be backed by EU finance ministers on 12 July, the Commission has given Italy until 2007 to get its financial house in order. Although regulation 1467/97 specifies that an excessive deficit should be corrected with a year following its identification, the Commission has taken the view that Italy is a special case due to its cyclical economic weakness and the size of the adjustment it needs to make.

Meanwhile, The Capital Spectator asks "Does the Dollar Rally Have Legs?"  TCS didn't have this story in hand, but I tend to think it is highly relevant to the question.

June 30, 2005 in Europe, Exchange Rates and the Dollar | Permalink

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US And The UK: Headed In Opposite Directions?

While almost everyone expects a rate increase to be announced by the Federal Reserve's Federal Open Market Committee today -- you can check it out here, here, here,  here, and here, for just a small sampling -- the Bank of England may be headed in the opposite direction.  From the Financial Times:

British economic growth in the first quarter was sharply revised down on Thursday, adding to expectations that the Bank of England would try to stop the economy’s downward trend by cutting interest rates this summer.

Meanwhile in the United States, we have this report from Bloomberg:

The U.S. economy grew at a 3.8 percent annual rate from January through March, matching the pace in the previous three months and suggesting Federal Reserve policy makers will keep raising interest rates to ensure inflation doesn't accelerate.

As is clear from the details of the Bureau of Economic Analysis's GDP report, the robust housing market, while not the only story, was a big a part of the picture on the left side of the Atlantic:

Business fixed investment, which includes spending on commercial construction as well as on equipment and software, rose at a 4.1 percent annual rate in the first quarter. That compares with the preliminary first-quarter estimate of 3.5 percent and a 14.5 percent gain in the fourth quarter...

Residential construction increased at an 11.5 percent annual rate in the first quarter, revised from an 8.8 percent pace estimated last month. At the same time, the government's measures on prices were revised down in part because prices of single- family homes rose less than initially reported.         

Consumer spending, which accounts for more than two-thirds of the economy, expanded at a 3.6 percent annual pace, the same as estimated last month and compared with a 4.2 percent rise in the fourth quarter. Last year's consumer spending growth of 3.8 percent was the most since 2000.       

Consumer spending in the U.K, on the other hand, is showing the strain of slower growth and a stall in housing price appreciation.  Again from the Financial Times:

The annual rate of growth for the first quarter was revised downwards more sharply from an initial estimate of 2.7 per cent to 2.1 per cent...

The revisions were due partly to upgrades of growth in previous years which underlines the extend of the slowdown since last autumn when higher interest rates dampened consumer spending...

Under the [Office for National Statistics’] new revision, household consumption expenditure only grew by 0.1 per cent between the fourth and the first quarter, the worst pace of growth since the year 2000.

Thanks to consumer’s reluctance to part with their money, the closely-watched household savings ration improved between the fourth quarter last year and the first quarter of this year from 3.9 per cent to 4.8 per cent.

Not everyone is impressed with the U.S. performance, however,  and there are plenty of people waiting for the U.S. housing market to hit the wall.  So many, in fact, it's hard to know where to start, but this post (from Calculated Risk wearing his Angry Bear hat) is as good as place as any to begin.  If that happens, some think that U.K. may just be a leading indicator of things to come in the United States.  From Reuters' Mike Dolan:

The U.S. housing boom need not end in some dramatic crash -- if the example of Britain or Australia is anything to go by -- but even a flattening of prices may feel as painful for overstretched homebuyers.

A surge in U.S. house prices, which have jumped 50 percent nationally in just 5 years and 12.5 percent in the past 12 months alone, started later than decade-long accelerations in the UK and Australia, which leveled off this year.

The problem, still being played out in these markets and deemed a salutary lesson to U.S. homeowners, is that even the prospect of flat or low single-digit price gains may be enough to create problems for increasingly leveraged Americans.

The flattening in Australian and UK house prices has reminded buyers that double-digit gains are the exception, not the long-term rule

Beware the end of the conundrum, says Dolan's report:

"There are some disturbing parallels emerging between the boom in the U.S. and the later stages of the housing bubbles in the UK and Australia," said Paul Ashworth, senior international economist at the London-based Capital Economics.

"These similarities suggest to us the U.S. boom is entering the finishing straight."

House prices inflation in the both UK and Australia halted or even eased within 12 to 18 months of the first of five rate moves, even though the short-term rate increases by the Bank of England and Reserve Bank of Australia were historically modest...

British interest rates started to rise in November 2003. They climbed in five quarter-point moves to 4.75 percent over the following year, with the last in August 2004.

The UK housing market lost significant momentum by the third quarter of 2004, with annual price gains slowing to 5.5 percent in the first quarter from 17 percent early last year...

"It is absolutely no coincidence that residential property prices first started flattening out in Australia, and then in the UK," Andreas Rees of Germany's HVB bank said in a recent note. "We expect the same pattern to occur in the U.S."

You've been warned. 

On related note, have a look at Kash's discussion of international saving rates.

June 30, 2005 in Data Releases, Europe, Housing, Interest Rates | Permalink

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June 29, 2005

Unfinished Business: I "Answer" Max's Questions

A few weeks back, I offered some thoughts on how one might filter views on the trajectory of Federal Reserve funds-rate policy through the prism of a so-called "Taylor rule."  The posts are here and here, but as a brief reminder, I relied on a speech by then-Governor Ben Bernanke  to explain what the Taylor rule construct is all about:

A classic example of a simple feedback policy is the famous Taylor rule (Taylor, 1993). In its most basic version the Taylor rule is an equation that relates the current setting of the federal funds rate to two variables: the level of the output gap (the deviation of output from its full-employment level) and the difference between the inflation rate and the policy committee's preferred inflation rate.

These posts prompted the following, I presume not rhetorical, questions from Max Sawicky:

Based on the most recent data,

1.  How big is the output gap?

2.  What is the minimum acceptable or safe rate of unemployment?

3.  What is the maximum acceptable or safe employment to population ratio?

I have been remiss in not responding until now, but better late than never I guess.

To the first question, how big is the output gap?   Mechanically, that's an easy one to answer.  The estimated Taylor rule in the pictures from my earlier posts used an output-gap measure based on the Congressional Budget Office's estimates of potential GDP.  The current gap derived from this calculation is just a bit over 1 percent (where the gap is measured as potential GDP less actual GDP).  Here's what it looks like:

Cbo_potential

For my money, this is an upper bound on reasonable estimates of the output gap.  I say it is an upper bound because this way of calculating an output gap is, in fact, pretty old-fashioned.  In particular, it is not obvious that the CBO measure of potential conforms to our current understanding of how potential GDP ought to be measured.  To make the point, let me present a highly stylized version of the graph above:

Oldfashioned_gap


Here potential GDP is assumed to evolve as a more or less straight-line through time.  As a consequence, all ups and downs in the trajectory of GDP represent inefficient deviations from the perfect white-line world.  If you are a really smart and really beneficent policymaker, you put on the brake when the red line is above the white line -- when actual GDP is above potential --  and step on the gas when the red line is below the white line -- when actual GDP is below potential.

It is apparent that this stylized view of the world corresponds almost exactly to the perspective taken in my calculations of the output gap based on the CBO potential output estimate.  The problem is that the straight white-line version of potential is the wrong construct to use in formulating monetary policy. 

Here's a question that gets to the basic issue: Do you think the economy's potential pace of expansion is affected by a 60 percent rise in oil prices (about the actual percentage increase from this time last year)?   If you answer yes, then you probably (at least implicitly) envision a world that looks more like this:

A_better_output_gap_1


In words, in the short-run there are lots of shocks that cause the potential of the economy to be higher or lower than average for some (perhaps extended) periods of time.  These ups and downs are not the result of monetary policy. Nor is it useful (or even possible) for monetary policy to counteract them.   In fact, by interfering with the natural functioning of market forces in the face of changing circumstances -- not all of which are desirable, of course -- monetary policy activism can make an already bad situation worse.

The point is not that output never falls below its potential -- in the last picture above there are still gaps between the red line and white line.  The point is that those gaps may often be a lot smaller than they appear on the basis of long-run trends or averages.

The oil-price increase referred to above was not, of course, an arbitrary example.  As I've argued in the past, it is my firm belief that energy-related price increases are a big part of the economic story for most of the period since the end of the last recession.  In the context of the current discussion, it means I believe that the current shortfall of GDP relative to its potential is probably a lot less than the 1 percent implied by the CBO-based numbers.  In fact, I'm willing to conjecture that there may be no output gap at all.   That doesn't mean that I think everything is hunky-dory.  It just means that there may be a limit on what we should expect from monetary policy with respect to the pace of the economic expansion.

On to Max's questions about the labor markets in a later post.

A side note:  The way I am proposing to think about potential obviously owes a lot to the Nobel-prize winning ideas of Finn Kydland and Ed Prescott.  It also owes a lot to the work of Mike Woodford (and others).  Mark Thoma has been busying himself with explaining this work to blog consumers who care (here and here, for example).  if you are one of them, you will benefit from Mark's efforts.

June 29, 2005 in Federal Reserve and Monetary Policy | Permalink

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Is the output gap less than 1%? One can readily (and I'm sure Max will be working on this soon) present estimates where the estimate you have provided misses certain changes, which if corrected would provide a larger estimate. Yes, part of the reason macro-history is attributable to real business cycle events - but not every factor out there would suggest that this old fashion measure overstates the gap.

Posted by: pgl | June 30, 2005 at 12:48 PM

pgl --

Well, I am of course just sharing my gut feeling. The quantitative measure in Taylor rule post was not under 1%. But, I'm interested in your comment. What are those "certain changes" you think I've missed?

Posted by: Dave Altig | July 01, 2005 at 04:02 PM

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June 28, 2005

Risky Business II: Policy Advice From The BIS

As noted in my previous post, the Bank for International Settlements has taken the occasion of its annual report on global economic conditions to reiterate its concerns about the emergence of financial market imbalances in the world economy:

One simply cannot ignore the number of indicators that are now simultaneously exhibiting marked deviations from historical norms. Among the internal imbalances that compel attention, real policy rates in many industrial countries and in emerging Asia continue to hover around zero. Nominal rates on long bonds, as well as credit spreads and measures of market volatility, are remarkably low. The household saving rate in many industrial countries has been trending sharply downwards, and debt levels are at record highs. House prices in many countries have never been higher. And in China, the investment ratio has risen to a startling 50% of GDP. Finally, external imbalances have never been larger in the postwar period. Any or all of these numbers might well revert to the mean, with associated implications for global economic growth.

The report does more than wave the yellow flag, however.  It also contains some advice:

What can policy do about these internal and external imbalances? With respect to internal imbalances, one obvious answer is to increase interest rates to induce reductions in long-term exposures. But this immediately raises the prospect of conflict with more traditional short-term objectives of policy ,namely low unemployment and the avoidance of excessive disinflation. As for external imbalances, here too many conflicts arise. For example, fiscal tightening might help remedy external imbalance problems for deficit countries, but could also lead to uncomfortable levels of unemployment. In such circumstances, perhaps the best that can be hoped for is “opportunistic” progress. That is, look for opportunities to cut these longer-term exposures, but only as other priorities allow.

This one is no surprise:

Turning to external imbalances, the widening current account deficit of the United States is a serious longer-term problem...

What could policy do at this juncture? The textbook answer, against the backdrop of declining levels of excess capacity, is that deficit countries should reduce the rate of growth of domestic spending below that of domestic production. Allowing their currencies to depreciate in real terms would make their products more competitive, and also provide an incentive for production to shift out of non-tradables into tradables. The opposite should occur in surplus countries: that is, higher real exchange rates and more domestic spending.

The question is, how are the required fix-ups accomplished?  The BIS suggests rethinking the policy framework:

A guiding principle, should one wish to introduce a macrofinancial stabilisation framework, would be that both regulatory and monetary policies should be applied more symmetrically over the cycle... In the case of regulatory policy, more symmetry would imply that more capital should be built up in good times. Not only would this help restrain credit excesses, but it would also allow capital to be run down in bad times, up to a point, to cushion the economy from associated credit constraints. Tightening monetary policy in the face of excessive credit growth would also attenuate the worst excesses, and could obviate the need for radical easing later that might result in policy rates facing the constraint of the zero lower bound. This would be of considerable advantage should an unwelcome degree of disinflation emerge in such an environment.

In practice, a more symmetrical regulatory policy might be implemented in various ways. Were the regulators to be convinced that systemic risks were rising to dangerous levels, they could have recourse to discretionary action. Liquidity ratios, loan-to-value ratios, collateral requirements, margin requirements and repayment periods could all be tightened... In contrast, were the authorities to be less certain about their capacity to predict stressful events, they might rely more on some simple indicators to encourage more prudent behaviour. Prudential norms pertaining to the rate of growth of credit or asset prices could in principle be used to influence the pricing of risk, provisions for losses (for expected losses) or the accumulation of capital (for unexpected losses).

Regarding a more symmetrical monetary policy, this too might rely on either discretion or simple normative indicators. As to the former, both the Bank of England and the Reserve Bank of Australia have, in the last year, indicated that concerns about rising house prices and debt played a role, along with strong demand growth, in explaining their respective interest rate increases. Sveriges Riksbank, for similar reasons, did not lower interest rates as much as might have been expected given that it was actually undershooting its inflation target. As for the use of normative indicators, the two-pillar approach of the ECB could be noted. However, the suggestion here would be somewhat different: namely, to use monetary and credit data as a basis for resisting financial excesses in general, rather than inflationary pressures in particular.

To be honest, I'm not sure how discretion amounts to a framework, and it's my impression that  monetary and credit aggregates have very much been the lesser of the ECB's two pillars when it comes to actual policy decisions.  But I think the general message is that policymakers ought to move beyond the traditional emphasis on things like inflation targets and "output gaps" and concentrate more on financial stability goals:

Identifying when financial imbalances are building up, to a point likely to involve substantial macroeconomic costs, is a serious practical problem. Yet a macrofinancial orientation should at least ensure that policymakers are looking in the right direction. Those concerned with weaknesses in the financial sector would thus focus more carefully on areas where stresses were more likely to have knock-on effects elsewhere.

Fair enough.  I would argue that this already describes how monetary policy is conducted.  The Federal Reserve was created, after all, to protect the financial system from systemic meltdown.  This is not a relic of the past, and the proof is no further in the past than September 11, 2001.  But I cannot argue at all with this conclusion:

... while progress has been made in strengthening our assessment powers, significant shortcomings remain. Improvements in financial intermediation make higher debt/income ratios more sustainable than in the past, complicating the quantitative assessment of just when these ratios become excessive. In addition, some basic data tend to be flawed. External ratings, internal ratings and market-based measures of credit risk are all likely, at times, to be affected by waves of optimism or pessimism. They may then give misleading indications of the dangers faced by individual components of the system looking forward. Moreover, the use of aggregated data for prediction purposes fails to capture interactions that can be both complex and non-linear.

We need to know more about the distribution of risks within the system, as well as the likelihood that different market participants might react to similar shocks in the same way. In effect, we need better means to stress-test the financial system as a whole, as well as to test the manner in which stresses might then feed back on the real economy, leading in turn to another set of shocks to the financial system and so on.

The BIS report concludes with some thoughts on how international arrangements might be improved to the service of global financial stability, albeit ones that will probably make more than a few people a little bit queasy:

First, one might contemplate going back to a more rule-based system. Several academics have suggested the establishment of a single international currency. In the context of the impossible trinity, this would imply national authorities relinquishing domestic monetary control and moving away from still existing capital controls. A more realistic recommendation might be to have a small number of more formal currency blocs (say, based on the dollar, euro and renminbi/yen), but clearly they would have to float more freely against each other...

A second possibility could be to revert to a system more like that of Bretton Woods. History teaches that this would only work smoothly if there were more controls on capital flows than is currently the case, which would entail its own costs. Moreover, the IMF would have to be given substantially more power to force both creditors and debtors to play their role in the international adjustment process...

Third, and most promising in the real world, consideration could be given to informal cooperative solutions, recognising interdependencies and the need to avoid circumstances that could lead to systemic disruptions.

The first two are likely to be unpalatable to most, and the third belongs to the "Why can't we all just get along?" class of solutions (which are useful, but of limited effectiveness). 

I think the best advice in the report is the call for policymakers to continue with efforts to elevate our abilities to model, monitor, and respond to the financial stability challenges that show no signs of abating any time soon. I said so myself not long ago:

In my time at the Fed, I have come to appreciate that most of the really important policy choices have nothing to do with Taylor rules or the like. They have to do with those episodes of financial crisis in which Taylor-like rules are woefully inadequate. Think here October 1987, the period from summer 1997 through the end of 1998, and the aftermath of September 11, 2001.

I have in the past argued that it is useful to think of the policy choices in those periods as policy shocks. I would still argue that today. But it sure would be helpful if at least some of these events would appear as something more than completely random disturbances. In other words, it would be very useful to have usable measures of what we loosely call “financial market fragility,” and more useful still to have a coherent quantitative model... that captures them.

UPDATE:  The Prudent Investor notes similar warnings from the IMF.

 

June 28, 2005 in Economic Growth and Development | Permalink

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» Turbulence from The Glittering Eye
I remember some years back running into a friend who was a newly-minted PhD in physics and launching into a discussion of turbulence (which I'd suddenly gotten interested in while stirring cream into my coffee). She shuddered and said “Turbulence&... [Read More]

Tracked on Jun 28, 2005 6:27:50 PM

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The BIS Annual Report: Risky Business

The Bank for International Settlements strikes a reflective pose in its latest annual report on the global economy:

On the occasion of the 75th anniversary of the BIS, it seems appropriate in this Annual Report to look back over a longer historical period than normal...

Looking back over the last two decades or so, four features stand out. The first has been a welcome reduction in the level of inflation worldwide and an associated decline in its volatility. The second has been generally robust growth in the global economy, again accompanied by lower short-term volatility, with sluggish growth in Japan and Germany more recently an important exception to the rule. The third feature has been the widening of external imbalances. And finally, one must note the increasing prominence of credit, asset price and investment booms, often followed by financial difficulties of various kinds...

Here's the good news:

... inflation in every industrial country has fallen sharply from its peaks in the 1970s. A similar pattern has been observed in the majority of emerging market economies. Even in countries which previously suffered from hyperinflation, notably in Latin America, inflation is now generally at single digit levels. Significantly, in Argentina and Brazil the pass-through from the most recent large depreciations failed to reignite inflation expectations as had almost always happened previously...

A second broad trend has been towards faster economic growth at the global level, often accompanied by lower short-term output volatility. As to growth rates, phases of expansion in industrial countries have lengthened, while the rate of expansion in many emerging market economies has turned sharply upwards.

That said:

In contrast, all the countries hit by financial crisis over recent decades, as described below, did experience a very sharp slowdown during the worst phase of the crisis. Moreover, in the case of Japan, very rapid growth through the 1980s gave way to a much more sluggish output trend after the bubble burst...

Even if the economic features described above have been broadly satisfactory, two other, less welcome, longer-term trends deserve to be singled out. The first of these has to do with global current account imbalances. For at least the last 15 years, the US external deficit has been trending upwards, accompanied by rising, if still relatively low, external debt... It is unprecedented for a reserve currency country to have a current account deficit of such magnitude.

Concerns about the implications over time of these external imbalances have been heightened by another longer-term trend. The global financial system seems to have become increasingly prone to financial turbulence of various sorts. The Mexican, Asian and Russian crises of the last decade indicated the force with which shocks could be transmitted both across liberalised financial markets and across countries. Short-term price volatility in financial markets, often associated with a sudden drying-up of previously abundant liquidity (as in the Long-Term Capital Management (LTCM) episode), has at times been another source of turbulence. A number of small but high profile  bankruptcies of financial firms (eg Drexel Burnham Lambert and Barings) have occurred, raising sensitivities to the potential implications of larger and more complex institutions getting into difficulties. And finally, financial losses due to operational risks seem to have been on an upward trend. This has reflected not only the increased complexity and IT dependence of modern financial systems, but also governance issues (eg Enron, Parmalat and AIG) and the new reality of terrorist disruptions (11 September 2001).

Yet the single most remarkable feature in the financial area has been the recurrence of credit, asset price and investment booms and busts. A first cycle began in the industrial countries in the 1970s, affecting both equities and real estate. A second cycle started in the mid-1980s, ending in a property bust a few years later... Moreover, it seems increasingly evident that we are today well into the boom phase of a third such cycle, dating from the economic upturn of the mid-1990s. Equity prices were affected first but, after their sharp decline in early 2001, the upward momentum of demand was transferred to the housing market.

The BIS report suggests that traditional demand-driven explanations of business cycle dynamics are no apropos to the nature of the modern global economy:

In virtually every instance, the bust phase of credit, asset price and investment cycles has been accompanied by some kind of headwind that has slowed down the subsequent economic recovery. The most serious effects have generally been due to outright crises in the banking system, as was the case in the Nordic countries in the late 1980s, Mexico in 1994 and a number of Asian countries in 1997–98...

In any event, even short of financial crisis there have been many examples in recent decades of loss-impaired financial institutions restricting lending, with negative effects on real economic activity. Moreover, headwinds seem sometimes to have arisen also from overstretched corporate and household balance sheets and the overhang of unprofitable capital investment.

What to think about this?

The recurrence of bouts of financial instability, even after inflation had been sharply reduced, also allows for alternative explanations, and perhaps alternative policy responses. One possibility is that problems encountered to date will, in the end, prove only transitional. Learning to live with low inflation, a liberalised financial sector and recent advances in financial technology simply takes time. During the learning process, disruptive mistakes have been made but their incidence and costs will decline.

An alternative possibility is that such instability might be longer-lasting. Liberalised financial systems, while more efficient than repressed ones, might be inherently prone to instability if competitive pressures occasionally lead to excessive risk-taking. A second point is that they also seem to be inherently procyclical. That is, perceptions of value and risk move up and down with the economy, as does the willingness to take on risk. Credit spreads, asset prices, external ratings, internal ratings and loan loss provisions have all demonstrated this characteristic over the last few decades at least. This can result in powerful financial forces spurring real growth during an economic upturn, but an equally powerful downdraft should the initial optimism eventually come to be seen as excessive.

The bottom line?  We're not out of the woods just yet.

A continuation of steady, non-inflationary growth might seem the most likely outcome, given the positive aspects of the fundamental structural changes described above. However, it is by no means guaranteed. On the one hand, the significant monetary stimulus seen to date could yet end in overt inflation. On the other hand, the implications of growing debt levels, both domestic and international, remain a great unknown. Either debtors or creditors, or both, might retrench as debt levels mount. Reductions in asset prices and assessments of private sector wealth could reinforce such behaviour. Conversely, increases in debt levels might simply be a normal part of financial deepening as markets mature and become more complete.

Given how little experience we have had with the interactions of the many structural changes identified above, these less welcome possibilities cannot be ruled out.

UPDATE: catallaxis has a chapter-by-chapter summary of the BIS report.

June 28, 2005 in Economic Growth and Development | Permalink

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» BIS: "Time might well be running out" from New Economist
By now quite a few people have noticed the truly impressive annual report from the Bank for International Settlements, the world's central bankers. So far, so good was published on Monday to coincide with its Annual General Meeting. If you have time to... [Read More]

Tracked on Jun 30, 2005 7:54:38 PM

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From page 146:
"If what needs to be done to resolve external imbalances is reasonably clear, it also seems clear that much of it is simply not going to happen in the near term. One reason for this is domestic policy conflicts of the sort noted above. Indeed, even such policies as a reduction in the US fiscal deficit, desirable for both domestic and international reasons, could easily fall prey to political wrangling and entrenched interests. Worse, policymakers who blame the policies of others for causing external imbalances, while denying their own culpability, risk destabilising financial markets in the meantime and exacerbating the problems that policymakers should be seeking to resolve."

Well said.

Posted by: Secret Admirer | June 28, 2005 at 02:35 PM

Have you seen this before? It's a number guessing game: http://www.amblesideprimary.com/ambleweb/mentalmaths/guessthenumber.html. I guessed 37375, and it got it right! Pretty neat.

Posted by: Merideth Carleton | November 15, 2005 at 12:07 PM

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June 27, 2005

Funds Rate Probabilities: Last Post Before The FOMC Meeting

As markets prepare for this week's meeting of the Federal Open Market Committee, it's pretty much the same old story coming from the market for options on federal funds futures:   Not much doubt being expressed about a 25 basis increase this week, but there is apparently still a lot of volatility around expectations of where we will be come October.  The pictures:

July_13


October_7


The data:
Download july_pdfs_062705.xls
Download october_pdfs_062705.xls

And, if you'd like, a handy Power Point presentation (courtesy of Erkin Sahinoz):
Download Imp_pdf_slides_for_blog_062405.ppt

June 27, 2005 | Permalink

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Becker And Posner On Eminent Domain

This week's edition of The Becker-Posner Blog focuses on just what you hoped: The issues raised by the Supreme Court of the United State's expansive definition of public use in Kelo et al versus City of New London et al. Becker starts:

The eminent domain clause of the Fifth Amendment of the U.S. Constitution states that "Nor shall private property be taken for public use, without just compensation". This clause allows private property to be taken for public use, but requires "fair" compensation. The clause raises three major questions: what is "public use", what is "fair compensation", and is the principle of eminent domain desirable in a modern economy? I briefly discuss all three questions.

On the circumstances in which it is appropriate to invoke the public use justification for the taking of private property, Becker applies the standard definition of economic efficiency:

It is difficult to establish a simple dividing line between what is and what is not a public use...

The best judge of this is the market test of whether the new owners could fully compensate the old owners and still benefit, yet the right to eminent domain means that a public project can avoid having to pass this test.

What is fair compensation?  Becker says the utility value to the individual, not the market:

To me, the only reasonable interpretation of "fair compensation" is the worth of property to the present owners. This often is greater than the highest bids for the property in the marketplace.

In the end, Becker appears to feel that the best route is to avoid trying to jump these hurdles all together:

Without the right to eminent domain, governments would have to buy property in the same manner that private companies often accumulate many parcels to create shopping centers, factory campuses, and building complexes, like Rockefeller Center. There are difficulties involved in combining separate parcels into a single more extensive property, but whey should that be made too easy, as through a condemnation proceeding?...

I am not claiming that a system without eminent domain would work perfectly- it would not. But modern governments have more than enough power through the power to tax and regulate.

Posner, for his part, acknowledges Becker's points, but seems generally sympathetic to the courts decision:

It is possible that what really motivated the Court was a simple unwillingness to become involved (or to involve the lower courts) in the details of urban redevelopment plans; a flat rule against takings in which the land ends up in the hands of private companies would, as I have explained, be unsound. Another practical defense of the decision is that the more limitations are placed on the private development of condemned land, the more active the government itself will become in development, and that would be inefficient.

For more spirited debate on the Kelo decision, check out this discussion string at SCOTUSblog.

June 27, 2005 in This, That, and the Other | Permalink

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The Chinese Surge: Trick Or Treat?

The Wall Street Journal features China as a challenger to the United States in two articles today.   The first (appearing on page A2 of the print version) compares and contrasts the Chinese surge to that coming from Japan two decades ago.

The frenzy in Congress stirred by Chinese oil company Cnooc Ltd.'s bid for Unocal Corp. of California harks back to a period of similar hand-wringing over Asian power. That came in the 1980s with Sony Corp.'s purchase of Columbia Pictures Entertainment Inc. and, more broadly, Japan's increasing economic presence in the U.S.

The interesting distinctions appear to be drawn between strategic political interests and private economic interests:

Above all, Japan was then, and remains, a U.S. ally. Japan depended on the U.S. for help on defense, with U.S. military bases throughout Japan and an American-written "peace constitution" restricting Japan's Self-Defense Force. There were limits on how far economic tensions could ripple. China has no similar ties to, or dependence on, the U.S...

The article claims, however, that the opposite dynamics apply to private sector relations:

While U.S. executives often had little stake in keeping tension with Japan in check, today the huge flow of investment to China from the rest of the world, including the U.S. -- running at about $89 billion a year -- is a form of diplomacy that keeps the two nations in a sometimes uneasy commercial embrace. That is because "China had a totally different development model than Japan had," one based on actively encouraging foreign capital, says David Hale, head of Chicago consultants Hale Advisors. (The $89 billion includes about $34 billion into Hong Kong.)...

Tokyo did carve out a modest oil diplomacy in the 1970s and 1980s, curbing trade with Israel, for example, to ease tensions with Arab states and stepping up trading with smaller suppliers in the Persian Gulf to gain more leverage. By and large, it followed American diplomacy -- and enjoyed the assurance of U.S. military muscle to keep supply lines open.

China, however, "is a potential security rival to the U.S., or at least a potential counterpart in conflicts in Asia," says Adam Posen, senior fellow at the Institute for International Economics in Washington. So Beijing "feels it cannot rely on U.S. relationships to guarantee flow of oil -- quite the opposite," he adds. And Chinese oil diplomacy is creating rifts with the U.S. in flashpoints throughout the world, particularly as China seeks closer ties with U.S. foes in Venezuela and Iran.

The second article (appearing on page B1 of the print version) continues the theme:

Many in Congress and the Pentagon think it may hasten an inevitable clash between the U.S. and China for economic and political leadership in the world. Many businessmen and academics, however, think China's growing wealth and international economic ties will make it more democratic and a force for global stability. Both have history on their side.

A familiar name checks in with his opinion:

Brad DeLong, an economic historian at the University of California at Berkeley, sees a useful parallel in Britain's policy toward the emerging industrial colossus of the United States in the 19th century.

As late as the 1840s, he notes, the U.S. and Britain -- then the world's sole superpower -- came close to war over territorial disputes in the Pacific Northwest and the lucrative fur trade there. But in subsequent decades Britain chose to accommodate, rather than suppress, the U.S. By 1900, the notion of conflict was widely regarded "as silly, simply because the trade and economic connections were so tight and the political systems so compatible," Mr. DeLong said.

Similarly, he argues the world will be safer if the Chinese in time see the U.S. as having aided, rather than hampered, their economic development.

Others are not so sure:

"There is no deterministic relation" between economic advance and war or peace, said Charles Maier, a Harvard University historian. Katherine Barbieri, a political scientist at the University of South Carolina, has found that countries that trade more with each other are actually more likely to fight, in part because deeper relationships generate more things to fight about. "Trade generates wealth but...certain countries may take that wealth and direct it to military purposes," she said. "We're giving China the power to build a very strong military."

Again the rift between purely economic and purely geopolitical perspectives:

The widely differing views of China were vividly evident in 2001 when military and Wall Street officials came together at the World Trade Center in New York to share thoughts on the impact of China's economic and military rise. The organizer, Thomas Barnett, then a teacher at the U.S. Naval War College, hoped to bring the two constituencies closer together. Instead, their opposing views were reinforced.

 Mr. Barnett, now a writer and consultant, says the Wall Street participants concluded, "'When I think of the security issues I realize how a strategic partnership with China is all the more imperative,' and the military guys would say, 'Wow, realizing all the economic competition, war with China is that much more inevitable.' "

The article ends with these less than comforting thoughts:

History suggests that while economic engagement helps prevent conflict between countries, by itself it isn't enough. During the 1920s, Japan had low import tariffs and its democratic, civilian government encouraged domestic alliances with European and American companies to hasten Japan's technological catch-up, said Hideaki Miyajima, a Japanese economic historian at Waseda University in Tokyo and a visiting scholar at Harvard. General Motors Corp. and Ford Motor Co. operated Japan's only major automobile assembly plants. The heads of Japan's "zaibatsu" -- urban industrial conglomerates -- were pro-Western. Many sent their children to U.S. universities.

But these pro-Western elites were too weak to resist the forces of militarism and imperial expansion. Mr. Miyajima said the Depression fell disproportionately on Japan's large agricultural population, which was the military's power base. It increased economic inequality and fueled resentment of the traditional business elite.

... In 1910, Norman Angell, a British economist, wrote in "The Great Illusion" that Europe's great powers had become so economically interdependent that war was unthinkable. Harvard's Mr. Maier says the hypothesis was plausible. Britain's old-line industrial elites saw Germany as a threat, while its emerging financial elites saw it as an opportunity. Within Germany, Ruhr-based heavy industry favored the army buildup and were more willing to risk conflict with Britain, while Hamburg-based trading interests were more pro-British, though supportive of the German fleet buildup.

British-Germany naval rivalry didn't lead to war itself, says Mr. Maier; rather, entangling alliances between Germany and Austria-Hungary on one hand and Britain and Russia on the other, were a more proximate cause.

June 27, 2005 in Asia | Permalink

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Good points on oil and "aiding" China's rise. A joint PRC-USA project to create and spread civilian nuclear reactors in both countries would limit both their dependencies on foreign and be a clear example of profitable cooperation.

Posted by: Dan | June 27, 2005 at 09:51 PM

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June 26, 2005

Europeans Turn Down The Heat On Chinese Currency Reform

From China Daily:

European finance officials on Sunday acknowledged the timing of China's exchange rate reform should be upon the country's own decision. They did not press the yuan to appreciate in a hurry.

The officials who are here attending the Sixth ASEM Finance Ministers' Meeting actually echoed the remarks of Chinese Premier Wen Jiabao, who told the meeting Sunday morning that it is the "common understanding" around the world that every country is entitled to choose the exchange rate mechanism and policy suitable to its own national conditions.

At first blush, this appears consistent with the direction taken by U.S. Treasury Secretary John Snow's comments last week...

U.S. Treasury Secretary John Snow said on Thursday he believes China is ready to move to a more flexible exchange rate right away, but warned Congress steps to pressure Beijing through sanctions would backfire.

... but the "right away" versus "not... in a hurry"  distinction is an important one.  Snow went on:

At the same time, the treasury secretary called China's policy of pegging its currency, the yuan, to the dollar "highly distortionary" and said it poses risks for China and its neighbors.

He told lawmakers that failure by Beijing to make "substantial alteration" to its currency policies would likely lead to China's designation as a currency manipulator under U.S. law, which in turn would lead to the possibility of sanctions.

"China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions," Snow said.

I suppose it remains to be seen if this is consistent with what the Chinese government has in mind.  Again from the China Daily report:

Vowing to keep the yuan "basically stable," China does not mean its currency will not float at all. On Sunday, Premier Wen Jiabao reiterated that China must uphold the principles of "independent initiative, controllability and gradual progress" in pursuing RMB exchange rate reform...

"By 'independent initiative,' we mean to independently determine the modality, content and timing of the reform in accordance with China's needs for reform and development," said the premier...

"By 'controllability,' we mean to properly manage the changes in RMB exchange rate at the level of macro-regulations. We must push forward the reform but always stay on top of the challenges, so as to prevent fluctuations in the financial market and economic instability," the premier said.

"By 'gradual progress,' we mean to push forward the reform in a step-by-step manner. We must take into consideration both the present needs and future development and guard against undue haste."

Whatever the tensions this might present relative to the American point of view, the European finance ministers said no problem:

... it is up to China to decide the timing (of exchange rate reform) and we are waiting," [Deputy Finance Minister Caio K. Koch-Weser of Germany] said...

RT Hon Des Browne, chief secretary to the British Treasury, said he was "pleased" by what the Chinese premier said, adding, "We will continue to be supportive of China's ambition in this regard."

"It is very important and very good that Chinese leaders paid great attention to this matter (currency reform) and I'm sure this matter will develop in time," Rastislav Sulla, counselor/head of the trade and economic department, the Slovakian Embassy to China,told Xinhua.

Polish Finance Minister Miroslaw Gronicki said, "I like the gradual approach to solve the issue. I mean, any movements on currency may have effects not only on the Chinese economy, but on the Asian economy."

What China is doing -- moving gradually to liberalize the exchange rate -- is a "right thing," the minister said.

"I don't mean in a near time, but in five- to ten-year time, the Chinese economy will need a different currency regime to adjust it to the developing economy and at this moment, I think any rush will not do good."

UPDATE:  See also Tyler Cowen's post regarding Niall Ferguson's thoughts on the subject.

June 26, 2005 in Asia, Europe, Exchange Rates and the Dollar | Permalink

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June 25, 2005

Outsourcing/Offshoring Info

Brad DeLong advises:

Offshoring is a very big deal, not for the next five years, but for the next fifty.

Based on the popularity of Tom Friedman's latest book, many of you apparently agree.  If you are one of them, here are a couple of sites you might want to keep your eyes on: Outsourcing Times and Outsourcing Blog.  These are run by proprietary concerns -- and my notice does not constitute an endorsement of whatever they are selling -- but that doesn't make them uninformative.  You can also find a ton of links at Blogspot's Outsourcing/Offshoring Information and Resources Subject Tracer. 

(P.S. My friend and colleague Eric Fisher offered this recent review of Friedman's book in the Cleveland Plain Dealer.)

June 25, 2005 in Trade | Permalink

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friedman is careful not to say that which is unsayable.he goes round and round but avoids the real answer which is that people are different.the germans will always do well and the italians will always have to devalue.the indians will do well but are not able to achieve significantly at the upper tail of the curve.the chinese do well because the north asians have an iq of 105.if chinese ability had been recognised then the wto will not have left bangladesh to the mercies of a rampant chinese textile industry.
all this because we are unable to speak the truth.we go on endlessly about why africa does badly yet we all know the reasons.because we are unable to utter them there is no solution.

Posted by: richard | June 25, 2005 at 12:05 PM

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