January 11, 2011
The pluses and minuses of reluctant consumers
If you've been keeping up with news from last weekend's convergence of economists at the annual meeting of the Allied Social Science Associations, you will probably have heard of this optimistic-sounding conclusion by Harvard economist Martin Feldstein:
"It is not hard to imagine that a few years from now the current account imbalances of the US and China will be very much smaller than they are today or even totally gone."
An advance copy of the article was provided a few weeks ago at Real Time Economics, and considerable commentary has followed since (here, here, here, and here, for example). Not surprisingly, the progress Professor Feldstein envisions has two components:
"The persistence of large current account imbalances reflects government policies that alter the savings-investment balances in both the United States and China.
"The large current account deficit of the United States reflects the combination of large budget deficits (negative government saving) and very low household saving rates. ...
"In contrast, China's large current account surplus reflects the world’s highest saving rate at some 45 percent of GDP [gross domestic product]."
The source of Feldstein's belief that progress will come?
"Consider first the situation in the United States. Current conditions suggest that national saving as a percentage of GDP will rise as private saving increases and government dissaving declines. Private saving has been on a rising path from less than two percent of disposable income in 2007 to nearly six percent of disposable income in 2010. The forces that caused the rise in the U.S. saving rate since 2007 could cause the saving rate to continue to rise. Those forces include reduced real wealth, increased debt ratios, and a reduced availability of credit. ...
"The reduction of the U.S. current account deficit implies that the current account surplus of the rest of the world must also decrease. While this need not mean a lower current account surplus in China, I believe that the policies that the Chinese have outlined for their new five year plan are likely to have that effect. These include raising the share of household income in GDP, requiring state owned enterprises to increase their dividends, and increasing government spending on consumption services like health care, education and housing."
Some skepticism about the probability of a substantial decline in Chinese saving rates was noted in a recent post at The Curious Capitalist, which focuses on some interesting new research that relates high Chinese saving rates to an increase in income volatility. To the extent that the increased income volatility is inherent in China's ongoing transition to a more market-based economy, substantial changes in consumer behavior might be difficult to engineer. That said, only about half of the increase in Chinese saving rates appears explainable based on natural economic forces, and the Chinese government can certainly reduce national saving of its own accord (via deficit spending). Furthermore, according to Feldstein's calculations, a relatively small decline in the Chinese saving rate could eliminate their side of the current account imbalance.
As to the first part of the equation—an increase in saving by U.S. consumers—Atlanta Fed President Dennis Lockhart offered this yesterday in remarks prepared for the Atlanta Rotary Club:
"Households have been actively deleveraging—that is, working down debt levels and saving more of their income. The savings rate has increased from a little over 1 percent in 2005 to more than 5 percent currently.
"Consumer debt as a percent of disposable income has declined markedly over the past three years after rising steadily since the 1980s. Most nonmortgage consumer debt reduction has been in credit card balances. As consumers have reduced their debt, the share of income used to service financial obligations has fallen sharply to the lowest level in a decade.
"Consumer action to reduce debt is not the whole deleveraging story. In the numbers, the decline in overall household indebtedness has been highly affected by bank write-offs. Also, banks' stricter underwriting requirements for new consumer debt have contributed to runoff.
"I expect the phenomenon of household deleveraging to continue."
Restrained consumer spending was one item on a list of three "headwinds" that President Lockhart believes will serve to restrain growth in 2011 (the other two being policy uncertainties and ongoing credit market repair). Not that this is all bad:
"First, today's headwinds to a significant degree reflect structural adjustments that will, in the longer term, place the U.S. economy on a stronger footing. The preconditions for strong future growth are reduced uncertainty, improved consumer and household finances, and healthy credit markets.
"Second, I believe the headwinds I have emphasized will restrain growth but not stop it. I fully expect growth in gross domestic product, in personal incomes, and in jobs to be better in 2011 than in 2010.
"Finally, I acknowledge the potential that economic performance this year could surprise me on the upside. Businesses, for example, are sitting on lots of cash. Cash accumulation is not something that can continue forever, particularly in the case of public companies. It may not take much weakening of headwinds to unleash some of the economic forces that thus far have been bottled up."
Though faster progress would be welcome—particularly with respect to job creation—the Lockhart and Feldstein commentary makes it clear there is a delicate balance between resolving the short-run pain and setting up the longer-term gain.
By Dave Altig
Senior vice president and research director at the Atlanta Fed
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December 10, 2008
Credit storm hitting the high seas?
Now that the mystery has been solved concerning whether we are in recession or not, our attention can turn to monitoring the conditions that might signal the contraction’s end. A nice assist in this endeavor comes from the “Credit Crisis Watch” at The Big Picture, which includes an extensive list of graphs summarizing ongoing conditions in credit markets.
In case that list is not extensive enough for you, allow us to add one more item to the list: the condition of trade finance. International trade amounts to about $14 trillion and, according to the World Trade Organization (WTO), 90 percent of these transactions involve trade financing. Trade-related credit is issued primarily by banks via “letters of credit,” the purpose of which is to secure payment for the exporter. Letters of credit prove that a business is able to pay and allow exporters to load cargo for shipments with the assurance of being paid. Though routine in normal times, the letter of credit of process is yet another example of how transactions between multiple financial intermediaries introduce counterparty risk and the potential for trouble when confidence flags.
This is how it works: Company A located in the Republic of A wants to buy goods from Company B located in B-land. Company A and B draw up a sales contract for the agreed sales price of $100,000. Company A would then go to its bank, A Plus Bank, and apply for a letter of credit for $100,000 with Company B as the beneficiary. (The letter of credit is done either through a standard loan underwriting process or funded with a deposit and an associated fee). A Plus Bank sends a copy of the letter of credit to B Bank, which notifies Company B that its payment is available when the terms and conditions of the letter of credit have been met (normally upon receipt of shipping documents). Once the documents have been confirmed, A Plus Bank transfers the $100,000 to Bank B to be credited to Company B.
In general, exporters and importers in emerging economies may be particularly vulnerable since they rely more heavily on trade finance, and in recent weeks, the price of credit has risen significantly, especially for emerging economies. According to Bloomberg, the cost of a letter of credit has tripled for importers in China, Brazil, and Turkey and doubled for Pakistan, Argentina, and Bangladesh. Banks are now charging 1.5 percent of the value of the transaction for credit guarantees for some Chinese transactions. There have been reports of banks refusing to honor letters of credit from other banks and cargo ships being stranded at ports, according to Dismal Scientist.
These financial market woes are clearly spilling over to “global Main Street.” The Baltic Dry Index, an indirect gauge of international trade flows, has dropped by more than 90 percent since its peak in June as a result not only of decreased global demand but also availability of financing that demand, according to Dismal Scientist.
In the words of the WTO’s Director-General Pascal Lamy, “The world economy is slowing and we are seeing trade decrease. If trade finance is not tackled, we run the risk of further exacerbating this downward spiral.” Since about 40 percent of U.S. exports are shipped to developing countries, the inability of the importers in those countries to finance their purchases of U.S.-made goods can’t help the U.S. exports sector, which is already suffering from falling foreign demand as the global economy slows.
At VoxEU, Helmut Reisen sums up the situation thus:
“As a mid-term consequence of the global credit crisis, private debt will be financed only reluctantly and capital costs are bound to rise to incorporate higher risk. Instead, solvent governments and public institutions will become the lenders of last resort.”
That process has begun. In the last 12 months, according to the WTO, export credit agencies have increased their business by more than 30 percent, with an acceleration since the summer. The increase in this activity, the WTO reports, is being backed by governments of some of the world’s largest exporters, such as Germany and Japan.
Most recently, to support exports of products from the United States and China to emerging economies, both countries decided on December 5 to provide a total of $20 billion through their export-import banks. The program will be implemented in the form of direct loans, guarantees, or insurance to creditworthy banks. Together, the United States and China expect that these efforts will generate total trade financing for up to $38 billion in exports over the next year.
The sense one gets from The Big Picture charts is that at least some hopeful signs have emerged in developed-economy credit markets. Going forward, progress in markets directly related to trade flows between developed and emerging economies may well be an equally key indicator of how quickly we turn the bend toward recovery.
By Galina Alexeenko and Sandra Kollen, senior economic research analysts at the Federal Reserve Bank of Atlanta
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July 17, 2007
US Assets: Still Looking Tasty
It appears that the appetite for dollar-denominated assets is not sated quite yet. From Bloomberg:
International buying of U.S. financial assets unexpectedly climbed to a record in May as investors snapped up American stocks and corporate bonds.
Total holdings of equities, notes and bonds climbed a net $126.1 billion, from $80.3 billion the previous month, the Treasury said today in Washington...
Brad Setser does his usual fine job with the details:
Demand for US equities and corporate bonds was particularly strong, which does suggest the persistence of private demand for US assets abroad. Private investors tend to buy corporate bonds and equities; central banks tend to buy Treasuries and Agencies -- though that is changing.
What causes me trouble is the split between private and official purchases, and specifically the absence of any official inflows in the May TIC data.
In case you need visual confirmation:
Brad isn't buying it:
I have a hard time believing that. May was a record month for official reserve growth. China, Russia and Brazil all added to their reserves like crazy. Those three together combined to add close to $100b to their reserves – and a host of other countries were adding to their reserves too. That money has to go somewhere...
... the Fed’s custodial data doesn’t show a comparable fall off in official demand in May (June is another story).
The Treasury helpfully explains why the custodial data may differ from its own data:
- Differences in coverage: The most important reason for differences between holdings reported in the TIC and the FRBNY custody accounts is a difference in coverage. First, not all foreign official holdings of Treasury securities as reported by the TIC system are held at FRBNY. In particular, Treasury securities held by private custodians on the behalf of foreign official institutions are included in the TIC but not in the FRBNY figures. In this sense, the coverage of the TIC system is broader than that of the FRBNY custody holdings. Second, the custody holdings at FRBNY include securities held for some international organizations as well as for foreign official institutions. In this sense, the coverage of the FRBNY custody holdings is broader than the foreign official designation in the TIC system.
That description suggests advantage Treasury to me, but Brad offers other reasons for distrusting the official (that is, government) flows reported in the TIC data, and sticks to his guns on the belief that central bank diversification continues on. I won't -- can't really -- argue. But at the very least the latest report does little to vanquish the sense that global asset demand retains a strong attraction to the USA.
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June 11, 2007
One Savings Glut That Carries On
China's monthly trade surplus soared 73% in May from a year earlier, a state news agency reported Monday, amid U.S. pressure on Beijing for action on its yawning trade gap and the possibility of sanctions.
Exports exceeded imports by $22.5 billion, the Xinhua News Agency said, citing data from China's customs agency. That figure, close to the all-time record high monthly surplus of $23.8 billion reported in October, came despite repeated Chinese pledges to take steps to narrow the gap by boosting imports and rein in fevered export growth. The report gave no details of imports or exports.
The U.S. government has been pressing Beijing for action, especially steps to raise the value of the Chinese currency. Critics say the yuan is kept undervalued, giving Chinese exporters an unfair advantage and adding to the country's growing trade gap.
Apparently, the U.S. Senate is about to officially jump into the yuan-peg fray. From Bloomberg:
The U.S. Senate will introduce a bill this week to pressure China to strengthen its currency, the Financial Times said today, citing unidentified people close to the situation.
The market, on the other hand, suggests that maybe things aren't so straightforward:
The gap may increase pressure on China to let the yuan appreciate to reduce tensions with trading partners and cool the world's fastest-growing major economy. The currency today had its biggest decline in 10 months and has reversed gains made in May when Chinese and U.S. officials met for trade talks in Washington...
The yuan declined 0.2 percent to 7.6691 against the U.S. dollar at 4 p.m. in Shanghai today, the biggest one-day fall since Aug. 15.
The currency has strengthened 7.9 percent since China scrapped a 10-year peg to the dollar and revalued the currency in July 2005. The 0.74 percent monthly gain in May was the biggest since the end of the fixed exchange rate.
I'm not sure what the story is there, but Nobel Prize winner Robert Mundell warned this weekend that too much pressure on the Chinese may not imply an appreciating yuan. From the Wall Street Journal (page A9 in the weekend print edition):
... in the unlikely event that the yuan were suddenly made fully convertible, Mr. Mundell predicts that the value of the currency would fall, not rise. Many Chinese savers would want the security of keeping at least some portion of their wealth in foreign currency and would convert quickly, worried that the government might slam the door shut. This might become a self-fulfilling prophecy. In the U.K. in 1947, the Bank of England saw its reserves evaporate in a matter of weeks, and reinstated capital controls. The movement to full convertibility is fraught with danger and must be approached cautiously.
Meanwhile, yet another Nobel Prize winner, Michael Spence, suggests there is something much deeper in play than mere currency policy. From China Daily:
China has been in a high growth mode since it started economic reforms in the late 70s. Its almost three decades of high growth is the longest among the 11 high-growth economies in the world and part of "a recent, post-World War II phenomenon". And the Chinese economy will sustain its fast growth for at least two more decades...
The high levels of savings and investments both in the public and private sectors, resource mobility and rapid urbanization are the important characteristics of China's high growth, says Spence, who is also the chairman of the independent Commission on Growth and Development. The commission was set up last year to focus on growth and poverty reduction in developing countries. China's saving rate of between 35 to 45 percent is among the highest despite the relatively low level of income of its people. Resource mobility has generated new productive employment to absorb surplus labor in a country where 15-20 million people move from the rural areas to the cities every year.
The most important feature of sustained high growth is that it leverages the demand and resources of the global economy, says Spence. All cases of sustained high growth in the post-War period have integrated into the global economy because exports act as a major high-growth driver.
Enumerating the reasons why the Chinese economy will sustain its high growth rate for another two decades, he says: "There are basically two reasons. One is that there is still a lot of surplus labor in agriculture. The engine for high growth is still there. The second is that the Chinese economy has diversified very rapidly. It's quite flexible and entrepreneurial."
Spence clearly believes that the Western complaints of too low a value for the Chinese currency and too high a surplus in its trade balances will self-correct, with a little help from government policy:
The only way to stop China's high growth would be to shut the economy off from the rest of the world. "It's just not going to happen." Even 20 years later, China will continue to grow because its currency will appreciate, helping raise the income level and increase the wealth of the people...
... To balance the huge trade deficit, Spence hopes China would boost domestic consumption and bring down the saving rate.
He acknowledges, though, that the relatively high-income younger generation is spending more despite the fact that East Asians traditionally are good at saving. A solution to the trade imbalance could also be found by increasing social security and the pension system, making them available to everybody, improving the medical coverage in the rural areas and making education at all levels affordable.
Meanwhile, the move to liberalize domestic financial markets in China took another step forward this weekend. From Reuters, via China Daily:
China Export-Import Bank (EximBank) is set to issue 2 billion yuan (US$261 million) in yuan-denominated bonds in Hong Kong this month, making it the first Chinese lender to do so, sources told Reuters on Monday.
Exim Bank is to sell the 3-year bonds only to institutional investors, an investment banking source said, adding that the bank would decide on the yield later.
Never boring, is it?
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May 01, 2007
I Asked, The Chairman Answered
The missing ingredient in this most recent installment of the free-trade discussion is evidence in favor of one story or another, a task that is a good deal messier than writing down models.
According to one recent study that used four approaches to measuring the gains from trade, the increase in trade since World War II has boosted U.S. annual incomes on the order of $10,000 per household (Bradford, Grieco, and Hufbauer ["The Payoff to America from Globalization"). The same study found that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household. Other research has found similar results. Our willingness to trade freely with the world is indeed an essential source of our prosperity--and I think it is safe to say that the importance of trade for us will continue to grow...
If trade both destroys and creates jobs, what is its overall effect on employment? The answer is, essentially none... To see the irrelevance of trade to total employment, we need only observe that, between 1965 and 2006, the share of imports in the U.S. economy nearly quadrupled, from 4.4 percent of GDP to 16.8 percent. Yet, reflecting growth in the labor force, employment more than doubled during that time, and the unemployment rate was at about 4-1/2 percent at both the beginning and end of the period. Furthermore, average real compensation per hour in the United States has nearly doubled since 1965...
A recent study of twenty-one occupations that are most likely to be affected by outsourcing found that net job losses were concentrated almost exclusively in the lower-wage occupations and that strong employment gains have occurred in the occupations that pay the highest wages [Catherine L. Mann, "Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth"]...
As I suggested in my earlier post, my instinct is to believe that the issue is not whether trade is a net gain but how to think about distributing those gains, which will almost surely arrive unevenly across the population. Here, it seems that Bernanke and Alan Blinder find some common cause. Blinder, via the Wall Street Journal:
Mr. Blinder's answer is not protectionism, a word he utters with the contempt that Cold Warriors reserved for communism. Rather, Mr. Blinder still believes the principle British economist David Ricardo introduced 200 years ago: Nations prosper by focusing on things they do best -- their "comparative advantage" -- and trading with other nations with different strengths. He accepts the economic logic that U.S. trade with large low-wage countries like India and China will make all of them richer -- eventually. He acknowledges that trade can create jobs in the U.S. and bolster productivity growth.
But he says the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge. He wants government to do far more for displaced workers than the few months of retraining it offers today. He thinks the U.S. education system must be revamped so it prepares workers for jobs that can't easily go overseas, and is contemplating changes to the tax code that would reward companies that produce jobs that stay in the U.S.
Restricting trade by imposing tariffs, quotas, or other barriers is exactly the wrong thing to do. Such solutions might temporarily slow job loss in affected industries, but the benefits would be outweighed, typically many times over, by the costs, which would include higher prices for consumers and increased costs (and thus reduced competitiveness) for U.S. firms. Indeed, studies of the effects of protectionist policies almost invariably find that the costs to the rest of society far exceed the benefits to the protected industry. In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers (Bernanke ["Trade and Jobs"] ).
The better approach to mitigating the disruptive effects of trade is to adopt policies and programs aimed at easing the transition of displaced workers into new jobs and increasing the adaptability and skills of the labor force more generally...
Actually, Blinder's prescription is for a sort of labor version of industrial policy. Again from the WSJ:
He thinks the U.S. education system must be revamped so it prepares workers for jobs that can't easily go overseas, and is contemplating changes to the tax code that would reward companies that produce jobs that stay in the U.S.
Bernanke does not indicate if he would favor so interventionist a strategy. I would not, but it still looks like about the same page to me, and that page has more and freer trade written all over it.
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April 29, 2007
What Are You Going To Believe -- Theory Or Your Own Lying Eyes?
The blogger epicenter of the free-trade debate is rumbling at Harvard, with Greg Mankiw and Dani Rodrik engaged in a terrific -- and important -- conversation about winners, losers, and how (or whether) economic theory divides the two. You can check-in on the state of the debate at Angry Bear, where pgl provides the appropriate links. It is highly recommended reading, but I think it ought to come with a few warning labels. For example, Professor Rodrik responds to Professor Mankiw with this claim:
... there is no theorem that guarantees that the partial-equilibrium losses to import-competing producers “are more than offset by gains to consumers from lower prices.”
In a related vein, pgl opens his post with:
Let's be perfectly clear: There are no theorems in economics that guarantee anything about the real world. Economic models are not descriptions of physical realities but formalizations of stories about how social interactions deliver particular outcomes. Different, equally coherent, stories deliver different predictions about the world. The claim that "free trade benefits everyone" is not a fallacy, but a particular outcome based on a particular model. Different models deliver different answers, so theory alone does nothing beyond eliminating stories that are internally inconsistent.
Or, perhaps, unconvincing. The missing ingredient in this most recent installment of the free-trade discussion is evidence in favor of one story or another, a task that is a good deal messier than writing down models. What makes matters worse is that adjudicating the issue is not a mere matter of counting up winners and losers. In the court of determining what is "good" or "bad", economists have standing to address one question, and one question only: Can someone be made better off without making anyone worse off? That too depends on the model at hand, and in fact it's even worse than that. The Rodrik-Mankiw debate revolves in part around a result known as the Stolper-Samuelson theorem. Greg Mankiw does a good job explaining Stolper-Samuleson and its relevance to the subject at hand, but I'll note one item from the Wikipedia description of the theorem:
If considering the change in real returns under increased international trade a robust finding of the theorem is that returns to the scarce factor will go down, ceteris paribus. A further robust corollary of the theorem is that a compensation to the scarce-factor exists which will overcome this effect and make increased trade Pareto optimal.
In simple terms, there are losers, but the winners can win enough to more than match those losses. All would be well with the world if the winners and losers could be easily identified, and an appropriate compensation scheme implemented. But what if that is not feasible? What is the right move then? To protect the losers at the expense of significant opportunity cost to potential winners? The other way around? I've yet to encounter an economist trained to answer those questions, and you should be very suspicious of any who speak as if they are.
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January 10, 2007
Sometimes it's nice to hear a little good news. From the Financial Times:
The transatlantic push to conclude the troubled Doha round of global trade talks got a wary welcome from the head and some members of the World Trade Organisation on Tuesday.
Details of any deal to reconcile the US and European Union positions remain elusive, but Pascal Lamy, director-general of the WTO, said the determination expressed this week by US president George W. Bush and José Manuel Barroso, president of the European Commission, was a marked advance.
Similar expressions of enthusiasm from Mr Bush and other heads of government during the Group of Eight summit in St Petersburg last summer were not followed by concessions at the negotiating table, and the Doha talks were suspended in July amid bitter transatlantic recriminations.
But Mr Lamy said prospects were better. “The signs we are seeing now are qualitatively different from what we heard last year,” he told the Financial Times. “The political chemistry is beginning to work.”
And from The Wall Street Journal (page A1 of the print edition):
With Fidel Castro ailing and absent from the public stage, some influential Cuban intellectuals are laying plans for a more market-oriented approach to fortify the island's ailing communist economy...
Together, the Cuban economists' proposals would cut down on state interference in businesses and aim to wring more productivity out of the island nation's economy. Among the steps under discussion: decentralizing control, expanding the power of managers at privately owned agricultural cooperatives, extending private ownership to other sectors, boosting investment in infrastructure and increasing incentives to workers.
None of the plans would shuck communism for capitalism or open the island further to foreign investment -- which economists outside Cuba say are critical for the island to prosper. But the fact that the government is permitting -- and perhaps even encouraging -- the debate suggests regime officials might find these kinds of changes acceptable, though it may take Mr. Castro's death to put them into action.
There are lots of devils in all the details of both stories, but hey, it's a new year. Why not start it with a little hope?
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November 26, 2006
FOR years, the Clinton wing of the Democratic Party, exercising a lock on the party’s economic policies, argued that the economy could achieve sustained growth only if markets were allowed to operate unfettered and globally...
This approach coincided with a period of economic prosperity, low unemployment and falling deficits. Over time, this combination — called Rubinomics after the Clinton administration’s Treasury secretary, Robert E. Rubin — became the Democratic establishment’s accepted model for the future.
Not anymore. With the Democrats having won a majority in Congress, and disquiet over globalization growing, a party faction that has been powerless — the economic populists — is emerging and strongly promoting an alternative to Rubinomics.
... They want to rethink America’s role in the global economy. They would intervene in markets and regulate them much more than the Rubinites would. For a start, they would declare a moratorium on new trade agreements until clauses were included that would, for example, restrict layoffs and protect incomes.
The split is not over the damage from globalization. Mr. Rubin and his followers increasingly say that globalization has not brought job security or rising incomes to millions of Americans. The “share of the pie may even be shrinking” for vast segments of the middle class, Mr. Rubin’s successor as Treasury secretary under President Clinton, Lawrence H. Summers, recently wrote in an op-ed in The Financial Times. And the populists certainly agree.
But the Rubin camp argues that regulating trade, or imposing other market restrictions, would be self-defeating.
That seems right to me. What's the counter?
The economic populists argue that the trade agreements themselves are the problem. They cite several studies showing that more jobs shifted to Mexico as a result of Nafta than were created in the United States to serve the Mexican market.
Hmm. Doesn't that argue by way of attacking with a point the other side already conceded? Perhaps we should focus on the actual claims made by those who argue globalization is a force for good?
And then there is this:
As the two groups face off, Lawrence Mishel, president of the Economic Policy Institute, contends that the populists are pushing much harder than the Rubinites for government-subsidized universal health care. They also favor expanding Social Security to offset the decline in pension coverage in the private sector.
Expanding Social Security? Maybe "the people" weren't as upset about growth in entitlements (via Medicare's prescription drug benefit, for example) as we were led to believe?
Is there any room for agreement here. Sure:
Apart from such differences, there are nevertheless crucial issues on which the groups agree. Both would sponsor legislation that reduced college tuition, mainly through tax credits or lower interest rates on student loans...
OK. I'm not sure access is the problem with our educational system, but at least that focuses on a real issue.
Both would expand the earned-income tax credit to subsidize the working poor.
Both would have the government negotiate lower drug prices for Medicare’s prescription drug plan.
Uh-oh. Price controls by any other name...
And despite their relentless criticisms of President Bush’s tax cuts, neither the populists nor the Rubinite regulars would try to roll them back now, risking a veto that the Democrats lack the votes to override.
Here, I guess, is the bottom line:
The populists argue that the national income has flowed disproportionately into corporate coffers and the nation’s wealthiest households, and that the imbalance has grown worse in recent years. They want to rethink America’s role in the global economy. They would intervene in markets and regulate them much more than the Rubinites would. For a start, they would declare a moratorium on new trade agreements until clauses were included that would, for example, restrict layoffs and protect incomes.
I have a prediction: I won't lose much sleep thinking about which side in this debate I support.
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March 30, 2006
Protectionism Watch, Air Travel Edition
The rising tide of protectionism that killed the Dubai ports deal threatens to swamp another major transportation proposal: removal of 62-year-old limits on air service between Europe and the USA.
If European Union transport ministers approve the move at a meeting scheduled for June, any U.S. airline could fly to any of the European Union's 25 nations. Likewise, any European airline could fly from anywhere in Europe to anywhere in the USA.
Supporters of so-called Open Skies say it would allow airlines to step up competition for an estimated 17 million new passengers annually, making a trans-Atlantic market already valued at $22 billion a year even more lucrative. For travelers, Open Skies could mean more flights, more convenient routes and cheaper fares across the Atlantic...
In the USA, the Bush administration backs Open Skies because officials believe it would lower fares and benefit U.S. carriers. No. 2 United Airlines and No. 3 Delta Air Lines support it as a welcome step toward globalization of the industry.
Well, that certainly sounds like a good thing. But wait...
Just as adamantly, Houston-based Continental Airlines argues that the promised benefits are illusory. Open Skies has also drawn vehement opposition from labor groups that fear American jobs might be lost.
"Giving away another vital U.S. industry to foreign interests is one more example of globalization run amok," says the AFL-CIO's Edward Wytkind.
Open Skies was no sure thing even before the political flare-up that killed the plan to turn over management of five major U.S. ports to Dubai Ports World, a company based in the United Arab Emirates. Now some of the same arguments used to thwart that deal are being used to attack Open Skies.
Great. From my perspective, those arguments look just as weak as they seemed in the case of the port deal:
Opponents are aiming criticism not at Open Skies directly, but at a proposed change in rules that govern ownership of U.S. airlines. EU transport ministers aren't inclined to approve Open Skies unless the U.S. first relaxes restrictions on foreign control of U.S. airlines to better reflect foreign ownership rules for European airlines...
Tight restrictions on foreign control of U.S. airlines date back to the 1920s, when memories of World War I were still fresh. Even today, no U.S. airline is permitted to have foreign interests control more than 25% of its voting stock or more than one-third of its board of directors...
U.S. citizens must control an airline's safety, security, routes, fares — everything. To invite foreign investment and to pave the way for Open Skies, the DOT now proposes changing this rule so foreign investors could exert control over purely "commercial" decisions, such as fares and routes.
Only U.S. citizens would make decisions on safety and security, the proposal says. Limits on stock ownership and board control wouldn't change. Loosening foreign-control restrictions is not formally linked to Open Skies, but EU officials say one follows the other.
In other words, the increasingly abused safety and security shield is, once again, a red herring. No matter:
Reps. James Oberstar, D-Minn., and Frank LoBiondo, R-N.J., sponsors of the House bill to block the easing of ownership restrictions, are sounding alarms about homeland security and national defense. During war, the Pentagon pays U.S. airlines to transport troops in the airlines' jets. Critics of the rule change say foreign investors might resist allowing aircraft use in a war they oppose.
"Allowing the daily operations of our airlines to be controlled by competing — and potentially unfriendly — foreign interests could significantly undermine homeland security," LoBiondo says.
Look, I'm no expert on the airline industry and maybe there is something I am missing here. If there is, I welcome the opportunity to be educated. But I'm waiting for someone to give me an example where cutting out competition ultimately served the public good (as opposed to narrow or parochial interests). And putting up walls to foreign direct investment at a time when the U.S. economy has a large exposure to rapid reverses in capital inflows does not strike me as wise. For sure, none of this serves to enhance our claim to global economic leadership:
... criticism in the USA shows no sign of relenting. "Some of the rhetoric has been embarrassing, even xenophobic," [Michael Whitaker, vice president of United Airlines] says.
Unfortunately, merely looking foolish looks to me to be the best possible outcome.
UPDATE: On the general topic, today brings this from the Adam Smith Institute Blog:
Tony Blair is telling them Down Under that the biggest threat to world stability is not terrorism, not even climate change, but American isolationism after Iraq. On trade, the WTO implies he may be right.
There is more, and you should read it. And while I am at it, let me belatedly commend to you the Becker-Posner discussion of a few weeks back on the "Dubai Ports World Fiasco" -- here, here, here, and here.
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March 26, 2006
Odds And Ends
Another quarter begins at the University of Chicago Graduate School of Business, and I have once again cleverly fallen behind on my reading, giving me the excuse to introduce some of my favorite weblogs to new students, via this review of things I should have talked about last week.
First things first, the week ended with economic news that was mixed, at best. Kash at Angry Bear reads the durable goods reports and concludes (fairly, I think) that business investment spending is still short of spectacular. On the other hand, at The Nattering Naybob Chronicles, Mr. Naybob is able to look on the bright side: "Both [the durable goods and house sales] reports eased inflation fears and bond yield dropped."
With respect to the real estate news, Calculated Risk, a consistently fine go-to source on the housing market, has the latest on home mortgage applications (down slightly), existing home sales (up, but perhaps not the best indicator), and new home sales (a better indicator, and coming in "very weak".) CR also has a handy chart, mapping the pattern of home sales in recessions. At the Big Picture, Barry Ritholtz opines: "The [Real Estate] market has dropped from white hot to red hot to mid-plateau." Calculated Risk says "The sky may not be falling, but... housing sales are clearly trending down." Captain Capitalism, however, is not cheered by that prognosis, and Michael Shedlock pores over the Calculated Risk pictures, to find that his disposition is soured as well. ElectEcon finds a prediction that things are going to get ugly fast.
For those who simply must have more housing indicators to watch, Daniel Gross bears good news, from Standard & Poor's. For those who just can't get enough detail on economic data period, Mark Thoma has more at Economist's View.
Speaking of data, a nice summary of U.S. wealth as reported in the Federal Reserve's Flow of Funds can be found at Angry Bear. (Although I don't necessarily endorse the conclusions, you might also enjoy the pictures provided at Economic Dreams - Economic Nightmares.)
Last week I (sort of) came to the rescue of the Consumer Price Index. Barry Ritholtz (again) counter punches, with a Wall Street Journal survey of readers indicating the vast majority don't think very highly of the Consumer Price Index, but Russell Roberts effectively (in my view) defends the beleaguered index, at Cafe Hayek.
Mark also relays the crux of Federal Reserve Chairman Ben Bernanke's speech on the yield curve. Meanwhile, the inverted yield curve watch continues, at The Capital Spectator.
Shifting to the fiscal side of the government house, Kash breaks down the sources of federal spending growth in the United States over the past five years. The guys at Angry Bear have had several useful, even if a bit partisan, posts on the subject in the recent past -- here, here, here, here, and here. Gary Becker and Richard Posner provide some much needed perspective on how to think about the build-up in defense spending.
In other legislative news, Andrew Chamberlain at Tax Policy Blog indicates that tax reform may not be dead just yet (good), and at Vox Baby, Andrew Samwick reports on the progress of pension reform (decidedly not good).
David Weman at A Few Euros More gives us the heads up on an item (from the Guardian Unlimited (U.K.) blog) bemoaning the rising tide of protectionism (among countries, including the U.S., that really ought to know better). The Skeptical Speculator concurs that "protectionism looms." Asia Pundit reminds us that, in the United States, the impulse is bipartisan (and Sun Bin channels Stephen Roach's comments on the subject). William Polley deems it "Nothing if not predictable." Mark Thoma provides an extended commentary from the Financial Times on the dangers of "Dobbism" (as in Lou). Daniel Drezner, however, has better news. Brad DeLong takes notice of a Alan Blinder's sometimes less charitable view of trade and globalization, to which Arnold Kling replies -- here and here.
Steve Antler (of EconoPundit) makes the connection from trade protectionism to immigration reform. Russell Roberts is even less tolerant of the anti-immigration argument. So is Arnold Kling (at EconLog). EurActiv reports on how the EU is attempting to deal with its own immigration questions. The New Economist provides a glimpse of research suggesting that outsourcing explains about 28 percent of the growth in the wage gap between high- and low-skilled labor between 1980 and 1999.
Continuing with the international theme, Brad Setser thinks both sides are at fault in the ongoing tensions over Chinese exchange rate policies. He also has terrific coverage of Larry Summers' must-read views on the current state of global financial markets and capital flows. Mark Thoma notes an article on the relationship between exchange rate policies and trade gaps and a summary of research on foreign direct investment. Steve Antler suggests an explanation for "why the dollar still reigns". Barry Ritholtz is pretty sure the answer is not Dark Matter. Menzie Chinn, writing at Econbrowser, is even less convinced. (He follows up that post with a very nice discussion of "purchasing power parity." Don't worry if you don't know what that means -- Menzie will fill you in.)
Speaking of China, Daniel Gross carries a story from the New York Times on the development race between China and India, the latter a country that I think gets far less attention than it deserves. (Lest there is any confusion, I mean positive attention.) Interestingly, Toni Straka at The Prudent Investor -- who unfailingly does not ignore India -- reports that India is about to float its currency and remove foreign exchange controls.
About Economics has a macro-relevant post on the, increasingly quaint, problem of the so-called zero nominal interest rate bound. Digging even further into the history of monetary theory, Jane Galt ruminates on "free money." In the some-think-it-matters-I-don't category, The Capital Spectator comments on the retirement of M3. So does Tim Iacono. That makes the graphs at Economist's View on M3 velocity -- explained here -- somewhat obsolete, but don't worry -- there is still M1 and M2 to absorb your attention.
UPDATE: Oh yeah -- Tyler Cowen has a new gig at the New York Times.
SPECIAL BRAIN-LOCK UPDATE: Above I hat-tipped A Fistful of Euro's David Weman for a Guardian article "bemoaning the rising tide of protectionism" (my words). Unfortunately, the Guardian article that does the bemoaning is not the one David cites. I had in mind an earlier article by James Surowiecki. David was pointing to another article, by Daniel Davies, arguing that capital controls do not count as protectionism. Double hat-tip to David for keeping me on the straight and narrow. (Oh, and by the way -- I'm with Surowiecki.)
March 26, 2006 in Asia, Data Releases, Deficits, Europe, Exchange Rates and the Dollar, Federal Debt and Deficits, Housing, Inflation, Interest Rates, Labor Markets, Saving, Capital, and Investment, Taxes, This, That, and the Other, Trade , Trade Deficit | Permalink
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