Inflation is often used inconsistently in the press. For example, today's FT:
"China’s voracious appetite for commodities ranging from copper to corn is now lighting a fire in a new sector – timber. Businesses dealing in wood in Europe say the cost of timber is soaring amid an acute shortage of supplies. According to the Office for National Statistics in the UK – a big importer – the inflation rate for wood products hit 13 per cent last month – its highest level for more than a decade."
However, as described here by Mark Thoma, inflation can only be sustained if caused by an increase in the money supply. (and to be specific, in increase in velocity of money). Basically, if the money supply is increased, but the amount of goods that that money is chasing is constant, the price level will rise assuming aggregate demand is unchanged. However, in the article above refers to a price rise (or inflation as they call it) caused by "China's voracious appetite for commodities". This means that prices are rising because more people are buying, or trying to buy the product. This is not inflation in the true sense of the word. This is just a rightward shift in the demand curve for timber.
Monday, April 30, 2007
Lazy, Job Stealing Immigrants?
Sebastian Mallaby examines the myths embedded in the debate over illegal immigration. His column is pasted below, but here's the gist:
Myth 1: Immigrants steal American jobs!
Not really, in fact, companies that would have located outside the United States have a greater incentive to do business here because of the supply of low skilled, low wage labor in the United States. So, immigrants also create jobs for American workers and managers.
Myth 2: Illegal immigrants drain federal, state, and local governments of revenue.
False, recent studies suggest that the effects of undocumented workers on Uncle Sam's pocketbook is about zero.
Myth 3: Even if illegals don't steal jobs from Americans, they drive down the wages of low skilled Americans.
Well...the evidence here is mixed and studies have found that undocumented workers have lowered the wages of low-skilled natives. In his column (pasted below), Sebastian Mallaby suggests that even if undocumented workers cause wage losses for some groups, the costs associated with preventing the inflows of illegals well outweigh the gains that could be achieved from stemming the inflow. I would add a footnote to that: If low skilled workers in the United States are losing jobs to or, in any way, competing for jobs with low skilled workers from Mexico that cannot speak English, policymakers should focus their attention on U.S. educational institutions. The U.S. is the richest country in the world; American workers should not be losing jobs to low skilled workers who, in some cases, cannot speak English.
Sebastian Mallaby in today's Post:
"...People say, contrariwise, that immigrants steal jobs from native-born Americans. But economists have patiently explained for years that there is no finite "lump of labor" in an economy. The presence of migrants causes new jobs to be created: Factories that might have gone abroad spring up in Arizona or Texas. Hasn't anyone noticed that California, where fully one-third of the adult population is foreign born, has an unemployment rate of less than 5 percent?
People say that immigrants burden social services while not paying taxes. Actually, undocumented immigrants are ineligible for welfare, food stamps and Medicaid; and although they do use hospital emergency rooms and schools, they also pay sales taxes and payroll taxes, and one in three pays income tax. The net result is that immigrants cost the average native U.S. household an extra $200 in taxes each year, according to a study of 1996 data. Once you take into account the boost to pretax incomes caused by immigrants' contribution to growth, the total effect of undocumented workers on native-born Americans is roughly zero, according to Gordon Hanson of the University of California at San Diego.
People say that immigrants cause wage losses even if they don't cause job losses. Here the story is subtle: Some studies find no evidence that immigrants pull down wages, while others find that native-born high school dropouts lost as much as 9 percent of their earnings between 1980 and 2000 as a result of immigration. But -- and here comes the sane scream -- there's no way that even a 9 percent wage loss can justify the policies that immigration hawks advocate.
Really, how much could draconian enforcement restore those wages? Between a quarter and two-fifths of undocumented workers originally enter legally, so stringent border enforcement could only affect about two-thirds of new arrivals. Moreover, arrivals are only part of the issue; the alleged downward pressure on wages comes less from the 400,000 illegal immigrants who show up each year than from the 35 million immigrants already here, two-thirds of them legally. And migrants will continue coming even if the entire southern border is walled off. Europe has a wall called the Mediterranean. It still has illegal immigrants.
Thanks to intensive enforcement over the past year, illegal immigration from Mexico is thought to have fallen by a quarter. Suppose even more spending could cut the number of illegal entrants from 400,000 to 200,000 a year, so that 2 million arrivals could be prevented over a 10-year period. Add in an aggressive deportation program that ejected 1 million illegals, and you are still only scratching the surface. Even if immigration has driven down wages for high school dropouts by 9 percent, it's hard to see how truly vicious counter-immigration policies could drive them up by more than about 2 percent.
That simply can't be worth it. Border security does not come cheap: We could save money on unmanned aerial drones and use it to help high-school dropouts with a more generous earned-income tax credit. And although the concern for high-school dropouts is welcome, it must be weighed against the aspirations of migrants. Is it right to push native workers' pay up by 2 percent if that means depriving poor Mexicans of a chance to triple their incomes?
Of course it isn't, and given that the total economic effect of immigration on U.S. households is a wash, the big ramp-up in enforcement spending beloved by immigration hawks is an egregious waste of money. But no politician is going to say that. Candidates with a good record on immigration -- Rudy Giuliani, Hillary Clinton, John McCain -- are trying to avoid the issue. And the demagogues and nativists are allowed to spout unchallenged nonsense."
Myth 1: Immigrants steal American jobs!
Not really, in fact, companies that would have located outside the United States have a greater incentive to do business here because of the supply of low skilled, low wage labor in the United States. So, immigrants also create jobs for American workers and managers.
Myth 2: Illegal immigrants drain federal, state, and local governments of revenue.
False, recent studies suggest that the effects of undocumented workers on Uncle Sam's pocketbook is about zero.
Myth 3: Even if illegals don't steal jobs from Americans, they drive down the wages of low skilled Americans.
Well...the evidence here is mixed and studies have found that undocumented workers have lowered the wages of low-skilled natives. In his column (pasted below), Sebastian Mallaby suggests that even if undocumented workers cause wage losses for some groups, the costs associated with preventing the inflows of illegals well outweigh the gains that could be achieved from stemming the inflow. I would add a footnote to that: If low skilled workers in the United States are losing jobs to or, in any way, competing for jobs with low skilled workers from Mexico that cannot speak English, policymakers should focus their attention on U.S. educational institutions. The U.S. is the richest country in the world; American workers should not be losing jobs to low skilled workers who, in some cases, cannot speak English.
Sebastian Mallaby in today's Post:
"...People say, contrariwise, that immigrants steal jobs from native-born Americans. But economists have patiently explained for years that there is no finite "lump of labor" in an economy. The presence of migrants causes new jobs to be created: Factories that might have gone abroad spring up in Arizona or Texas. Hasn't anyone noticed that California, where fully one-third of the adult population is foreign born, has an unemployment rate of less than 5 percent?
People say that immigrants burden social services while not paying taxes. Actually, undocumented immigrants are ineligible for welfare, food stamps and Medicaid; and although they do use hospital emergency rooms and schools, they also pay sales taxes and payroll taxes, and one in three pays income tax. The net result is that immigrants cost the average native U.S. household an extra $200 in taxes each year, according to a study of 1996 data. Once you take into account the boost to pretax incomes caused by immigrants' contribution to growth, the total effect of undocumented workers on native-born Americans is roughly zero, according to Gordon Hanson of the University of California at San Diego.
People say that immigrants cause wage losses even if they don't cause job losses. Here the story is subtle: Some studies find no evidence that immigrants pull down wages, while others find that native-born high school dropouts lost as much as 9 percent of their earnings between 1980 and 2000 as a result of immigration. But -- and here comes the sane scream -- there's no way that even a 9 percent wage loss can justify the policies that immigration hawks advocate.
Really, how much could draconian enforcement restore those wages? Between a quarter and two-fifths of undocumented workers originally enter legally, so stringent border enforcement could only affect about two-thirds of new arrivals. Moreover, arrivals are only part of the issue; the alleged downward pressure on wages comes less from the 400,000 illegal immigrants who show up each year than from the 35 million immigrants already here, two-thirds of them legally. And migrants will continue coming even if the entire southern border is walled off. Europe has a wall called the Mediterranean. It still has illegal immigrants.
Thanks to intensive enforcement over the past year, illegal immigration from Mexico is thought to have fallen by a quarter. Suppose even more spending could cut the number of illegal entrants from 400,000 to 200,000 a year, so that 2 million arrivals could be prevented over a 10-year period. Add in an aggressive deportation program that ejected 1 million illegals, and you are still only scratching the surface. Even if immigration has driven down wages for high school dropouts by 9 percent, it's hard to see how truly vicious counter-immigration policies could drive them up by more than about 2 percent.
That simply can't be worth it. Border security does not come cheap: We could save money on unmanned aerial drones and use it to help high-school dropouts with a more generous earned-income tax credit. And although the concern for high-school dropouts is welcome, it must be weighed against the aspirations of migrants. Is it right to push native workers' pay up by 2 percent if that means depriving poor Mexicans of a chance to triple their incomes?
Of course it isn't, and given that the total economic effect of immigration on U.S. households is a wash, the big ramp-up in enforcement spending beloved by immigration hawks is an egregious waste of money. But no politician is going to say that. Candidates with a good record on immigration -- Rudy Giuliani, Hillary Clinton, John McCain -- are trying to avoid the issue. And the demagogues and nativists are allowed to spout unchallenged nonsense."
Wednesday, April 25, 2007
Bob Samuelson Discusses the Benefits of a Recession?
Bob Samuelson in today's Washington Post:
"Start with inflation. You may have noticed that last week's release of the March consumer price index (CPI) -- the government's main inflation indicator -- inspired much optimism. "Inflation Fears Relax," headlined the Wall Street Journal. Stock prices jumped on the supposedly good news. But if you actually examined the CPI report, you found that prices in March rose at their highest rate since September 2005 and that, over the past three months, they've increased at a 4.7 percent annual rate. Doesn't sound like retreating inflation, does it?
What explains the discrepancy is "core inflation." That's the CPI minus food and energy prices. In March, core inflation did subside, prompting the upbeat spin. But you might wonder: We must pay for food, gasoline and electricity; why strip them out? The usual answer is: These prices jump around from month to month; they often reverse themselves (oil prices were high in the early 1980s, low in the late 1980s); core inflation better reflects the underlying trend. This is hardly wishful thinking. Since the early 1980s, the two indexes (the CPI and the core CPI) have recorded -- despite many monthly differences -- virtually identical increases.
But suppose that this relationship is breaking down. We all know about oil. Prices are about $60 a barrel. They seem unlikely to return to $28, the 2000 level. The real surprise involves food prices. In the past three months, they've risen at a 7 percent annual rate. We may be seeing the first adverse effects of the ethanol boom. Corn is a main feed grain for poultry, cattle and hogs. Corn is also the main raw material for ethanol, an alternate fuel for gasoline. Competition for grain has pushed up corn prices to about $3.50 or more a bushel, almost double a typical level. High feed prices have discouraged meat producers from expanding. The resulting tight meat supplies raise retail prices...
Now switch to recession. Since 1982, there have been only two (1990-91 and 2001). That's good. In the previous 13 years, there had been four (1969, 1973-75, 1980 and 1981-82). Almost everyone dreads another one...
Hardly anyone likes what happens in a recession. Unemployment rises, production falls, profits weaken, stocks retreat. But the obvious drawbacks blind us to collateral benefits. Downturns check inflation -- it's harder to increase wages and prices -- and low inflation has proved crucial to long-term prosperity. Downturns also punish and deter wasteful speculation. When people begin to believe that an economic boom won't ever end, they start to take foolish risks. Partly, that explains the high-tech and stock bubbles of the late 1990s and, possibly, the recent housing bubble.
Some sort of a recession might also reduce the gargantuan U.S. trade deficit, $836 billion in 2006 (just counting goods). Almost everyone believes that the U.S. and world economies would be healthier if Americans consumed less, imported less, saved more and exported more. The corollary is that Europe, Japan, China and the rest of Asia would rely more on domestic spending -- their own citizens buying more -- and less on exports.
Ideally, this massive switch would occur silently and smoothly. Realistically, the transition might not be so placid. A slowdown in Americans' appetite for imports would involve weaker overall consumer spending, about 70 percent of the U.S. economy. Such a slowdown might also be needed to persuade other countries to stimulate their domestic spending.
Almost no one wishes for a recession, but the consequences might not be all bad."
"Start with inflation. You may have noticed that last week's release of the March consumer price index (CPI) -- the government's main inflation indicator -- inspired much optimism. "Inflation Fears Relax," headlined the Wall Street Journal. Stock prices jumped on the supposedly good news. But if you actually examined the CPI report, you found that prices in March rose at their highest rate since September 2005 and that, over the past three months, they've increased at a 4.7 percent annual rate. Doesn't sound like retreating inflation, does it?
What explains the discrepancy is "core inflation." That's the CPI minus food and energy prices. In March, core inflation did subside, prompting the upbeat spin. But you might wonder: We must pay for food, gasoline and electricity; why strip them out? The usual answer is: These prices jump around from month to month; they often reverse themselves (oil prices were high in the early 1980s, low in the late 1980s); core inflation better reflects the underlying trend. This is hardly wishful thinking. Since the early 1980s, the two indexes (the CPI and the core CPI) have recorded -- despite many monthly differences -- virtually identical increases.
But suppose that this relationship is breaking down. We all know about oil. Prices are about $60 a barrel. They seem unlikely to return to $28, the 2000 level. The real surprise involves food prices. In the past three months, they've risen at a 7 percent annual rate. We may be seeing the first adverse effects of the ethanol boom. Corn is a main feed grain for poultry, cattle and hogs. Corn is also the main raw material for ethanol, an alternate fuel for gasoline. Competition for grain has pushed up corn prices to about $3.50 or more a bushel, almost double a typical level. High feed prices have discouraged meat producers from expanding. The resulting tight meat supplies raise retail prices...
Now switch to recession. Since 1982, there have been only two (1990-91 and 2001). That's good. In the previous 13 years, there had been four (1969, 1973-75, 1980 and 1981-82). Almost everyone dreads another one...
Hardly anyone likes what happens in a recession. Unemployment rises, production falls, profits weaken, stocks retreat. But the obvious drawbacks blind us to collateral benefits. Downturns check inflation -- it's harder to increase wages and prices -- and low inflation has proved crucial to long-term prosperity. Downturns also punish and deter wasteful speculation. When people begin to believe that an economic boom won't ever end, they start to take foolish risks. Partly, that explains the high-tech and stock bubbles of the late 1990s and, possibly, the recent housing bubble.
Some sort of a recession might also reduce the gargantuan U.S. trade deficit, $836 billion in 2006 (just counting goods). Almost everyone believes that the U.S. and world economies would be healthier if Americans consumed less, imported less, saved more and exported more. The corollary is that Europe, Japan, China and the rest of Asia would rely more on domestic spending -- their own citizens buying more -- and less on exports.
Ideally, this massive switch would occur silently and smoothly. Realistically, the transition might not be so placid. A slowdown in Americans' appetite for imports would involve weaker overall consumer spending, about 70 percent of the U.S. economy. Such a slowdown might also be needed to persuade other countries to stimulate their domestic spending.
Almost no one wishes for a recession, but the consequences might not be all bad."
Tuesday, April 24, 2007
What's Squeezing the Middle Class?
David Leonhardt writing in today's NY Times:
"There are two different stories people tend to tell when they’re trying to explain why the middle class is feeling squeezed. The first one is about inequality. The top 0.1 percent of earners — that’s one taxpayer out of every 1,000 — now brings in 11 percent of the nation’s total income, triple the share that they did just a generation ago. This has happened because the rich have grown ever richer, while the pay of rank-and-file workers hasn’t risen much faster than inflation.
The second, related story is about instability. Layoffs seem to happen more frequently than they once did, and these job losses — combined with the spread of bonus pay — have caused workers’ incomes to bounce around a lot more than in the past. So not only have middle-class families been getting meager raises, their finances have also become more volatile.
The story about inequality is indisputably true. But we’re starting to learn that the second story, the one about instability, is more complicated. It may even end up being wrong...
Last week, the Congressional Budget Office released a study that was arguably the fullest picture of economic volatility anyone has yet put together...If you read the C.B.O. report, you can tell that its authors knew they were dealing with a delicate subject. The summary starts by noting that a “significant number of workers experience substantial variability in their total wage earnings,” which is certainly true. Only later do you come to the surprising part: there is the same amount of variability now that there was in the 1980s and 1990s. In journalism, this is known as burying the lead...
We can all tick off reasons that the economy feels so volatile. Hardly a week goes by without another big corporation — the Tribune Company, Citigroup, DaimlerChrysler — announcing a big job cut. The number of temporary jobs, meanwhile, has mushroomed. Globalization and technological innovation are causing many of these changes, and labor unions are too weak to prevent them...But there is also a whole set of other forces, harder to see and pushing in the other direction. Manufacturing, where furloughs and layoffs have always been the norm, accounts for a much smaller part of the work force than it used to, while more stable industries, like health care, have grown. This is one reason that recessions, and the job cuts they bring, haven’t happened as often as they once did.
Yesterday’s layoffs could go unnoticed by people who weren’t affected by them because they were a regular part of doing business. Today’s tend to come in big chunks and are often announced in news releases. “There have always been a lot of mass layoffs,” said Lawrence F. Katz, a labor economist at Harvard. “We didn’t count them before.” In fact, research by Henry S. Farber, an economist at Princeton, has found that job loss rates have followed a cyclical pattern since the early ’80s, peaking around the same highs during recessions and falling to similar lows during expansions. (The rate has risen for workers who went to college and fallen a bit who those who didn’t.) Americans, looking at their own jobs, realize that there hasn’t been a big change: in a recent Gallup Poll, 12 percent of respondents said it was very or fairly likely they would be laid off in the coming year. In the 1970s, ’80s and ’90s, at similar points in the business cycle, the percentage was virtually identical.
I don’t want to exaggerate how much we know about instability, because there are some conflicting signals. Mr. Farber has also found, for instance, that average job tenure has declined during this time. Maybe people are more willing to leave a job voluntarily — or maybe companies nudge more workers out the door with early retirements and other stealth layoffs.
The C.B.O., for its part, has looked only at the pay of individual workers. In the future, economists there will look at family income — which is affected by divorce and other factors — and could potentially find changes there, as some academic work has.
The bottom line, though, is that the picture is likely to look mixed. Volatility may or may not have increased over the last generation, but it does not appear to have changed in a fundamental way.
Inequality is a whole different story. It has risen enormously and is not about to stop. With the recent jump in gas prices, the pay of rank-and-file workers is once again failing to keep pace with inflation, just as it did from 2002 until early last year, despite healthy economic growth.
In fact, inequality is probably the real reason that the economy often feels more volatile. When people are stretched — when their pay has been stagnant, when they’re worried about health insurance, when they don’t know what the future holds — a jolt to their income is harder to handle.
As the C.B.O. pointed out, these jolts do happen a lot, even if they don’t happen more than in the past. In 2003, a whopping 20 percent of workers saw their earnings drop 25 percent or more compared to the previous year. (For about 22 percent of workers, earnings rose at least 25 percent.)
But it’s important to keep in mind what is really changing. As Mr. Schumer says, “If you’re holding a job but your share of the pie is getting smaller, that’s a different set of policy needs than if you keep losing your job.”
In an economy where volatility was the main problem, you might want to protect jobs by making it harder for companies to cut them. In an economy where inequality was the problem, you would want to protect people. You would help them pay for health insurance, retirement, their children’s education and other basic needs when the market, left to its own devices, was not doing so.
And if your resources were limited, wouldn’t you start with the problem you were sure that you had?"
"There are two different stories people tend to tell when they’re trying to explain why the middle class is feeling squeezed. The first one is about inequality. The top 0.1 percent of earners — that’s one taxpayer out of every 1,000 — now brings in 11 percent of the nation’s total income, triple the share that they did just a generation ago. This has happened because the rich have grown ever richer, while the pay of rank-and-file workers hasn’t risen much faster than inflation.
The second, related story is about instability. Layoffs seem to happen more frequently than they once did, and these job losses — combined with the spread of bonus pay — have caused workers’ incomes to bounce around a lot more than in the past. So not only have middle-class families been getting meager raises, their finances have also become more volatile.
The story about inequality is indisputably true. But we’re starting to learn that the second story, the one about instability, is more complicated. It may even end up being wrong...
Last week, the Congressional Budget Office released a study that was arguably the fullest picture of economic volatility anyone has yet put together...If you read the C.B.O. report, you can tell that its authors knew they were dealing with a delicate subject. The summary starts by noting that a “significant number of workers experience substantial variability in their total wage earnings,” which is certainly true. Only later do you come to the surprising part: there is the same amount of variability now that there was in the 1980s and 1990s. In journalism, this is known as burying the lead...
We can all tick off reasons that the economy feels so volatile. Hardly a week goes by without another big corporation — the Tribune Company, Citigroup, DaimlerChrysler — announcing a big job cut. The number of temporary jobs, meanwhile, has mushroomed. Globalization and technological innovation are causing many of these changes, and labor unions are too weak to prevent them...But there is also a whole set of other forces, harder to see and pushing in the other direction. Manufacturing, where furloughs and layoffs have always been the norm, accounts for a much smaller part of the work force than it used to, while more stable industries, like health care, have grown. This is one reason that recessions, and the job cuts they bring, haven’t happened as often as they once did.
Yesterday’s layoffs could go unnoticed by people who weren’t affected by them because they were a regular part of doing business. Today’s tend to come in big chunks and are often announced in news releases. “There have always been a lot of mass layoffs,” said Lawrence F. Katz, a labor economist at Harvard. “We didn’t count them before.” In fact, research by Henry S. Farber, an economist at Princeton, has found that job loss rates have followed a cyclical pattern since the early ’80s, peaking around the same highs during recessions and falling to similar lows during expansions. (The rate has risen for workers who went to college and fallen a bit who those who didn’t.) Americans, looking at their own jobs, realize that there hasn’t been a big change: in a recent Gallup Poll, 12 percent of respondents said it was very or fairly likely they would be laid off in the coming year. In the 1970s, ’80s and ’90s, at similar points in the business cycle, the percentage was virtually identical.
I don’t want to exaggerate how much we know about instability, because there are some conflicting signals. Mr. Farber has also found, for instance, that average job tenure has declined during this time. Maybe people are more willing to leave a job voluntarily — or maybe companies nudge more workers out the door with early retirements and other stealth layoffs.
The C.B.O., for its part, has looked only at the pay of individual workers. In the future, economists there will look at family income — which is affected by divorce and other factors — and could potentially find changes there, as some academic work has.
The bottom line, though, is that the picture is likely to look mixed. Volatility may or may not have increased over the last generation, but it does not appear to have changed in a fundamental way.
Inequality is a whole different story. It has risen enormously and is not about to stop. With the recent jump in gas prices, the pay of rank-and-file workers is once again failing to keep pace with inflation, just as it did from 2002 until early last year, despite healthy economic growth.
In fact, inequality is probably the real reason that the economy often feels more volatile. When people are stretched — when their pay has been stagnant, when they’re worried about health insurance, when they don’t know what the future holds — a jolt to their income is harder to handle.
As the C.B.O. pointed out, these jolts do happen a lot, even if they don’t happen more than in the past. In 2003, a whopping 20 percent of workers saw their earnings drop 25 percent or more compared to the previous year. (For about 22 percent of workers, earnings rose at least 25 percent.)
But it’s important to keep in mind what is really changing. As Mr. Schumer says, “If you’re holding a job but your share of the pie is getting smaller, that’s a different set of policy needs than if you keep losing your job.”
In an economy where volatility was the main problem, you might want to protect jobs by making it harder for companies to cut them. In an economy where inequality was the problem, you would want to protect people. You would help them pay for health insurance, retirement, their children’s education and other basic needs when the market, left to its own devices, was not doing so.
And if your resources were limited, wouldn’t you start with the problem you were sure that you had?"
McCain's Economic Policy
McCain's op-ed in today's Financial Times provides a look into what his economic policy team has in mind:
"The world made the grave error of building walls against trade 75 years ago and it contributed to the Great Depression. Since that time, the US has been in the forefront of the fight for reduced barriers to trade and has reaped the benefits of sustained growth in standards of living, an awesome display of innovation and technical advance, an explosion in the variety, quality and affordability of consumer goods, a rise in home ownership, and ascendancy to become the world’s greatest economy.
But we must also face the fact that opening new and integrated world markets won’t automatically translate into higher quality of life for every American. It is government’s job to help workers get education and training. Instead we have outmoded and redundant training programmes and nobody in government bothers to check whether they work. This is unacceptable. We have an obligation to deliver a single, effective system for assistance, training and relocation.
Low, efficient taxes and open, level global markets are central to success, but both are threatened if reckless government spending is allowed to continue. An economy cannot be economically free if it is festooned with massive government spending."
Although it's not surprising that a conservative candidate is championing lower taxes and "economic freedom", his mention of reexamining programs to help and/or retrain displaced workers is telling. Presumably, this means that McCain plans on overhauling trade adjustment assistance, which is designed to provide unemployed benefits and retraining/job search assistance to displaced workers, but is, for the most part, badly underutilized - most workers don't know about it or don't bother to use the services it provides. In the past, the Bush administration has been accused for purposefully making it difficult for unemployed workers to access the services provided for by the program.
Here is the GAO report that takes a close look at the problems with TAA. Also, an IIE paper that offers specific proposals for improving the program.
"The world made the grave error of building walls against trade 75 years ago and it contributed to the Great Depression. Since that time, the US has been in the forefront of the fight for reduced barriers to trade and has reaped the benefits of sustained growth in standards of living, an awesome display of innovation and technical advance, an explosion in the variety, quality and affordability of consumer goods, a rise in home ownership, and ascendancy to become the world’s greatest economy.
But we must also face the fact that opening new and integrated world markets won’t automatically translate into higher quality of life for every American. It is government’s job to help workers get education and training. Instead we have outmoded and redundant training programmes and nobody in government bothers to check whether they work. This is unacceptable. We have an obligation to deliver a single, effective system for assistance, training and relocation.
Low, efficient taxes and open, level global markets are central to success, but both are threatened if reckless government spending is allowed to continue. An economy cannot be economically free if it is festooned with massive government spending."
Although it's not surprising that a conservative candidate is championing lower taxes and "economic freedom", his mention of reexamining programs to help and/or retrain displaced workers is telling. Presumably, this means that McCain plans on overhauling trade adjustment assistance, which is designed to provide unemployed benefits and retraining/job search assistance to displaced workers, but is, for the most part, badly underutilized - most workers don't know about it or don't bother to use the services it provides. In the past, the Bush administration has been accused for purposefully making it difficult for unemployed workers to access the services provided for by the program.
Here is the GAO report that takes a close look at the problems with TAA. Also, an IIE paper that offers specific proposals for improving the program.
Monday, April 23, 2007
Due Budget Deficits Matter?
From Jared Bernstein (Economic Policy Institute):
Perhaps, given my bias, I should recuse myself from the argument I’m about to make. You see, on our first date, I impressed the woman who is now my wife by convincing her conservative brother-in-law that budget deficits are not always a problem. Such is DC romance.
That was over a decade ago, but the issue remains both contentious and misunderstood. That’s why I was so interested in the recent talk given at the Economic Policy Institute by Joseph Stiglitz, Nobel Laureate economist and all around interesting guy. What’s unique about Stiglitz is not that he always rejects conventional wisdom—he doesn’t. It’s that he looks at in the context of the real world, and often finds it lacking.
Both in his talk and his writings, he seems genuinely and appropriately worried about a mania for balancing budgets. If I could summarize his message in one over-arching thought, it would be: too often, our budget debates mindlessly assume that deficit reduction is the best option, both for us and for other countries with whom we do business. This simplistic, reductionist view is leading both political parties toward a philosophy of fiscal austerity which will have very negative consequences.
The debate is far from academic. Misguided thinking about deficits has led to the two options that form the core of the fiscal debate between Democrats and Republicans: the D’s want to balance the budget by holding down spending and letting (some of) the Bush tax cuts expire, the R’s want to do so by extending the Bush tax cuts and cutting spending, big time. Make no mistake, when John McCain says in a recent speech that he wants to “save entitlements,” he means he wants to save them by shrinking them. These two options have crowded out the third: raise the revenue we need to support that which will make our economy and country stronger.
Stiglitz framed the issue in terms of two pressing problems: a short-term and a long-term one.
First, there’s the fact that the economy is currently growing about one point below its trend (with real GDP growth around 2-2.5% per year instead of 3-3.5%), a problem Stiglitz attributed mostly to the slump in housing and the loss of stimulus from this sector. In this context, taking money out of the economy by pursuing deficit reduction would do more harm than good.
You don’t hit someone when they’re down, and you don’t pursue deficit reduction when the economy is already stressing out. As Stiglitz noted, “The idea that deficit reduction leads to a strong economy was an idea that Andrew Mellon tried in the midst of the Great Depression…the effect, of course was not positive. Then came Keynesian economics.”
In the current context, this is hopefully a short-term problem and one that even some pretty hawkish folks on the deficit will be okay with. The more important question is the longer-term one: what’s the proper role of deficit spending in good times?
Here’s where reductionism—a zombie-like allegiance to balancing the budget—is your enemy. Stiglitz argued “that we should never focus just on deficits, but on broader economic concepts.” What’s the magnitude of the deficit relative to GDP (it’s now a very manageable 2%)? What are we spending it on (we’re wasting far too much of it on the war and tax cuts for the rich instead of accumulating worthwhile assets)? Are we, in the interest of balancing the budget, ignoring important investments that the private sector won’t make?
It’s on this last point where I thought Stiglitz’s message was most important, and it’s where we’re furthest off track. We have large and growing needs for investments that market forces simply won’t make.
We would be much wiser to focus on these deficits: early childhood development and education; access to higher ed for those who ought to be there but can't pull it off; our public health care system, which will absolutely need to expand in coming years as the private, employer-based system unravels; safety nets: programs like unemployment insurance and job training that can help those displaced by globalization; and, one Stiglitz emphasized, environmental policy.
Yet, even the most progressive budget alternatives, such as that of the Progressive Caucus, brag on the fact their budget gets to balance before all the others. This is a disheartening example of Bob Kuttner’s observation about deficits and Democrats: they’ve elevated a defensive tactic—hawkishness on deficits to stave off wasteful tax cuts—to a principle: balance budgets regardless of whether you’re foregoing short-term stimulus or needed investments.
Which brings us to politics.
Since when did Democrats become slavishly committed to fiscal austerity? As Kuttner explains in a recent critical piece about Bob Rubin, much of this comes from the belief that balancing the budget in the Clinton years drove the 1990s boom. When asked about this at EPI, Stiglitz explained that in his view deficit reduction had little to do with it: the boom was more of function of unique conditions in the banking sector that made borrowing cheap and financed an investment boom (that ultimately became a bubble).
Alan Blinder and Janet Yellin (both were top Clinton economists; Blinder was vice-chair at the Fed; Yellin’s there now) take the closest analytic look and are unable to pin the Clinton boom on deficit reduction. Instead, lower health care and energy costs boosted the economy, and, most importantly, productivity accelerated, facilitating both low inflation and interest rates. It was the revenue growth from these developments that balanced the budget, not the other way around.
But urban legends die hard, and Rubinomics, with its emphasis on balanced budgets, still holds sway in the top reaches of Democratic power. Word is that both Hillary Clinton and Obama are listening more closely to Bob than to Joe.
This is too bad, because more than any prominent economist, he understands the damaging limits of fiscal austerity, and the extent to which it undercuts our ability to tackle the big problems of today and tomorrow, from frayed safety nets to depleted ozone, from the war on poverty to the war in Iraq.
So move over Bob, and make room for Joe. We need him, or at least his ideas, at the table too.
Perhaps, given my bias, I should recuse myself from the argument I’m about to make. You see, on our first date, I impressed the woman who is now my wife by convincing her conservative brother-in-law that budget deficits are not always a problem. Such is DC romance.
That was over a decade ago, but the issue remains both contentious and misunderstood. That’s why I was so interested in the recent talk given at the Economic Policy Institute by Joseph Stiglitz, Nobel Laureate economist and all around interesting guy. What’s unique about Stiglitz is not that he always rejects conventional wisdom—he doesn’t. It’s that he looks at in the context of the real world, and often finds it lacking.
Both in his talk and his writings, he seems genuinely and appropriately worried about a mania for balancing budgets. If I could summarize his message in one over-arching thought, it would be: too often, our budget debates mindlessly assume that deficit reduction is the best option, both for us and for other countries with whom we do business. This simplistic, reductionist view is leading both political parties toward a philosophy of fiscal austerity which will have very negative consequences.
The debate is far from academic. Misguided thinking about deficits has led to the two options that form the core of the fiscal debate between Democrats and Republicans: the D’s want to balance the budget by holding down spending and letting (some of) the Bush tax cuts expire, the R’s want to do so by extending the Bush tax cuts and cutting spending, big time. Make no mistake, when John McCain says in a recent speech that he wants to “save entitlements,” he means he wants to save them by shrinking them. These two options have crowded out the third: raise the revenue we need to support that which will make our economy and country stronger.
Stiglitz framed the issue in terms of two pressing problems: a short-term and a long-term one.
First, there’s the fact that the economy is currently growing about one point below its trend (with real GDP growth around 2-2.5% per year instead of 3-3.5%), a problem Stiglitz attributed mostly to the slump in housing and the loss of stimulus from this sector. In this context, taking money out of the economy by pursuing deficit reduction would do more harm than good.
You don’t hit someone when they’re down, and you don’t pursue deficit reduction when the economy is already stressing out. As Stiglitz noted, “The idea that deficit reduction leads to a strong economy was an idea that Andrew Mellon tried in the midst of the Great Depression…the effect, of course was not positive. Then came Keynesian economics.”
In the current context, this is hopefully a short-term problem and one that even some pretty hawkish folks on the deficit will be okay with. The more important question is the longer-term one: what’s the proper role of deficit spending in good times?
Here’s where reductionism—a zombie-like allegiance to balancing the budget—is your enemy. Stiglitz argued “that we should never focus just on deficits, but on broader economic concepts.” What’s the magnitude of the deficit relative to GDP (it’s now a very manageable 2%)? What are we spending it on (we’re wasting far too much of it on the war and tax cuts for the rich instead of accumulating worthwhile assets)? Are we, in the interest of balancing the budget, ignoring important investments that the private sector won’t make?
It’s on this last point where I thought Stiglitz’s message was most important, and it’s where we’re furthest off track. We have large and growing needs for investments that market forces simply won’t make.
We would be much wiser to focus on these deficits: early childhood development and education; access to higher ed for those who ought to be there but can't pull it off; our public health care system, which will absolutely need to expand in coming years as the private, employer-based system unravels; safety nets: programs like unemployment insurance and job training that can help those displaced by globalization; and, one Stiglitz emphasized, environmental policy.
Yet, even the most progressive budget alternatives, such as that of the Progressive Caucus, brag on the fact their budget gets to balance before all the others. This is a disheartening example of Bob Kuttner’s observation about deficits and Democrats: they’ve elevated a defensive tactic—hawkishness on deficits to stave off wasteful tax cuts—to a principle: balance budgets regardless of whether you’re foregoing short-term stimulus or needed investments.
Which brings us to politics.
Since when did Democrats become slavishly committed to fiscal austerity? As Kuttner explains in a recent critical piece about Bob Rubin, much of this comes from the belief that balancing the budget in the Clinton years drove the 1990s boom. When asked about this at EPI, Stiglitz explained that in his view deficit reduction had little to do with it: the boom was more of function of unique conditions in the banking sector that made borrowing cheap and financed an investment boom (that ultimately became a bubble).
Alan Blinder and Janet Yellin (both were top Clinton economists; Blinder was vice-chair at the Fed; Yellin’s there now) take the closest analytic look and are unable to pin the Clinton boom on deficit reduction. Instead, lower health care and energy costs boosted the economy, and, most importantly, productivity accelerated, facilitating both low inflation and interest rates. It was the revenue growth from these developments that balanced the budget, not the other way around.
But urban legends die hard, and Rubinomics, with its emphasis on balanced budgets, still holds sway in the top reaches of Democratic power. Word is that both Hillary Clinton and Obama are listening more closely to Bob than to Joe.
This is too bad, because more than any prominent economist, he understands the damaging limits of fiscal austerity, and the extent to which it undercuts our ability to tackle the big problems of today and tomorrow, from frayed safety nets to depleted ozone, from the war on poverty to the war in Iraq.
So move over Bob, and make room for Joe. We need him, or at least his ideas, at the table too.
General Consequences of a Falling Dollar
For a general look at the costs and benefits of a falling dollar, I've pasted an example filled article from Terri Belkas, a currency analyst at Daily FX:
With the Euro hovering near its record highs and the British pound having breached the psychologically important 2.000 level, the extent of the US dollar’s weakness has finally been recognized. As we have seen in the past few months, the value of the US dollar is important not only for currency traders, but also for equity traders. It is hardly a coincidence that the US stock market hit an all time high around the same time that the US dollar reached multi decade lows against currencies like the British pound, New Zealand dollar and the Euro. The strength of those currencies has made US stocks attractive values for foreign investors and looking ahead, the value of the US dollar can be a useful tool for equity traders, especially those who are looking to buy or sell the shares of big US importers and exporters.
US Dollar and the Impact of Its Value on Stocks
In order to assess the impact of the US dollar on stocks, we compare the performance of the Dollar Index with the stocks of Wal-Mart (a big importer) and Boeing (a big exporter). The chart below clearly indicates that a drop in the US dollar leads to the underperformance of Wal-Mart over Boeing. In fact, the correlation between the two components has been a whopping 74 percent over the past few months with the Dollar Index (blue line) often leading the movement of the Wal-Mart / Boeing ratio (red line). The rationale for the correlation is simple. When the US dollar weakens, importers have less purchasing power so they are faced with one of two options, which is either to increase prices or take a hit to profits. Exporters on their hand find their goods automatically more competitively priced in the global market place, which only adds to earnings. Equity traders may find it useful to keep this information in mind when picking which companies to buy or sell.
A Deeper Look Into Who Wins
When we compare Boeing to Airbus – the US and French based companies competing to sell two of the biggest passenger planes in the world, the importance of the value of dollar can be understood further. Sales of Boeing’s Dreamliner have far outpaced those of Airbus’s A380, which has been plagued by delays and production problems. Furthermore, Boeing’s profitability prospects are far greater than that of Airbus, as the Dreamliner is priced in US dollars whereas Airbus’s products are priced in Euros. Given this pricing advantage, Airbus has gone so far as to cut the price of their mid-size A350 in half in order to draw more demand. Nevertheless, a quick look at the share prices of these respective companies gives an even clearer picture: over the course of the past year, shares of EADS (producer of Airbus) have fallen nearly 22 percent while shares of Boeing have climbed 11 percent. The markets have spoken.
Other American exporters have gained from the weaker dollar as well. IBM saw stronger-than-expected quarterly profit growth on the back of a 13 percent jump in revenue from the Middle East, Europe, and Africa while US markets only saw a 1 percent gain. Meanwhile American firms like Al-jon Manufacturing LLC in Iowa have benefited from a jump in demand from Asia for scrap steel with a lengthy waiting list until the end of the year.
Not Everyone Wins When the Dollar Dwindles
Simple logic tells you that when someone wins in a deal, someone else has got to lose. As of last year, 70 percent of the goods Wal-Mart sold were produced in China. While the company has started to turn towards India for less pricey goods, there is only so much the American superstore can do to offset the implications of a dwindling dollar. European and New Zealand companies have also run into major pitfalls as the weakness of the US dollar drove the value of the Euro, British pound and New Zealand dollar higher. Corporate earnings for European companies, such as UK fashion group Burberry, were stellar for the second half of the fiscal year as demand for luxury goods have skyrocketed. However, the company reported that the British Pound’s appreciation against not only the US dollar, but the Japanese yen as well, may slash revenues by a whopping 7 million pounds. Meanwhile, Paris-based L’Oreal saw revenues beat analyst estimates, with sales up 7.9 percent in the first quarter. The devil is in the details, though, as the sales figure does not account for exchange rate fluctuations. The rapid rise of the Euro during the quarter actually produced a negative 4.1 percent impact on sales.
The plunge of the dollar was perhaps worse for New Zealand companies, as the New Zealand dollar hit 25 year highs. Sanford, a fishing company based in Auckland, said that while demand out of Europe remained strong, exports to US markets plummeted as the company’s catches were far more expensive. Furthermore, foreign exchange losses for the firm amounted to more than NZ$7 million, which decimated earnings for the second half of the fiscal year.
Déjà vu – A Repeat of 2004?
European companies are no strangers to the impact of a dwindling dollar. Back in 2004, a crunch of the greenback sent the Euro to a record high of 1.3667. As a result, exporters like Volkswagen, which has no production facilities in the US, making the company even more susceptible to currency fluctuations, had their earnings slashed as the automaker faced a loss of $1 billion in the US in 2004 alone. LVMH faced a similar debacle, as the luxury goods producer had their profits cut in half during the year due to foreign exchange losses. While these companies had no choice but to take the hit, other exporters decided to take action. Italy-based clothier Benetton announced plans in late 2004 to shift more factories outside of the Euro-zone to lower costs in order to compete with rivals such as H&M, whose manufacturing costs were in US dollars.
Japanese companies aren’t typically viewed as being as vulnerable to currency shifts since the yen’s value is extremely low relative to the US dollar. However, 2004 also represented harsh times for exporters like Nintendo. While sales did not suffer in the US market, where stores faced a shortage of consoles in the run-up to Christmas, the company revised profit forecasts early in the year down 39 percent on foreign exchange losses. Nintendo was particularly affected by the dollar’s plunge since it holds about $5 billion worth of dollar-denominated deposits, which need to be revalued every year.
While foreign exchange losses are still an issue for companies who export goods to the US, many of them have learned the importance of hedging these losses. After a rough 2004, Volkswagen increased hedging so that the company was 75 percent covered against a future drop in the dollar from 40 percent in 2003. Following the lead of Italy’s Benetton, Volkswagen opted to shift production out of Europe to Mexico, whose peso was more closely linked to the dollar. Meanwhile, Japan’s Nintendo cut back on the amount of assets held in US dollars.
Looking Ahead, Canada and the Europe Remain the Most Vulnerable
Nevertheless, foreign companies still face a certain amount of exchange rate risk, and Canadian and European companies could remain the most assailable. The US is by far the biggest trade partner of Canada, with 85 percent of the country’s exports shipped to the US last year. During the month of January, the Canadian dollar eased back to 14 month lows against the greenback, subsequently leading to a jump in exports to the US. However, the status of Canada’s export sector may become increasingly precarious going forward, faced by the double-edged sword of commodity price and exchange rate risk. First, should commodity prices continue to ease back, the value of goods shipped out of the country could easily decline and erode Canada’s trade balance. Furthermore, if the Canadian dollar appreciates more throughout the second quarter as it has done in the first, the country’s primary trading partner may cut back on purchases of Canadian products and undermine the strength of the economy as a whole.
Europe faces a similar dilemma, with export-dependant Germany at the forefront, as the hasty appreciation of the Euro against the US dollar helped drive the 2006 Euro-zone trade balance into deficit for the first time since 2000. While the German trade balance has been buoyed to 13.8 billion euros by demand from within Europe, deficits with Russia, China, and Japan have soared amidst gains in energy prices along with marked weakness of the Chinese Yuan and Japanese yen. As a result, Germany and other countries within the Euro-zone will face even more pressure to build up domestic demand in order to pick up the slack of the export sector.
If the US dollar begins to bottom out at current levels however, expect the relationship between the Dollar Index and the ratio of importers / exporters to hold. Except this time, a rise in the dollar will begin to help importers and hurt exporters. According to our chart, when the dollar index rallied from 82.50 to 85.25 in December 2006, the ratio of Wal-Mart / Boeing increased from 0.51 to 0.55.
With the Euro hovering near its record highs and the British pound having breached the psychologically important 2.000 level, the extent of the US dollar’s weakness has finally been recognized. As we have seen in the past few months, the value of the US dollar is important not only for currency traders, but also for equity traders. It is hardly a coincidence that the US stock market hit an all time high around the same time that the US dollar reached multi decade lows against currencies like the British pound, New Zealand dollar and the Euro. The strength of those currencies has made US stocks attractive values for foreign investors and looking ahead, the value of the US dollar can be a useful tool for equity traders, especially those who are looking to buy or sell the shares of big US importers and exporters.
US Dollar and the Impact of Its Value on Stocks
In order to assess the impact of the US dollar on stocks, we compare the performance of the Dollar Index with the stocks of Wal-Mart (a big importer) and Boeing (a big exporter). The chart below clearly indicates that a drop in the US dollar leads to the underperformance of Wal-Mart over Boeing. In fact, the correlation between the two components has been a whopping 74 percent over the past few months with the Dollar Index (blue line) often leading the movement of the Wal-Mart / Boeing ratio (red line). The rationale for the correlation is simple. When the US dollar weakens, importers have less purchasing power so they are faced with one of two options, which is either to increase prices or take a hit to profits. Exporters on their hand find their goods automatically more competitively priced in the global market place, which only adds to earnings. Equity traders may find it useful to keep this information in mind when picking which companies to buy or sell.
A Deeper Look Into Who Wins
When we compare Boeing to Airbus – the US and French based companies competing to sell two of the biggest passenger planes in the world, the importance of the value of dollar can be understood further. Sales of Boeing’s Dreamliner have far outpaced those of Airbus’s A380, which has been plagued by delays and production problems. Furthermore, Boeing’s profitability prospects are far greater than that of Airbus, as the Dreamliner is priced in US dollars whereas Airbus’s products are priced in Euros. Given this pricing advantage, Airbus has gone so far as to cut the price of their mid-size A350 in half in order to draw more demand. Nevertheless, a quick look at the share prices of these respective companies gives an even clearer picture: over the course of the past year, shares of EADS (producer of Airbus) have fallen nearly 22 percent while shares of Boeing have climbed 11 percent. The markets have spoken.
Other American exporters have gained from the weaker dollar as well. IBM saw stronger-than-expected quarterly profit growth on the back of a 13 percent jump in revenue from the Middle East, Europe, and Africa while US markets only saw a 1 percent gain. Meanwhile American firms like Al-jon Manufacturing LLC in Iowa have benefited from a jump in demand from Asia for scrap steel with a lengthy waiting list until the end of the year.
Not Everyone Wins When the Dollar Dwindles
Simple logic tells you that when someone wins in a deal, someone else has got to lose. As of last year, 70 percent of the goods Wal-Mart sold were produced in China. While the company has started to turn towards India for less pricey goods, there is only so much the American superstore can do to offset the implications of a dwindling dollar. European and New Zealand companies have also run into major pitfalls as the weakness of the US dollar drove the value of the Euro, British pound and New Zealand dollar higher. Corporate earnings for European companies, such as UK fashion group Burberry, were stellar for the second half of the fiscal year as demand for luxury goods have skyrocketed. However, the company reported that the British Pound’s appreciation against not only the US dollar, but the Japanese yen as well, may slash revenues by a whopping 7 million pounds. Meanwhile, Paris-based L’Oreal saw revenues beat analyst estimates, with sales up 7.9 percent in the first quarter. The devil is in the details, though, as the sales figure does not account for exchange rate fluctuations. The rapid rise of the Euro during the quarter actually produced a negative 4.1 percent impact on sales.
The plunge of the dollar was perhaps worse for New Zealand companies, as the New Zealand dollar hit 25 year highs. Sanford, a fishing company based in Auckland, said that while demand out of Europe remained strong, exports to US markets plummeted as the company’s catches were far more expensive. Furthermore, foreign exchange losses for the firm amounted to more than NZ$7 million, which decimated earnings for the second half of the fiscal year.
Déjà vu – A Repeat of 2004?
European companies are no strangers to the impact of a dwindling dollar. Back in 2004, a crunch of the greenback sent the Euro to a record high of 1.3667. As a result, exporters like Volkswagen, which has no production facilities in the US, making the company even more susceptible to currency fluctuations, had their earnings slashed as the automaker faced a loss of $1 billion in the US in 2004 alone. LVMH faced a similar debacle, as the luxury goods producer had their profits cut in half during the year due to foreign exchange losses. While these companies had no choice but to take the hit, other exporters decided to take action. Italy-based clothier Benetton announced plans in late 2004 to shift more factories outside of the Euro-zone to lower costs in order to compete with rivals such as H&M, whose manufacturing costs were in US dollars.
Japanese companies aren’t typically viewed as being as vulnerable to currency shifts since the yen’s value is extremely low relative to the US dollar. However, 2004 also represented harsh times for exporters like Nintendo. While sales did not suffer in the US market, where stores faced a shortage of consoles in the run-up to Christmas, the company revised profit forecasts early in the year down 39 percent on foreign exchange losses. Nintendo was particularly affected by the dollar’s plunge since it holds about $5 billion worth of dollar-denominated deposits, which need to be revalued every year.
While foreign exchange losses are still an issue for companies who export goods to the US, many of them have learned the importance of hedging these losses. After a rough 2004, Volkswagen increased hedging so that the company was 75 percent covered against a future drop in the dollar from 40 percent in 2003. Following the lead of Italy’s Benetton, Volkswagen opted to shift production out of Europe to Mexico, whose peso was more closely linked to the dollar. Meanwhile, Japan’s Nintendo cut back on the amount of assets held in US dollars.
Looking Ahead, Canada and the Europe Remain the Most Vulnerable
Nevertheless, foreign companies still face a certain amount of exchange rate risk, and Canadian and European companies could remain the most assailable. The US is by far the biggest trade partner of Canada, with 85 percent of the country’s exports shipped to the US last year. During the month of January, the Canadian dollar eased back to 14 month lows against the greenback, subsequently leading to a jump in exports to the US. However, the status of Canada’s export sector may become increasingly precarious going forward, faced by the double-edged sword of commodity price and exchange rate risk. First, should commodity prices continue to ease back, the value of goods shipped out of the country could easily decline and erode Canada’s trade balance. Furthermore, if the Canadian dollar appreciates more throughout the second quarter as it has done in the first, the country’s primary trading partner may cut back on purchases of Canadian products and undermine the strength of the economy as a whole.
Europe faces a similar dilemma, with export-dependant Germany at the forefront, as the hasty appreciation of the Euro against the US dollar helped drive the 2006 Euro-zone trade balance into deficit for the first time since 2000. While the German trade balance has been buoyed to 13.8 billion euros by demand from within Europe, deficits with Russia, China, and Japan have soared amidst gains in energy prices along with marked weakness of the Chinese Yuan and Japanese yen. As a result, Germany and other countries within the Euro-zone will face even more pressure to build up domestic demand in order to pick up the slack of the export sector.
If the US dollar begins to bottom out at current levels however, expect the relationship between the Dollar Index and the ratio of importers / exporters to hold. Except this time, a rise in the dollar will begin to help importers and hurt exporters. According to our chart, when the dollar index rallied from 82.50 to 85.25 in December 2006, the ratio of Wal-Mart / Boeing increased from 0.51 to 0.55.
Saturday, April 21, 2007
Who/What is Keeping the U.S. Economy Afloat?
From the Big Picture:
This is the most cogent argument for what has been a key supporting element to the US markets: Overseas economic strength. Even as the US decelerates, the overseas strength, driven primarily by China, but with growth in Japan and the rest of the Pacific Rim, as well as Europe, is maintaining the global boom.
We have discussed over the past few Qs exporters, who can sell into those markets, and take advantage of the weak US currency. That continues to be the greatest market strength out there -- not so much their consumers, but their massive infrastructure development. And, as strong as the US markets appear, they continue to lag most world markets.
Barron's Mike Santoli sums it up nicely:
"THE REST OF THE WORLD IS CARRYING THE U.S. STOCK MARKET. Fast-galloping overseas economies, flush world capital markets and a sagging dollar fatten multinationals' earnings and furnish the fuel for commodity-related stocks to surge.
That's the takeaway from the earnings beats by Caterpillar (CAT) and Honeywell (HON) last week, the 22% jump in the Philadelphia Steel Producers index since March 5, the continued outperformance of foreign stock indexes, the seven-month high in copper and the run toward $700 an ounce in gold.
As a result, materials stocks are the new momentum favorites, and more broadly, traditionally cyclical sectors are being treated and valued as perpetual-growth vehicles -- a process even extending to sectors like railroads and utilities, now considered implicit plays on the commodity-demand boom."
This is the most cogent argument for what has been a key supporting element to the US markets: Overseas economic strength. Even as the US decelerates, the overseas strength, driven primarily by China, but with growth in Japan and the rest of the Pacific Rim, as well as Europe, is maintaining the global boom.
We have discussed over the past few Qs exporters, who can sell into those markets, and take advantage of the weak US currency. That continues to be the greatest market strength out there -- not so much their consumers, but their massive infrastructure development. And, as strong as the US markets appear, they continue to lag most world markets.
Barron's Mike Santoli sums it up nicely:
"THE REST OF THE WORLD IS CARRYING THE U.S. STOCK MARKET. Fast-galloping overseas economies, flush world capital markets and a sagging dollar fatten multinationals' earnings and furnish the fuel for commodity-related stocks to surge.
That's the takeaway from the earnings beats by Caterpillar (CAT) and Honeywell (HON) last week, the 22% jump in the Philadelphia Steel Producers index since March 5, the continued outperformance of foreign stock indexes, the seven-month high in copper and the run toward $700 an ounce in gold.
As a result, materials stocks are the new momentum favorites, and more broadly, traditionally cyclical sectors are being treated and valued as perpetual-growth vehicles -- a process even extending to sectors like railroads and utilities, now considered implicit plays on the commodity-demand boom."
Where Does Walmart Get It's Products?
A map detailing the percentage of Wal-Mart's products coming from foreign countries
Fun Ways of Viewing Boring Data
The video below is from Gapminder.org, an organization that turns really boring data into interactive video presentations. One of the cooler parts of their site allows you to plot time series data on multiple economic and development indicators collected by the World Bank and the United Nations Development Program. Check out this feature
Wednesday, April 18, 2007
Stagflation in 2007? No, Stagflation-Lite
My post below discusses the tension faced by the Fed, but doesn't go into the question, "Is the high inflation and slow growth of today similar to the "stagflation" experienced in the 1970s:
Here's The Big Picture on that question:
"For some reason, the word stagflation keeps creeping back into the lexicon. It really shouldn't be. As we have noted for quite some time, we are experiencing a form of "demi-stagflation." Growth is below the long term trend, inflation is above.Call it stagflation lite or blahflation, but it is not the 10% inflation, 1% growth of the 1970s. So why are so many concerned about stagflation?
• GDP growth expected in Q1 07 to be < 2%
• CPI = 2.7%
• Spreads between 10y TIPS and non-inflation-indexed Treasuries widened
• Fed governor Miskin notes that if inflation does not moderate "we would have to do something about it"
• GDP growth expectedMiskin notes that if inflation does not moderate "we would have to do something about it"
Caroline Baum has more details:
"Is it stagflation or is it just normal, late-cycle behavior of a lagging indicator?'' says Paul Kasriel, director of economic research at the Northern Trust Corp. in Chicago. ``In the stagflation of the '70s, energy prices were rising because of absolute declines in oil production. There was a wage-price spiral because of strong unions. Neither of these holds today.''
Inflation has the distinction of being a lagging economic indicator. The change in the CPI for services is one of seven components of the Index of Lagging Economic Indicators. A second laggard is the change in labor cost per unit of output, or "wage inflation,'' another faux concept. (Wages are the price of labor. Inflation is a general rise in the price level.)
What that means is that over time, these indicators have proved to turn up after the business cycle trough and down after the peak. "Inflation typically lags growth by about a year, so the slowdown in growth since the spring of last year has only just started to depress core CPI,'' says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. "The process has much further to run.'' As always, interesting stuff from Ms. Baum."
Here's The Big Picture on that question:
"For some reason, the word stagflation keeps creeping back into the lexicon. It really shouldn't be. As we have noted for quite some time, we are experiencing a form of "demi-stagflation." Growth is below the long term trend, inflation is above.Call it stagflation lite or blahflation, but it is not the 10% inflation, 1% growth of the 1970s. So why are so many concerned about stagflation?
• GDP growth expected in Q1 07 to be < 2%
• CPI = 2.7%
• Spreads between 10y TIPS and non-inflation-indexed Treasuries widened
• Fed governor Miskin notes that if inflation does not moderate "we would have to do something about it"
• GDP growth expectedMiskin notes that if inflation does not moderate "we would have to do something about it"
Caroline Baum has more details:
"Is it stagflation or is it just normal, late-cycle behavior of a lagging indicator?'' says Paul Kasriel, director of economic research at the Northern Trust Corp. in Chicago. ``In the stagflation of the '70s, energy prices were rising because of absolute declines in oil production. There was a wage-price spiral because of strong unions. Neither of these holds today.''
Inflation has the distinction of being a lagging economic indicator. The change in the CPI for services is one of seven components of the Index of Lagging Economic Indicators. A second laggard is the change in labor cost per unit of output, or "wage inflation,'' another faux concept. (Wages are the price of labor. Inflation is a general rise in the price level.)
What that means is that over time, these indicators have proved to turn up after the business cycle trough and down after the peak. "Inflation typically lags growth by about a year, so the slowdown in growth since the spring of last year has only just started to depress core CPI,'' says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. "The process has much further to run.'' As always, interesting stuff from Ms. Baum."
One Child Is Enough, Apparently
A recent study suggests that couples are better off with one child:
"In comparing identical twins, Kohler found that mothers with one child are about 20 percent happier than their childless counterparts; and while fathers' happiness gains are smaller, men enjoy an almost 75 percent larger happiness boost from a firstborn son than from a firstborn daughter. The first child's sex doesn't matter to mothers, perhaps because women are better than men at enjoying the company of both girls and boys, Kohler speculates.
Interestingly, second and third children don't add to parents' happiness at all. In fact, these additional children seem to make mothers less happy than mothers with only one child—though still happier than women with no children. "If you want to maximize your subjective well-being, you should stop at one child," concludes Kohler, adding that people probably have additional children either for the benefit of the firstborn or because they reason that if the first child made them happy, the second one will, too.
Thanks to Tyler Cohen at Marginal Revolution for bringing this to my attention.
"In comparing identical twins, Kohler found that mothers with one child are about 20 percent happier than their childless counterparts; and while fathers' happiness gains are smaller, men enjoy an almost 75 percent larger happiness boost from a firstborn son than from a firstborn daughter. The first child's sex doesn't matter to mothers, perhaps because women are better than men at enjoying the company of both girls and boys, Kohler speculates.
Interestingly, second and third children don't add to parents' happiness at all. In fact, these additional children seem to make mothers less happy than mothers with only one child—though still happier than women with no children. "If you want to maximize your subjective well-being, you should stop at one child," concludes Kohler, adding that people probably have additional children either for the benefit of the firstborn or because they reason that if the first child made them happy, the second one will, too.
Thanks to Tyler Cohen at Marginal Revolution for bringing this to my attention.
The Rich and The Rest
Bob Samuelson provides an overview of the economic problem that is the U.S. income distribution:
In a democracy, there is something unsettling about great extremes of wealth and poverty. One question today is whether rich Americans are claiming too much of the economic pie. Look at the latest astonishing estimates from economists Emmanuel Saez of the University of California at Berkeley and Thomas Piketty of the Paris School of Economics. They find that the richest 10 percent of the population received 44 percent of the pretax income in 2005. This was the highest since the 1920s and 1930s (average: 44 percent) and much higher than from 1945 to 1980 (average: 32 percent).
But the biggest gains occurred among the richest 1 percent. Their share of pretax income has gradually climbed from 8 percent in 1980 to 17 percent in 2005. Indeed, many others in the top 10 percent seem mainly upper middle class. For example, those in the richest 90th to 95th percentiles had incomes of about $110,000.
...As for what's caused greater inequality, we're also in the dark. The Reagan and Bush tax cuts are weak explanations, because gains have occurred in pretax incomes. Globalization, by increasing company sizes, may have boosted executive salaries and payouts. The economy also has become more competitive -- with more pressures on firms from foreign rivals, new technologies and the stock market. Pay practices de-emphasized "fairness" and focused on what the market would bear. Opportunities for huge gains -- from company start-ups, from dealmaking -- mushroomed.
...That said, the inequality debate is misleading. Up to a point, inequality is inevitable and desirable. The prospect of doing well encourages people to work hard, develop new skills and take risks. It anchors America's entrepreneurial spirit and economic success. Most of today's rich have earned -- not inherited -- their status. Among the top 1 percent, report Saez and Piketty, more than four-fifths of income comes from salaries and self-employment. In 1916, the top 1 percent relied far more heavily on income from dividends, interest and rent.
The question of whether the rich pay their "fair" share of taxes has triggered one of those debates in which both sides are half right. It's true, as liberals say, that the Bush administration pampered the rich. Tax cuts on capital gains (stock profits) and dividends weren't needed as incentives. Ending the estate tax would be similarly unwise. But it's also true, as conservatives say, that liberals popularize the fantasy that taxing the rich more will solve most budget problems.
It won't. The richest 10 percent already pay half of all federal taxes, including the 25 percent paid by the top 1 percent. Just how much these taxes could be raised without dulling economic incentives and stimulating massive tax avoidance is unclear. But increasing the taxes on the top 1 percent by 25 percent wouldn't cover even today's budget deficit, let alone pay for new programs (universal health insurance, more school aid) or baby boomers' retirement costs.
It would be healthier if the trend toward greater economic inequality reversed itself spontaneously. The poor aren't poor because the rich are richer. Their poverty reflects low skills, poor work habits or bad luck. But if the middle class thinks the rich are grabbing most of the gains from economic growth, they will feel resentful. The result could be a self-defeating debate over income redistribution, not growth. To paraphrase economist John Maynard Keynes: The rich are tolerable only so long as their gains can be held to bear some relation to roughly what they have contributed to society."
In a democracy, there is something unsettling about great extremes of wealth and poverty. One question today is whether rich Americans are claiming too much of the economic pie. Look at the latest astonishing estimates from economists Emmanuel Saez of the University of California at Berkeley and Thomas Piketty of the Paris School of Economics. They find that the richest 10 percent of the population received 44 percent of the pretax income in 2005. This was the highest since the 1920s and 1930s (average: 44 percent) and much higher than from 1945 to 1980 (average: 32 percent).
But the biggest gains occurred among the richest 1 percent. Their share of pretax income has gradually climbed from 8 percent in 1980 to 17 percent in 2005. Indeed, many others in the top 10 percent seem mainly upper middle class. For example, those in the richest 90th to 95th percentiles had incomes of about $110,000.
...As for what's caused greater inequality, we're also in the dark. The Reagan and Bush tax cuts are weak explanations, because gains have occurred in pretax incomes. Globalization, by increasing company sizes, may have boosted executive salaries and payouts. The economy also has become more competitive -- with more pressures on firms from foreign rivals, new technologies and the stock market. Pay practices de-emphasized "fairness" and focused on what the market would bear. Opportunities for huge gains -- from company start-ups, from dealmaking -- mushroomed.
...That said, the inequality debate is misleading. Up to a point, inequality is inevitable and desirable. The prospect of doing well encourages people to work hard, develop new skills and take risks. It anchors America's entrepreneurial spirit and economic success. Most of today's rich have earned -- not inherited -- their status. Among the top 1 percent, report Saez and Piketty, more than four-fifths of income comes from salaries and self-employment. In 1916, the top 1 percent relied far more heavily on income from dividends, interest and rent.
The question of whether the rich pay their "fair" share of taxes has triggered one of those debates in which both sides are half right. It's true, as liberals say, that the Bush administration pampered the rich. Tax cuts on capital gains (stock profits) and dividends weren't needed as incentives. Ending the estate tax would be similarly unwise. But it's also true, as conservatives say, that liberals popularize the fantasy that taxing the rich more will solve most budget problems.
It won't. The richest 10 percent already pay half of all federal taxes, including the 25 percent paid by the top 1 percent. Just how much these taxes could be raised without dulling economic incentives and stimulating massive tax avoidance is unclear. But increasing the taxes on the top 1 percent by 25 percent wouldn't cover even today's budget deficit, let alone pay for new programs (universal health insurance, more school aid) or baby boomers' retirement costs.
It would be healthier if the trend toward greater economic inequality reversed itself spontaneously. The poor aren't poor because the rich are richer. Their poverty reflects low skills, poor work habits or bad luck. But if the middle class thinks the rich are grabbing most of the gains from economic growth, they will feel resentful. The result could be a self-defeating debate over income redistribution, not growth. To paraphrase economist John Maynard Keynes: The rich are tolerable only so long as their gains can be held to bear some relation to roughly what they have contributed to society."
The Fed Can Rest Easy
As mentioned in previous posts, the Fed has been walking a tightrope between providing sufficient liquidity to support economic growth during a time of distress in some sectors of the economy, notably housing, while also keeping inflation in hand. This got a bit easier yesterday, when inflation data was surprisingly low in the United States, meaning the Fed can hold off on raising rates while still keeping a close eye on economic growth and inflation.
According to Lehman's Drew Matus (cited in today's FT):
"The inflation numbers give the Fed more breathing room. This gives them a little more time to wait and see and let things develop."
In a related story, going to graduate school in London just got a bit more expensive. The dollar is now trading 2 to 1 against the pound. Ouch!
According to Lehman's Drew Matus (cited in today's FT):
"The inflation numbers give the Fed more breathing room. This gives them a little more time to wait and see and let things develop."
In a related story, going to graduate school in London just got a bit more expensive. The dollar is now trading 2 to 1 against the pound. Ouch!
Tuesday, April 10, 2007
Should Clean Water Have a Price?
From Jesse Shapiro, Becker Center on Chicago Price Theory, University of Chicago, writing in this week's Forbes:
"Each year some 1.6 million people, most of them small children, die form diarrhea caused by poor water quality. Many of these deaths are avoidable. Anyone with a back-yard pool knows dirty water is easily made safe by using good old-fashioned chloring...so why could charging more (for Clorin, a water sanitizer) help solve this problem?...First, it might be that charging a price means only people who intend t use it will show up to buy. with free products there's a risk that people will take a sample with no intention of using it. I'll gladly accept a free subscription to a boring magazine; whether I'll read it is another question. Second, it could be that paying, or paying more, makes the buyer feel that he should use the product. This is why I'd finish an expensive bottle of wine even if it tasted like perfectly aged mouthwash, but I'd toss a cheap bottle with the same iffy flavor down the drain."
Fortunately, Dr. Shapiro tested the theory:
"In the spring of 2006, in collaboration with PSI, we sent marketers to visit 1,000 households in Lusaka, Zambia. At each house a marketer offered to sell a single bottle of Clorin at a randomly chosen discounted price. If the household agreed to buy Clorin at that price, we then surprised them with a second discount, again chosen randomly. here's what we found: Households that agreed to pay more for Clorin did use it more; their water was more likely to be chlorinated when we showed up to test it two weeks later. As for the surprise discount, we found that when we gave people a deal, it didn't affect how much Clorin they used. But there is some evidence that those who paid something were more likely to use their Clorin than those who got it for free. That is, the data hint that the act of paying in itself may make people more likely to put Clorin in their water...the results do show that pricing can help to get lifesaving products into the hands of those who will use them most. What's more, charging a price may cause people to use more than they otherwise would."
"Each year some 1.6 million people, most of them small children, die form diarrhea caused by poor water quality. Many of these deaths are avoidable. Anyone with a back-yard pool knows dirty water is easily made safe by using good old-fashioned chloring...so why could charging more (for Clorin, a water sanitizer) help solve this problem?...First, it might be that charging a price means only people who intend t use it will show up to buy. with free products there's a risk that people will take a sample with no intention of using it. I'll gladly accept a free subscription to a boring magazine; whether I'll read it is another question. Second, it could be that paying, or paying more, makes the buyer feel that he should use the product. This is why I'd finish an expensive bottle of wine even if it tasted like perfectly aged mouthwash, but I'd toss a cheap bottle with the same iffy flavor down the drain."
Fortunately, Dr. Shapiro tested the theory:
"In the spring of 2006, in collaboration with PSI, we sent marketers to visit 1,000 households in Lusaka, Zambia. At each house a marketer offered to sell a single bottle of Clorin at a randomly chosen discounted price. If the household agreed to buy Clorin at that price, we then surprised them with a second discount, again chosen randomly. here's what we found: Households that agreed to pay more for Clorin did use it more; their water was more likely to be chlorinated when we showed up to test it two weeks later. As for the surprise discount, we found that when we gave people a deal, it didn't affect how much Clorin they used. But there is some evidence that those who paid something were more likely to use their Clorin than those who got it for free. That is, the data hint that the act of paying in itself may make people more likely to put Clorin in their water...the results do show that pricing can help to get lifesaving products into the hands of those who will use them most. What's more, charging a price may cause people to use more than they otherwise would."
Monday, April 9, 2007
America's Trade Debate: Commentary from a Free Trader
To follow up on Martin Wolf's post in last week's FT discussed below, Jagdish Bhagwati argued in today's FT that 1) U.S. economic policy geared toward signing bilateral trade deals as a second best alternative to multilateral trade is undermining progress on the Doha Round of multilateral trade talks, and 2) That opponents of free trade who support minimum environmental and labor standards are actually economic protectionists using the environment and labor rights to justify mask their self-interested economic motives for reducing import competition.
In his own words, argument #1:
"First, they (bilateral deals) have diverted the attention of top policymakers from multilateral negotiations. Second, they have helped to undermine political support for trade liberalization in the U.S. Congress, chiefly among the democrats. Amid anxiety over wages and jobs, wrongly blamed on trade and globalisation, it makes no political sense to take one piffling PTA (preferential trade agreement) after another to Congress...Each time a congressman votes for it, he expends scarce political goodwill. This applies particularly to Democrats whose constituents include a high proportion of workers. Asking Congress members to go repeatedly to a poisoned well has reduced their willingness to do so."
Argument #2
"...the democrats insist on inclusion in trade treaties of labour and environmental standards as elements of "fair trade" in a tougher way than ever before. The old Democrats, previously more sympathetic to free trade, are playing along, some from changed conviction and others from changed circumstances. Such standards may be demanded out of empathy for others or they may be required because of fear and self interest. The latter motive is clearly at play. It is hoped by those terrified by competition from poor countries that raising standards and therefore costs abroad will moderate the competitive ability of foreign companies...But, instead of admitting that this is their game, they want to mask their demands behind the language of altruism.; oh, we are doing it for your workers. The hypocrisy is astonishing and offensive..."
In his own words, argument #1:
"First, they (bilateral deals) have diverted the attention of top policymakers from multilateral negotiations. Second, they have helped to undermine political support for trade liberalization in the U.S. Congress, chiefly among the democrats. Amid anxiety over wages and jobs, wrongly blamed on trade and globalisation, it makes no political sense to take one piffling PTA (preferential trade agreement) after another to Congress...Each time a congressman votes for it, he expends scarce political goodwill. This applies particularly to Democrats whose constituents include a high proportion of workers. Asking Congress members to go repeatedly to a poisoned well has reduced their willingness to do so."
Argument #2
"...the democrats insist on inclusion in trade treaties of labour and environmental standards as elements of "fair trade" in a tougher way than ever before. The old Democrats, previously more sympathetic to free trade, are playing along, some from changed conviction and others from changed circumstances. Such standards may be demanded out of empathy for others or they may be required because of fear and self interest. The latter motive is clearly at play. It is hoped by those terrified by competition from poor countries that raising standards and therefore costs abroad will moderate the competitive ability of foreign companies...But, instead of admitting that this is their game, they want to mask their demands behind the language of altruism.; oh, we are doing it for your workers. The hypocrisy is astonishing and offensive..."
Sunday, April 8, 2007
Federal Reserve and the U.S.'s Economic Outlook
The Jobs report released on Friday by the Department of Labor showed a 180,000 increase in non-farm payrolls, and an employment rate that had fallen to 4.4 percent. The report should increase the Fed’s confidence that job growth will keep the economy on a stable trajectory, even with consumer confidence at low levels and with the difficulties in housing. The report should also allow Fed chair Ben Bernanke to breath a little easier for the time being. The Fed has primarily been focused on reducing inflation, whereas some commentators--including former Fed chair Alan Greenspan!--have suggested that a slowing economy is the biggest risk to the U.S. The data suggested that the U.S. economy could get through the year okay, but tight labor market data and the inflation numbers suggest that the Fed will need to raise rates to reduce inflation pressures.
Expect the market to fall on Monday as the news above reduces the chances of a rate decrease at the next FOMC meeting.
Expect the market to fall on Monday as the news above reduces the chances of a rate decrease at the next FOMC meeting.
Wednesday, April 4, 2007
Are Bilaterals Good or Bad?
There has been a lot of talk recently about the proliferation of bilateral trade agreements. Are they worth pursuing? Will they enhance or decrease the likelyhood of a multilateral trade deal in the future? The most recent round of multilateral trade talks (Doha Round) has stalled so countries have turned to negotating bilitaral deals which are much easier to negotiate and where the U.S. can take off the table its subsidies to politically sensitive areas.
The real question in this debate boils down to whether or not bilaterals are "building blocks" or "stumbling blocks" to multilateral trade. Underpinning pro-trade liberalization arguments is the number produced by the Peterson Institute for International Economics that complete trade liberalization would bring $500 billion in benefits to the U.S. per year.
The proponents of bilateral trade deals offer the following arguments:
1) More trade is good, so if we can't get a multilateral deal, bilaterals are the next best.
2) Bilateral deals can offer political benefits; Following 9/11 the U.S. negotiated trade deals with predominantly Muslim countries (Bahrain, Jordan, Morocco).
3) If we don't do bilateral deals, other countries will continue to negotiate them amongst themselves, at the expense of the United States.
For the opposing arguments, I refer to Martin Wolf in today's FT who comments on the recent deal awaiting approval by the U.S. congress between the U.S. and South Korea:
"The number of preferential trade agreements has exploded upwards in recent years. An agreement between the US and South Korea is itself a quantum leap in this progression. The US was the world's largest importer of merchandise products and South Korea the sixth largest in 2005. The US is also the world's largest importer of commercial services, while South Korea is the 12th largest. Other countries will be desperate to avoid the adverse effects upon them. This makes probable yet another jump in the prevalence of such agreements. That will have at least two further economic consequences. First, an increasing proportion of the world's trade is sure to be governed by the diverse rules of origins and special procedures of a host of discriminatory bilateral and plurilateral agreements. That guarantees an explosion in administrative complexity. Second, every further bilateral agreement will alter the degree of preference enjoyed by existing suppliers. That guarantees an explosion of business uncertainty. These are indeed inevitable results of what Prof Bhagwati has called the "spaghetti bowl" of preferences.
The political consequences of this development are, however, at least as important. First, a company's market access will depend increasingly on the power of its own government to lever open other markets rather than its competitiveness. Second, big powers will compete with one another to wrest more favourable terms for their own producers. The emergence of such power-driven trading blocs is a world away from the hopes of the founding fathers of the Gatt system.
Political and diplomatic capacity is also limited. While the US is focusing on preferential agreements, the Doha round of negotiations is incomplete. The EU is at least as culpable as the US for the failure to complete a round that would bring far greater benefits to world trade than any conceivable bilateral agreements. But if the attention of the US is diverted from multilateral to bilateral trade agreements, the Doha round is even less likely to be completed.
I am not totally opposed to the idea of preferential trade agreements. Regional agreements at least have a natural political and economic logic. More imaginatively, a free trade agreement open to the world could be the best route to global liberalisation, after the Doha round. Liberally minded countries could agree to a single free trade agreement open to any country prepared to sign up. Such an agreement could then ultimately be a template for global free trade.
As it is, however, it is far more likely that the move to discriminatory trade will end up fragmenting the world economy rather than integrating it in this imaginative way. If they were so minded, the members of the World Trade Organisation could sign some 10,000 different bilateral agreements among themselves. Does anybody think that this would be sensible? If not, at what point would the Gadarene rush cease? If the US, as the dominant economic player, makes discrimination a central principle of its own policy, how can it fail to become a global model, with predictable and disturbing results?"
The real question in this debate boils down to whether or not bilaterals are "building blocks" or "stumbling blocks" to multilateral trade. Underpinning pro-trade liberalization arguments is the number produced by the Peterson Institute for International Economics that complete trade liberalization would bring $500 billion in benefits to the U.S. per year.
The proponents of bilateral trade deals offer the following arguments:
1) More trade is good, so if we can't get a multilateral deal, bilaterals are the next best.
2) Bilateral deals can offer political benefits; Following 9/11 the U.S. negotiated trade deals with predominantly Muslim countries (Bahrain, Jordan, Morocco).
3) If we don't do bilateral deals, other countries will continue to negotiate them amongst themselves, at the expense of the United States.
For the opposing arguments, I refer to Martin Wolf in today's FT who comments on the recent deal awaiting approval by the U.S. congress between the U.S. and South Korea:
"The number of preferential trade agreements has exploded upwards in recent years. An agreement between the US and South Korea is itself a quantum leap in this progression. The US was the world's largest importer of merchandise products and South Korea the sixth largest in 2005. The US is also the world's largest importer of commercial services, while South Korea is the 12th largest. Other countries will be desperate to avoid the adverse effects upon them. This makes probable yet another jump in the prevalence of such agreements. That will have at least two further economic consequences. First, an increasing proportion of the world's trade is sure to be governed by the diverse rules of origins and special procedures of a host of discriminatory bilateral and plurilateral agreements. That guarantees an explosion in administrative complexity. Second, every further bilateral agreement will alter the degree of preference enjoyed by existing suppliers. That guarantees an explosion of business uncertainty. These are indeed inevitable results of what Prof Bhagwati has called the "spaghetti bowl" of preferences.
The political consequences of this development are, however, at least as important. First, a company's market access will depend increasingly on the power of its own government to lever open other markets rather than its competitiveness. Second, big powers will compete with one another to wrest more favourable terms for their own producers. The emergence of such power-driven trading blocs is a world away from the hopes of the founding fathers of the Gatt system.
Political and diplomatic capacity is also limited. While the US is focusing on preferential agreements, the Doha round of negotiations is incomplete. The EU is at least as culpable as the US for the failure to complete a round that would bring far greater benefits to world trade than any conceivable bilateral agreements. But if the attention of the US is diverted from multilateral to bilateral trade agreements, the Doha round is even less likely to be completed.
I am not totally opposed to the idea of preferential trade agreements. Regional agreements at least have a natural political and economic logic. More imaginatively, a free trade agreement open to the world could be the best route to global liberalisation, after the Doha round. Liberally minded countries could agree to a single free trade agreement open to any country prepared to sign up. Such an agreement could then ultimately be a template for global free trade.
As it is, however, it is far more likely that the move to discriminatory trade will end up fragmenting the world economy rather than integrating it in this imaginative way. If they were so minded, the members of the World Trade Organisation could sign some 10,000 different bilateral agreements among themselves. Does anybody think that this would be sensible? If not, at what point would the Gadarene rush cease? If the US, as the dominant economic player, makes discrimination a central principle of its own policy, how can it fail to become a global model, with predictable and disturbing results?"
Victimized by Bad US Trade Policy
I can finally say that I was personally (negatively) effected by bad U.S. trade policy. Last week, the United States slapped tariffs on imports of glossy paper from China claiming that "the glossy paper is subsidized by the Chinese state". The US commerce department said they had no choice but "to act in a petition filed by an aggrieved U.S. paper company whose sales have been undercut by cheap Chinese imports." This is no good for me and the non-profit I work for as we print our electronic newsletters on glossy paper and send them to our funders. I was pretty shocked last week when color copies of our newsletter on glossy paper cost $15 for 16 pages! Apparently cheap Chinese paper has not yet found its way to the DC market; or it has but is about to get much much more expensive.
I find it funny/depressing that we use words like "cheap, unfair, predatory, ect." to describe China's subsidies of products imported to the U.S. By subsidizing paper, the Chinese are doing two things, 1) Making a calculated decision that it is worth taxing their people for the sake of the well being of their glossy paper industry, and 2) Indirectly subsidizing buyers of glossy paper in the United States, such as the company I work for. Do they think that the market for glossy paper is an excessively profitable enterprise? Whatever their reasoning for the subsidy is, it benefits my company, and on the whole it benefits the United States.
Instead of accusing the Chinese of attacking our suppliers of glossy paper, Secretary Paulson should:
a) Thank them for not subsidizing something else, like terrorism, their military, internet watchdog services, or the constuction of prisons to lock up their political dissidents. That would also make for a funny letter.
b) Laugh at them for providing subsidies to the glossy paper industry (am I missing something; is glossy paper a really valuable resource that the Chinese think will command high prices in the future? We're subsidizing research in the hard sciences and their subsidizing companies that cut down trees and process wood? I feel like I'm going crazy here)
c) At the very least commerce could calulate the benefits that the imports of glossy paper from China bring to the U.S., find that they outweigh the costs born by US suppliers of the glossy stuff, and (through the tax system) use a large chunk of the benefit to pay off the U.S. suppliers hurt by the imports.
I find it funny/depressing that we use words like "cheap, unfair, predatory, ect." to describe China's subsidies of products imported to the U.S. By subsidizing paper, the Chinese are doing two things, 1) Making a calculated decision that it is worth taxing their people for the sake of the well being of their glossy paper industry, and 2) Indirectly subsidizing buyers of glossy paper in the United States, such as the company I work for. Do they think that the market for glossy paper is an excessively profitable enterprise? Whatever their reasoning for the subsidy is, it benefits my company, and on the whole it benefits the United States.
Instead of accusing the Chinese of attacking our suppliers of glossy paper, Secretary Paulson should:
a) Thank them for not subsidizing something else, like terrorism, their military, internet watchdog services, or the constuction of prisons to lock up their political dissidents. That would also make for a funny letter.
b) Laugh at them for providing subsidies to the glossy paper industry (am I missing something; is glossy paper a really valuable resource that the Chinese think will command high prices in the future? We're subsidizing research in the hard sciences and their subsidizing companies that cut down trees and process wood? I feel like I'm going crazy here)
c) At the very least commerce could calulate the benefits that the imports of glossy paper from China bring to the U.S., find that they outweigh the costs born by US suppliers of the glossy stuff, and (through the tax system) use a large chunk of the benefit to pay off the U.S. suppliers hurt by the imports.
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