Twenty-Cent Paradigms

Obama on Africa

2009-07-14T11:15:00.003-04:00

In his speech in Ghana last week, President Obama cast his lot with the school of thought that emphasizes the centrality of institutions in development. He said:

Development depends on good governance. That is the ingredient which has been missing in far too many places, for far too long. That's the change that can unlock Africa's potential. And that is a responsibility that can only be met by Africans.

The speech got mostly good marks from Paul Collier, Bill Easterly and Chris Blattman.

Compared to What?

2009-07-14T10:50:00.003-04:00

One of the difficulties of assessing macroeconomic policies like the fiscal stimulus is that doing so requires comparing the performance of the economy with a "counterfactual" - what would have occurred in the absence of the policy. Of course, we do not really know the counterfactual.

Last night, Barney Frank, Chair of the House Financial Services Committee, explained it well to Jon Stewart:

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A Nightmare, Condensed

2009-07-09T22:34:00.005-04:00

Reliving the traumas of the first year of graduate school, I stumbled upon this: A "Cram101 Textbook Outline" of Mas-Colell, Whinston and Green?!? Veterans of economics PhD programs will realize that is a strange idea - who would ever conceive such a thing?

While Mas-Colell could stand to be shorter (and lighter!), I can't imagine how it could be "condensed" - if it were any more dense, light might not escape from it.

Hmmm... I am curious to see what might be inside, but for now I'll stick by my recommendation of Varian's book (and, surreptitiously, its baby brother) for anyone seeking to start out on graduate microeconomics.

The Theory of the Blackberry Class

2009-07-08T21:53:00.003-04:00

In the Times last week, Daniel Gross revisited The Theory of the Leisure Class, the most famous work of Carleton College's most famous alumnus, Thorstein Veblen. Though much of what Veblen wrote continues to be relevant today, Gross notes that conspicuous leisure no longer seems to be a preferred way for people to display their wealth. Indeed, quite the opposite:

In the contemporary money culture, to be at leisure, to be idle, is to be irrelevant. After Bank of America acquired Merrill Lynch, John Thain, the former chief executive of Merrill, was pushed out, in part because he insisted on going skiing at Vail over Christmas and wanted to attend the World Economic Forum in Davos amid the company’s continuing crisis. A great many people can afford not to work and could spend their time shuttling between multiple homes, eating fabulous meals and playing golf. Yet they continue to work around the clock. Of course, the private jet, the BlackBerry and the Internet allow people to do all of the above. But among Type-A, self-made members of the leisure class, there’s a sort of reverse prestige associated with leisure. At Davos, which is filled with conspicuous consumers, the only people who ski are the journalists.

Ezra Klein has an explanation: unlike in Veblen's era, when tycoons derived their income from capital, their contemporary equivalents - investment bankers, CEOs, professional athletes etc. - are the beneficiaries of increasing disparities in labor income. Klein writes:

Veblen, who died in 1929, saw a large overclass that earned most of its wealth through returns on capital. Essentially, their money made money for them. Which gave them time to hang about and conspicuously consume. In the period after his death, that overclass shrank substantially, first because the Great Depression battered them and then because the New Deal disadvantaged them. But by the start of the 21st century, they were back. At least in terms of wealth concentration. Their money, however, wasn't coming from capital returns. It was coming from wages and salaries. They were -- gasp! -- working.

Tire Tracks Trade Telltale?

2009-07-07T16:15:00.004-04:00

The US International Trade Commission has recommended safeguard tariffs on Chinese tires. The ITC's announcement says:

In accordance with Section 421 of the Trade Act of 1974, we have determined that imports of certain passenger vehicle and light truck tires from China are being imported into the United States in such increased quantities that they are causing market disruption to the domestic industry producing such tires. Under Section 421(f) of the Act, we have the responsibility of recommending actions that will remedy the market disruption. We have considered the relevant factors set out in the statute, the written and oral submissions of all parties, and other information obtained in the investigation.
To remedy the market disruption caused by rapidly increasing subject imports, we propose that the President, for a three-year period, impose a duty, in addition to the current rate of duty, on imports of certain passenger vehicle and light truck tires from China. This duty would be 55 percent ad valorem in the first year, 45 percent ad valorem in the second year, and 35 percent ad valorem in the third year. In our opinion, these tariff levels would remedy the market disruption that we have found to exist.

See also this Reuters story. The recommendation next goes to the President. Recalling that Obama's views on trade were somewhat murky during the campaign, Greg Mankiw suggests his determination in this case will be revealing. "This Chinese tire case may be one indication of the president's true feelings about trade."

Although safeguard tariffs are explicitly protectionist, not all "free traders" are opposed to them. While trade theory emphasizes the gains from trade by comparing welfare under different policies in equilibrium, much of the public concern over trade really comes from the dislocation associated with the transition between equilibria. By providing a mechanism to cushion the adjustment, safeguards may help reduce opposition to trade liberalization. Moreover, safeguards may be a preferable alternative to the more frequently utilized antidumping actions. A 2005 article about antidumping in Foreign Affairs (JSTOR) argued:

A better way to protect industries adjusting to increased competition would be through the increased use of "safeguard tariffs," a type of trade barrier that is explicitly temporary. Increased use of safeguards may fall short of the free-trade ideal, but they cost the U.S. economy far less than do antidumping tariffs. (When tariffs are in place for more than three years, the WTO allows countries whose exports are affected by the safeguards to levy retaliatory tariffs.) Like antidumping duties, safeguards can be put in place only if the ITC determines that specific imports are hurting a domestic industry. The legal hurdle for getting a safeguard, however, is higher: unlike antidumping tariffs, which can be levied when imports merely cause material injury, safeguards are permissible only when the ITC finds that no other factor is more important than imports in causing harm to a U.S. industry. In return for the higher standard of injury with safeguards, import-competing firms in the United States do not have to show that the foreign firms took any particular actions. No consideration is given in safeguard determinations as to whether trade is fair or unfair.

The law governing safeguard tariffs also gives the president an opportunity to balance the needs of the import-competing community against the interests of the rest of the country. Although the ITC issues a recommendation, the president, according to the legislation, has the discretion to impose trade barriers as he sees fit, balancing "the short- and long-term economic and social costs" of the safeguard tariffs with "other factors related to the national economic interest of the United States." And in return for trade barriers, the domestic industry must put forward a plan for adjustment and show progress in making the adjustment--or face the prospect of having the safeguard tariffs removed by presidential action.

The authors of that article? Greg Mankiw and Phil Swagel. While it will be interesting to see how the President deals with this, it would be a stretch to proclaim him a "protectionist" if he follows the ITC's recommendation.

Off for the Week

2009-06-27T12:50:00.003-04:00

I'll be on vacation next week, and I intend to eschew glowing rectangles while I'm gone, so there won't be anything new here for a while.

The MPC is Very Low

2009-06-26T23:33:00.004-04:00

The BEA reports disposable income increased by $178 billion in May, while consumption increased $25 billion. In the textbook Keynesian framework, that implies an extremely small marginal propensity to consume of 0.14 (25/178). That, in turn, means a modest multiplier effect. While expansionary fiscal policy is still the right thing to do, a smaller multiplier means a larger stimulus is necessary to achieve a given increase in output.

Of course, the fluctuation in the MPC serves to highlight the limitations of the "consumption function" approach...

Another implication of incomes growing faster than consumption is an increasing savings rate. In May, the savings rate was 6.9%, which means we've quickly and painfully re-attained historically "normal" levels, according to this chart at Economix, after hovering near zero over the past several years. More domestic saving also means less borrowing from the rest of the world, which is reflected in a narrowing current account deficit.

On Second Thought

2009-06-25T02:10:00.008-04:00

They'll take the money, the Enquirer reports:

Turns out Warren County Commissioners will take the $1.87 million in stimulus dollars some of its members eagerly wished to return to the U.S. Treasury in April.
The county leaders voted Tuesday to apply for the Energy Efficiency and Conservation Block Grant and use it toward a $13 million expansion of the Common Pleas Court building in Lebanon, a top-priority project this year in Warren County.

Indeed, like I said.

Cap and Trade: Bargain Insurance

2009-06-25T01:18:00.008-04:00

The Congressional Budget Office (CBO) has estimated the cost of the Waxman-Markey "cap and trade" bill, and found that it is modest - about $22 billion ($175 per capita) in 2020. That is an estimate of gross costs, and does not take into account the benefits of reducing global warming.

The benefits may be quite large. Separately, the CBO has analyzed the likely effects of global warming. Though they do not put a dollar value on it, $175 per year seems like a small price to (partly) avoid this: While there is some imprecision in estimating the exact implications of carbon emissions for the climate and the consequent economic costs, it is rational to pay small costs to reduce the probability of really, really, really bad outcomes. That is, in essence, why we buy insurance. Though I haven't (yet) managed to crash a car, it makes sense for me to write a check to a lovable, British-accented Gecko who will protect me from some the consequences if I ever do. In this case, the potential consequences are far worse than a car accident, and the costs of insurance are considerably less.

Moreover, as Ezra Klein notes, the cost estimates are likely overstated. Along those lines, Paul Krugman reminds us that market economies can adapt to relative price changes; he writes:

The point is that we need to be clear about who are the realists and who are the fantasists here. The realists are actually the climate activists, who understand that if you give people in a market economy the right incentives they will make big changes in their energy use and environmental impact. The fantasists are the burn-baby-burn crowd who hate the idea of using government for good, and therefore insist that doing the right thing is economically impossible.

The Engaged University?

2009-06-19T01:31:00.004-04:00

An e-mail to faculty from Provost Herbst concludes:

I look forward to an exciting and rewarding academic year and ask you to join me in engaging our students in all facets of their Miami experience.

Does that mean that we're supposed to join in on stuff like this?

Personally, I'd prefer to stick with engaging our students in some facets of their Miami experience.

Keep the (Fiscal) Pedal to the Metal

2009-06-19T00:34:00.009-04:00

And the thing to the floor...

The stimulus bill passed in February was somewhat a watered-down compromise at the time, and the recession has since proven even worse than expected. Brad DeLong amended a chart made by CEA chair Christina Romer and Biden economic advisor Jared Bernstein during the stimulus debate. He writes:

So my first point is that the Obama administration's federal fiscal stimulus programmes are on the low side of what is appropriate by a substantial margin. This is the largest economic downturn since the Great Depression and the standard tools of expansionary monetary policy are tapped out and broken right now.
My second, related point is that the need for federal-level fiscal expansion is reinforced by what state governments are doing right now. The federal government's discretionary actions are expanding aggregate demand by about $400 billion over fiscal year 2010, but state governments are right now cutting their spending and raising their taxes in order to offset this federal fiscal expansion more or less completely. On net, the government sector will be on autopilot as far as discretionary policy moves to stimulate the economy are concerned: federal-level expansion is offset and neutralised by state-level fiscal contraction. This is not an appropriate macroeconomic policy stance: this is the largest economic downturn since the Great Depression.

That is from his contribution to a roundtable discussion at The Economist of a column by Romer in which she revisits the recession that interrupted the recovery from the Great Depression in 1937. She writes:

The recovery from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war. But the truth is the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid. Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%. The second world war aside, the United States has never experienced such sustained, rapid growth.
However, that growth was halted by a second severe downturn in 1937-38, when unemployment surged again to 19% (see chart). The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy.

Therefore,

The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow. In this regard, not only should we not prematurely stop Recovery Act spending, we need to plan carefully for its expiration. According to the Congressional Budget Office, the Recovery Act will provide nearly $400 billion of stimulus in the 2010 fiscal year, but just over $130 billion in 2011. This implies a fiscal contraction of about 2% of GDP. If all goes well, private demand will have increased enough by then to fill the gap. If that is not the case, broad policy support may need to be sustained somewhat longer.

It sounds like she is laying the groundwork to follow DeLong's advice. That may be hard to pull off, politically, as Andrew Leonard notes polls show concern about the federal deficit (as they did in 1935 and 36, Krugman points out).

In his column, Paul Krugman also argued it is not the time to let up:

The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it’s déjà vu all over again — literally.
For this is the third time in history that a major economy has found itself in a liquidity trap, a situation in which interest-rate cuts, the conventional way to perk up the economy, have reached their limit. When this happens, unconventional measures are the only way to fight recession.
Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy. In previous liquidity-trap episodes, policy makers gave in to these pressures far too soon, plunging the economy back into crisis. And if the critics have their way, we’ll do the same thing this time.

Update (6/21): Catherine Rampell of Economix puts those poll results in perspective:

2009’s federal deficit is projected to be a larger percentage of G.D.P. (12 or 13 percent) than it has been any year since 1945, and yet a measly 5 percent of Americans are complaining that deficit/debt/budget issues are the country’s biggest problem.

Gilded Angst

2009-06-17T11:02:00.004-04:00

The traumatic effects of the 1923 hyperinflation linger in the German monetary psyche. This has been manifested in the overly-restrictive policies of the European Central Bank and now, in this:

Long attracted to the safety of solid gold, Germans will soon be able to sate their appetite for the yellow metal as easily as buying a chocolate bar after plans were announced on Tuesday to install gold vending machines in airports and railway stations across the country.
The venture by the TG-Gold-Super-Markt company, based near Stuttgart, aims to build on soaring retail interest in gold purchases after a loss in confidence in a range of other investments as a result of the financial crisis.

That comes to my attention via Yves Smith, who says "you cannot make this stuff up."

Update: More on this from the Times.

Internecine Strife

2009-06-09T21:14:00.006-04:00

Someone's been spilling some of the beans about the fights within the Obama economic team. The Times has the scoop, including:

[Council of Economic Advisors Chair Christina] Romer was joking, she said in an interview, adding, “There are only a few times that I felt like smacking Larry.” Yet few laughed in the president’s presence.

"Larry" being National Economic Council chair Lawrence Summers.

Could it be that the other other members of the economic team resent the "brilliant but supercilious" Summers because he got a better office? That's what the graphic accompanying the article seems to imply: Of course, intra-administration battles over economic policy are nothing new... indeed, it would be strange if there wasn't any. TNR has a slideshow of the "Economic Feuds" in administrations going back to FDR.

As Matthew Yglesias notes, the real question is who is leaking and why?

The all-time classic of the economic advisor leak genre remains William Greider's 1981 Atlantic Monthly piece wherein David Stockman reveals the existence of the "magic asterisk."

Time to End the Amenities Arms Race?

2009-06-09T17:51:00.003-04:00

In the middle of a rather depressing story about Reed College's financial woes, I did find some encouragement in this:

When he talks about Reed’s short-term response to the recession, [Reed President Colin] Diver concedes that he is torn, wondering whether a broader reassessment would be in order.
Perhaps it would be a good thing, he said, if the recession could refocus college administrators on the quality of higher education, rather than on investments in climbing walls (Reed does not have one) and other “country club” aspects of college life that have fueled an academic arms race reliant on tuition increases and fund-raising.
“The catering to consumer tastes — I keep trying to say, we are in the education business,” Mr. Diver said, describing the pressure to keep up with wealthier colleges and expressing a frustration rarely voiced publicly by college presidents. “The whole principle behind higher education is, we know something that you don’t. Therefore, we shouldn’t cater to them.”

Amen to that!

While I would attribute the increase in the relative price of higher education primarily to Baumol's cost disease, the positional arms race in amenities is no doubt an important secondary factor. Hopefully the recession will finally force a change in priorities.

Of course, I say that secure in the knowledge that the finishing touches are being applied to the new FSB building...

Hydraulic Keynesianism, Indeed

2009-06-04T00:42:00.005-04:00

A.W. Phillips, who famously noted the relationship between inflation and employment that became the "Phillips curve," was also mechanically inclined... check out the Phillips machine, which models the stocks and flows of the economy with water circulating through a contraption of tanks, valves, pumps and tubes.

For more, see also this Guardian article.

Shoot Out at the Aid Corral

2009-06-04T00:20:00.004-04:00

I think the message is that foreign aid is cool uptown, but not downtown. Development aid booster Jeffrey Sachs (Columbia) and critic William Easterly (NYU) are at it again, and this time it's personal.... (Dambisa Moyo is in on it too; she used to work at Goldman Sachs, which is downtown... coincidence?).

Mark Thoma has rounded up their exchange at Economist's View, and Easterly summarizes at Aid Watch.

Nancy Birdsall sees common ground beneath all the sturm und drang:

I am with the majority of students of aid who agree with both of them, yes both of them, on one thing they actually agree on: that aid has made a difference in improving people’s lives and that there ought to be more of it. You wouldn’t know that what they disagree about is not whether aid “works” but how aid programs should be designed and implemented – a subject that doesn’t get headlines but matters.

The Keynes That Can Be Diagrammed

2009-05-27T21:41:00.005-04:00

is not the true Keynes...

When I teach the IS-LM / AS-AD apparatus to my intermediate macro students, I preface it with the caveat that some believe that the "textbook" Keynesian model is not a correct representation of the General Theory. Roger E.A. Farmer is among them. He writes:

In the FT’s Economists’ Forum, Benn Steil wrote a stimulating piece in which he argued that Keynes was wrong. His argument is that interpretations of Keynesian economics are all based on the assumption that wages and prices are sticky. But wages and prices are not sticky. Ergo - Keynes was wrong. Mr. Steil and I are in complete agreement that the Keynesians, interpreted in this way are, to use a technical term, out to lunch. But that does not imply that Keynes was wrong. At least not entirely wrong. Far from it.
My emeritus colleague, Axel Leijonhufvud, made a distinction in his 1966 book, on Keynesian Economics and the Economics of Keynes, between Keynes and the Keynesians. He meant that orthodox Keynesian interpretations of the General Theory, that began with influential papers by John Hicks in England and Alvin Hansen in the US, got it all wrong.

Keynes said three things in the General Theory. First: the labour market is not cleared by demand and supply and, as a consequence, very high unemployment can persist forever. Second: the beliefs of market participants independently influence the unemployment rate. Third: It is the responsibility of government to maintain full employment.

He was right on all three counts. But he was wrong about something else. Keynes thought that consumption depends on income. Two decades of research on the consumption function, following world war two, led to a different conclusion. Consumption, and this is two thirds of the economy, depends not on income but on wealth. This is no small matter: the theory of the multiplier and the implication that fiscal policy can get us out of the current crisis rests on exactly this point.

Whether the "Keynesians" got Keynes right and whether Keynes was right are separable issues. On the former, I am a little more sympathetic to the textbook version - it seems to me a correct, but highly incomplete, representation of what Keynes said in the General Theory. On the latter point, Farmer goes on to argue that because (in his view) consumption is dependent on wealth, not income, fiscal policies intended to raise demand through an increase in disposable income will not be effective. Instead, policy needs to focus on asset prices:

Where does this leave us? Keynes was right about three key points. 1) High unemployment can persist forever because the market is not self-correcting. 2) Confidence matters. 3) Government can and should intervene to fix things. But the orthodox Keynesians are wrong: fiscal policy cannot provide a permanent fix to the problem of high unemployment. We need a new approach that directly attacks a lack of confidence in the asset markets by putting a floor and a ceiling on the value of the stock market through direct central bank intervention.

Offhand, it seems to me that using monetary policy to prop up the stock market is not so radically different from increasing "M" in the textbook model. The transmission mechanism is different: Farmer would have the central bank buy stocks, instead of bonds, as it does in conventional open market operations (or instead of dropping money from helicopters, or burying it in bottles...), but the end result would still be an increase in nominal demand.

I suspect I may be missing something - Farmer had limited space to make his argument and the "textbook" Keynesian framework is pretty engrained in my thinking, so it is hard for me to think of these issues outside of it. I'll look forward to the longer version in his forthcoming books.

Too Low for Zero

2009-05-26T23:57:00.005-04:00

The Taylor rule describes how the Fed adjusts monetary policy (by changing the target for the Fed funds rate) in response to output and inflation. The San Francisco Fed's Glenn Rudebusch plugged the Fed's forecasts for inflation and the output gap into the Taylor rule, and found that the Fed funds rate should be headed deep into negative territory:The problem is that nominal interest rates cannot be negative; it is better to hold money and earn no interest than lend it and get less back in the future. Thus, monetary policy is up against the "zero lower bound" (which it reached in Dec. 2008, when the Fed lowered the Fed funds target to a range of 0-0.25%), forcing the Fed to improvise. Rudebusch explains:

Toward the end of 2008, the recession deepened with the prospect of a substantial monetary policy funds rate shortfall. In response, the Fed expanded its balance sheet policies in order to lower the cost and improve the availability of credit to households and businesses. One key element of this expansion involves buying long-term securities in the open market. The idea is that, even if the funds rate and other short-term interest rates fall to the zero lower bound, there may be considerable scope to lower long-term interest rates. The FOMC has approved the purchase of longer-term Treasury securities and the debt and mortgage-backed securities issued by government-sponsored enterprises. These initiatives have helped reduce the cost of long-term borrowing for households and businesses, especially by lowering mortgage rates for home purchases and refinancing.

In terms of overall size, the Fed's balance sheet has more than doubled to just over $2 trillion. However, this increase has likely only partially offset the funds rate shortfall, and the FOMC has committed to further balance sheet expansion by the end of this year. Looking ahead even further over the next few years, the size and persistence of the monetary policy shortfall suggest that the Fed's balance sheet will only slowly return to its pre-crisis level.

That is, the usual adjustments to the Fed funds rate affect the short end of the yield curve (the relationship between interest rates and maturity of debt), but now the Fed is creating money to buy longer-term securities. Because bond prices and yields move in opposite directions, this should reduce rates further along the curve.

Global Warming and Investment Demand

2009-05-25T14:52:00.004-04:00

Paul Krugman believes the world economy is stabilizing, but it remains to be seen where the demand necessary to output growing again will come from. On a global scale, Krugman notes, it cannot be exports, but it could be investment associated with tougher rules on carbon emissions:

Speaking in UAE, the world's third-largest oil exporter, Krugman said Japan's solution of export-led growth would not work because the downturn has been global.
"In some sense we may be past the worst but there is a big difference between stabilizing and actually making up the lost ground," he said.
"We have averted utter catastrophe, but how do we get real recovery?
"We can't all export our way to recovery. There's no other planet to trade with. So the road Japan took is not available to us all," Krugman said.
Global recovery could come about through more investment by major corporations, the emergence of a major technological innovation to match the IT revolution of the 1990s or government moves on climate change.
"Legislation that will establish a cap-and-trade system for greenhouse gases' emissions is moving forward," he said, referring to the U.S. Congress.
"When the Europeans probably follow suit, and the Japanese, and negotiations begin with developing countries to work them into the system, that will provide enormous incentive for businesses to start investing and prepare for the new regime on emissions... But that's a hope, that's not a certainty."

That's an important point. Critics of meaningful measures to deal with global warming have focused on the costs of dealing with the problem. These costs are often overstated, and the people making this argument seem to underestimate the ability of market economies to adjust to the changes in relative prices that would be induced by cap-and-trade or carbon tax measures. Part of that adjustment will involve replacing some of the capital stock - from air conditioners to power plants - with more efficient equipment. A policy that credibly commits to raising the relative price of carbon in the future therefore could increase demand today. In the Keynesian model, this would shift the investment demand function, which would also shift aggregate demand, and help close the output gap.

Particularly the midst of a global slump, the need to create jobs provides an argument in favor of taking serious action on global warming now.

As for the actual legislation moving through congress, the Waxman-Markey bill, Krugman sees it as a step in the right direction, but The Economist is disappointed.

(Krugman's reference to Japan is to the export growth which helped get it out of its 1990s slump; as I noted recently, its reliance on foreign demand is getting it in trouble again now).

Keynes 1, Trotsky 0

2009-05-22T14:04:00.002-04:00

One reason I frequently return to Brad DeLong's blog is that he occasionally digs up nuggets like Keynes' review of Trotsky's book on England. Both men were capable of writing with cutting wit; this is on display in the passages Keynes quotes from Trotsky and in his response to them.

In response to Trotsky's argument that the British left's desire to work through the parlimentary system stood in the way of revolutionary progress, Keynes wrote:

Granted his assumptions, much of Trotsky’s argument is, I think, unanswerable. Nothing can be sillier than to play at revolution – if that is what he means. But what are his assumptions? He assumes that the moral and intellectual problems of the transformation of Society have been already solved--that a plan exists, and that nothing remains except to put it into operation. He assumes further that Society is divided into two parts – the proletariat who are converted to the plan, and the rest who for purely selfish reasons oppose it. He does not understand that no plan could win until it had first convinced many people, and that, if there really were a plan, it would draw support from many different quarters. He is so much occupied with means that he forgets to tell us what it is all for. If we pressed him, I suppose he would mention Marx. And there we will leave him with an echo of his own words – “together with theological literature, perhaps the most useless, and in any case the most boring form of verbal creation.”

Fortunately, eighty years later, it appears that it was Keynes, not Trotsky, who was right about history (though some might say it is too soon to tell).

Japan's GDP: Yikes!

2009-05-20T12:33:00.005-04:00

Just as the various emerging market financial crises of the 1990s demonstrated the dangers of dependence on capital inflows, the present global recession is revealing the risks of relying on exports. The latest news on Japan's GDP is staggering, as the Times reports:

Japan confirmed Wednesday what many had long suspected: that the world’s second-largest economy contracted at a record pace during the quarter that ended March 31, as exports collapsed and companies cut back production.
The Japanese gross domestic product shrank 15.2 percent on an annualized basis. It marked a fourth straight quarter of contraction and the biggest decline since Japan began keeping records in 1955.

It was also a deeper fall than during the last quarter of 2008, when the economy shrank a revised 14.4 percent on an annualized basis.

With shipments overseas down 26 percent from the previous quarter, export-dependent Japan has been harder hit than the United States and Europe as demand evaporated amid the global economic turmoil.
The Japanese contraction in the last quarter from the previous quarter — 4 percent — compares to 1.6 percent shrinkage in the United States and a 2.5 percent fall in the euro zone.

Update (5/22): Germany: -14.4%, Mexico: -21.5% (annual rates).

How Much Carbon Does a Dragon Emit?

2009-05-17T02:27:00.004-04:00

In his Times column, Paul Krugman argues that if China won't control its carbon emissions, we should impose a tariff:

China’s emissions, which come largely from its coal-burning electricity plants, doubled between 1996 and 2006. That was a much faster pace of growth than in the previous decade. And the trend seems set to continue: In January, China announced that it plans to continue its reliance on coal as its main energy source and that to feed its economic growth it will increase coal production 30 percent by 2015. That’s a decision that, all by itself, will swamp any emission reductions elsewhere.
So what is to be done about the China problem?
Nothing, say the Chinese. Each time I raised the issue during my visit, I was met with outraged declarations that it was unfair to expect China to limit its use of fossil fuels. After all, they declared, the West faced no similar constraints during its development; while China may be the world’s largest source of carbon-dioxide emissions, its per-capita emissions are still far below American levels; and anyway, the great bulk of the global warming that has already happened is due not to China but to the past carbon emissions of today’s wealthy nations.
And they’re right. It is unfair to expect China to live within constraints that we didn’t have to face when our own economy was on its way up. But that unfairness doesn’t change the fact that letting China match the West’s past profligacy would doom the Earth as we know it.
Historical injustice aside, the Chinese also insisted that they should not be held responsible for the greenhouse gases they emit when producing goods for foreign consumers. But they refused to accept the logical implication of this view — that the burden should fall on those foreign consumers instead, that shoppers who buy Chinese products should pay a “carbon tariff” that reflects the emissions associated with those goods’ production. That, said the Chinese, would violate the principles of free trade.
Sorry, but the climate-change consequences of Chinese production have to be taken into account somewhere.

James Fallows thinks Krugman misreads what's going on in China:

While his conclusion -- that China has to be part of global efforts to control carbon emissions -- is obviously correct and important, his premise -- that no one in China admits this -- does not square with my observation over these past three years.* As it happens, I spent this very day at a conference in Beijing where the first five presentations I heard were about emissions-reductions and sustainability in one specific domestic industry. (Also, I wrote in the magazine, a year ago, about Chinese people and organizations making similar efforts in a variety of other fields.)

If blunt-instrument outside pressure like this column makes it more likely that Chinese authorities will keep making progress, then as a pure matter of power-politics I say: fine. But my guess and observation is that it is just as likely to get their back up -- and encourage the ever-present victimization mentality that makes it less rather than more likely that Chinese authorities will behave "responsibly" on the international stage.

As I've written a million times (most recently here and here and generally here), arguably the most important thing that will happen on Barack Obama's watch is reaching an agreement with China -- or not -- on environmental and climate issues. We'll see what's the best means toward that end.

Tyler Cowen also has objections. Gary Clyde Hufbauer and Jisun Kim discussed the idea of using tariffs as an instrument of climate policy in a Vox post last year.

Do Not Omit the Rupee

2009-05-16T02:38:00.004-04:00

The "strength" of a country's currency can sometimes be a matter of national pride (or embarrassment), but this is a new one... the Washington Post reports:

It has a venerable culture. It has growing economic might. But what India doesn't have is a currency symbol that reflects those things, according to its government, which has launched a public competition to find one.
Unlike other major currencies such as the U.S. dollar, the British pound, the euro and the Japanese yen, the Indian rupee lacks an easily recognizable identification symbol -- a logo to set beside the $, the £, the € and the ¥. It is currently depicted around the world as either "Rs" or "INR" and is designated differently in various Indian languages.

In March, the Finance Ministry called for suggestions for a logo in a nationwide contest. It attracted about 3,000 entries before it closed April 15.

We eagerly await the winner.

April Employment Report

2009-05-08T21:14:00.006-04:00

The unemployment rate continued its rise in April, hitting 8.9%, according to the BLS employment report. However, the news isn't all bad. The rate of decline in employment has slowed (i.e., the second derivative is positive); nonfarm payrolls fell 539,000, compared to a decline of 699,000 in March. Another encouraging sign is that labor force participation rose: As David Leonhardt explains:

[T]he increase in the unemployment rate, to 8.9 percent from 8.5 percent, wasn’t as bad as it sounds. It was nearly all a shift of people from unofficial unemployment — not working and not looking for a job — to official unemployment. The percentage of adults with jobs remained unchanged, at 59.9 percent.

That is, to be counted as "unemployed" people must report that they are looking for work. This may be a sign that some of the people who had given up looking for work - so-called "discouraged workers" - now think its at least worth it to re-enter the job market.

Note that the number of jobs (i.e, "nonfarm payrolls") comes from a survey of firms, while the unemployment rate and labor force participation are based on a survey of households, so the numbers do not generally line up perfectly. The household survey actually reported an increase of 120,000 in the number of employed persons.

Menzie Chinn notes another hopeful sign that the worst may be over: new claims for unemployment insurance are falling.

The Fed's Layer-Cake Balance Sheet

2009-05-08T00:24:00.005-04:00

The Cleveland Fed has put together a useful tool to track all the action on the Fed's balance sheet, which has suddenly become very interesting:This comes to my attention via Economix, which discuses some of the implications.