April 02, 2008
Globalization and soccer talent
A student sends me this piece by Dani Rodrik.
How does globalization reshape wealth and opportunity around the world? Is it mainly a force for good, enabling poor nations to lift themselves up from poverty by taking part in global markets? Or does it create vast opportunities only for a small minority?
To answer these questions, look no farther than soccer. Ever since European clubs loosened restrictions on the number of foreign players, the game has become truly global.
Read the whole thing.
Posted by William Polley at 02:19 PM | Comments (1) | TrackBack
December 06, 2007
Bank of England cuts; ECB holds steady
From the NY Times:
FRANKFURT, Dec. 6 — The European Central Bank, caught between fears of rising inflation and subsiding economic growth, walked a middle ground today, leaving interest rates unchanged.
But across the channel, the Bank of England opted to take action, cutting its key rate for the first time in two years, by a quarter-point, to 5.5 percent. The bank said the credit squeeze in the United States had curtailed loans for households and businesses, denting Britain’s growth prospects.
Apparently the ECB was not of one mind on their decision....
In a rare departure from his usual discretion about the bank’s deliberations, Mr. Trichet disclosed that some bankers on the 19-member governing council had argued for raising rates.
Meanwhile, the probability of a 50 basis point ease increased from 31% to 35% (reaching a high of 37%) as measured by the binary options contracts on the Chicago Board of Trade.
Posted by William Polley at 03:29 PM | Comments (0) | TrackBack
December 04, 2007
The loonie gets its wings clipped
The Bank of Canada sees inflation risks declining. Consequently, they lowered their key interest rate from 4 1/2 to 4 1/4 percent.
Consistent with the outlook in the MPR [Monetary Policy Report], the global economic expansion has remained robust and commodity prices have continued to be strong. The Canadian economy has been growing broadly in line with the Bank's expectations, reflecting in large part underlying strength in domestic demand. However, both total CPI inflation and core inflation in October, at 2.4 per cent and 1.8 per cent respectively, were below the Bank's expectations, reflecting increased competitive pressures related to the level of the Canadian dollar. The Bank now expects inflation over the next several months to be lower than was projected in the MPR. In the context of exceptional volatility in global financial markets, the Canadian dollar spiked well above parity with the U.S. dollar in November, but it has recently traded closer to the 98-cent-U.S. level assumed in the October MPR.
Posted by William Polley at 12:09 PM | Comments (0) | TrackBack
August 03, 2007
Tangerine dreams
From The Politico (Ben Smith's Blog):
The politics of global warming got very concrete, and oddly difficult, in a meeting with local environmentalists in the coastal town of McClellanville today, where Elizabeth Edwards raised in passing the importance of relying on locally-grown fruit.
"We've been moving back to 'buy local,'" Mrs. Edwards said, outlining a trade policy that "acknowledges the carbon footprint" of transporting fruit.
"I live in North Carolina. I'll probably never eat a tangerine again," she said, speaking of a time when the fruit is reaches the price that it "needs" to be.
This inspired the Chicago Boyz to work out a rough estimate of a tangerine's carbon footprint.
If the tangerines are raised by a farmer 60 miles away, and he brings 500 lb of them to market in a pickup truck getting 20 mpg, then he is using 3 gallons of fuel each way–6 for the round trip–which equates to 333 tangerines per gallon. This is worse than truck from Florida, worse than rail from California, and worse than ship from Spain.
Read the whole post to see their calculations. I'm sure someone will point out minor flaws and refinements, but the basic idea is sound. Transporting bulk quantities long distances by boat, barge, or train is very fuel efficient in terms of ton miles per gallon. Reducing carbon emissions is not a compelling reason to buy locally. At best, Edwards should have thought more carefully about her example.
Anyway, back to The Politico...
Asked about her comment immediately after the event, John Edwards avoided the question twice, then said he isn't sure.
"Would I add to the price of food?" he asked. "I'd have to think about that."
Let them eat cake?
Hat tip to The Door.
Posted by William Polley at 11:47 AM | Comments (11) | TrackBack
July 14, 2007
Boudreaux vs. Rodrik
Don Boudreaux scores the first hit, and it's a beauty.
I suspect that if someone proposed to Dani Rodrik that he explore the wealth-creating potential of state-level protectionism, he would refuse. He would likely (and correctly) say that it's ridiculous on its face to suppose that such protectionism would make the people of Tennessee as a group wealthier over time. If my suspicion is correct, then to what would Rodrik himself attribute his out-of-hand dismissal of the notion that Tennessee tariffs might well make Tennesseeans richer? Would he realize to his chagrin that he is a benighted, faith-based non-scholar? Or would he instead understand that the case for an extensive, market-driven division of labor is so strong -- and that the political border that separates Tennessee from other states is so economically meaningless -- that it would be as pointless for a serious economist to explore the economic potential of Tennessee protectionism as it would be for a serious oncologist to try to cure a patient of cancer by bleeding that patient with leeches.
Let me confirm Boudreaux's suspicion that I would indeed be against imposing intra-state trade restrictions in general (or to be more precise, that I would have a strong presumption against them). So the question he asks is an important one. Why then do I not take an equally strong position against trade restrictions in international trade?
The answer is that the parallel is misleading in this context. The two situations are alike only in the limiting (and counterfactual) case where government-imposed tariffs are the only transaction costs blocking economic exchange across international borders. In reality, national borders demarcate political and legal jurisdictions, which means that there remain plenty of transaction costs which block economic convergence. Capital flows are hindered by sovereign risk and the absence of international regulation and lender-of-last resort functions, which create the kind of syndromes that I often discuss in this blog. Labor mobility is severely restricted. And differences in regulatory regimes impose severe transaction costs (estimated by Jim Anderson and Eric van Wincoop to be of the order of 40% in tariff equivalents) on international trade. In the presence of these transaction costs, free trade in goods (in the sense of zero import tariffs) is in general incapable of achieving rapid economic growth and economic convergence in poorer nations of the world. If you do not believe this, just ask the Mexicans.
Within this U.S., economic convergence is achieved because there is a common constitution, a federal judiciary, nation-wide financial regulation, and free flow of labor. This ensures that a lagging region (such as the South until recently) catches up by a combination of capital coming in and labor moving out. Neither of these channels are operative in a world economy that is divided into nation-states. Removing restrictions on international trade in goods, services, and capital simply does not do it. Trade ends up being too small, and capital flows in the wrong direction (from poor to rich countries).
Integration normally proceeds (e.g. the European Union) from free trade area or customs union, to monetary union, to political union. Europe is trying to make the last step, and it's not an easy one. Here in the U.S., the framers of the constitution were smart enough to establish the fledgling country as a customs union and monetary union. This was in order to form a more perfect political union that that Articles of Confederation was unable to deliver.
Unfortunately, this does not stop the states and localities from pursuing other policies (wooing multinational factories, establishing tax-increment financing districts, etc.) that do with a series of knife cuts a bit of what a tariff would do with a hatchet blow.
Such behavior, when done by all, would result in something that resembles the suboptimal outcome of a prisoner's dilemma. There are, however, probably some asymmetries that would lead to some states winning a tariff war with other states. California vs. Hawaii would probably not be a fair fight, for example. Whether Tennessee has that sort of bargaining power is left to the reader to contemplate.
That there are strong arguments and historical precedent for the usual progression of these economic unions plays into Boudreaux's stand. It would be self-defeating to move backward.
And similarly, Rodrik's position is that where the political (and even monetary) unions do not exist, there is no reason to presume the same prohibition on trade protection you would expect in a political union like the U.S. He can't resist one more jab at Boudreaux.
There is of course the option of global federalism (creating a U.S. or an EU at the global level)--but that does not seem a realistic option anytime soon. I doubt that Don Boudreaux would go for it in any case.
Brad DeLong scores it a knockout for Boudreaux.
The knockout punch, of course, is that Dani Rodrik's country whose "labor force that is producing at low levels of productivity" is doing so because it has lousy political institutions: it lacks the "constitution... judiciary, nation-wide financial regulation, and free flow of labor" that have underpinned economic growth in the rich post-industrial core. The poor country is poor because its government is incompetent, and corrupt.
And yet Dani wants--in this situation--to enhance and extend the role and powers of the poor-country government by asking it to implement an active protectionist industrial policy because "there exists a bunch of arguments having to do with learning and (domestic) market failures under which subsidization of tradable activities could speed up your economic growth."
Certainly many countries are poor because their government is incompetent and corrupt. But I find it hard to accept this as a blanket statement. So does Rodrik, who responds:
No, the argument that poor countries are and remain poor because their governments are incompetent and corrupt is one of the absurd reductionisms of the day which I do not believe in and have written against. The point I made was that a poor country would have the real prospect of converging in living standards with rich countries if international economic integration were near-total (involving free labor mobility, truly integrated capital markets, and a transnational set of regulatory, legal and political institutions that underpin this integration). In the absence of these, trade liberalization does not get you there. You are in a second-best world and you need to think appropriately. The idea that developing countries cannot employ industrial policy in such a world to good effect is downright silly.
Here is a thought experiment: does anyone really believe that China would have grown as fast as it did if it had removed all its tariffs and trade restrictions in 1978, instead of liberalizing strategically and sequentially--first in agriculture, than in industry, then on the export side, and only later in the 1990s on the import liberalization side? There are many reasons why the Chinese strategy worked, but one of them is that it protected employment while industrial capabilities were being built up.
Rodrik's notion of the second-best is one that I employ frequently when I think about reasons why protection has been implemented by countries. While I understand the concept and am sympathetic to the notion, my mind always comes back to the fact that it is difficult to remove protection once it is in place--vested interests being what they are. Hence, I am much more disposed to allowing a country to go slowly and deliberately (like China is in many respects) toward a goal of more openness than I am to allowing a country to take steps backward and impose additional protection.
Completely free trade is neither necessary nor sufficient for fast growth initially. Free trade is necessary but not sufficient for broader and deeper economic integration. Those are two different goals, but they are both goals that many countries have for themselves. And both are reasons why free trade should be pursued, but not necessarily in its extreme form right away. Rodrik is correct that unilateral free trade does not make integration happen (not sufficient), but I would have liked him to address the desirability of multilateral free trade for further integration down the road.
Or, to answer Boudreaux (albeit in a way that he probably didn't intend), Tennessee would not do itself any favors by unilaterally abstaining from offering incentives to companies to locate there. But reducing state level competition of that sort would benefit everyone.
There's a big difference between China going slowly towards reform and the U.S. wanting to punish China for going too slowly.
UPDATE: Brad DeLong responds to Dani Rodrik. He's responding to Rodrik's comment about China.
...The fact that China's government had been so bad before 1978 meant that there were enormous problems and enormous opportunities for a government that was both competent and (relatively) benevolent--in the sense of wanting to see the economy grow rapidly if that could be accomplished without endangering its hold on power.
and...
...A lot of human resources and infrastructural capital was wasted becuase Deng Xiaoping did not dare risk the political consequences of the economic process of shifting resources out of the old Soviet-style industrial sector. I think he was right--from his perspective at least--to initially limit market manufacturing to the south. However, the logic is not economic but political.
No and yes. There is no disputing that the political motivation was real. But DeLong also notes the mass unemployment that would have occurred had the breaking down of the Soviet-style industrial sector happened more quickly. I think even a benevolent social planner who was immune to revolution would hesitate to put that in motion. Ultimately, I think this one is both economic and political, but if DeLong's point is that it was the political constraint and not the economic one that was binding I would not disagree. Furthermore, there is no doubt that the second best argument can be abused by governments that don't want to face up to their own shortcomings. DeLong's example of Peron's Argentina would qualify.
Of course now we've moved so far away from Boudreaux's original challenge that anything further deserves a new post. The lesson is that second best considerations can be legitimate, but because industrial policy--whether in five year plans or "temporary" tariffs--are hard to remove once in place, it is important to resist the temptation to apply the argument everywhere. Yet it seems to me that had China gone full-tilt for liberalization in 1978, they would look different today, and I'm not convinced it would be better.
Posted by William Polley at 03:01 AM | Comments (2) | TrackBack
July 11, 2007
Reserve growth in the BRICs
In this excellent post, Brad Setser looks at the growth of reserves of foreign central banks, particularly in Brazil, Russia, India, and China (often referred to as the BRICs), and says that they are "simply too big not to matter".
Posted by William Polley at 01:44 AM | Comments (0) | TrackBack
June 29, 2007
State management of production and the forces of the market (or, what should be the price of gas in Iran anyway?)
On Wednesday, I posted a story on how Iranians are upset about gasoline rationing. A key point which figures into what follows is this quote from the article:
The new rules limit drivers of private cars to 100 liters, or 26 gallons, every month at the subsidized price per liter of 1,000 rials, or 10 cents. Taxicab drivers are limited to 800 liters a month. (Emphasis mine)
So we are to take away from this article that gasoline is offered for sale to Iranian citizens at the price of 10 cents per liter and that this price is the result of a government subsidy. (NOTE: 10 cents per liter would be 38 cents per gallon. However, another article cites it as 42 cents. It depends on how you round your exchange rate and your gallon to liter conversion. I will use 40 cents from this point on.)
One of my frequent commenters, spencer, raises an objection that essentially boils down to this. Is that 40 cents per gallon price really a subsidy if, as a major oil producer, they are able to produce the gasoline for just pennies per gallon? Don't OPEC countries have lower gasoline prices anyway? Is that a subsidy, or just price discrimination (supplying the domestic market at cost before putting the rest of the supply on the world market as an oligopolist)?
First of all, spencer points out that the domestic refining and distribution network in Iran is nationalized. I should have pointed that out, and I am grateful that he reminded us of that fact. So, the question is would they be within their power to produce their domestic supply of gasoline cheaper because they can extract the oil at a cost that is much below the $70/barrel the oil fetches on the world market? Absolutely.
How much cheaper? For that, I refer to this MSNBC analysis piece by Robert Windrem from January with the provocative headline: Are Saudis waging an oil-price war on Iran? The entire article is worth a read, but here's the part that matters for us:
The trader notes that Iran, OPEC’s second largest producer, is “in trouble” both in the short and long term. Iran’s oil reserves, he notes, are declining more rapidly than Saudi Arabia’s and are more difficult to extract. While a barrel of oil costs the Saudis $2-3 to get out of the ground and to market, that same barrel costs Iran as much as $15-18.
“Iran does have some oil that costs them $8-10 but most of it is in that upper range,” he said.
Moreover, Iran has a large domestic market for oil, particularly fuel oil, which Saudi Arabia, with its smaller population and milder climate, does not.
Perhaps more important, because Iran has limited refining capability, it must import more than 40 percent its gasoline, making it the second largest importer of gasoline in the world after the United States, according to the Department of Energy’s Energy Information Agency.
And since Iran sells gasoline at a rate comparable to the rest of the Gulf states — around 33 cents a gallon — it must subsidize the price on a massive scale. In fact, say traders, Iran is paying about $1.50 per gallon to subsidize domestic gasoline consumption — the world market price of gasoline minus the tiny price per gallon — a practice that is costing Iran billions of dollars annually and eating up most of the state-run oil company’s discretionary funds.
Yes. You see, as I said in a follow up comment to spencer on the previous post, Iran imports around half of its gasoline. The world wholesale price for gasoline is in the neighborhood of $2/gallon. Being as charitable as I could to spencer's argument, I allow for the fact that they may be able to negotiate a better deal than the U.S. can. Even so, the half of the gasoline supply that comes from overseas surely must cost them more than 40 cents per gallon. Maybe they're not losing their shirt, but I don't see them breaking even. Today's research on the subject suggests I might not have had to be so charitable. They might be losing their shirt, if Windrem's sources are correct.
So I think we can safely lay to rest the claim that this really isn't a subsidy. If the oil coming out of the ground costs $15/barrel, then the cost of producing a gallon of gasoline probably exceeds 40 cents per gallon. (It is commonly stated that a barrel of oil yields 19.5 gallons of gasoline among other products. If the other products fetch a high enough price, you might break even overall, but I'm not sure this is the case.)
The fact is that Iran is facing a lack of refinery capacity. Welcome to the club. The question is how will they deal with this. If this was more of a competitive market situation, the answer would be that prices would rise, refinery profits would increase, capacity would be added and price would head back down towards marginal cost.
Yeah, that's textbook theory. It doesn't work literally here in the U.S. because there are a lot of frictions caused by imperfect competition, regulation, externalities, etc. It certainly won't happen in a state controlled monopoly situation as Iran has. But are they immune to the forces of the market. Absolutely not.
So spencer writes, "First, refining is a public sector industry so the economics are secondary."
I'd prefer "non-market".
He continues, "Second, Iran has budgeted a doubling of refining capacity."
So they are responding then? In fact, that seems like a no-brainer. Of course, if domestic demand is building, oil extraction costs are going up, and you're losing your shirt paying for imports because your nationalized firm can't satisfy your domestic consumers, then yeah, I'd say it's time to think about expanding that line in the budget.
But this is not going to be easy for them. If you are a company that builds refineries, is Iran a place where you want to be building them right now? If you are the government of Iran, where is the money going to come from? This is what I meant when, in the first post, I said:
...I would suppose that more comprehensive solutions will be politically difficult.
So in the end, I have to take issue with spencer's final comment,
But what it comes down to is standard economic theory has little to do with the issue and refinery profitability is not really an issue.
That's true only if you think that standard economic theory begins and ends with the perfectly competitive model. In that model, profitability is the main issue. The market fixes imbalances by sending signals to expand or contract and to enter or exit.
However, governments can and do contravene the operation of the market. They do this for good or for evil, but regardless of the reason behind it, the effect is to obscure the signals. Nevertheless, the forces are still there, and they ignore them at their peril. In setting a fixed market price for gasoline, Iran has committed the resources of the state to supply its citizens with the gasoline they demand at that price, even if that means the state's resources will be drained away from other uses. This they can do because profitability is not the main issue. Political economy is. However, there are still no free lunches, even for nationalized firms. Now, both market and non-market forces outside of Iran have combined to increase the drain on its treasury caused by its commitment of resources.
They must now make a choice. They could allow it to continue and supply at a price that is below cost. (A private firm that did so would soon find itself bankrupt.) They could make a long term investment in capital to lower the marginal cost of supplying the product to bring it in line with the price. (Just as a private firm might invest in the ability to perform a task "in-house" rather than pay a high market price.) But as I pointed out, this may be easier said than done.
Of course, they could just raise the price--doing by committee what the markets usually do. If they get it right, bravo. If they get it wrong, well...
Or they could renege on their commitment to their citizens and reveal that the gasoline is too expensive to obtain and supply to them at the established price, so they will not be able to have as much as they want at that price. This has been known to make people violently angry.
I know that spencer and probably some of my other readers think that I've never seen a problem that the market can't fix. That's simply not true. I tend to favor market solutions, but readily admit that government intervention is sometimes necessary. I'm not even suggesting that a move to a free market is desirable or even possible for Iran without a lot of other considerations.
No, my message here is simpler. You can obscure the signals of the price system with the stroke of a pen. But escaping the forces of the market is more difficult by orders of magnitude. The rigidity of Iran's price controls have allowed this problem to "slow-cook" for a long time in a way that doesn't happen in a free market. They must now deal with the consequences of their choices.
Posted by William Polley at 02:33 PM | Comments (5) | TrackBack
June 27, 2007
iPod accounting
In his Economic Scene column, Hal Varian links to this study by researchers at UC-Irvine that does a breakdown of the value added throughout the supply chain for the iPod.
I think I'll assign the article in my principles course this fall.
Posted by William Polley at 11:01 PM | Comments (0) | TrackBack
Isn't it ironic?
Iran, awash with crude oil, is finding itself short on refinery capacity. The results aren't pretty.
TEHRAN: Angry drivers set fire to some gasoline stations here after the government announced that fuel would be rationed beginning Wednesday.
The government first planned to start the rationing a year ago, but put the decision off repeatedly out of fear that it would lead to unrest. The plan was announced only a few hours before it took effect. State television reported Wednesday that "several gas stations and public places had been attacked by vandals."
...
The new rules limit drivers of private cars to 100 liters, or 26 gallons, every month at the subsidized price per liter of 1,000 rials, or 10 cents. Taxicab drivers are limited to 800 liters a month.
And then there's this...
The government is still considering whether to allow drivers to buy additional fuel at higher prices.
At 10 cents per liter, I can understand why they have issues with low refinery capacity. Even if the crude oil was free, the cost of running the refinery would make it a rather dicey proposition. Since the government subsidizes gasoline to keep the prices low, one would have to expect that only government subsidies will rectify the refinery capacity issue. Meanwhile the economy continues to grow and demand increases. Something has to give.
Allowing additional purchases at a higher price might be warranted as a stop-gap measure. I would suppose that more comprehensive solutions will be politically difficult.
Posted by William Polley at 04:36 PM | Comments (6) | TrackBack
June 26, 2007
Hans Rosling at TED 2007
If you liked this one, you'll enjoy the sequel.
Hat tip to Felix Salmon.
Posted by William Polley at 03:42 PM | Comments (0) | TrackBack
Our graduates are in public service worldwide
I learned today that one of our alumni is now Deputy Minister of Finance for Economy and Integration in Paraguay. One of my thesis students from this past year is in the Ministry of Finance in Mozambique. He and I are working on a paper together.
Both came here on a Fulbright Fellowship. Over the years, WIU has attracted many Fulbright students from around the world. They add to the intellectual vitality of the department, and it is rewarding to see them do well.
Posted by William Polley at 02:24 PM | Comments (0) | TrackBack
Globalization backlash
I'm teaching a course in international economic relations that is primarily for MBA students. Tonight their reading assignment was Dani Rodrik's "The Global Governance of Trade as if Development Really Mattered". For Wednesday, they will read, among other things, Rodrik's "Trading in Illusions". So I've been doing quite a bit of reading on trade and development, the collapse of the Doha round, etc. As you would expect, it has had me thinking a lot about public sentiment toward globalization.
So when I saw the New Economist's post tonight on the changing opinions toward globalization, I immediately sent the link to my class. It fits perfectly with what we've been discussing.
This article from the Wall St. Journal does as well.
A paper commissioned by the Financial Services Forum sets out several policy options aimed at cushioning the blow from job losses and other dislocations caused by global trade, in a bid to defuse protectionist sentiment in the U.S. and promote free-trade agreements.
The banking, investment and other CEOs who belong to the group have consistently cited protectionism as the leading threat to continued U.S. and global economic growth.
The effort marks one of the first times top business leaders have sought to weigh in collectively in the globalization debate. The paper acknowledges that trade can have ill effects on some groups of workers -- such as stagnant personal earnings and job losses -- and recommends ways to reduce, or at least redistribute, the pain.
Incidentally, one of the authors of the paper was Matthew Slaughter, who also co-wrote this article with Kenneth Scheve cited by the New Economist.
This has been building for some time, and isn't going away any time soon.
Posted by William Polley at 01:10 AM | Comments (0) | TrackBack
April 20, 2007
Made in Japan? Not anymore
Where does Wal-Mart get it's products? Check out this map. Via Marginal Revolution. A commenter over there speculates that it is not a random sample. Indeed, if you read the explanation, it is clearly not random. The picture would also look a lot different if you looked at the value of the products rather than the simple count. But I must say that I don't see as much made in Japan anymore. And what is made in Japan is likely to be higher priced electronics rather than cheap clothing (or cheap electronics for that matter).
And this all got me thinking about how many popular songs in the 1970s and 1980s had a "made in Japan" theme. Besides the songs titled "Made in Japan" of which it looks like there were at least three, there was also an album by Deep Purple. And who can forget Mr. Roboto, by Styx.
I am not aware of any similar songs about China today. There is an album by Juliana Hatfield. Are there others?
Posted by William Polley at 03:26 PM | Comments (0) | TrackBack
March 07, 2007
Hans Rosling at TED
Russ Roberts saw this and wrote, "This is so cool." You really need to take 20 minutes of your day and watch this Google video of Hans Rosling giving a presentation on economic development at the recent TED conference.
Back in January, I linked to Rosling's site, http://www.gapminder.org. I'm about to start lecturing on growth in my intermediate macro course, and I intend to use the wonderful interactive tools on the site.
UPDATE: The video is also available from the TED blog along with other videos from the conference.
Posted by William Polley at 02:53 PM | Comments (0) | TrackBack
February 15, 2007
50 years of globalization
Ed Prescott notes that this year is the 50th anniversary of the Treaty of Rome and warns against the seductiveness of protectionism in this Wall St. Journal op-ed.
Posted by William Polley at 12:22 AM | Comments (0) | TrackBack
February 07, 2007
From bad to worse
This NY Times article is right. Watching Zimbabwe over the last few years has been like watching a tragedy in slow motion. You don't know exactly how it will end, but you know it will end badly. Here's the latest installment:
JOHANNESBURG, Feb. 6 — For close to seven years, Zimbabwe’s economy and quality of life have been in slow, uninterrupted decline. They are still declining this year, people there say, with one notable difference: the pace is no longer so slow.
Indeed, Zimbabwe’s economic descent has picked up so much speed that President Robert G. Mugabe, the nation’s leader for 27 years, is starting to lose support from parts of his own party.
In recent weeks, the national power authority has warned of a collapse of electrical service. A breakdown in water treatment has set off a new outbreak of cholera in the capital, Harare. All public services were cut off in Marondera, a regional capital of 50,000 in eastern Zimbabwe, after the city ran out of money to fix broken equipment. In Chitungwiza, just south of Harare, electricity is supplied only four days a week.
The government awarded all civil servants a 300 percent raise two weeks ago. But the increase is only a fraction of the inflation rate, so the nation’s 110,000 teachers are staging a work slowdown for more money. Measured by the black-market value of Zimbabwe’s ragtag currency, even their new salaries total less than 60 American dollars a month.
The article goes on, and I encourage you to read it all. Here is just one choice example of how things are going so very wrong:
Seeking to revive farm production, for example, the government sells gasoline to farmers at a bargain rate of 330 Zimbabwe dollars per liter — and farmers promptly resell it on the black market for 10 times that, leaving their fields idle.
The anecdotes coming out of Zimbabwe are beginning to sound like scenarios made-up for textbook examples, but they are not hypothetical. This is happening...right now...to real people.
And you just know it is going to get worse.
Posted by William Polley at 11:46 PM | Comments (0) | TrackBack
January 18, 2007
Move over, Big Mac Index...
Now there is an iPod index (Reuters). It is based on the same idea as The Economist's Big Mac Index.
One of Australia's biggest banks, the Commonwealth Bank, has used the latest version of Apple's music player -- the slimline Nano -- to compare global currencies and purchasing power in 26 countries.
Along the lines of the Big Mac index launched 20 years ago by The Economist magazine, the survey prices the 2GB Nano in U.S. dollars and found Brazilians pay the most for an iPod, shelling out $327.71, well above second-placed India at $222.27.
Canada was the cheapest place to buy a Nano at $144.20, while Australia ranked 19th at $172.36, cheaper than Germany ($192.46), France ($205.80), South Korea ($176.17) and China where the machine is manufactured. The U.S. was fourth cheapest at $149.
"Interestingly, especially with freight costs close to zero, China is middle ranked in terms of global prices at US$179.84," Craig James, the Chief Equities Economist at Commonwealth Bank, told Reuters.
You know what comes next, don't you?
James said the results suggested the U.S. currency had scope to rise against a range of major currencies except for the Hong Kong and Canadian dollars or the Japanese yen.
If this story was being read on SNL's Weekend Update, the "laughter" sign would be flashing about now.
However, the results could be influenced by different pricing policies that Apple might apply in different parts of the world, James said.
Ya think?
Ok. It's a clever idea and a good discussion starter, but not a serious test of purchasing power parity. In fact, it makes the Big Mac Index look methodologically sensible by comparison.
But if you tell people that you've got a test of purchasing power parity based on the iPod, people will stand up and take notice. It is clever, but don't take it too seriously.
To their credit though, it will be interesting to watch what happens to the index over time (more for what it will tell us about Apple and how they operate in each of these countries than for what it says about purchasing power parity, however).
UPDATE: Surfing around, I found this from three years ago. (Guardian Unlimited January 8, 2004)
Apple Computer is set to review the UK pricing of its iPod mini music player, launched on Tuesday, after complaints about a substantial mark-up for non-US buyers of the device.
The iPod mini will go on sale next month in the US for $249 - which would translate to a UK price of £162 including VAT if today's exchange rates were applied. Yet Apple's UK arm announced on Tuesday that it plans to sell the device for £38 more, at £199, immediately sparking an outcry from the company's European customers.
Now a senior Apple executive has said the company will review its pricing outside the US, and blamed the high pricing on the continuing weakness of the dollar against other currencies.
In an interview, Apple vice president Greg Joswiak told Online the price announcement was "subject to change" and that the company would settle on a UK price "closer to the availability date, simply because of the volatility of the currency exchange".
The exact pricing would depend on the strength of dollar relative to the pound, he said. "What we don't want to do is lock Europe into a price now, see the dollar continue to weaken, and have done all of ourselves a disservice by pricing too early," said Mr Joswiak.
Here is the $/pound exchange rate for the period between the time of this article and the present.
When predicting exchange rates, the most important thing is to be correct about whether the rate ends up above or below where the market (forward or futures) is predicting. Why? Because that determines whether you take a long or short position. In this pricing problem, the position you take is whether to price above or below what current market conditions imply (assuming that this price is sticky). Let's say they re-evaluated their position a year later. Did they get it right? Looking at exchange rates in 2005, you would say no. The iPod would appear to have been overpriced.
Indeed that was the case as we see in The Register in February 2005:
Tacitly acknowledging that the color iPod Photo was overpriced, Apple lopped $150 off the price of the high end 60GB model, which is now $449 (UK:£309), and replaced the $499 40GB iPod Photo with a 30GB version that's also $150 cheaper (UK:£249). The cheapest 4GB iPod Mini is now $199 (UK:£139), a price cut of $50. It's joined by a 6GB model at the old price of $249 (UK:£169). The UK prices quoted include VAT.
In fact, somewhere along the line it was cut from 199 pounds to 169 pounds (the U.S. price in early 2004) before dropping to 139 pounds.
Applying today's exchange rate to the Reuters story implies that the UK price is somewhere around 100 pounds. I saw a website advertising it for 128 pounds. Perhaps either the iPod index doesn't include the VAT (I would think that it would though) or it was based on exchange rates a few months ago when the dollar was a bit stronger than it is today (seems more likely).
Given that Apple has at least once in the last couple years been chasing changes in the exchange rate, it seems reasonable to suggest that the iPod index's indication of an undervalued dollar is more likely to be a sign that Apple will be adjusting its pricing policies than a sign that the dollar is likely to rise. I doubt that is what Commonwealth Bank had in mind when they constructed the index.
CLARIFICATION: The iPod Mini referenced in the older articles has been discontinued in favor of the newer iPod Nano. It is the closest comparison. Since the introduction of the Nano, similar stories of price cuts in the U.K. are readily found.
Posted by William Polley at 01:28 AM | Comments (0) | TrackBack
December 07, 2006
Meanwhile in Europe...
The ECB has raised their key interest rate from 3.25% to 3.5%.
Posted by William Polley at 11:31 AM | Comments (0) | TrackBack
October 30, 2006
Adam Smith on trade protection as rent seeking
Returning visitors will immediately recognize that this post was inspired by these comments. In The Wealth of Nations, Adam Smith has a lot to say about "rent". In fact, Smith spends the whole of Chapter 11 of Book I on the subject. This rent of which he writes is a term for the returns to a fixed factor. For example, mineral wealth taken out of the ground returns rent to the landowner. In economic parlance, rent is often synonymous with profit. While most of the time there is no confusion from this, economists (and non-economists) also use the term "rent seeking" to describe behavior that is wasteful and decreases social welfare. When speaking of "rent seeking", they are not talking about the normal types of profit maximization behavior. Nor are they referring to the division of labor so eloquently described by Adam Smith. Behavior that Adam Smith praised in The Wealth of Nations (prudence, self-betterment, etc.) is not identical to the rent seeking behavior described by scholars such as Tullock and Krueger. The fact that the word "rent" is used in both contexts is perhaps unfortunate, but too solidly entrenched in the literature and the minds of economists to ever change. I believe that most economists are careful about the difference. Outside the profession, however, I think there may be some confusion that ends up giving economics a bad reputation.
As I pointed out last year in an Econoblog with Russell Roberts,
"The Theory of Moral Sentiments," on the other hand, is a treatise on temperance. It is a study of propriety, sympathy, and justice. Sadly, many people don't even know the book exists or that it was written by the man who is sometimes called the "father of capitalism." Ignorance of Smith's other major work leads people to think that economics is only about greed, self-interest, and rational maximization. As a result, many intelligent people who would be quite capable of becoming economically literate are turned off to economics because they see it as promoting a "greed is good" mentality that doesn't square with their world view. Unfortunately, this perception is so well embedded in the pop culture view of economics and economists that it may be very difficult to reverse.
While it helps to read The Theory of Moral Sentiments to reinforce the fact that Adam Smith was no Gordon Gecko, it is not really necessary. Only a misreading of The Wealth of Nations would cause someone to think economics is about "greed." Greed and self-interest are not identical ideas. Greed is self-interest run amok--self-interest with no temperance.
Consider first what Smith said in comparing trade protection to monopoly. After all, giving trade protection increases the market power of the domestic firm.
To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. (Book IV, Chapter 2, paragraph 11)
Since Smith lived 200 years before Tullock and Krueger, he did not frame the discussion in precisely the same terms, but the notion of rent seeking as a destructive influence is present in The Wealth of Nations. It is in one of my favorite passages in the entire text. The context is a discussion of barriers to trade. I was first introduced to this passage in my 2nd year of grad school, and it has been with me ever since. Combined with the previous passage, it shows that Smith took a dim view of what we would today call "rent seeking," but correctly saw that it would always be with us as a thorn in our side.
To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it. Were the officers of the army to oppose with the same zeal and unanimity any reduction in the numbers of forces with which master manufacturers set themselves against every law that is likely to increase the number of their rivals in the home-market; were the former to animate their soldiers in the same manner as the latter enflame their workmen to attack with violence and outrage the proposers of any such regulation, to attempt to reduce the army would be as dangerous as it has now become to attempt to diminish in any respect the monopoly which our manufacturers have obtained against us. This monopoly has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists. (Book IV, Chapter 2, paragraph 43)
Posted by William Polley at 11:18 AM | Comments (4) | TrackBack
October 03, 2006
Stiglitz on global imbalances
In today's NY Times, Joseph Stiglitz takes on the topic of the hour. Most of it you have probably heard elsewhere. This part is not always mentioned:
Imagine that the Bush administration suddenly got religion (at least, the religion of fiscal responsibility) and cut expenditures. Assume that raising taxes is unlikely for an administration that has been arguing for further tax cuts. The expenditure cuts by themselves would lead to a weakening of the American and global economy. The Federal Reserve might try to offset this by lowering interest rates, and this might protect the American economy — by encouraging debt-ridden American households to try to take even more money out of their home-equity loans to pay for spending. But that would make America’s future even more precarious.
Yes, there is a tension between the fiscal and monetary authorities in cases like this. That is an important point to make, and is not always made. Stiglitz has a simple solution, however.
There is one way out of this seeming impasse: expenditure cuts combined with an increase in taxes on upper-income Americans and a reduction in taxes on lower-income Americans. The expenditure cuts would, of course, by themselves reduce spending, but because poor individuals consume a larger fraction of their income than the rich, the “switch” in taxes would, by itself, increase spending. If appropriately designed, such a combination could simultaneously sustain the American economy and reduce the deficit.
"If appropriately designed...," is a deus ex machina. This paragraph, I think even the most adamant proponents of tax increases would admit, makes a number of assumptions. One important one would be that the increase in taxes at the high end of the distribution does not reduce saving even further (since he laments our lack of savings earlier in the piece). It also assumes that the tax change would cause enough new spending by "poor individuals" to offset whatever change in consumption and savings occurs at the high end. I suppose one could postulate a Keynesian model and mathematically determine how to change taxes at different income levels--thus the phrase "if appropriately designed". I am understandably skeptical of either party's ability to do the math and appropriately design the new policy. I would also apply the Lucas Critique to any proposed model.
So the title of the piece, "How to Fix the Global Economy," is perhaps too ambitious. It's not that simple, even at the textbook level. Unfortunately, it is hard to fix the global economy in 1000 words--harder still when you have to expend half of your word budget rehashing the yuan issue. He makes an excellent point on the fiscal vs. monetary conflict but reduces the solution to one paragraph that raises more questions than it answers and makes some rather heroic assumptions about our ability to model the effects of these policies as well as our ability to design and implement them. The debate continues.
UPDATE: The debate does indeed continue. Mark Thoma, Greg Mankiw, and "knzn" all weigh in. Thoma notes that it is the difference in maginal propensities to consume (for individuals with different levels of income) that matters. True. Mankiw argues that average propensities differ, but that "...the evidence for substantially different marginal propensities is much weaker." Being charitable and granting the benefit of the doubt that there may be some difference in MPCs, I'm still left with the feeling that those MPCs (and the differences between them) are not policy-invariant (my original objection invoking the Lucas Critique). I would be very wary of attempts to fine tune progressivity to this objective. If you want to argue for more progressivity for other purposes, that's one thing. But this argument doesn't convince me. (Greg Mankiw makes a similar statement.)
Postscript: In this post, I referred to posulating a Keynesian model. That is not to say that I think that a Keynesian model would be the one I would opt for in addressing this issue, but because it seemed to best fit the argument that Stiglitz was making (the focus on the MPC in formulating tax policy). Just wanted to clarify that.
Posted by William Polley at 01:46 AM | Comments (9) | TrackBack
September 07, 2006
More yuan debate
For part I, see here.
My focus was, as usual, on the merits of gradual rather than sudden yuan revaluation, and I come to that conclusion mainly from considering how fragile the Chinese banking system is and how a gradual revaluation really will help them in the long run. Yes, the yuan is undervalued. No, it should not remain that way forever. But I think that as Tyler Cowen suggests, it's a waste of political capital for American politicians to keep harping on it. When the yuan appreciates, it will not be because we told them to. I know we have big egos, but come on. Don't get me wrong. I understand why a hard line stance on the yuan makes sense politically. Therein lies the problem.
But Cowen also made some comments that I don't find as convincing when he downplayed the effect of a revaluation.
The belief is that if the dollar has less value in China, Americans will spend less on Chinese products to offset the prices they pay per item. But even if the numbers work out so that the flow of dollars to China diminishes, American consumers will pay higher prices and see fewer goods from China. Yuan revaluation is unlikely to benefit the United States, even if it does lower its trade deficit.
The trade effects of a revaluation of the yuan are unlikely to be large, in part because many Chinese exporters specialize in assembly. China sends out money buying components like semiconductors and turns them into finished goods, thereby running a trade deficit with East Asia. A new and higher value for the yuan would largely be a wash for these activities. With a stronger currency, China would have a harder time selling its electronic goods, but this would be offset by its greater purchasing power over the semiconductors. It would not do much damage to the Chinese competitive position.
See the discussions at numerous blogs: Brad DeLong, Brad Setser, Greg Mankiw. (Mankiw does not take Cowen's assertion about the small effect of a revaluation head on in his post. His post is more about the benefits to the U.S. of an undervalued yuan.) Cowen responds that he is still "skeptical" about yuan revaluation, and throws in another line that is more to the point I have been making:
My view is not that China should stay put on all matters of economic policy (see today's FT for an excellent article on the internal Chinese debate); rather my argument is that the U.S. won't do a good job micro-managing Chinese reforms.
Precisely. But I'm less skeptical about the effect that revaluation might have for the U.S. On that score, I fall somewhere between Setser and Cowen, probably leaning towards Setser. I just don't think that outweighs the substantial case for encouraging the Chinese to take a gradual approach--as long as they reach the goal in the end. And I think Cowen gets one more thing right:
The fundamental problem in the U.S., to the extent we have one, is our propensity to spend, especially given our long-run demographic position and our government's fiscal irresponsibility.
So when Brad DeLong says:
We should be moving toward Andrew Samwick's policy of a cyclically-appropriate on-budget government surplus in order to put downward pressure on domestic absorption, and we should be strongly advising the Chinese and others to shift from export-led growth and allowing their real exchange rates to adjust, in order to reduce the risks of a really unpleasant episode.
I can at least sign on to the first part.
Posted by William Polley at 05:56 PM | Comments (0) | TrackBack
The (marginally) more egalitarian IMF
From the NY Times editorial page:
Any move that makes the International Monetary Fund — and for that matter other major global institutions — look less like an old boys’ club is a good move. So the I.M.F.’s executive board began doing the right thing last week when it decided to give China, South Korea, Turkey and Mexico slightly larger voting shares — and promised them even more say to come.
A reapportionment is essential for bolstering the fund’s credibility. And it is long overdue. China represents about 15 percent of the world’s gross domestic product but has only a 2.9 percent voting share at the fund, which will grow to 3.7 percent. (Belgium, with less than 1 percent of the global economy, has a 2.1 percent share.)
...
The Bush administration, which championed the changes, is hoping that if China gains more of a stake in the global system it will have an incentive to behave more responsibly: allowing the yuan to strengthen against the dollar and reining in its export binge. China needs a more flexible currency, both for the sake of smooth trade relations — the system is pretty tetchy these days — and to gain more control over its economy. As long as China keeps the yuan artificially low, other Asian countries, eager to sell their own cheap exports, will too.
But the advice can’t stop there. The fund needs to take a closer look at who’s buying all those cheap goods and borrowing all that excess cash from China. China may be the enabler. But the United States needs to reduce its enormous trade deficit and its enormous budget deficit, to protect its economy and for the sake of global stability.
Ok, the sentiment is nice, but how much will these changes really affect the outcomes? Probably not much. It is, however, a step in the right direction. The makeup of the fund should evolve over time to reflect changes in the world economy. Decades from now we may want to enlist the help of a modern and developed China in the development of Africa. They will expect (and deserve) greater voice in those deliberations. We should welcome that.
I'm less sure about the argument that this will give the Chinese the "incentive to behave more responsibly." First of all, the American political definition of "responsible" in this situation is to allow a faster (immediate?) revaluation of the yuan. If you have done any amount of reading on China and know the first thing about the banking situation you know that the American political definition of responsible does not mesh with what the Chinese know that they need. Many economics blogs, including this one, have chronicled that story for some time, so I don't need to repeat it. Tyler Cowen sums it up quite well, also in the Times today. Cowen makes an additional point that is relevant to the Times editorial:
The Chinese keep the yuan low, relative to the dollar, by buying up United States Treasury securities; as of early 2006, the Chinese central bank held up to $470 billion in Treasury securities. This huge accumulation of relatively low-yielding assets is the investment strategy of risk-averse bureaucrats, but it may bring longer-term benefits. Those assets can someday be sold or otherwise transferred to underdiversified Chinese financial institutions. The accumulation gives the Chinese a stake in American prosperity and signals that the Chinese are committed to long-term participation in the global economy. On the American side, the Treasury market is more liquid and the budget deficit can be financed at lower cost.
Yes, you heard that right. Chinese ownership of U.S. assets signals a commitment to long-term participation in the global economy. One might even say that it would give them an incentive to "behave responsibly." In the long run, that is going to be as significant, if not more so, than a token increase in their IMF voting rights.
Posted by William Polley at 10:31 AM | Comments (0) | TrackBack
April 10, 2006
Just how important are standardized shipping containers?
It's the 50th birthday of the shipping container this month. Marc Levinson has a new book for the occasion. In it he argues that the shipping container permanently changed the economic landscape and was instrumental in turning emerging Asian economies into trading powers.
Michael Mandel isn't convinced. He wants data to back up the claim--data that is lacking in Levinson's book. I put my 2 cents in on the comments over there. I just finished posting a 2nd comment that is awaiting approval in which I answer Mandel's skepticism that the container was a disruptive innovation. (He thinks it was an "incremental process improvement.") I think it would suffice to say that there wouldn't need to be a World Trade Center in cities like Denver, Kansas City, and St. Louis, if it were not for some form of standardized intermodal shipping.
I have not read the book, but have read comments and reviews about it. I plan to put it at the top of my list of things to read. Virginia Postrel blogged about it a while back. She also mentions the regulatory system, which was also crucial to the expansion of intermodal transport. How quickly we forget.
Posted by William Polley at 07:35 PM | Comments (0) | TrackBack
March 08, 2006
Bank of Japan holds steady
The lead-up to the decision...
Last week it seemed like the Bank of Japan might be ready to join all of the other major central banks and hop on the rate hike train. This week they get some advice from the OECD, and that advice is "not so fast." From the Times Online:
The OECD cautioned Japan yesterday against any over-hasty move to end its zero interest-rate policy, telling Tokyo that the world’s second-largest economy was only slowly emerging from deflation.
The NY Times shows concern...
TOKYO, Thursday, March 9 — Is Japan about to start a sell-off in global financial markets?
Economists dismiss such fears as alarmist. But concerns have been building ahead of an expected vote Thursday by the policy board of the country's central bank, the Bank of Japan. At issue is whether the bank should end its policy of supereasy money, which has kept Japan's short-term interest rates near zero.
Because no major central bank has ever had such a loose policy, no one knows for sure how to end it smoothly.
Economists say the Bank of Japan must tread carefully to avoid sending shock waves through the country's recovering economy and through world markets.
"These are uncharted waters for a central bank," said R. Glenn Hubbard, dean of Columbia University Business School and a central banking expert. "Exiting with minimal disruptions will be a difficult exercise."
Bloomberg has the same sort of feeling I get on a spring day in Illinois as the barometer starts to fall and things get really still...
March 9 (Bloomberg) -- The yen was little changed as Bank of Japan Governor Toshihiko Fukui and members of his board meet to decide how to end five years of deflation-fighting policies.
Currency fluctuations may be exaggerated today as investors jockey for position as the BOJ makes its decision, traders said.
...
Some traders who built up dollar holdings against the yen before the meeting may have placed automatic orders to sell the U.S. currency in case their bets go the wrong way, he said.
...
``We could have hit-and-run moves by speculators trying to break those levels around 117.30-117.35,'' said Soma. ``This meeting could be a milestone in Japanese history so it's hard to push the yen lower even if rates don't rise soon.''
...
``There's that nervousness around,'' said Waddington, head of interbank currency sales. ``On a knee-jerk we could go as far as 117. Anything under there will start to see very good bids'' for dollars. ``Buy that and try and take out stops above 118.''
...while Reuters weighs the risk of doing nothing...
TOKYO (Reuters) - Japan's central bank will decide on Thursday whether to scrap its unprecedented super-loose monetary policy, paving the way for a rise in interest rates from zero that could reverberate around the world.
If the Bank of Japan stands pat, however, it could leave itself open to criticism that it had bowed to pressure from politicians worried about derailing Japan's hard-won recovery.
...and the decision comes down...
March 9 (Bloomberg) -- The yen traded lower after the Bank of Japan said it will keep interest rates near zero percent after it ended a five-year policy of fighting deflation.
...
``The yen is more likely to fall than rise,'' said Yasunori Kuroda, who helps manage fixed-income assets in Tokyo at Sompo Japan Insurance Inc., the nation's third-largest casualty insurer. ``The BOJ probably won't raise rates anytime soon, keeping the rate-differential story alive.'' He spoke before the announcement.
And so it goes for a few more weeks, at least. But the end is in sight...
TOKYO (Reuters) - The Bank of Japan scrapped a five-year-old experiment with ultra-loose monetary policy on Thursday and returned to a more conventional regime, but said it would still keep short-term interest rates around zero for now.
The decision represents a first step toward an eventual interest rate rise in a country where rates have been virtually zero for years, and reflects the central bank's confidence that a seven-year fight against deflation has been won.
So, it's sort of a move, but not really a move. On your mark, get set.... but not quite "go".
Here's the official announcement, if you are so inclined.
At the Monetary Policy Meeting held today, the Bank of Japan decided to change the operating target of money market operations from the outstanding balance of current accounts at the Bank to the uncollateralized overnight call rate, and to set the following guideline for money market operations for the intermeeting period.
The Bank of Japan will encourage the uncollateralized overnight call rate to remain at effectively zero percent.
UPDATE: Day two story.
TOKYO (Reuters) - Japan's central bank and government sparred politely on Friday over when to raise interest rates, a day after the Bank of Japan defied political pressure and scrapped its hyper-loose monetary policy.
Bank of Japan Governor Toshihiko Fukui repeated that the central bank would for now anchor interest rates around zero, where they have been for most of the past seven years.
...
"Eventually, there is a need to gradually raise rates in Japan to a level in line with the economy and prices," Fukui told a parliamentary committee.
"We cannot keep rates at zero forever. But as we are only finally emerging from deflation ... we will continue to offer an accommodative monetary environment for a while," he added.
"I cannot say for how long."
Posted by William Polley at 10:59 PM | Comments (0) | TrackBack
February 15, 2006
Hyperinflation in Zimbabwe
Click this link for some quotes that pretty much speak for themselves (BBC News). Thanks to King for the link. Here is one quote:
I don't even know if I'll have a job at the end of the week, because there is so much uncertainty. There are so many companies closing down.
It is quite interesting to see people going in banks with bags and sometimes even suitcases.
You know that there are large amounts of money in there - which unfortunately are not going to buy much.
Go to the link for the rest.
Posted by William Polley at 11:05 AM | Comments (1) | TrackBack
October 04, 2005
Website on current account sustainability
Hosted at the University of Wisconsin, this new site houses a number of papers (academic and policy oriented)on current account sustainability.
Hat tip: macroblog
Posted by William Polley at 10:59 AM | Comments (0) | TrackBack
September 05, 2005
What's in your closet?
We did some clothes shopping for the family today. Countries represented on the "Made in ______" label include: Peru, the Philippines, Egypt, and Vietnam.
Neither China nor any Central American country was represented.
Are you surprised or not? (I'm not.)
Posted by William Polley at 01:26 AM | Comments (0) | TrackBack
August 20, 2005
Foreign central bank reserves and other interesting topics in recent Fed letters
The San Francisco Fed has had some pretty good Economic Letters lately, including this on foreign central bank reserve diversification. They also look at unemployment in this letter and bubbles in this one.
Good weekend reading.
Posted by William Polley at 12:25 AM | Comments (0) | TrackBack
August 11, 2005
Mr. Keynes and the Classics for the 21st century
Mark Thoma points us to The Economist (subscription required)
Let me just add back a sentence that Mark left out when clipping pieces of the article.
The IS-LM model helps us to understand these two opposing theories. Originally devised for a single closed economy, it can today be more realistically applied to the global economy.
That's the part that is potentially intriguing, even though I'm not a fan of IS-LM and I don't totally buy into the explanation put forth by the author of the article. Part of the reason for the frustration with the IS-LM is that it is a closed economy model. (Tacking on a balance of payments function helps a little, but it's not the final answer.) The global economy is closed, and so a "paradox of thrift" is possible if there were enough of a global "savings glut". But are low labor costs in China and India enough to keep inflation down enough that a fixed-price model becomes a good approximation?
Almost makes you want to go read Hicks (1937 Econometrica) again. Click here if you are at an institution with a JSTOR subscription.
Like Mark, I'm not ready to jump on the IS-LM bandwagon, but author of the article in The Economist does understand the shortcomings of the model. It makes a nice introduction for students at the intermediate level.
Posted by William Polley at 06:05 PM | Comments (0) | TrackBack
July 17, 2005
International (interplanetary?) macroeconomics in The Jetsons
Well, we've been very busy lately with moving in, settling in, and all. After a long day yesterday, my wife and I sat down to watch some TV. It had been a long time since I'd watched The Jetsons. It happened to be the episode "Jetson's Millions," one of the last episodes from the revived version of the series which aired in 1985.
Synopsis: George Jetson wins the Venutian lottery (10 million venutis) which at the current exchange rate (75 cents per venuti) means he wins 7.5 million dollars. At the end, the Venutian economy collapses and the planet Venus has to devalue their currency to 0.01 cents per venuti, which devalues his prize to 1000 dollars (he had not received the money before the economic collapse).
Cartoons often have social commentary (from WWII era Warner Brothers all the way through The Simpsons), but economic commentary is not always tied to the main plot. As cartoon humor goes, this was pretty sophisticated.
The timing was interesting too. The episode originally aired May 4, 1985. That corresponds almost exactly with the peak of the dollar just a couple of months earlier but before the large drop in the value of the dollar. Of course, cartoons take a while to develop and animate, so the episode was probably conceived in 1984 or even 1983. That is only a year or two after the Mexican peso devaluation of 1982. Perhaps that provided the inspiration for the writers.
Whatever provided the inspiration, it made this economist laugh 20 year after the episode first aired.
Microeconomics is probably easier to spot in TV shows in general and cartoons in particular. I've never done a careful count, but it just seems to me to be the case. If you can remember any vintage cartoons that have some sort of macroeconomic reference, I'd be interested to hear about it.
Posted by William Polley at 09:23 PM | Comments (0) | TrackBack
May 12, 2005
Trade deficit--cloud or silver lining?
I spent most of the day dealing with other things, so I will simply note some of the excellent discussion of the trade numbers at the usual blogs with a brief comment at the end.
Macroblog sees the silver lining and calls our attention to a Chicago Fed Letter on the sustainability of the trade deficit by Michael Kouparitsas. Brad Setser is more optimistic than he was last month in the post on his blog, but he lays out a critique of the Kouparitsas article in the comments of macroblog. Kash at Angry Bear has two posts. In the first, he concludes:
Thinking about it this way reminds us that the US's voracious appetite for imports is not the result of low labor costs in China, but rather the result of a fundamental imbalance in which the US consumes more than it produces of virtually all types of goods. In many of the countries with which the US runs a trade deficit labor costs are actually higher than in the US, but since those countries don't consume everything they produce the US imports from them. The cause of the trade deficit is therefore clear: it is simply the direct result of the US's lack of saving.
PGL offers critique of the Kouparitsas paper in a separate post. Calculated Risk has the charts. The Prudent Investor is not impressed by the supposed good news.
My two cents:
I don't put a lot of emphasis on big swings in monthly data for some of the more volatile statistics, like the trade deficit. Yet, if you want to contribute to the discussion, you have to find a way to tell a tale about the numbers as they are presented. So the question is how today's news affects my expectations going forward.
Last month's trade figures really worried me. I mean when Brad Setser starts throwing around numbers like $900 billion, it makes you wonder. And do I need to remind you that it was about a month ago that we started going back and forth on the whole "soft landing" or "hard landing" business? But amid my worry, part of me wondered if last month's numbers were an aberration.
The same is true tonight. I wonder if today's numbers were an aberration. I'm inclined to think it's one or the other, and we won't know for another few months. So today's numbers increase the width of my confidence interval if I was to forecast the trade deficit, but that's about all. There's not much more you can say about headline numbers as bad as last month and as good (or, not as bad) as this month.
Looking behind the headlines, I don't think we've turned a corner yet (or if we have, it will take a couple months before we really know it). The issue is, as Kash points out, a lack of savings. Falling oil prices are great, but it's not enough. I don't see a lot of compelling reasons for the trade deficit to shrink much in the near term. What you think about the longer term depends on a lot of other things (hard/soft landings). I'm willing to wait another month before revising my expectations very much.
Oh, and in the blog-find of the day, macroblog links to Economics Unbound by Michael Mandel of BusinessWeek.
Posted by William Polley at 01:32 AM | Comments (3) | TrackBack
May 02, 2005
Those unpredictable exchange rates
Buffet loses millions, but his pockets are deep.
Chris Dillow (Stumbling and Mumbling) makes a couple of good points.
Indeed, even common sense is little use. It tells us that currencies with high interest rates should depreciate relative to those with lower interest rates. As often as not, they don’t. That’s the forward premium puzzle.
For money-making purposes, then, economists don’t know much about exchange rates.
Is this a failure of the economics profession? No, It’s a success. People pay many economists good money for exchange rate forecasts. How many other professionals can get such good money for so little?
Instead, this is just another vindication of Blinder’s law: economists have most influence where they know least and disagree most, and least influence where they know most and disagree least.
Yep.
Posted by William Polley at 11:29 AM | Comments (0) | TrackBack
April 27, 2005
Declining pass-through and the widening trade deficit
Catharine L. Mann and Katharina Pluck have an interesting op-ed in the NY Times which concludes as follows:
Several factors help explain America's lower pass-through rate. Reduced inflation around the world has made prices less volatile, enabling exporters to ride out currency fluctuations without changing prices. As the United States imports more consumer goods (which have a lower pass-through rate compared with commodities), the overall pass-through rate for American im