The Economist's verdict: an endorsement that was not a foregone conclusion

Typical Economist for me: I find plenty to disagree with, mixed with a good bit of wisdom, topped off with phrases like “cloud-cuckoo-land” and references to “Southern-fried” headbanger Torquemadas:

http://www.economist.com/news/leaders/21565623-america-could-do-better-barack-obama-sadly-mitt-romney-does-not-fit-bill-which-one

Happy to discuss at Lex Coffee, Macado's, or anywhere besides Huntley 230...

Just a thought...

To draw upon Amanda's post and her reference to an interesting piece by Fareed Zakaria, it is interesting to think about the determinants of US economic performance, particularly in election season.

One thing to consider from Krugman's chapter 7.  Nestled in the analysis are a couple of tidbits.  First, note that the "hard work" in changing the economic malaise of the late 1970s was done by Fed chairman Paul Volcker.  Now think about time lags, as Amanda notes. Volcker was appointed in 1979.  By Jimmy Carter.  Did Reagan get credit for what a Carter appointee did?

And, to be clear, this is not a one-sided partisan thought experiment.  Notice that Krugman suggests the Clinton era jobs record would have been nowhere near what it was with someone else at the head of the Fed.  Greenspan didn't take the punch bowl away just as the party got started.  Did Clinton get credit for Greenspan's own "irrational exuberance"?

In short, you can find arguments on either side of this politically (and this certainly informs the current debate on Capitol Hill over whether Ben Bernanke is "helping Obama" or just "helping the economy").  But the larger question is: just how much leverage does monetary policy have over our economic performance? 

Put another way: who is the most important person shaping economic policy in the United States?  The President?  Or the Chair of the Fed?

On China's lending (or not)

To buttress some of what we discussed in class today:

Japan is set to overtake China as the top foreign lender to the U.S.

Not the only columnist out there, but...

George Will has been on a Federal Reserve kick.  And it seems rather timely for our purposes.  Will is greatly concerned (as noted in a previous post) that the Fed is arrogating too much responsibility for the country's economic management. 

To buttress his point, he has drawn in recent columns on several conversations with several presidents of regional Federal Reserve banks (of which there are 12 around the country).  Will makes the case that the Fed's primary emphasis should be on "price stability — preserving the currency as a store of value by tightly controlling inflation".  But the Fed's recent actions suggest the other half of it's "dual mandate": maximizing employment.  This is really another way of saying George Will and many "hawkish" Fed leaders would like to insist that interest rates be raised as needed, and certainly not kept near zero for so long that inflation rears its ugly head. 

It should be noted that this has been a minority position inside the Fed in recent years.  The presidents of the Dallas and St. Louis Federal Reserve banks have lost out to the majority that say interest rates should be low until employment recovers and/or at least until there is some concrete sign of consumer inflation (for price in items other than volatile commodities like oil and some food prices). 

It should also be recalled that many people nowadays would echo with a sentiment I linked to in a previous post that runs against Will's logic.  Will believes economic management is fundamentally the responsibility of Congress, not a bunch of technocrats at the Fed.  (Though Will certainly does want to the Fed to behave technocratically in the way he defines, by keeping prices stable.) Others, like Senator Chuck Schumer referred to in Will's piece, would say the Fed has to act, because "Congress is lame". 

You make your own call.

And this one is Old School...

A YouTube video we might watch, starring titanic economist Milton Friedman!

QE3 (and QE2 and QE1...)

A pretty decent explanation from The Economist of quantitative easing, a major post-2008 version of expanding the money supply.

Iran Too Fast

Something to flag for conversation next week, when we discuss money and currency, banking, inflation, and exchange rates.  We may be watching a spiral of inflation and currency collapse in real time.  In Iran.  We live in interesting times.

You can be Pro-Romney and Pro-Trade, if you want...

Some useful perspective from Ezra Klein of the Washington Post.  The post there is a bit older (late September), but is pertinent to the discussions we have had.  In addition to hitting some themes that have come up lately, it also does a couple of other things.

First, Ezra Klein authorizes you (as an official policy wonk gatekeeper) to be pro-trade and anti-currency-manipulation.  By extension, some of you may be happy that you can be pro-Romney and pro-free trade, regardless of his attacks on China.

Second, it shows that Romney has a way with the classic stock and trade of economics: simplified models of the world that often involve two actors, two factors, and the like (think comparative advantage, Rogowski, etc.)  Notice the part where Romney talks about a 200-person economy.  Interesting stuff.

The Real Upset in the Debate: The China-Free Zone!

I defer to Camie's superior instincts about presidential debates, but I was shocked (SHOCKED, I say!) about the limited discussion of China in the debate.  Now admittedly, I was in and out of the room a bit and didn't catch every word, but am I right in thinking trade and China barely came up at all?  Given the recent surge in China-specific ads as campaign material (which Annelise rightly notes has been going on for a time, but which seems to have hit fever pitch lately), I expected a ton of this whenever words like "jobs" came up.

Amanda notes that the debate went in a different direction.  (Though I should say as an aside that "direction" is a funny word here, because at the risk of getting into the raw politics of it the main theme for me was actually Obama's directionlessness in the debate - which I read as spurred in turn by an uncertainty in how to deal with Romney's shape-shifting.)  The direction of the debate.  was not unrelated to IPE, just more indirectly related, I suppose. 

Anyway, maybe the China and outsourcing questions will come in the next debate, which is focused on "foreign policy"?  Or the third one, which is focused on (I suppose) everything?  I find it strange, nonetheless, that this aspect of domestic policy barely surfaced.  In part, I attribute this to what I would argue was Obama's really poor performance - he seemed to me rather ofter to forget he was running a campaign against Romney and wandered around instead inside his own head.  Maybe that's what people mean when they say he sounded "professorial"? 

D'oh!

In any event, I hope that by now (after looking at Wolf, Stiglitz, Rogowski, Coughlin, et al., Krasner, and so on) we all might consider that the distinction between "international" and "domestic" is a false distinction at best, and misleading and damaging at worse. 

SimCities, Spillovers, and Something Else

Still wrestling with how to bring these pieces together precisely, but I am intrigued by the interaction between several recent blog posts: from Merve, Camie, and Freddy.  There is much to be said about the ways people operate differently in their different local contexts, and how economic modeling reflects the possibilities that come from different jurisdictions (think model cities or particular EU countries) affect the broader political-economic framework.  Something for consideration.

Trading Blows

Following up on Sean Gebhard's post about the Obama tire ad, have a look at this ad from the Romney campaign. I think you can bet on this part of IPE being the next big theme in the presidential campaign, perhaps up through the first debate.

Free trade and intellectual property rights

One rather highbrow version of the issue.  Ho ho!

Farm Bill

Here's an article that I bet Stiglitz and Wolf would agree upon.  It's about the farm bill, a law passed by Congress with wide-reaching impacts on things like food (and gas) prices, farm incomes, and the social safety net, not to mention trade policy.  The Washington Post editorial is arguing that no policy - or implicitly a more free market policy - might be preferable to the distortions and inefficiencies generated by the bill.  The argument generally goes that farm bills "overprotect" farmers and end up as some form of subsidies (whether directly or indirectly) for large-scale businesses rather than small family farms.

Note that this is the Washington Post, a major national paper that is read primarily by urbanites and suburbanites.  One might anticipate different reactions from the Topeka Capital-Journal, the Sacramento Bee, or for that matter the Roanoke Star, newspapers with lots of readers in farm country.  

Case in Point

Wen (of Normative Irrationality fame) said it.

"Free trade is...

... a substitute for people actually having to move."  Stiglitz says this on p. 67.  An intriguing sentence, and one we might discuss.  Many of you have already expressed questions and concerns about rising inequality, and when we talk about this in the U.S. over the last 30 years or so, the potential role of globalization is often overlooked in the debate.  The focus tends to be on domestic tax rates (for high- and low-income people) and the resulting returns to capital vs. labor.  We should keep in mind this is an international story as well as a domestic one.  Something our readings for Thursday will address.  

Meanwhile, back in the international economy...

While all the political talk today is about Mitt Romney's statements regarding the 47% of Americans who do not pay income tax, there is some real international trade news going on.  Obama and Romney are arguing about who is (or will be) tougher on China. Stiglitz would have a good time with this argument.  More soon as this morning's NPR transcripts and podcasts come online, as these cover Obama speaking to a crowd in Ohio and saying that American makes the best products in the world, and that when the "playing field is level", "we always win".  Standard stuff from a politician, to be sure, but as we talk about comparative advantage, we can pick apart what is true and what is not in these sorts of statements.

QE3 because "Congress is Lame"?

In the previous post, I noted how George Will was arguing against further monetary expansion from the Federal Reserve.  The day after Will's announcement, the Fed made its own announcement: that it would proceed with the increase in the money supply.  The program is known as the third round of "quantitative easing", or QE3.  All but one of the Federal Reserve governors voted in favor of monetary expansion, including those Will mentioned in his article.

One of Will's arguments was that the Fed was usurping roles that should be the domain of Congress.  Here's the contrary perspective from an op-ed writer at CNN: that the Fed had to act because Congress is "lame".

To be sure, a long-standing belief has been that Ben Bernanke, head of the Fed, would argue for doing "whatever it takes" to avoid a depression (or deflation, which we can discuss later), and that this would include a relatively broad interpretation of the Fed's mandate.

Some may object to the Fed taking on a big role in trying to get the economy going in this way.  In particular, many conservatives (including George Will) object to more Fed action to stimulate the economy, for a host of reasons we can discuss.  But it is also true that - if we take to heart recent polling data on Congressional popularity - a large number of Americans (of various political persuasions) would probably agree with the sentiment about Congressional lameness...      

 

Will.he.is

I want to flag for a later conversation (once we have discussed central banks) George Will's op-ed today on the Federal Reserve.  Will discusses the perspectives of the heads of three of the Federal Reserve regional banks.  (As we will discuss, there are 12 of them around the U.S. Incidentally they are excellent sources for research papers and reports on the American economy and a range of economic issues - just click on the map in the previous links to go to the different sites.)  From Will's perspective, these three voices have it right, being in opposition to the views of Fed Chairman Ben Bernanke and a majority of the Fed's governing board. 

We will discuss this in a couple of weeks, so feel free to disregard for now, if this is new to you.  But the first step in Will's argument is theoretical: that the Fed should in general focusing on avoiding the creation of too much money and its mandate should be to prevent inflation.  This argument rests on the idea (what is often called a "monetarist" perspective) that the role of a central bank is to maintain a stable money supply and let the vacillations in the real economy work themselves out. Secondarily, he argues that the Fed's recent efforts to do otherwise - namely by creating lots of money in the hopes that it will stimulate spending in the economy - have not succeeded in their aim.  And third, he suggests that the Fed's actions have arrogated to the central bank the responsibilities of Congress; he says monetary policy has usurped fiscal policy. 

A couple of scattered thoughts, though I will save the debate for later.

1. For any Ron Paul fans in the room, this gets directly to what he considers the main economic challenge to our current system.  We can discuss.

2. This also relates to Simone's post about the decisions of Europe's central bank, and the national institutions that have to endorse or approve of these.

 

First Official Economist Reference of the Term

I will probably make relatively frequent reference to The Economist magazine, for several reasons.

1. It has, far and away, the most in-depth regular coverage of IPE of any major American (or in this case, American-British) news weekly.  Far more than Newsweek or Time.  The Wall Street Journal and New York Times also have a good bit, but The Economist writes investigative and analytical pieces on the issues, whereas the dailies focus on reactions to the day's business news. Some of the others with comparable coverage come out monthly or even as quarterly journals.

2. It has a clear editorial position.  You may or may not agree with it, but you will know what it is.  This transparency about their perspective I find welcome (whether I agree or not on any particular issue).  As for what the perspective is, a big hint is the blurb on the cover of the Wolf book.

3. I get it in the mail every week. In sight, in mind.

In any event, a major article this week is about the emergence of the welfare state in emerging Asian economics such as South Korea, Singapore, and China.  It will be interesting to see, as these countries become among the most developed in the world, whether they will follow the same path as the "western" countries in developing comprehensive welfare states. If they do, that may be because there is just something about the socio-economic "structure" of relatively rich countries that makes it so. If not, the inference may be that historical trajectories or even culture matter more for the political and economic systems a country develops.  One note is that Mancur Olson - a name we will see later in the course - has argued in The Rise and Decline of Nations that the lack of persistent special interest groups over time is a reason that Japan did so well in terms of economic growth (relative to, say, Britain) after World War II.  As welfare states develop in the emerging East Asian economies, it will be something to watch to see if growth slows down, and if so what conclusions people reach about whether the welfare state caused slow growth or vice versa.   

World's Most Boring Headline (Actual Winner)

I nominated "European Central Bank Leaves Rates Unchanged at 0.75%", but in a search I was reminded that there was actually a competition for the world's most boring headline.  Paul Krugman had the details.

The winner: "Worthwhile Canadian Initiative".

IPE 2012: May You Live in Uninteresting Times

Chalk this one up as a punchline to the old joke about the world's most boring news item:
European Central Bank Leaves Rates Unchanged at 0.75%.

Any sentence that includes the words "central bank" and "unchanged" generally has a doubly soporific effect on people.  That said, we will discuss over the course of this term why some of these items are among those in current events that have the greatest effects on your lives.

Now some of you will not yet know what this headline means, and others of you will not understand the mechanics or perhaps its deeper implications.  But by the end of the term, I hope you will be able to look at this sort of seemingly drab headline about something like a central bank decision (or a consumer confidence report, or news on growth of manufacturing output in China, or a policy proposal about a payroll tax cut) and have some understanding of it, and some intuition that it matters.  When something like a central bank decision hits the news, I hope you will understand what it is, how it works, why it works the way it does, and what it all means.   

In the case of this specific news item, the European Central Bank is trying to figure out what role it should play in getting the European economy jump-started, and it is concerned about the prospects that some European countries (especially Greece and Spain, but others as well) might go bust, and blow apart the common currency, the euro.  That may sound like a problem for Greeks and Spaniards to sort out - along with Germans, Italians, and others - but let me put it another way.  Whether the euro survives in the short-run and in the medium-run will likely have a huge impact on a few little issues, among others:

• whether you have decent prospects for a job if you are graduating in 2013  
• when your parents might be able to retire 
• whether China can continue to bring millions of people out of poverty every year or not
• whether Barack Obama or Mitt Romney is elected in November

An old saying is, "May you live in interesting times".  I think that probably has it backwards for many of the big issues in IPE. Interesting times often means crises, which many of us could do without.  Certainly, people nearing retirement can do with a bit less financial market excitement than we've had in recent years.  And those now at the Democratic National Committee trying to reelect the president could certainly do without interesting times right now.. And the European Central Bank is hoping - really hoping - that they will be able to get by making very boring announcements for the foreseeable future.

You don't need to be able to trace yet all the logic, but the implications of decisions by these sorts of actors (central banks, private businesses, individuals, international institutions, and governments) is one way of understanding what IPE is all about. 

Sunday morning newspapers in my armchair (wearing tweed coat)

File this one under "wrong thing to read at 7:15 AM on a Sunday morning while taking 10 minute break from overdue grading".

At some level, it's actually an interesting question and an interesting illustration of questions of consumer and producer preferences, supply and demand for labor, even technology and productivity.  My reaction may be predictable, but just to state the obvious: I think the logic in this article does not capture much about W&L. 

I do suppose I could be persuaded to act in accordance with the assumptions in this article.  I may cap my office hours and interactions with students outside of class at a maximum of 3 hours per week.  (This includes during weeks when papers are due.)  I will refrain from comment on how courses might differ under the preparation assumptions.  Also, I am well aware there are indeed many ways to make my grading more efficient.  Most of them would require less work of me and (I would argue) less learning for you.  In other words: a win-win!  Woohoo!

But then, isn't my reaction to be expected from laborers who seek protection, instinctively resist greater productivity, and object to the extraction of the value (if any) they create? 

What?

It's a simple question ,What.  But it is not always easy to know "what" something is.  And I don't mean just non-descript lunch meat.  For example, some of the basics of modern economics depend upon measures, indicators, and measurements that are not always "correct" in terms of measuring what we wish to measure.  An example is Ben's discussion of Stiglitz's book on rethinking whether GDP is the best indicator of performance and development.  What is the actual production of an economy?  This definitional question can be surprisingly difficult to answer.  (I would thus note that definitional questions are sometimes good ones, notwithstanding my "mainstream social scientist's" view that the most appropriate questions for our purposes are causal in nature.)

On a previous occasion, I noted being struck by the folks at the IMF who said they felt like the institution had got things precisely backward in the Asian crisis.  That was an error - understood in hindsight - based on an understanding of economic dynamics.  But even more fundamental is if economists don't know what's actually going on in an economy.  What is the actual amount of activity?  What is the amount of output?  What is the amount of production?  What are the prices?  What is being imported, and what is produced domestically?  What?  What?  What? 

These may seem relatively simple to answer, but examples abound that show we don't even know what the current indicators are.  A common example is the need to revise various economic estimates - such as GDP or job gains and losses - a couple of months after initial estimates are sent out.  At some level, this is not to be too much lamented, perhaps: we know we rely on estimates, and accept their veracity at our peril.

But sometimes a presumed measurement becomes conventional wisdom, and then affects policy assumptions.  Which can be dangerous if the underlying measures are wrong. Take this article from the Washington Post.  It says that US manufacturing has done much worse in the last decade than was feared.  Conventional wisdom of late (no doubt fueled in part by economists for whichever party holds the White House, as the article notes) had become that manufacturing is actually on the upswing in the U.S., on the back of much greater labor productivity.  But this article holds that such claims were based on wrong estimates of what is actually being produced in the U.S.  In short: our top economists have been giving us the wrong numbers for what we actually produce in this country.  D'oh!

Take this new finding with a grain of salt as well, and note that it does not eradicate all of the growth in labor productivity.  On the other hand, if you have become convinced that the U.S. will do fine in manufacturing going forward, and are inclined to suggest policies accordingly, you will want to make sure you know "What" you are talking about.  The implication of this article being, in part: Not that most economists actually do.

Monetarists and Keynesians

Kane asked a question yesterday in class about what Milton Friedman would have done about the 2008-2009 economic crisis.  My expectation is that Friedman would have argued for monetary expansion and that it would have been interesting to hear his thoughts about fiscal stimulus.

Since we have Krugman and Stiglitz as major advocates of fiscal stimulus (along with Wolf, actually), here is a piece by someone (Ramesh Ponnuru) working more in the monetarist tradition.  You may be interested in the first part - on whether or not stimulus worked - but for the moment I am particularly interested in the latter part of the paper where the Fed is brought into the equation.  From a monetarist's perspective, significant expansion of the money supply could have provided economic stimulus without additional accumulation of debt.

Needless to say, a Keynesian could return with questions about this analysis.  One is the conflation of the deficit and national debt with the stimulus, when in fact stimulus is only a fraction of the deficit.  Another is the implication that monetary expansion worked from 1932 onward to come out of the Great Depression, while overlooking the fact that simultaneous fiscal stimulus (which the author opposes now) interacted with any monetary expansion then; also, there is some good evidence that fiscal stimulus was ultimately necessary in that case, having been removed in the mid-late 30s (with a resulting depressionary echo in 1937) and ultimately taking the form of massive government spending for World War II (which marks the definitive end of the Depression). 

Anyway, the debate could go on, but the main point is that here is an argument that I think can safely be categorized as monetarist in the Milton Friedman tradition.  The debate seems one that would be of interest to many of you.

The Economist (and a political scientist) on China

As noted in class on occasion and in a previous blog post, The Economist has really ramped up its regular coverage of China. The magazine very much straddles a line on its expectations about China's future, and in a way that I find compelling.

We have had a discussion in class on occasion about the prospects for Chinese growth and economic power into the coming decades.  I take a relatively bullish view on China over the medium to long term (though perhaps somewhat less than, say, Morten). 

In my role as Devil's Advocate, my own perspective is that there are a number of uncertainties that make projections about Chinese economic superpowerdom risky.  In brief, these are: 1) demography and aging; 2) the challenge of shifting to a more consumption-based and domestically-oriented economy; 3) the question of whether very high rates of growth are sustainable beyond about the 30 year time frame that Japan and South Korea experienced; 4) possibilities of a property bubble (which was a major trigger of Japan's economic troubles leading into its lost decade, and the trigger of the American crisis in recent years); 5) related questions about the banking system; and 6) the more political issue of whether the Chinese Communist Party faces instability as the middle class consolidates.   (Focusing on GDP growth rather than quality of life here, I am less persuaded that the environmental sustainability question will affect China's economy in the short term, though if we expanded the view a bit, that is certainly a non-trivial issue.)

That may sound like a big list, and a list from someone who is bearish on China.  I'm actually not pessimistic.  For one thing, the list could be shortened, depending on how one prefers to break things down.  The first 3 items on the list are really closely related, and relate to how China's growth and economy will change as it shifts from drawing on "surplus labor" and moves towards higher productivity, higher wages, higher capital investment, more production directed at increasingly wealthy domestic consumers, and growth that is less less export-driven.  I am moderately confident China's economic decisionmakers will handle this effectively (and the trillion+ in reserves doesn't hurt as a rainy day fund), though I also think that item 6 (and whether there is a push for greater political opening) is a wild card here. Items 4 and 5 are really interrelated as well, and again there is a good chance that China can successfully manage to deflate any bubbles without a hard landing. 

I do not project some collapse or waning of Chinese influence; I would just say there is real variance in possible future outcomes, and I would not share the confidence of any who make bold assertions about the extent of China's development another generation from now.  There are sets of lingering questions that make me reticent about such predictions.. For one, I also remember the fading of the Japanese "threat" - from the perspective of American competitiveness, etc. - rather too vividly.  I think China's economy likely has more staying power as one that will surpass the US economy in size and significance, but the Japanese experience does still haunt my thinking about this.  One way to put it is what David Shambaugh mentioned in his session the other evening: that making straight-line projections about China base on its last 30 years is unwise.  

In any event, The Economist hits on this set of issues to a large degree.  They raise questions about the future of the Chinese economic model without assuming that it will collapse.  They are wary without being alarmist.  They have elevated China to the point where it has its own weekly section, yet are constantly inquiring about whether the country is pushing or reaching certain limits, and how it will and must adapt.  In short, it is good coverage, and I recommend it. 

Gold Man Sachs

Okay, so maybe he doesn't want to run the IMF, but Jeffrey Sachs really, really wants to be president of the World Bank.  And this article from the Washington Post has a kind of funny take on it.  Here is the actual op-ed. He even has put up on his own website his running list of prominent statespeople who support his candidacy. 

I encourage each and every person to write their own essay - preferably on your blogs - for why you would be the best person to lead the World Bank. You can also post your list of those who support your candidacy, if you choose.  You can consider this a voluntary addendum to your essay on the greatest global challenges of the 21st century.   

Oooh! World Bank gossip!

This is what passed for juicy tidbits in the rarified air of World Bank gossip: the development community whispering about who will be the next president of the institution.

Could it be a non-American? 

Inflation, Exchange Rates, and the Fed

The question came up today about how Federal Reserve action would affect other countries, and how this may differ in different countries.

Stephen noted that the Bank of Japan is fighting deflation by basically printing yen (buying bonds and releasing cash into the economy), trying to get people spending, and is worried about Fed action.  I speculated that the concern about the Fed lowering US interest rates would mean that more people would want to have yen, which would mean a stronger yen and more imports, which could in turn be deflationary.  Hence the worry.

Morten asked about why the Indian and Brazilian central banks would thus worry about inflation resulting from the Federal Reserve lowering US interest rates.  Certainly, we would expect that the Fed lowering US interest rates could lead to inflation in the US (though it has not yet), but we would not expect that for Brazil or India.  If anything, the Fed lowering interest rates for the dollar means that more people would rather have Brazilian reais or Indian rupees, especially if you can earn 12% interest in Brazil and only 0% in the U.S.

So what is the dynamic?  One possible answer is that the complaint from the Indian and Brazilian governments was not really about their own domestic inflation, but rather a worry about about their currencies appreciating and this hurting Indian and Brazilian competitiveness.  Keep in mind that what would be good for Brazilian consumers (and should, all other things equal, lead to lower prices for imported goods in Brazil and India) would be bad for exporters, as Americans and Europeans (and Argentines and Malaysians, etc.) would have less reason to buy Brazilian and Indian goods. So the worry might be less about inflation and more about economic growth.

Another possibility is that the demand for the Brazilian and Indian currencies would put downward pressure on interest rates in those countries (since so many Americans and Europeans want reais and rupees, Brazilian and Indian banks don't need to pay interest rates that are as high), whereas the governments want to keep interest rates high to prevent domestic inflation.

As noted in response to Randi's question the other day, there is a lot of "push and pull" in any of these issues.  A particular effect - such as an appreciation of the exchange rate leading to a reduction in inflation - might lead to a policy response such as a lower interest rate that then in turn depreciates the exchange rate.  So you come full circle in a sense, with the market "re-equilibrating", at least in theory.  

More on this as Morten posts his own follow-up.

Pardon Me?

First up today: any enthusiastic praise for - and any necessary debunking of - the speech by Gov. Haley Barbour (as introduced by SoRelle), as well as other speakers at Mock Con. I didn't see the whole event, but had a few "pardon me" moments that generally come when I listen to active politicians... and pundits.

See also the post by Stephen Wilson. Speaking with Briegel, I know several of you have reactions to the speeches that are IPE-relevant. The reactions may be more or less evenly split between WTFs and woots.

Points for the first person who thinks the title of this post is funny and can explain why.

Ads of ill repute

So apparently, one of the most intriguing Super Bowl ads (aired only in "select" markets) was an IPE ad. I am not sure if the message is supposed to be fear of outsourcing, or of Asia (and Asians?) more generally. But note this goes back a couple of years. It is also a bipartisan endeavor: the site this is from looks generally left-of-center, but is rather equal opportunity in taking on the ads.

I should note that these are still not, for me, the most memorable of the generically anti-foreigner political ads that are in poor taste. That distinction has to go to Vernon Robinson from 2006. Have a listen (at the only place online where I could find this), but don't say I didn't warn you.

On deficits

Two articles came out today in the Washington Post about the deficit. One was on the apparent agreement between the president and Congressional Republicans on a measure that would eliminate half a trillion dollars in deficit spending over a decade. The author, Ezra Klein, is rightly skeptical that this would actually get passed. Run a thought experiment and imagine one or another political actor proposes this measure. What do you think will happen next in Congress and in media outlets?

The second was on action that could be taken that will virtually eliminate the entire deficit. Or rather the inaction that could be taken. If you think Washington is good at doing nothing, you should be pleased with this prospect: if Congress does not act at all, the deficit is cut dramatically beginning in 2013. Congress must act - and the president must affirm Congressional action - in order for a variety of temporary measures to be extended. This includes the Bush era tax cuts (or Bush-Obama tax cuts, if you prefer), the Medicare "doc fix", and other tax and spending provisions. If Congress does not act, we also will see $600 billion in cuts both to the military and to discretionary spending. Taken together, if Congress and the President cannot agree to extend these provisions, the deficit nearly goes away.

For me, one of the interesting subtexts of the 2012 election will be the efforts of the Republican nominee to get Obama to pledge to extend all the Bush tax cuts (which Obama himself did previously agree to extend for 2 years, but not permanently). Whether and how Obama stands on that will, I suspect tell us a lot about what will happen in the period between the election and the end of December 2012, the time when extensions of the tax cuts would have to be in place.

In any event, I was reminded of a recent study by the Center on Budget and Policy Priorities that disaggregates the causes of the deficit. If you have a chance, have a look. It makes for interesting reading.

Signs of the Times

The Economist has long had sections in each issue on "Britain" (since it is originally a British magazine) and the "United States" (being half-published in the U.S. now, and because of American economic weight), as well as sections on "Europe", "Asia", "The Americas", "Middle East and Africa", and then other topics such as "Business", "Finance and Economics", and so on.

And this is the way the world changes: starting this week, China gets its own section.

NPR PlanetMoney (on Iran)

NPR has a good segment its news shows called PlanetMoney, as Kane Thomas has noted. This morning, a segment featured a description of the pressure on Iran's currency. We will be turning to money, foreign exchange, and currency in the coming weeks, so not all of the language may be familiar yet, but have a look. I hope you will find it to be a nice segment in the way I did: it's targeted at the educated-but-not-specialized listener (or reader), so it demands your attention, but is sparing with the jargon.

In any event, the economic news out of Iran is a classic manifestation of exactly the kind of bank runs, panics, and possible currency collapses that have so often struck developing countries, such as in Latin America in the 1980s and 1990s. It also ranges from politics and corruption to the global market for energy (namely oil). We will discuss.

Religion, Culture, and Development

Hal Bozarth has written a lengthy post on the Protestant work ethic, and the role of religion and culture in economic development. It has not received much attention yet, but I will be curious to see if reactions emerge. The piece takes a strong tone on these issues, with Bozarth (let me refer to the scholar by his last name, as convention dictates) calling the Protestant ethic "nonsense", for instance.

My own reactions to the piece are mixed. On the positive side, there are two items. First, I am intrigued by Bozarth's argument that the fragmentation of authority in modernizing Europe contributed to economic dynamism, and will be on the lookout to see how and where that argument is developed further. The thrust of my reading being that the rivalry between Protestant and Catholic authorities and between Protestant denominations themselves inhibited the rise of a continental church-state (a "super-Church") that might have stunted economic growth. An interesting historical hypothesis to test and consider further.

Second, I too am generally queasy about cultural interpretations that can become overly deterministic. The suggestion that a certain theology or worldview is more conducive to dynamism more sound innocuous, but a paired implication is that other worldviews are more conducive to backwardness. From here, the leap is too easy to the idea that if, say, Africans are economically behind, they must have certain cultural deficiencies. Experience in Africa and other developing countries leads me to object to that culturalist implication more strongly than almost any other proposition in all the social sciences. I rather think of seemingly cultural expressions of economic practice (in Africa, for example) as something less theological and culturally-given, and more environmentally adaptive and even rationalist: communal solidarity and collectivism (at the level of families, villages, community groups, and other local units, but not at the level of the state) have a different economic significance when people are living at close to a subsistence level, to use one example. I have met very few Africans who have any less ambition for capital accumulation than Americans, but I have probably met more Africans who feel strong socio-economic obligations to share meager wealth with family and friends.

On the other side of the argument, Bozarth seems too quick to categorize and to make sweeping statements in some areas, even as he adds welcome nuance in others. Islam's economic history is much more varied than the caricature of Koranic limitations on usury would suggest, for instance. It also strikes me as overstated that "Calvinism and other sects had no bearing on economics". Cultural theories of development come in a range of flavors, from the baldly deterministic (which I do often find reprehensible and inaccurate) to much subtler and more conditional theories that treat religion and culture as factors that may matter among others, and that further deem religion and culture to be endogenous, subject to their own modifications and alterations over time.

This would be central to my critique of Bozarth: that he treats religion as rather exogenous and fixed, rather than being itself malleable, adaptable, and engaged in a more reciprocal relationship with economy and society. Perhaps this is because he is responding in kind to what he sees as religious determinists, but I would not find it fair to assert that Weber and others necessarily do the same. I am not a culturalist, yet I feel comfortable saying that one of the reasons for Weber's enduring significance is that he both carved out a clear theoretical statement of religion's possible impact (which I agree may well have been wrong) AND understood religion's embeddedness in economy and society, and its own adaptability. For this reason, while I agree with Bozarth on the merits of some of the critique of religious and cultural arguments, I think it precipitous to flatly argue that these lines of thought are of necessity wrong and/or imply they are reprehensible. Instead, cultural arguments are only partially correct (at best, and they require constant revision) and exist on a spectrum from reprehensible to something much more thoughtful and even humanistic.

It would also be useful to distinguish further between strict scriptural or textual interpretations of religions and their actual application in different societies. On this note, Bozarth offers an interpretation, drawing on Christopher Hitchens (see brief, but touching obituary here) of biblical requirements on the accumulation of wealth, but we cannot paint with a broad brush the extent to which these have been adopted as Christian practice; we cannot simply cast Protestantism as looking solely to scripture for guidance, then assume it should come out with a single, fixed interpretation of what that scripture says. It has never done so. No major text survives centuries without being subject to interpretation and reinterpretation. (Consider the Supreme Court and the U.S. Constitution, among others.) It is unclear the extent to which people and cultures through history have taken the "vow of poverty" and service as the central interpretation of the Christian economic gospel. Certainly, modern Christianity has included hugely ranging perspectives on wealth, from the "prosperity gospel" to liberation theology's "preferential option for the poor", with the Calvinist ethic being one of these many understandings.

I risk a reply that is longer than the original post, which I prefer to avoid for substantive blog entries. I encourage others to have a look and offer comments on Bozarth's blog and/or here.

Friedman: Don't be average

Not exactly new stuff, but in case you are up for a dose of Thomas Friedman's latest.

The more we discuss this, the more I am struck by the different implications and implicit recommendations from Friedman and Blinder. The two seem to me to depart from a common diagnosis of the fundamental challenge: that competition from an increasingly global labor supply will put downward pressure on white-collar American wages (see also Freeman on factor price equalization). But as many of you have noticed, the remedies do diverge from there, with Friedman seeming to be a science and technology enthusiast and Blinder deeming personal services to be the set of options that will be less vulnerable to offshoring.

There is much to say about this. One point I would offer is the comment I suggested on Freeman's piece in class: that downward pressure on wages in one sector of a market economy should soon "trickle through" to other sectors, albeit with a time lag. If wages in offshorable jobs fall, would not people in those jobs be expected to move more toward the now-higher-wage jobs in personal services, thereby driving down wages in personal services due to the increased labor supply? (The example in class was that more people will become barbers, and the greater competition among barbers should lead to cheaper haircuts: good for consumers, but likely bad for barbers.)

There are many other angles, including the question of job satisfaction and what status professions would look like if Blinder is correct, but that can be discussed another time.

What is Batman Really About?

Economics. Of course.

And Natasha was right: it was Batman Begins.

On stimulus

We have discussed two perspectives on the economic stimulus that began in earnest in 2009 and is now winding down.

One perspective is exemplified by Sally Platt, who noted that the stimulus did not work, but merely contributed to the deficit and was detrimental to the overall economy: "Let's be honest, the stimulus plan did nothing". Another perspective - less featured on our blogs thus far, but one that received several approving nods in the classroom - is that the stimulus was inadequate, not big enough.

It may not come as surprising that both Stiglitz and Krugman take on the second of these perspectives. Krugman has done so in many articles in the New York Times over the last two years, and Stiglitz on several instances as well. It should be noted that while both lean more Democratic than Republican, neither necessarily applauds the Obama administration on their execution of the stimulus, though both would be highly critical of Republican reactions.

More surprising, perhaps, is Martin Wolf, whose perspective on the stimulus would not have been a foregone conclusion. Here it is.

Thanks to Prof. Casey in the Econ department for noting this when he saw me carrying my Wolf book around after class.

Early Blog Awards

Only some of the blogs are functional yet, but as I get the URLs and links from you, I will update the list at right. Incidentally, here are the early nominees for blog awards:

Best Title (3 nominees):
"If the Ruby Slipper Fits", Stephanie Brandao Carvalho
"Gringa Economics", unnamed student
"See email later*", Morten Wendelbo

Most Ambitious Title (only 1 nominee):
"All Things International", Ben Ersing

Lamest Title (2 nominees):
Sorelle Peat, for "Sorelle Peat"
Tyler Dickovick, for "International Political Economy"

Best image in a post:
"Gringa Economics" for Castro hugging Chavez

Best post that is not actually a post to the best of my knowledge (1 kandydat):
Bądź pierwszą osobą! (Dominika Kruszewska)

* this is Morten's blog URL as listed on the sign-up sheet. I think it actually means "See email later", not "my blog title is 'See email later'". If so, I reserve the right to unnominate him.

Useful resources

In a previous post, I noted that the Euro crisis (or resolution of the crisis) is likely to be the issue that dominates much of the IPE news this year. That is, barring an economic crash in China or the U.S. that could conceivably emerge for other reasons. One of my hopes in designing the course is that we will be able to discuss these sorts of issues on an ongoing basis, working to figure out what is going on even as global political leaders and leading economists are trying to do the same.

Now, many of the most reputable books and most major academic articles are going to get published more slowly than current events move; this is the nature of how academic work gets reviewed. So we will have to look to other sources to keep up with this. As noted on the bottom of p. 1 of the syllabus, I think some of the best resources are the regional banks of the Federal Reserve. Just click on the map in the link to go to one of the 12 banks, and then look for their research or publications. For some reason, the St. Louis and Atlanta banks in particular seem to have a lot of material on IPE. You may have to do a bit of fishing, but there is a lot of good material that won't show up easily in a Google Scholar search.

Here's an example of a report on the causes of the Euro crisis. Don't consider it required reading by any means - it's a bit technical and probably a better read a few weeks from now. But if this type of issue is your thing, do know that there is more where this came from.

Another good resource is the International Monetary Fund, though their reports tend towards the highly technical. Not to mention their website construction has been lousy for years. You can do a search, or look at their publications page, scrolling down to look at "Working Papers" and "Economic Issues in full text".

These sites have papers that will be timelier than many academic journals, but more analytical than newspapers. They can be helpful for research going forward. You will have to pick and choose, but do consider looking at these sorts of institutions and at this sort of material.

Book List (running)

This is a non-exhaustive list of books on financial and economic crisis that you might choose to read and write about for Weeks 7 and 8 [reposted and updated from 2009].

Ahamed, Liaquat. Lords of Finance: The Bankers who Broke the World.

Akerlof, George & Robert Shiller. Animal Spirits.

Bagus, Philip. Tragedy of the Euro.

Bernanke, Ben. Essays on the Great Depression.

Cooper, George. The Origin of Financial Crises.

Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System

Fox, Justin. The Myth of the Rational Market

Friedman, Milton. The Great Contraction, 1929-1933.

Galbraith, John Kenneth. The Great Crash of 1929.

James, Harold. The Creation and Destruction of Value: The Globalization Cycle

James, Harold. The End of Globalization: Lessons from the Great Depression.

Keynes, John Maynard. The General Theory of Employment, Interest, and Money.

Kindleberger, Charles. Manias, Panics, and Crashes: A History of Financial Crises.

Kindleberger, Charles. The World in Depression, 1929-1939.

Lewis, Michael. Panic: The Story of Modern Financial Insanity.

Lynn, Matthew. Bust: Greece, The Euro, and the Sovereign Debt Crisis.

Marsh, David. The Euro: The Battle for the New Global Currency

Minsky, Hyman. Can 'It' Happen Again? Essays on Instability and Finance

Minsky, Hyman. Stabilizing an Unstable Economy.

Morris, Charles. The Two Trillion Dollar Meltdown.

Onaran, Yalman. Zombie Banks: How Broken Banks and Debtor Nations are Crippling the Global Economy

Reinhart, Carmen and Kenneth Rogoff. This Time is Different: Eight Centuries of Financial Folly.

Shiller, Robert. The Subprime Solution.

van Overtveldt, Johan. The End of the Euro: The Uneasy Future of the European Union

Wapshot, Nicholas. Keynes Hayek: The Clash that Defined Modern Economics

Wessel, David. In Fed We Trust: Ben Bernanke's War on the Great Panic.

Wolf, Martin. Fixing Global Finance.

Zandi, Mark. Financial Shock.

IPE 2012

One of the leading issues I will wish to address in the coming weeks and months will be the prospects for the survival or collapse of the Euro. This issue cuts across many of the themes we will be discussing, it is pressing and current, and it will have a huge impact on all of our futures (for reasons we can discuss).

As you think about your choices for selected books later in the semester, keep your eye out for any books coming out about the Euro, and we can talk about whether they would be good options.

This is an example of how IPE moves faster than a syllabus.

...and lest we miss it

The Daily Show also hits the Dubai crisis.

Global Warming (and prostitution...)

Some of you may have beaten me to post this video... I haven't checked your blogs yet.

Anyway, here's Jon's take on global warming, along the lines of what we discussed yesterday.

And, as an alum, I will echo his comments: Go Quakers!

The first Political Scientist, I might add...

By the way, Elinor Ostrom is one of the authors of one of our articles today. If the name rings a bell, it's because of something that happened a few weeks ago.

Recognize any names?

Check out the invitee list for the White House jobs summit. Note especially the economists...

Who's 21 out there?

I won't announce here what my age is (though you already know I grew up watching Mr. Roboto). You will have to look at the links for that. But in case you're interested in general demographic and political trends, a set of surveys finds that I am from the single most Republican age cohort in the United States today.

The argument - from the New York Times' semi-official conservative columnist, Ross Douthat - goes that having grown up in the Reagan years was likely to make for more stable commitments to free markets (while by contrast having grown up in the FDR years of successful government intervention was likely to make citizens into Democrats).

Anyway, what caught my eye is that while I am from the most Republican birthyear in modern American history, many of you may be from the most Democratic birthyear: that is, current 21 year olds.

As a flip side of that coin, 24 year olds are the least Republican (though not most Democratic) of all voters. Don't be confused by the scale here -- we're talking about a few percentage points -- but it is intriguing to see what happened in your lifetimes (in the Clinton and Bush years) as contrasted with mine.

The President Goes to China...

... and all we get are these lousy t-shirts?

The New York Times has multiple columns up today: an Op-Ed, plus Krugman on global imbalances (again).

Similarly, the WSJ rings in on not forgetting the rest of Asia, and on China blaming the U.S. (turning the Krugman and Ferguson articles on their heads). The latter is behind the subscription wall, but can be reached via Google News.

"The key financial distortion in the world economy today..."

Niall Ferguson and Moritz Schularick on Chimerica.

This is JUST PLAIN COOL...

Count me in ...but now tell me we're not a hair's breadth away from transcontinental open heart surgery...

This American Life

Links referenced by Prof. Smitka yesterday:

"The Giant Pool of Money" transcript and audio.

I recall hearing this some time ago. It's clear and some of you will enjoy it.

Zero-sum and Positive-sum IPE

Toliy offered some thoughts in comments on the US-China post below. I started with a reply to his comments, but decided to make this a longer post. In short, I think he is correct to note that a country's political strategy and economic strategy may point in different directions. Specifically, China may "gain politically" from greater prestige relative to the U.S. (say, from a weakening dollar), even if it may "lose economically" by doing so. And I agree with his first paragraph in his comments. If I follow correctly, he also then asks whether China's "political strategy" might be to look for a decline in the dollar.

My expectation would simply be that economic logic would trump political "point winning" for China in this regard. I too would argue as Toliy has: that China wants a long-term move away from the dollar as reserve currency, but surely wants no collapse of the dollar in the short-term. (For what it's worth, I can think of no-one who would want a collapse of the dollar in the short-term. Except maybe this guy. That is, Mr. July 2004. And no, for those keeping score, not even Mr. June 2005 would want a collapse of the dollar -- no way.) As for the question of "winning political points", or what I called "bragging rights", my expectation is that China would subordinate these to its economic objectives, trying to manage a long-term, slow weakening of the dollar with no sudden movements.

Perhaps this expectation that China would not seek "political points" from hurting the dollar's prestige comes from my belief (and one is free to call it a "perspective", "bias", or other term) that IPE probably has fewer "zero-sum games" than security studies. You will have to ask yourself if you agree.

Think of the Cold War. The US and USSR opposed one another militarily, and any relative increase in US power was seen to be a comparable decrease in Soviet power, and vice versa. This is a zero-sum game, just like football, baseball, or (of course) ice hockey: one side scores points at the expense of the other side. Notice in the Cold War case that the US and USSR also did not trade with one another. That is, each side denied the economic benefits of exchange (from basic comparative advantage, etc.) to its rival.

Contrast that with most cases in IPE between countries that maintain economic relations with one another. The U.S. and China today being the biggest example, but take the U.S. and the EU, for a moment (or the EU and China). Of course, each side is going to maximize the advantage it can get in negotiations and in trade with other parties, but there is very little sense that the EU would benefit from American economic weakness, or that America wants an economically weak Europe. Economics simply isn't that zero-sum between trading partners. Again, each will try to get the best deal for itself, and will try to maximize its own power, and other caveats exist (domestic politics may intervene in many ways, and the question of rapid growth's effects on the environment may shape peoples' preferences), but you will not find many arguing that we want an economically weak EU or a less vibrant world economy. A decrepit China would also mean a less vibrant world economy, and China probably competes less than Europe with the U.S. when it comes to directly competitive goods. (That is, we buy European stuff that Americans also make - like cars and airplanes - but buy relatively few Chinese items that are also Made in the U.S.A.)

When it comes to the positive-sum international relations we find in the global economy, consider also the Marshall Plan, in which the U.S. was part of the reconstruction of Europe after WWII. The logic was that - apart from humanitarian reasons - the U.S. smartly recognized the need for a vibrant international economy in the long run and thus invested in building up Europe as a powerful integrated economy. (Incidentally, administering the Marshall Plan was the origin of the institution Prof. Smitka referenced yesterday - the International Bank for Reconstruction and Development, or the World Bank.)

Returning to China now, the same principle of interdependence seems operative. In short, as David Razum noted in referencing a recent book, and as The Economist notes in its current issue, and as Niall Ferguson noted in coining the term "Chimerica", we have a partial "fusion" of the two major economies. The notion of interdependence suggests to me that if China has the U.S. by the throat, the U.S. has China by the [insert graphic image here]. Either one squeezes and both are going to get hurt. So neither wants to squeeze.

Why do recessions happen?

Just as a marker for future conversation, note that Krugman and others seem to look at major systemic economic crises -- call them "depressions" -- in the following way:

Depression = recession + financial crisis

Which begs the question (since we're looking at financial crisis a good deal), why do recessions happen? Just as a first glance, have a look at this article in The Week. In short, it's a business cycle.

Occam's Razor and China's currency reserves

One recent item of much discussion has been whether the Chinese government wants to see the dollar decline as a reserve currency. The main reason we have given that China would not wish to see a precipitous decline in the dollar is that the government would be shooting itself in the foot: destroying the value of its trillion-dollar reserve stash. This certainly matters.

But another simple way to look at why China might not want this is to consider how its policy has long been centered around an undervalued yuan. To be sure, China is looking at moving towards a greater emphasis on domestic consumption of domestic production in the future (as part of the global "rebalancing" Bernanke and many other economists wish to see), but in recent years we have seen general agreement that the yuan is undervalued -- the question has been "how much".

Now consider what China would be doing if it initiated the much-feared "run on the dollar" apart from hurting the value of its reserves: it would be smashing the very logic of its export-oriented growth strategy by makings its products dramatically pricier to Americans. Again, there are caveats here (China sells a large amount to Europe as well and may be interested in a strong euro as a competitor to the dollar as a global reserve currency, and moreover past policy is unlikely to be reflected in future policy), but it would seem very unlikely to have an export-oriented economy seek to undermine the purchasing power of its biggest customer.

In other words, to address some concerns in class, China may wish to see a long-term waning of the dollar's dominance in favor of a more stable "basket" of currencies (perhaps including its own yuan in the long run), but it surely does not wish to see a collapse of the dollar for the sake of bragging rights.

In short, sometimes a simple argument can suffice: if China really wanted to hurt the dollar, why wouldn't they have simply revalued the yuan long ago? And why would they have accumulated so many of them in reserves in the first place?

Foreign and domestic capital flight

We have talked a about how uncertainty over a currency's value might lead to foreign capital fleeing a country. Nobody wants to be left "holding the bag" of cash after the hypothetical peso declines in value. This is true, but in the discussion, we may have been overlooking something that is also important: domestic capital. That is, citizens of [insert real country name here] Pesolandia might look to put their savings in dollars or another "hard currency" so they are not left holding the bag.

In other words, just a note that capital flight out of a developing country at a time of crisis may come from either international or domestic sources. And in some cases, it may be the latter that is more significant.

Animal Spirits

From the growing field (no joke!) of primate economics: evidence that monkeys know how to reward specialization, high-value tasks, and productivity with higher "wages" or maybe "profits". (You will love the form the earnings take.) More intriguing yet, when new suppliers enter the market, competition increases and earnings decline. Classic.

Have a listen. It is a 4 minute clip.

Reid Reads Krugman, but does Krugman Read Reid?

Paul Krugman this morning on China's currency and the dollar.

Beyond the arguments about the desirability of a strong or weak dollar, notice the linkage to the subprime mortgage crisis. Someone mentioned the "global savings glut" (or "Chinese" or "Asian" savings glut) as a possible cause of the crisis. How does that work? China uses the dollars from its exports to purchase massive amounts of U.S. government bonds. Since China is demanding so many bonds, the interest rate stays low. Low interest rates on government bonds leads to low interest rates on other loans, including mortgage rates, car loans, etc. So in this sense, the Chinese trade surplus led to Americans contracting more and more debt, which they/we largely used to buy bigger and bigger houses. You see where this is going...

China's Economy

What is your immediate reaction to this news:

China's Economy Grows 8.9%

Many of you may look at this and fear that it will signal China's continued growth at the expense of the United States, and its ever-more-imminent threat to overtake the U.S. as the world's "leading" economy. The case has already been made that China is the "leader" in the global macroeconomy, with the U.S. and Europe as followers.

There is a natural tendency to see the IPE as inherently "competitive". While this is appropriate for many reasons, it is worthwhile to note that the world economy is not "zero-sum". In fact, it is important to note that Asia (esp. China) must necessarily be a big part of any plan to get past the global financial panic and restabilize the world economy. By many counts, the U.S. needs China to do well.

So have a look at the article and consider the ways rapid Chinese growth presents both a challenge and an opportunity for the U.S.

It's Our Fault, All of Us

Since we took both sides of the lender-saver issue, Ben Bernanke decided to do the same.

It's everybody's fault!

Blast from the Past (Stiglitz 2005)

Note the following from Stiglitz, p. 254:

In early 2005, China announced that it is no longer committed to holding reserves in dollars. It had, in fact, already moved substantial amounts out of dollars (about a quarter of its reserve), but the announcement had immense symbolic value. Other central bankers, more in keeping with their tradition of staying out of the public eye, quietly confided to me that they too were moving out of dollars.

Compare with the news from 2009 that China is calling for a new international reserve currency to replace the dollar, as reported in the New York Times and Wall Street Journal, among other places.

Two notes on this. First, the interest in diversifying away from the dollar is not a product of the recent financial crisis; rather it has been percolating for longer than that as a way to address "global imbalances", as Wolf would call them. Second, this proposal is not far off from what Stiglitz proposed in his reformed "global reserve system". To that, I can only say, hmm.

The Dollar is Falling! The Dollar is Falling!

Obligatory weekly contribution from The Economist.

There are many possible responses to the dollar's decline. One is from renowned commentator Ian Reid. Reid's argument is as follows:

I say stop the printing presses, raise some rates and let those with money spend it and save the dollar. I don't want to be a 21st century Zaire...

This could certainly defend the dollar, largely by giving developing countries (read: China) more incentive to buy U.S. bonds. The downside is... well, someone else can make the counterargument.

One thing to be clear about is that inflation and currency depreciation should be differentiated from currency collapse and hyperinflation. It is unlikely the U.S. would suffer from the latter, even if/when it does suffer from the former.

News Doesn't Stop for Reading Days

The EU and South Korea move ahead on international trade.

One of the interesting elements of the main plot is that the US and South Korea are moving (slowly) towards ratifying free trade, and a question is whether this will accelerate that process. One of the subplots here is whether bilateral trade agreements between countries present blocks or stepping stones to broader multilateral trade agreements. Something to follow for the purposes of the simulation, and especially in the event you plan on writing about international trade for the final paper.

Sir prize

Bringing together Jon's blog comments and the in-class debate.

Timely Op-Ed

On the "gold standard mentality" and the strength vs. weakness of the dollar. From Paul Krugman in today's New York Times.

For what it's worth, you could add Peter Temin's Lessons from the Great Depression to the list of pre-approved books for Week 7. (Temin is mentioned by Krugman in the op-ed.)

Remittances and searches

Some of you may be interested in economic development in low-income countries, as it relates to some of the topics we will be discussing these weeks. In that vein, one of the big stories in development in recent years is about remittances. These are funds sent "home" by workers residing abroad. Most often, remittances come pass between family members from one earning a wage/salary in a higher-income country to the family in the low-income country. For families, this is obviously a supplemental source of income. From a national or macroeconomic perspective, they are also a source of "hard currency" -- an established, internationally-traded currency such as the dollar, euro, or yen.

Now, say you wanted to write your paper on this. As is often the case, I can link to a recent article in The Economist. But the point I'd like to make with the link here is a slightly different one: because the article piqued my interest, I googled "remittances capital account" and found a few different sources, including this interesting paper. This came after searching and finding similarly interesting material in a couple of other related searches. The lesson, I suppose, is one I have mentioned to several people: persist in trying out different search terms and take some time to sift through the results. (One of the great problems nowadays for me, being accustomed to easy availability of sources, is that I too often don't conduct a thorough search with different search parameters and the like.) If something interests you, find out more about it. It can be done, even if it takes a little extra effort.

Throw more curveballs.

Trust them. Via a short article in The Economist.

Shamira has her answer

But surely they can do better than just the "What do YOU think?".

Good news about gassy rocks

If you are feeling the need for some good news this morning, try this. The author, who writes for The Telegraph newpaper in the UK, was on NPR this morning with a decidedly optimistic assessment of the future of U.S. energy production and its resultant impact on the current account: easier extraction of natural gas from shale rock in the U.S. means natural gas prices decline, so oil prices must decline (because natural gas is increasingly a substitute for oil), so the U.S. will be sending much less overseas.

As for the US, we may soon be looking at an era when gas, wind and solar power, combined with a smarter grid and a switch to electric cars returns the country to near energy self-sufficiency.

This has currency implications. If you strip out the energy deficit, America's vaulting savings rate may soon bring the current account back into surplus – and that is going to come at somebody else's expense, chiefly Japan, Germany and, up to a point, China.

Have a look at the article. Before you get too excited, note one important caveat:

Shale gas is undoubtedly messy. Millions of gallons of water mixed with sand, hydrochloric acid and toxic chemicals are blasted at rocks...

Nor is it exactly green.

Nonetheless, the article notes, "[n]atural gas has much lower CO2 emissions than coal, even from shale." The article concludes with a note that we can be prone to hyperbole... but also that "we may need to rewrite the geo-strategy textbooks for the next half century". So I'm glad we resolved that.

Reading Options addendum

Add Globaloney 2.0, by Michael Veseth, to your list... though it is just being released and may not be available in time...

"Be careful what you wish for", Or "How Europe paid for the Vietnam War"

I can't believe I'm posting something I found via Drudge, but since Shamira's blog sent me there...

Here's another IPE issue raised... the dollar's role as a reserve currency.

We will be talking about the international monetary system soon, but notice that this issue -- the strength of the dollar -- underpins a huge range of related IPE issues. This includes your postings about China and the yuan, the Japanese yen, and so on.

One argument, just for fun, and just to keep the juices flowing: since the dollar was the reserve currency in the 1960s and 1970s (and we went off the gold standard in 1971), the U.S. was basically able to "export inflation" from all the expenditures of the 1960s. Which included Vietnam, Medicare, and Medicaid. Because other countries were stuffing dollars under their mattresses, the U.S. could spend a huge amount of dollars, suffering some inflation at home, but also knowing that the Europeans and others would accumulate some of the excess. Of course, with inflation, the dollar bought less over time (35 of them could no longer buy an ounce of gold, for starters), but the impact of that inflation was felt by foreigners just as it was felt by Americans. In other words, Europe partly paid for the Vietnam War.

If the world moves away from the dollar as the global reserve currency, think about what this means for American consumers and producers. Less demand for dollars from overseas, a less valuable ("weaker") dollar. Imports get more expensive. (Fuhgeddabout German cars...) Exports become relatively cheaper for others to buy. (Buy American! Woohoo!) It could be a kind of "rebalancing" that many people wish for... but, as we'll discuss...

be careful what you wish for, you just might get it...

Do Cry for Me

Argentina (sigh...)