Economics, Politics, Social Commentary and occasionally Superstring Theory.

Thursday, December 30, 2004

New Year's Fun

The Economist has an article here about the potential impacts of the elimination of textile quotas on January 1, 2005. A quota works just like it sounds; the U.S. only allows a certain amount of textiles from each country to be imported per year. The U.S. has had textile quotas in one form or another for the last 30 years. Because the domestic textile industry happens to be located in sensitive political geographic locations (like steel), any move in the industry is bound to be interesting.

Among some of the attention-grabbing findings is that China could gobble up about half of the U.S. market and more than 30% of the EU market. This would, of course, wipe out the economies of Bangladesh, Cambodia and a group of other countries. However, those numbers are based on cost alone and don't take other relevant circumstances into account (i.e. proximity, scale, etc.) Moreover, I don't think China wants the textile market. Textiles are how poor countries enter the world market; China is not a (relatively) poor country and is already in the world market. Moreover, textile dominance would be a step back for China. They're currently moving into manufacturing with an eye to jump into tech and services sometimes in the next decade. Exerting their influence in textiles would be a step back, not a step forward.

Tuesday, December 21, 2004

Russia's Devolution

The New York Times (free registration required) has the latest installment in the Yukos saga here. This story has interested me for a while.

In the old days, Russia would just send soldiers to a business when they wanted to take it over. However, that tends to make foreign shareholders a little edgy these days. So, today Putin uses taxes. It's not exactly parking a tank outside the storefront, but the effect is the same. Here's how they do it:

All of the sudden, you get an enormous bill for back taxes. "Absurd," you say to yourself. "Tax rates aren't this high, and I paid all my taxes." You try to work this out with the tax agency, but to no avail. You go to court, which is a joke. The judge easily finds for the government. So, how will the government collect its money? They'll auction off your business, of course. But wait, the government can't just auction the business to itself. Instead, it gets a couple of buddies to stand at the auction and make the bid for the government. To add insult to injury, the bid is less than the company is valued. It's all a sham, of course, these guys are going to transfer your business to a government-owned subsidiary pretty quick. But, at least it looks more official than a tank outside your storefront.

Who does this ultimately hurt? The Russian people. Foreign investment is critical for job creation in Russia. But no one is going to invest in Russia if they think the Kremlin can confiscate their investments at the drop of a hat. The blind spot for this Kremlin has always been their inability to connect the dots between domestic sovereign action and foreign private reaction. Like it or not, Russia depends on the rest of the world. It cannot continue to act as if it governs in a vacum. Doing so will only exacerbate their problems, not solve them.


Monday, December 20, 2004

Absence

Sorry for the lack of posting for the last few days. I have been in the middle of finals and my time was needed elsewhere. Now, happily, finals are over and I'll resume posting tomorrow. Thanks for your patience.

Sunday, December 12, 2004

China Slaps Export Tax on Textiles

China has announced that it will put an export duty on textile imports to compensate for the dismantling of textile import quotas under the WTO, Yahoo is reporting here. The duty will be on a quantity, rather than value, basis.

Why is China doing this? They've had no qualms about undercutting other countries on manufacturing, so why should textiles be any different? I have a couple of theories.

First, they're probably trying to avoid a flurry of anti-dumping actions in the U.S. Companies in the U.S. can file anti-dumping actions if they believe a foreign company is charging monopoly profits in its home market to subsidize lower cost exports into the U.S. market. It normally works by finding the ex ante price out of the warehouse, and comparing price in the home market and the U.S. market. However, because China is a non-market economy (NME), the Department of Commerce (DOC) will use prices in a surrogate country (Japan is normally substituted for China.) So, if comparable textiles that are produced in Japan are being sold to Japanese consumers for more than what Chinese companies are charging the U.S. for its textile imports, the Chinese company will get slapped with a duty to compensate for the difference. Even worse, under the Byrd Amendment, the proceeds from the duty put on the Chinese imports will go to the company who brought the anti-dumping petition. This effectively subsidizes inefficiency, but that's a subject for a different day. My take: the Chinese figured the anti-dumping duties were inevitable, so instead of having the money flow to U.S. competitors, the Chinese government decides they'd rather just keep it themselves. This is evident by how the tax is structured: quantity, not quality. This will encourage higher-end textile exports because they'll face less of a real duty compared to the value of the export. My worry is that other countries will catch onto this, and start their own export duties to raise their prices enough to get around a positive dumping determination. This will have the effect of raising world-wide prices, mostly on lower-cost goods. Another reason why the U.S. needs to get rid of the Byrd Amendment.

My second theory is that the Chinese probably don't want to get sucked into low-end textile manufacturing. Given enough latitude, China could easily become the entire world's textile producer. I don't think that's what China wants. Instead, they'd like to branch into more capital-intensive manufacturing and build enough infrastructure to compete as a first world power. The road to doing so does not lead through textiles. They get an added benefit of earning themselves some elbow room on their currency undervaluation, too.

UPDATE: New York Times (registration required) has a somewhat more expansive article here.

Saturday, December 11, 2004

Health Care Reform

Andrew Samwick makes a compelling case for eliminating the deductability of health care premiums, both on the employer and employee side, here and here. Tyler Cowen weighs in here. Brad DeLong signs on with Samwick here. The crux of Samwick's argument is:

Who benefits from this deductibility [of insurance]? ...the average family with $100,000 or more in income receives a benefit of $2,780. Compare this to an average benefit of $1,231 for a family with $30,000 - $39,999 in income. Because tax rates are higher at higher income levels, and those with higher incomes are more likely to have coverage, the benefit goes up with income...

The portion of this disparity that is due to the progressivity of the tax system is ridiculous. Subject it all to tax, and take some portion of the $100 - $200 billion saved and use it to provide refundable tax credits to purchase health insurance, whether through an employer or an individual policy. The credits should phase out at higher income levels.

I have a few reservations, myself.

The above is a good argument for ending the deductability at the the employee end. If you look at the deductability as a government payout rather than an exclusion (which it is, the government is forgoing a tax it could have employed, and in doing so is putting money in your pocket) the deduction makes no sense. It does not encourage anyone to do anything. It is skewed toward the higher income brackets. Furthermore, and most importantly, the deduction has little to no effect on whether employees opt for coverage. Employees don't get to decide whether their employer offers health care. And if it's offered to them, they certainly aren't going to turn it down simply because their income gets taxed before their premium is withdrawn, instead of after. The current deduction does nothing but give people a break on however much their insurance plan might charge for a premium. Taking the deduction away allows the government to target new money towards programs that might actually fix the health care market (overconsumption and inefficient choice of services). It also puts a little bit more of elasticity on the demand side for premium increases, as employees will feel them more than they do now.

The deduction for employers needs to stay. Eliminating it means that the cost of providing health care to employees goes up. Small employers are having a hard enough time keeping up with premium increases already. Making it even more expensive by eliminating the deduction means pricing more employers out of the market, and that means more employees will be unable to receive health care. Many low-wage employees simply cannot afford private health insurance if it is not provided by their employer.

Instead of using the money saved by eliminating the deductions to create tax credits for the purchase of health insurance, as Andrew argues above, I'd rather see them put into Health Savings Accounts. The goal of the HSA is to allow employees to divert some of their paycheck, on top of their higher deductible health care premiums, to a savings account which will cover out-of-pocket expenses until the insurance kicks in. Instead, eliminate the deductibility at the employee level, but use the new tax dollars as a transfer into the person's HSA. For instance, Andrew quotes above that the average family of four in the 30-39K tax bracket gets $1,231 from the deductability. Instead of that deductability, which doesn't give the family an incentive to do anything, why not put it in their HSA? This means the family that can't afford to divert any of their paycheck to contribute to their HSA can now forego the benefit of deductability and contribute directly into the HSA. Admittedly, all this is doing is switching around the time the benefit is realized, but it ties the benefit more directly towards health care spending.

Let's take it one step further and see if we get more benefit from means-testing it. This means we provide more of the benefit to people making less money. How to do it? Well, this is the tricky part, because again there's no way to judge health care spending or family size off of income tax bracket alone. Well, first off we can cap the automatic distribution of the deduction at age 65, because that's when Medicare kicks in. You'd still be able to withdraw from the HSA, but no more automatic contribution. This will give us some more money because people at age 65 and above will still be working, but we'll be transferring the benefits of the deduction to someone who doesn't have Medicare to back them up. Second, we can correlate a number of dependents that a household has to the number of children it has. The more people in the house, the more medical expenses there should be. We tie the amount of the benefit to the number of dependents claimed. So, for every dependent a person claims in addition to themself, they get a certain multiplier of their deduction contributed into their HSA. For instance, if you only claim yourself, you get the benefit of the deduction placed into your HSA. If you have claim head of household, have a wife and three kids, you'd get your deduction benefit times X, where X = the mutiplier assigned to 4 dependents, contributed into your HSA. The money saved by means testing means we can afford to give poorer families more than their automatic deduction contribution, which means they have more money to spend on health care.

Alright, you might say, but this is not going to help out anyone during Year One of the program. The contributions into the HSAs are going to be so small that they can't possibly cover ongoing first dollar expenses. You may be right. So, let's give everyone an up-front deposit of what their estimated deduction value would be. For instance, based on the deductions you had last year, let's say you're going to get X amount of dollars next year. We'll just give it to you now. Obviously, you'd want to make the means testing for eligibility for this program tighter than you would for the ongoing program. The most effective way to do this would probably be tie eligibility to eligibility for the Earned Income Tax Credit. It's going to cost you a few billion, but it's only a one-time expense and there are worse ways to spend the money.

Finally, you might ask, how does this combat the real problems in the health care market: overconsumption and inefficient decision-making? The same way regular HSA's do, by making consumers more price-sensitive to initial expenditures. The theory goes that once you've spent enough that your insurance is kicking in, you've become less price-sensitive because there's something seriously wrong with you. The key difference in the plan above is that it allows more participation in the program by diverting a benefit no employee pays attention to, deductability of premiums, into one they can use, their HSA. It allows poorer employees with more medical liability to actually realize more than their respective benefit by means-testing it to target it to those families who need it the most. Those who are so price sensitive that they've sensitized out of the market.

Thursday, December 09, 2004

Bad Moon Rising

The Financial Times has it that weak demand for ten year T-Bonds has pushed yields up by five basis points. This might be a good time to explain how the bond market works:

When the U.S. government (or anyone, for that matter) decides they want to borrow money from the public at large, they have a number of different options. One way is to issue bonds. The U.S. Treasury issues what are called 'zero-coupon bonds.' This means they don't pay out a stream of money over the life of the bond (or coupons.) Instead, they offer bonds at less than face value which are redeemable at some other point in time for full face value. This is like asking a friend for an IOU: "Hey, Mike, if you buy me lunch today I'll take you out to dinner next week." Dinner normally costs more than lunch, so most friends would go along. Buying bonds is the same thing. When you make this offer, however, you don't know where your friend is going to pick for dinner. You may get lucky, and he might decide he just wants a peanut butter sandwich. Or, he might decide he wants dinner at Spago's. People buying bonds are depending on the sandwich answer, because then they realize a gain. (Lunch out typically costs more than peanut butter and a couple of slices of bread.)

What determines the Spago's v. sandwich decision in the bond market is not your friend's preferences, but the rate of inflation. How much the face value of the bond is discounted depends on what the buyers' consensus of future inflation will be. If a bond will pay me $100 in ten years for a price today of $60, that might sound like a good deal. But if my present $60 is going to be worth $120 in ten years, then I've actually lost money. Typically, if the bond issuer does not get enough to demand, they have to raise yields. What this really means is that they're lowering the price (if this sounds counter-intuitive, it is.) Let's go back to our dinner example. Let's say you're asking your friend for another IOU. "Nope," Milke says. "I got burned by you one time before. You said you would buy me dinner, and then tried to pass off that sandwich as payment." Well, now you're either going to have go lunch-less or sweeten the deal (maybe with dinner and dessert.) When bond yields go up (and bond prices go down), the bond issuer is sweetening the deal by offering a deeper discount for a guaranteed payment at some point in the future. If the issuer discounts the bonds too much, then the bearer gets a pot of money at the end of the bond term, or maturity. If the issuer discounts the bonds too little, then the issuer gets the gain. At the end of the day, the bond market is an attempt by people to predict the future and capitalize off of what they believe to be misconceptions.

Given the above, the bond market should be an accurate predictor of future inflation. After all, you have all these savy traders who make a living off of trading these things and staying immersed in the current economic data. Well, you'd only be partially right. It gets trickier when the bonds are government bonds. While they are viewed as the safest investment, actors sometimes have ulterior motives in buying and selling bonds. This takes us to central banks and the currency market. It took about twenty times of reading this stuff to make me understand it, but a good maxim to keep in mind is the following: The value of something is directly dependent upon its scarcity. Grains of sand are everywhere, not very valuable. Gold is not everywhere, very valuable (sometimes.)

This goes for currency, too. The more dollars out there, the less valuable it is against other currencies. But how do more dollars get out there? The U.S. Treasury issues bonds. The more bonds it issues, the more dollars (theoretically) that are in circulation. So, why would the Treasury be issuing all these bonds if all it does is make the dollar less valuable. This is where deficit spending comes in. The U.S. government has to pay its bills somehow. And when its income doesn't meet its expenses, it has to borrow, just like everybody else. Typically, this has the effect of raising bond yields. Why? Remember, the value of something is dependent upon its scarcity. So, if we assume there's a finite amount of money out there to be borrowed, the less there is, the more expensive it gets to borrow it. Let's go back to our lunch example. You still want Mike to buy you lunch, but you've had to offer him dinner at McDonald's to get him to even consider it. Unfortunately, Mike is the only one of your friends who has any money, and a bunch of your friends want him to buy them lunch, too. Mike can only afford to buy one person lunch. So, a bidding war ensues. Mike will buy the person lunch who 1) makes the most lucrative offer and 2) has the most potential of fulfilling that offer. This is what happens in the bond market. In order to attract people to buy the bonds, the issuer has to offer lower prices that reflect the scarcity of available capital. So, if the government is in a record deficit (which it is) bond prices should be falling, yields should be rising and the dollar should be losing value. However, they aren't. Why not? Remember: more bonds = higher yields = lower bond prices = more dollars = less valued dollar.

Because actors in the market aren't making decisions purely out of self-interest. Central banks are typically large institutions that belong to or are controlled by governments. The Federal Reserve is the U.S. central bank. Because these banks are either de facto or de jure controlled by their host governments, they sometimes act in the interest of the government rather than the bank. For instance, Japan and South Korea's export markets are very sensitive to U.S. demand for their exports. The most direct way to value a currency is to measure its value against other currencies. A dollar that is declining in value means that their exports get more expensive. How? Because their exports are valued in their own currency. If the dollar will buy 1 won on Tuesday, but only 1/2 of a won on Wednesday, whatever I'm buying has just become more expensive if its valued in wons. Let's say that I want to buy a Sony Discman which is made in Japan. It costs Sony 1000 yen to produce the Discman, get it to the U.S. and realize a reasonable pocket. I, however, do not get paid in yen. I get paid in dollars. So, I will have to exchange my dollars for yen to buy the Discman (this will be done for me by the importer.) If the dollar has lost value, then the functional impact to me is that the Discman has become more expensive. So, I might decide to take a look at a Phillips brand instead (provided it is made in a U.S. dollar-denominated currency country.) Because the Phillips brand is made with its value denominated only in dollars, and it never has to be exchanged for a stronger currency, the Phillips brand Discman will be cheaper. And I will buy it. A falling dollar therefore makes foreign exports more expensive, driving down demand for them here in the U.S. So, central banks that are linked to governments that have export markets particularly sensitive to U.S. demand have the most to lose from a falling dollar. But what does all of this have to do with the bond market?

Hopefully, you're beginning to see the picture now. Central banks with strong U.S. export markets will intervene to prop up a dollar that is on the decline. Why? If the U.S. government is in record deficit territory, with no real end in sight, why buy bonds when the prices don't reflect the risk? Part of this is because there is no real risk that the U.S. will default on its bonds. It is the economic superpower, and its word is generally risk free. Remember criterion number 2 from the lunch example: Mike will lend to the person who has the greatest potential to actually deliver on their promise. If you offer Mike a lamborghini next week and have no job, and John offers him a steak dinner and has rich parents, which do you think he'll pick? Being the dominant economic power allows the U.S. to avoid some of the risk premium it would have to offer were it another country running the deficits that it is. But this only accounts for some of the irregularity. Bond prices should still be at record lows, with yields at record highs. The other reason is blanket self interest. A strong dollar is in the interests of governments who's economies are sensitive to U.S. demand for their exports. A drop in the dollar means a drop in demand. So, these banks will often buy undervalued bonds just to keep the dollar from sliding further. Because the banks generally buy through indirect buyers, so as to keep their motives secret, no one knows exactly how much they are buying for sure. But they are buying.

So, where does that leave us? central banks bought up the majority of the last two major bond issuings by the Treasury. We know central banks have incentives other than self-interest to buy these bonds. Those incentives lead them to push for an (over)valued dollar. Their buying resources cannot (ordinarily) be matched by the private sector. Conclusion: The central banks have propped the dollar up above its actual value. In doing so, they have depressed bond yields and inflated bond prices. Whether they can do this sustainably is open for debate. If they cannot, get ready for another global recession.

Snow Stays in the Forecast

It looks like John Snow will be staying at Treasury, according to many sources. Tyler Cowen and Brad DeLong have a discussion up at the WSJ's econblog (subscription not required). They do an excellent job of listing the qualities desired in an ideal SecTreas.

I would just add one more, and I think it's the most crucial: credibility.

People need to know that they can trust the Secretary when he calls and assures them the President is serious about deficit reduction. Or a strong dollar policy.

I don't think Snow has that credibility. He's only been a cheerleader for economic policy that's developed wholly in the White House instead of with input from the OEOB. There is no evidence that he has a substantive impact on policy formulation, or that the President seeks out, much less listens to, his advice.

Not that it would be easy for anyone to be Bush's Treasury Secretary. Their policies would be a joke if they weren't so tragic. At every juncture, the Bush Administration has chosen to pursue reckless policies in order to shore up a political constituency. It's just too bad the future doesn't have a vote, because they'll be the ones paying for it.


Tuesday, December 07, 2004

The BoSox Model

The New York Times (registration required) has an interesting story on the Sox's model of acquiring and retaining players. I found the following particularly noteworthy:

"The 2004 championship has emboldened the Red Sox, so far, to stick to club policies: no player is given a no-trade clause or a contract that guarantees more than four years."


Any personal service contract is an attempt between the principal and agent to predict future performance. The team (principal) has a number of options if a player (agent) performs at a level lower than that anticipated. One of those is trading the player to another team for different players, money, or both. The player who gets traded often has to shoulder the costs of relocation and something of a stigma that goes along with being traded. Another option the team has is to release a player at the end of the contract. By dealing only in (relatively) short-term contracts, the team takes less of a risk on a player by minimizing the team's exposure to a smaller number of years. This provides less stability for a player who may perform at lower level for reasons beyond her control.

No-trade and long-term clauses also create disincentives for players to perform at their best. After the level of compensation has been set, a team retains very little in terms of sanctions to address a player who is not giving enough effort. The ability to trade a player is one of those sanctions. If a player knows that her position on the team is not definite, she has an incentive to perform better than a player who believes her position is definite. Imagine you couldn't get fired from your job or get a pay-cut. How would it effect your job performance? (Be honest.)

A short-term contract also gives a player more of an incentive to perform well during the entirety of the contract term. If a player performs with an eye to increase her market value, she will perform well when that performance has the greatet impact on said value. Other teams aren't looking at how a player performs during the first year of ten year contract. But they'll be paying special attention to how she plays in the ninth and tenth year for two reasons. 1) The more recent trend in performance is more likely than less-recent trends to reflect future performance. 2) Other teams will assess their own needs as the player gets nearer to market availability. Because a player's performance will have a greater marginal impact on her market value towards the end of the contract than its beginning, short-term contracts should encourage better average performance than long-term contracts.

The downside of this policy lies in the potential impossibility to lure Tier I players to the Red Sox. Because high-value players are in a relatively better bargaining position than their lesser-valued peers, they have greater options for contract terms. If teams other than the Red Sox are willing to offer no-trade clauses or long-term contracts, Tier I players may disproportionately avoid the Red Sox for other teams. This would leave the Red Sox at a competitive disadvantage due to their inability to attract top tier talent. (The article does mention that the Sox made an exception for Ortiz.) However, the Red Sox have apparently decided that flexibility in their lineup is more important than attracting such talent. Time will tell if it becomes a dominant strategy.

Monday, December 06, 2004

Zoellick's Strategy

Sebastion Mallaby has an excellent op-ed in The Washington Post (registration required) about United States Trade Representative's Robert Zoellick's pursuit of not only multilateral, but also bilateral trade liberalization initiatives. The piece praises Zoellick's energy in promoting the Doha round of WTO trade negotiations, but strikes a cautionary note regarding bilateral agreements.

Mallory does a good job of listing the dangers inherent in bilateral trade treaties, but I'd like to add a couple more. Trade fortresses and rent-seeking.

Trade fortresses: There is a possibility that pursuing bilateral treaties will lead to the formation of regional trade blocs. The EU is already a customs union, and there is talk of reviving the Free Trade Area of the Americas along the same lines (although MERCOSUR seems to make this a long-shot.) The fear is that these regional customs unions will turn into regional trade fortresses, with trade free amongst their members but prohibitively high outside them. This is the flavor that international trade had taken in the run-up to World War I, and we saw how that worked out for everyone. Economic stability feeds into military stability. An open and level multilateral trading system is preferable to spheres of influence anchored by economic superpowers. No one needs an economic Cold War.

Rent-seeking: Creating different tariff levels for goods originating in different countries distorts commercial flows by making it more profitable to commit resources to an area where they would not normally generate the highest return. For instance, let's say our tariff rate on shoes originating in China is 5% ad valorem, consistent with our WTO obligations (I'm pulling these numbers out of the air, by the way.) So, a shipment of shoes from China valued at $100 will be assessed a $5 duty at import. This cost will be passed on to the consumer at the checkout line. Now, let's say we sign a regional free trade agreement with Haiti, the Dominican Republic and Grenada which commits us to a bound tariff rate on shoes at 2% ad valorem. A comparable shipment of shoes at $100 will only be assessed a $2 duty, and that cost will also be passed on to the consumer at the checkout line. China only remains competitive if its product costs are 3% or less than in the Carribean countries. This means that even if China could produce and sell the shoes for 1% or 2% less than the Carribean countries, it will still be less expensive for consumers to buy Carribean-made shoes. Therefore, capital will flow to Carribean shoe manufacturers, even though they are not the most efficient producer of shoes. This is a trade distortion, and works against the theory of comparative advantage that the multilateral trading system is based on.

Mallaby mentions it in his article, but I think it's worth mentioning again: there is a limited amount of enthusiasm for trade liberalization. Negotiations are an exhausting process of nailing down a deal that doesn't rob you blind and then selling it to a protectionist electorate. By using this limited enthusiasm for bilateral, rather than multilateral negotations, we may be taking the wind out of the sails for a successful conclusion to the Doha round. And the Doha round is critical to restoring developing coutries' faith in the WTO.


Superstring Theory 101

The sub-title of my blog says that I will occasionally discuss superstring theory. This is not my field of expertise, but something I keep up on in my free time. Expect the lack of knowledge that I exhibit in economics tol be compounded in superstring theory. Just a heads up.

You may be asking yourself why a blog that's concerned with international economics would post about theoretical physics. After all, I've never taken Chemistry, much less Physics. Both generally make my eyes glaze over and triggers an impulse to run. But, I read a couple of articles out of interest and got hooked on it. Why? Because it's a theory of everything.

The theory attempts to unite the theories of quantum mechanics and Einstein's general relativity. Those two theories are both consistent with what they describe, but force you to make opposite assumptions about how the world works. Quantum mechanics describes how things act at very small scales while general relativity describes how things act at very large scales. String theory started off as an attempt to make the two theories consistent. It evolved into a grand, unifying theory.

The superstring theorists have their critics, but its advocates insist that the theory is simply too beautiful to be wrong. Unfortunately, although it's explained many things, science does not yet have the capability to perform the sorts of experiments that would verify it. Or falsify it, for that matter. Alternative theories that challenge superstring theory normally end up getting absorbed into the theory itself. This has led some critics to call superstring as more of a philosophy than a theory.

At its core, superstring theory postulates that the fundamental element of the universe is not a spherical particle, but a loop of string. We just always thought it was a particle because our microscopes aren't powerful enough to peer to the side of the loop. The loops of string all vibrate at a certain resonance and tension, much like the strings on a violin. The type of vibration determines what form of matter the string takes. The universe is an infinite symphony of different strings vibrating at different frequencies.

It also postulates nine spatial dimensions and one temporal dimension, but that's a topic for another post. The New York Times (registration required) has an excellent introduction, as well.

I think superstring is to physics what comparative advantage is to economics. In physics, our intuition tells us that there are three spatial dimensions and one temporal dimension. In economics, our intuition tells us that protectionism is good because it encourages domestic job growth (at first). In physics, superstring was first postulated as a theory. In economics, so was comparative advantage. In either case, we don't have enough data to say that either theory is a law. But we know that they have to because we've tried everything else and it doesn't work.

Sunday, December 05, 2004

Becker and Posner

Turns out I won't get the 'Brand New Blog' newscycle to myself this week. Some guys named Gary Becker and Richard Posner decided to start their own blogs. They'll be posting once a week (Monday) and apparently each posting separate entries instead of collaborating. Their first post is up here. You can read my comment here. Their first post is about Pre-emptive (preventitive) war and is (obviously) pretty good.

As a side note, if I encounter one more Federalist-Society-wannabe-first-year-law-student signing weblog comments as 'Cincinnatus' one more time, I think I'll be sick.

Saturday, December 04, 2004

Blood Jumps on the Bandwagon

I just saw a commercial that demonized globalization to try and get people to give blood. It was from a first-person perspective about a guy who was writing to a company about its child labor/sweatshop practices and kept getting coupons instead of responses. Then talked about child labor and deforestation as it pertained to the paper for all the letters he was writing. The upshot is that, get this, 'saving the world' is hard but you can do a little by giving blood. As if saving the world meant putting an end to globalization?

This is the kind of stuff that really pisses me off. In law, it's akin to what we would call inference stacking. Fact A would lead you to draw Inference 1. If you assume Inference 1 is a fact, then you can draw Inference 2. The flaw being that Inference 1 is not a fact. This is why it isn't allowed in courtrooms. This commercial does the same thing. Fact A: global trade means that children will be making our jeans. Inference 1: Children are forced to work. Inference 2: The factories that employ them are heartless and exploitive. See where the flaw is here? And the worst part about is that it fans the flame of misinformed passion in order to get people to donate blood. Metamessage: If you give blood, you're one of the good guys. Global trade is the bad guy.

Children aren't forced to work at the barrel of a gun. They're forced to work because their families are poor. The parents wouldn't send them to work if they had a choice, but they don't. The working conditions in foreign-owned factories are often remarkably better than any available in domestic industries. And wages are higher. Doctors and lawyers are leaving their practices in Vietnam to go work in foreign-owned factories. Would these people rather these children go back to the farm and starve to death? Take a good look at Sub-Saharan Africa. See what happens when people can't work for a living to put food on their table. The girls become prostitutes and boys end up riding in the back of a Nissan pickup truck with an AK-47.

If you want to register your complaint with the Ad Council, who published the commercial, email them here. You can view the ad here.


Gains From Trade

The Economist has a story citing a new study* by Scott Bradford, Paul Grieco and Gary Hufbauer, of the Institute for International Economics (to be published in January.) The study attempted to measure the gains that the U.S. has realized through increased global trade.

This can be something of a Herculean task. Attempting to isolate out historical gains that are due only to global trade, rather than say productivity increases or transportation cost decreases, is rather daunting. The authors of this study attempted a couple of different methods, but the one I like the most is the counterfactual: Where would the U.S. be if it hadn't opened itself up to trade after WWII?

If the same protectionist tariffs were in place today, it would knock off 2.4% of GDP. If our neighbors responded with their own escalated tariffs, it would knock 2.1% of our GDP. Taken together, tariff and non-tariff barrier liberalization can be thanked for about 7.3% of GDP.

The authors then combined this finding with their macroeconomic and microeconomic modeling, and took the average of the gains to come up with about $1 trillion per year in benefits to the U.S. That's an extra $9000 per person per year due to free trade. The study goes on to say that there's at least a comparable amount to be gained by further trade liberalization, not just in the U.S. (which has an average bounded tariff rate of 3%, but an actual average tariff rate of about 2%) but in the developing countries as well.

I'll just say to those of you who might think globalization is bad for the world's poor, you are utterly incorrect. The developing world is craving increased opportunities for trade. More has been done in the last 50 years, more people brought up out of poverty, than the last 500. China alone has lifted over 100 million people out of poverty since it began adopting market reforms. Other countries are desperate to do the same. The blind spot in most people's thinking is that trade is somehow a zero sum game. If the U.S. is winning, then someone must be losing, and it's probably the poor. But trade is not a zero sum game. It can be a positive sum game.We all make positive sum trasnactions every day, teading our labor for coffee, food, computers, etc. Developing countries just want that same opportunity.

* “The Payoff to America from Global Integration”. Forthcoming in “The United States and the World Economy: Foreign Economic Policy for the Next Decade”, edited by Fred Bergsten, to be published in January by the Institute for International Economics

Friday, December 03, 2004

Property Taxes Inspiring 'Revolt'

CSM has a story about rising state property taxes and their impact on low-income retirees. Personally, my knee-jerk reaction to people who complain about taxes is just tell them to quit whining and go live in Uganda if they think the tax rate here is too high. Go ahead, see what kind of government your lower tax rate gets you iin Uganda.

However, this should not discount the argument that tax revenues are spent inefficiently. Of course they are. But, like any undertaking the size of the U.S. government, inefficiency is to be expected. Inefficiency isn't a reason for abandonment. If so, we should all be bailing out of our HMO's (20% spent on administration) in favor of government-run Medicare/Medicaid (3% spent on administration.)

Property taxes are a regressive tax that looks like a progressive tax. In most states, it's based on the valuation of the property. Because of the housing boom, valuations have been rising at double digit rates. But that doesn't mean people are getting a double digit increase in accompanying income. Normally, taxes based on value are progressive because they go up as revenue goes up. But there's no income stream tied to home ownership, it's largely a fixed asset. So, people are paying more taxes but not seeing any (real) value accuring out of it.

My advice?

Sell now! It's called a "bubble" for a reason. When interest rates start rising, housing prices will start falling, and then you won't have an opportunity to recapture some of that excess property tax. Sell now, while prices are still inflated.

State governments need to reform their property tax systems to deal with a bubble-prone market (remember the S & L's?) Instead of basing the tax on valuation, I would like to see one based on square footage. That way, people wouldn't get hit with a wildly fluctuating tax bill every year. They'd know if their taxes were going up because they'd know if they added anything to their house. You'd still have governments able to change how much they taxed per a square foot. At the very least, this would provide some needed stability in an uncertain system.

Thursday, December 02, 2004

Comparative Advantage and China

Business Week has an excellent article on the costs of Chinese manufacturing labor. The Bureau of Labor Statistics hired Judith Bannister, a Beijing-based American consultant, to ferret out these costs. Why hire a consultant? Because China does a poor job of publishing these statistics, of course. Remember, these numbers aren't bulletproof, but probably represent the best information available. Among the most interesting findings for 2002:

1. The average cost of an hour of manufacturing labor in China is 64 cents an hour. This, of course, means nothing. Translated into purchasing power, it becomes $2.96 per hour. As a basis for comparison, Mexico averages $2.48 per hour. But, lest you think China is lowest, Sri Lanka is at 49 cents (courtesy of the Bureau of Labor Statistics.) This is about what you expect. China has an enormous pool of cheap labor that it can use, and its costs are consistent with that supply.

2. Inflation-adjusted compensation in cities doubled from 1990 to 2002. This is also what you would expect. As the cities experienced hyper-growth, competition and accompanying tightening in the labor market drove wages up.

3. Between 1995 and 2002, cities shed 11 million factory jobs while the countryside gained 5 million factory jobs. And, the trifecta. As a result of the accompanying tightening of the labor market in the cities, operations with low fixed-costs moved to where the labor was cheaper.

Bottom line: Chinese manufacturing labor costs are going to be low for at least a generation. China's trying to balance modernizing with not upsetting the countryside too much. The spread of the factories away from the coasts is a good thing. It will help lift subsistence farmers out of poverty and bring needed infrastructure. Every Chinese revolution has originated in the countryside, so the government has good reason to foster such an outcome.

An interesting thought occurred to me as I was writing this post. Does purchasing price parity (PPP) really matter for labor costs? The Chinese analysis focused on what employers had to pay workers, including government benefits, etc. The real cost imposed is the opportunity cost, i.e. what the employer could have done with that money if it didn't have to pay its employee. But, what an employer could have done with its money is different from what the employee could have done with the money. For instance, if the employer could have invested the money and earned interest on it, this would be different from the employee buying a boat. Especially if the employer invested the money abroad. Because PPP is usually used to compare currencies based on the consumer transaction, is it really that relevant when translated into what labor costs the employer? If anyone knows about literature addressing this topic, please drop me a line.

The Dollar's Freefall

The Economist (subscription required) has an excellent article on the falling dollar. Of course, they explain it in a much better way than I ever could:

"THE dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted. If America keeps on spending and borrowing at its present pace, the dollar will eventually lose its mighty status in international finance. And that would hurt: the privilege of being able to print the world's reserve currency, a privilege which is now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far better terms than are available to others. Imagine you could write cheques that were accepted as payment but never cashed. That is what it amounts to. If you had been granted that ability, you might take care to hang on to it. America is taking no such care, and may come to regret it."

It goes on to cite unnamed experts who predict a further 30% decline in the dollar's value. However, experts are never of one mind, as an article in the Financial Times points out.

“People are beginning to wonder whether this [dollar sell-off] has gone too far and that there might be some kind of correction before the year-end,” said Aziz McMahon at ABN Amro.

South Korea also jumped on the coordinated currency intervention bandwagon with EU and Japan, although they have yet to make a move.

If the foreign central banks start buying greenbacks to weaken their own currency and strengthen the dollar, they're going to have to print their own money to do it. The EU would be better off cutting its own interest rates, and hence spending the newly printed money, on stimulating domestic consumption. Additonally, any intervention by these banks are only going to prolong the problem. Winston Churchill once said "The Americans always do the right thing, after they've tried everything else." The U.S. will continue to print money until the rest of the world forces economic reality upon it.

Wednesday, December 01, 2004

Japan and the EU Creating A Moral Hazard?

Japan and the EU are considering harmonizing an interventionist response to the falling dollar, Financial Times reports. Apparently, they believe that the increases in U.S. growth aren't properly reflected in its currency valuation. I think that's an excuse to try and snatch the dollar out of an inevitable freefall. When the U.S. (or any other country) prints money wholesale, its value is going to go down. The certainty of this law is somewhat tricky when it comes to the U.S. because of its (present) economic dominance. However, this trickiness is probably more of a suspension than an exception. Printing dollars makes their value slide, and eventually there will be a reckoning.

What would this look like? Probably a coordinated campaign to buy dollars with euros and yen. Japan already holds most of the U.S. debt, so their activities can be somewhat discounted. The EU holds less. If they go on a coordinated buying campaign, all they're doing is staving off the inevitable. Foreign central banks can't keep encouraging the U.S. to run unsustainable deficits by artifically propping up its currency to protect their own exports. Eventually, they'll run out of savings to finance our consumption. Better a little bit of pain now than decades spent on the rack.

If the Japanese and the Europeans do start this, I think it might also push the private holders to start betting against them. Possibly, it could lead to a showdown of the type last seen since Soros took on the Bank of England. And we all remember how that turned out.

Consumers Demand to Pay More For Shrimp

...or so the Commerce Deparment would have you believe. The Washington Times (which I deplore linking to) has the story. Now's a good time to give a functional analysis of anti-dumping law.

Dumping occurs when a foreign company sells its exports at a cheaper price than in its home market. The price in the home market price is referred to as normal value (NV) and the export price is referred to as (surprise) export price (EP) or constructed export price (CEP). Constructed export price is only used if the foreign company and the importer are somehow related. Both prices are subject to a number of adjustments in order to try to reach an ex-factory price, or the price at which the good would fetch as soon as it left the factory (or fishery). The difference between the price in the home market (NV) and the export price (EP) is called the dumping margin (DM). If Commerce finds a dumping margin above a certain level, they impose duties on the imports which make up the difference.

So, here's what we have: Foreign companies are offering consumers lower prices than are available in our domestic market. Our government responds by slapping a duty on the products to artificially raise prices. How is this not a tax?

Well, the principal way that it differs from a tax is the most appalling. The proceeds from the additional duty assessed against the imports is then given to the party who petitioned Commerce in the first place! This is the Byrd Amendment. For instance, let's say Shrimpcatcher, based in Louisiana, petitions Commerce that Shrimpexporter, based in Vietnam, is dumping shrimp in the U.S. Then, Commerce finds a positive dumping margin (which it does in more than 90% of the cases). If the International Trade Administration (another branch of Commerce) finds that the dumping is causing material injury to the U.S. shrimping industry, then the duties are assessed. Shrimpimporter has to pay more to Shrimpexporter because of the duty, which means it has to charge more to the consumers. The extra cost, in the form of the higher duties, gets sent in the form of a check from the U.S. Treasury to Shrimpcatcher in Louisiana. Essentially, Shrimpcatcher is imposing a regressive tax on shrimp consumers with the support of the U.S. government. Under these circumstances, why not bring an anti-dumping petition to Commerce? If the potential payoff is in the millions and the cost is substantially less, why not roll the dice?




EU Sees China As A Threat

The EU released a report today that warns member countries of a coming Chinese storm, the Telegraph reports. While most of this is the same boilerplate "anti-China" stuff, there is an interesting finding: that Chinese are taking advantage of a protected home market in electronics to dump cheaper products on EU. If this is true, the report is essentially encouraging anti-dumping petitions to be filed. I don't know enough about EU anti-dumping law to speak intelligently about it, but it should work similarly to U.S. law.

Dumping occurs when a foreign competitor is exporting products at a price lower than what it sells the products for in its home market. For example, if the Chinese are selling PC's in Germany for $100, and selling them in Shanghai for $300, that's dumping. (Of course, China is a non-market economy [NME] so the caculus gets a little trickier, but you get the idea.) The worry is that the producer is using monopoly rents in their home market to finance below-cost sales in the export market in order to capture market share and drive competition out of business.

Check back later for a longer post on anti-dumping law and its problems.