Checking out...
I am going to Tanzania to meet some chimpanzees. No Iowa, no New Hampshire; I imagine they will get along without me. See you on or around January 18th. Have a good Christmas.
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December 2007 Archives
December 24, 2007
A Christmas Eve movie recommendation
"Outsourced" is a low-budget no-stars romantic comedy about globalisation, improbable as that might seem. A young American executive is sent to India to run the company's call-centre. The clash of cultures--and the downright strangeness of India as seen through American eyes--provides the jokes. But there is no condescension, nor any fatuous admiration of the foreign for its own sake, which would have been equally annoying. Our hero struggles until he surrenders to his new environment, at which he falls for India and for his engaging Indian assistant. It sounds too sweet, but not at all. It is intelligent and wonderfully well-observed, as well as charming, and this frequent visitor to India, at any rate, lapped it up.
The reviews were good but not ecstatic. A few seemed to take offence at the very idea of an easy-going movie about life in the "trenches of globalisation" (as one miserable killjoy put it). Imagine making light of such horrors. In fact the movie neither glosses over nor exaggerates the human consequences of outsourcing. For me, it got that balance just right as well. With the possible exceptions of "Michael Clayton" and "No Country for Old Men", I enjoyed it more than anything else I saw in 2007. Matt Groening apparently loved it as well: enough said.
It has seemed to be getting a very limited US distribution all this year. See it if you can--you'll thank me. In the US, you can buy the DVD here.
The do-nothing Congress
A new column for the Financial Times:
Checks and balances are all very well, but sometimes you have to wonder. The first session of the 110th Congress came to a close last week in a disorderly crush of half-baked legislation. It was the end of a year that gave the new Democratic leadership little to boast about. Seizing control of House and Senate in the 2006 elections, the Democrats had big ideas about holding the Bush administration to account, forcing a prompt withdrawal from Iraq and radically realigning the government’s domestic priorities. Measured against those early promises, their record has been dismal.
The budget process was an unintelligible mess – not for the first time, admittedly. An omnibus $555bn spending bill, lumping together who knows how many appropriations bills, finally passed. The president gave it his blessing, because it gave him enough of what he wanted – including $70bn additional funding for the wars in Iraq and Afghanistan. Admittedly, that is less than half the extra war funding the administration had asked for, but enough for the army to keep going without another supplemental until June.
The rush of unfinished business also included the long-anticipated fix of the alternative minimum tax. This is a parallel income tax, allowing only limited deductions, initially devised to curb tax avoidance by the very rich. Due to years of neglect and rising incomes, it threatened to drag millions of middle-class taxpayers into its net. Patching it up so that this would not happen cost $53bn in forgone revenue.
You can read the rest of the article here
December 21, 2007
Trade and climate
An article by Yale's Judith Chevalier in last Sunday's New York Times slipped by me, until Greg Mankiw's blog redirected me to it. The piece discusses an issue that has so far received little attention, but which is likely to loom much larger before long: the trade-policy implications of unilateral (or at any rate, imperfectly co-ordinated) US action on climate change. Suppose the US adopts a cap-and-trade regime for carbon, as promised by Hillary Clinton, or as envisaged by the Lieberman-Warner Climate Security Act (yes, make this a security issue, why not) currently before Congress. Also suppose that China does nothing to curb its carbon emissions. Then Chinese imports, it will be argued, will have an unfair cost advantage in US markets.
One goal of a tradeable permit system is to force consumer prices for goods to reflect the harm that the production of those goods causes the planet. For example, if a television were made using a high-emission process, the factory would have to buy many carbon permits, driving up the TV’s price. A television made in a low-emission factory would require fewer permits, lowering its relative price. Consumers, of course, would have an incentive to choose the TV from the low-emission factory, and all factories would have an incentive to lower emissions.
A problem would arise, however, if a producer needed to buy permits to make televisions in a country with a carbon cap, while no permits were required in a country without a cap. The television from the country without the cap would be cheaper, consumers would prefer it, and there would be no economic incentive to cut emissions. Environmentalists call this the “leakage problem”: just as a balloon squeezed at one end will bulge at the other, emissions caps applied in only some economies will lead to emissions surges in others.
A provision in the current version of the Climate Security Act links responsibility to carbon consumption, not production. This idea derives from a joint proposal by the American Electric Power Company and the International Brotherhood of Electrical Workers. The provision requires that importers of goods from countries without carbon caps obtain permits for the emissions resulting from the goods’ production. While this requirement could be used to protect American jobs from foreign competition, if handled equitably, it could provide an elegant solution to the leakage problem.
If the United States adopted a tradable permit system that treated emissions from domestic producers identically to emissions associated with imported goods, then products that are more emissions-intensive, whether domestic or imported, would require more permits and thus be more expensive. Producers in the United States and abroad would have an incentive to reduce greenhouse gases to make their goods more competitive.
Greg points out that the carbon-tax equivalent of this proposal would be border adjustment of tax rates--that is, carbon-based import tariffs and export subsidies. Either approach, as Ms Chevalier puts it, "would face scrutiny under current trade agreements". Given prevailing anti-trade sentiment (no disrespect to the International Brotherhood of Electrical Workers), the risk that this idea might be co-opted as part of a wider retreat from liberal trade is plain. But if the US is going to get serious about carbon abatement, as seems likely if not next year then in 2009, the issue will have to be confronted.
A supplementary reading on the scale of the challenge. Daniel Gros points out on Vox that the price of coal has fallen sharply relative to the price of oil, which presages (other things equal) a huge expansion in global coal-fired electricity generation--the most carbon-intensive kind.
It is often thought that high oil prices could contribute to lowering CO2 emissions because they make energy more expensive, thus encouraging lower energy consumption. But this view overlooks that a high price of oil relative to coal encourages the substitution of a hydrocarbon with pure carbon, thus increasing the carbon intensity of energy use. The supply of coal is abundant, especially in the new emerging energy giants China and India, and relatively elastic. This implies that the price of coal is likely to stay low, thus encouraging an increase in the carbon intensity of energy use everywhere. Reaching the goal of reducing CO2 emissions will thus be even more difficult than generally assumed if oil (and thus also gas) prices remain at present levels.
The latest World Energy Outlook from the International Energy Agency already forecasts on a business-as-usual scenario an increase in the share of coal in global energy use. But over the last five years business has not been as usual as one half of the increase in global energy consumption has come from coal, prompting acceleration of global CO2 emissions. Sustained high hydrocarbon prices will intensify this trend, making it highly unlikely that the goal to reduce CO2 emissions can be reached.
December 19, 2007
Clinton, Obama and double standards
Are the media treating Hillary Clinton more harshly than Barack Obama? Howard Kurtz in the Washington Post:
Clinton's senior advisers have grown convinced that the media deck is stacked against them, that their candidate is drawing far harsher scrutiny than Barack Obama. And at least some journalists agree.
"She's just held to a different standard in every respect," says Mark Halperin, Time's editor at large. "The press rooted for Obama to go negative, and when he did he was applauded. When she does it, it's treated as this huge violation of propriety." While Clinton's mistakes deserve full coverage, Halperin says, "the press's flaws -- wild swings, accentuating the negative -- are magnified 50 times when it comes to her. It's not a level playing field."
The article cites plenty of instances. I think there's no question that Obama has been given an easy ride. It struck me throughout the televised debates that Clinton was generally declared the winner, but by a narrow or less-than-commanding margin--whereas in fact she nearly always trounced him. Quite a few commentators have called her slip over driver's licences for illegal immigrants in the Philadelphia debate a turning-point: since then she's been in trouble, they say. But Obama made a complete fool of himself on the very same issue in the next debate, by which time Hillary had sorted out her line, and he got away with it. Yes, the press is failing to be objective. Yes, it is treating Hillary quite harshly, while fawning over Obama.
But is this sentiment peculiar to the press, I wonder, or a feeling in the country at large? I suspect the latter. The United States may have doubts about Obama's policies (if it knows or cares) or lack of experience (compared with Hillary's such as it is), but it likes him. He is new, and the country is giving him the benefit of the doubt. When it comes to Hillary, there is no such instinct. She is asking for eight years in the White House--another eight years, as her claim of greater experience keeps reminding people--and people seem tired of her already.
Bill makes this worse. Predictably, with problems in Iowa and her national numbers starting to slide, he is playing a more forward role. David Warsh, author of the indispensable Economic Principals, drew my attention to this column by Alex Beam in the Boston Globe:
In 1999, after almost seven years of Bill Clinton's rule, the commentariat christened a new buzzterm: Clinton fatigue. The peccadilloes, the double-dealing, the outright lying had overwhelmed the American public. "The Clintons have finally worn out their welcome," wrote columnist Linda Bowles. "There is a prevailing sentiment that it's time for them to go, and to take their baggage with them."
Clinton fatigue. With the presidential election less than 11 months away, I am feeling it already.
I'm not talking about Mrs. Clinton...
My Clinton fatigue is about Bill. I am getting sick of him.
Bill's problem is that he has no idea of how to be a political wife. Right now, Michelle Obama is the best in the business. Smart, accomplished, articulate, and capable of projecting empathy, she moves the Obama campaign forward with every appearance. She fills the stage without stealing the spotlight from her husband, from Oprah, or from whoever she appears with. With Bill Clinton, it's just the opposite...
[An angle suggested by Herald columnist Margery Eagan:] Is Bill "The Underminer," as defined by the hilarious book of the same name by Mike Albo and Virginia Heffernan? The underminer is your "friend" who waxes enthusiastic about your fabulous trip to New Zealand, and then lets slip that he was hang-gliding there in the early 1980s, you know, before all the American tourists arrived.
Mainly, I think Bill makes his wife look weak. Otherwise, why would she need his help? And he reminds people just how long this double-act has been in business. When it comes to policies, Hillary may in fact be more of a "change candidate" than Obama (see Paul Krugman on this), hard though it is to say, ahead of time, how either presidency would work in practice. The point is, with Bill at her elbow, she does not look or sound like the change candidate. The more she relies on him, the more stale and diminished she will seem.
December 17, 2007
Obama and the base
Barack Obama’s campaign for the presidency has revived. Until recently Hillary Clinton had a commanding lead in the polls and was starting to seem unstoppable. But Mr Obama has pulled ahead in Iowa and level in New Hampshire, the states that vote first in the primaries. He is gaining ground again nationally. The television debates, in which he performed poorly, are behind him. What matters now is the ability to move a crowd and the energy of campaign staff on the ground. On the first, Mr Obama has no equal in this contest. On the second, he has no grounds for complaint. He is back in the race.
But here is an odd thing: the Democratic party’s progressive base has mixed feelings about this revival. What is their problem, one wonders? What could be more exciting or more transformative, from their point of view, than this candidate? Mr Obama is a clever, reflective and engaging man; he has dedicated his impressive intellect to a liberal political vision; he has a voting record in the Senate that puts him well to the left of Mrs Clinton; he makes, nonetheless, a strong appeal to the centre; he carries none of the baggage of the Clinton dynasty; and, in a country still riven by race, he just happens to be black. What’s not to like?
The main answer is not differences over policy – though it is true that Mr Obama’s positions in the campaign have tended to be in the centre, at least compared with his Senate voting record.
You can read the rest of this new column for the FT here.
December 14, 2007
Enclave extremism
Cass Sunstein examines the phenomenon of enclave extremism--the tendency of people to harden their political positions when they interact mainly with others of like mind. (Thanks to A&L.)
[O]n many issues, most of us are really not sure what we think. Our lack of certainty inclines us toward the middle. Outside of enclaves, moderation is the usual path. Now imagine that people find themselves in enclaves in which they exclusively hear from others who think as they do. As a result, their confidence typically grows, and they become more extreme in their beliefs. Corroboration, in short, reduces tentativeness, and an increase in confidence produces extremism. Enclave extremism is particularly likely to occur on the Internet because people can so easily find niches of like-minded types — and discover that their own tentative view is shared by others.
It would be foolish to say, from the mere fact of extreme movements, that people have moved in the wrong direction. After all, the more extreme tendency might be better rather than worse. Increased extremism, fed by discussions among like-minded people, has helped fuel many movements of great value — including, for example, the civil-rights movement, the antislavery movement, the antigenocide movement, the attack on communism in Eastern Europe, and the movement for gender equality. A special advantage of Internet enclaves is that they promote the development of positions that would otherwise be invisible, silenced, or squelched in general debate. Even if enclave extremism is at work — perhaps because enclave extremism is at work — discussions among like-minded people can provide a wide range of social benefits, not least because they greatly enrich the social "argument pool." The Internet can be extremely valuable here.
But there is also a serious danger, which is that people will move to positions that lack merit but are predictable consequences of the particular circumstances of their self-sorting. And it is impossible to say whether those who sort themselves into enclaves of like-minded people will move in a direction that is desirable for society at large, or even for the members of each enclave. It is easy to think of examples to the contrary — the rise of Nazism, terrorism, and cults of various sorts. There is a general risk that those who flock together, on the Internet or elsewhere, will end up both confident and wrong, simply because they have not been sufficiently exposed to counterarguments. They may even think of their fellow citizens as opponents or adversaries in some kind of "war."
Gosh. Could that really happen?
The future of reading
After more than a week with my Amazon Kindle, I am ready to say I have seen the future of reading. This actual device, mind you, much as I like it, is not yet there--not quite--but it's close enough to be already indispensable, and to prove that the underlying idea is unstoppable.
The Kindle is as clunky as it looks in the photographs--and the ergonomics are as awkward. The buttons are too big and squeaky; you can't pick it up without pressing one and losing your place; the keyboard, though pitifully slow, runs several characters ahead of the cursor; and I would be hard-pressed even after a week to say precisely what the "back" button does. The use of "locations" rather than page numbers needs rethinking. (The interface has to convey a better feel of how much you've read and how much further you have to go: it's not enough to be shown you're about 30 percent through...30 percent of what?) And I need to reconsider Michael Lewis's reliability as a reporter. His gushing on the Amazon website over the quality of the screen calls this very much into question. Clearer than print? Better than paper? What on earth is he talking about?
The screen is all right, I suppose, better than a computer screen--but it does not display black on white or anything even close. For the photographically minded, I would guess that it's maybe 80 percent gray on 15 percent gray. Perfectly legible in good light--the brighter the better--and no harder on my ageing eyes after several hours than a book. But in less than good light, it is a strain. Coming back on the train from New York last week, on a gloomy afternoon, with an under-powered reading light above, it was harder to read than a book or printed newspaper, and after my eyes had wandered a few times from my Kindle to my neighbor’s magazine, which I could read more easily, I switched back to old technology. Its picture display is hopeless. Its web-browser...well, forget about the web-browser.
I will never bond with this device the way I have with my iPhone. I spend no time gazing fondly in its direction. If my Kindle and my iPhone were trapped in a burning building, it would be all over (aptly enough) for the Kindle.
And yet! The thing is in constant use. Instead of lugging one or (often) two bags around, containing three or four multi-part newspapers and two or three books, I carry the virtually weightless Kindle and one paper. (If the FT was on the Kindle store, it would be no papers.) I currently have half a dozen books loaded, plus free sample chapters of several others. So whatever my mood, there is always something to read. The wireless connectivity--as much as the low-power, no-backlight, e-ink screen--is the real breakthrough. Download a book in 30 seconds (Lewis was not exaggerating about that), or today's paper, or the latest issue of The Atlantic--issue by issue on demand, or by subscription with automatic delivery. It's irresistible. Intrigued by a book review? Get the sample chapter, or buy the whole thing, and start reading right now.
Really, there's no going back. Not until they fix that button, anyway.
December 13, 2007
Oil shock
Another vote of thanks to James Hamilton (principal author of Econbrowser and an economics professor at the University of California, San Diego): I cite him again in this column for The Atlantic on the impressive irrelevance (for now) of the price of oil.
The oil market is not a bubble--fundamentals of supply and demand, not self-reinforcing speculative frenzy, are driving prices--but nonetheless I am intrigued by the fact that the dearer the stuff gets, the calmer we appear to be about the economic implications. That thinking has bubble-like characteristics. You recall how fears about irrational exuberance in the stockmarket were more to the fore in 1996 with the Dow at 6,000 than they were a few years later, after it had risen another 4,000 points. Accustomed to an oil price that would have seemed terrifying very recently, we now seem to worry less, the higher it goes.
Financial bubbles often do not burst until the last skeptics—the ones who called them bubbles early on, and rolled their eyes as speculation raged—have capitulated to the mania and bought in. Once nearly everyone is convinced that the rise in prices has some real economic foundation after all, and not before, the whole thing goes pop. The pattern repeats over and over. A parallel suggests itself. When even the people who were worried about $40 oil have stopped worrying about $100 oil, it may be time to panic. As the price of oil goes ever higher, we seem to get ever less anxious about it. In the June 2006 Atlantic, I explained why oil at more than $50 a barrel was having so little effect. But now it’s almost double that. What ought to be obvious might therefore be worth restating: The higher it goes, the more likely it is do real harm.
You can read the rest of the article here.
Counting the instruments
If you are following monetary policy in these testing times, and especially if you find recent Fed actions (and the markets' reaction to them) puzzling, two posts by James Hamilton at Econbrowser will help. Not that they clear things up, so much. But they make being puzzled an easier position to defend. First, James ponders the "surprise" cut of only 25 basis point in the fed funds rate.
Was Wall Street really expecting a 50-basis-point cut? Looking at fed funds futures or options, you might have thought this was a significant possibility. For example, the graph below is the interest rate implied by the January fed funds futures contract, which historically has proven to be an excellent predictor of the monthly average fed funds rate. This had been trading at 4.18% prior to the meeting. Since the FOMC is not scheduled to meet again until January 29/30, one might have read this as implying a 30% chance of having seen a 50-basis-point cut from yesterday's meeting:
(0.7)(4.25) + (0.3)(4.0) = 4.18
Implied interest rate on January 30-day fed funds futures contract. Data source: TFC.
But here's the curious thing: as of this writing, the price of that contract still has not budged more than half a basis point from where it stood at the close of trading last Friday. Fed funds futures traders seem not to have been surprised in the least by the outcome of Tuesday's meeting.
So why did the market drop? "Beats me," he concludes. James next looks at the Fed's new "term auction facility":
Evidently there are those who entertain the hope that the Fed could find two separate tools to achieve two separate ends. The first tool-- the traditional instrument of monetary policy-- is to adjust the total quantity of reserves available to the banking system so as to achieve a particular target value for the fed funds rate, the rate at which one bank lends to another overnight. When one describes a traditional monetary policy action as "providing liquidity," this is what we are discussing.
But there appears to be a widespread belief that the Fed needs a second tool in order to achieve a second policy objective, which is somehow to eliminate the gridlock in financial institutions resulting from huge holdings of assets that no one seems willing to buy. Perhaps, the thinking seems to go, adjusting the spread between the discount rate and the fed funds rate could be a tool to accomplish this.
I am inferring that the Fed itself may also have been musing along these lines, in that it today announced creation of a term auction facility. The basic idea is that the Fed will specify a certain maximum amount that it would like banks to borrow. It intends to lend up to $20 billion for a 28-day term on Monday, and lend up to an additional $20 billion for a 35-day period on December 20. Potential borrowers will bid an interest rate to receive this loan, with I presume each $20 billion going to the highest bidders. Banks must also provide collateral for these loans.
The objective is clearly not just to get $40 billion more in reserves into the banking system next week-- an open market operation could accomplish that just fine. The objective must be to get the reserves into the hands of those particular banks that want them most...
The other thing the facility accomplishes is allow the Fed to accept lower-quality collateral from borrowers than its rules require for open market operations conducted through repurchase agreements. If there is an effect of the facility, I would think that this would be the mechanism. What may matter is not the reserves put in the system, nor who gets those reserves, but the troublesome assets temporarily taken off some institutions' balance sheets.
Isn't that a "bail-out"?
The Fed's initiative was announced in concert with other big central banks, which also took steps to boost liquidity. As the FT reported, however, short-term interest rates hardly budged. The markets don't yet know what to make of it all.
December 11, 2007
A Farewell to Alms
Two more reviews of Gregory Clark's book on development. First, Ben Friedman in the NYT (skeptical but fascinated)...
Every story has to begin somewhere. Do we think technological progress was responsible for the Industrial Revolution and the astonishing increase in living standards in some countries but not others since then? Fine, but what brought about the new technology? Maybe social and political institutions — democracy, tolerance, the rule of law — played a role in when and where living standards increased. But where did they come from?
After decades of banishment to the realm of sociology and other such disciplines, the idea that a society’s “culture” matters has recently reappeared in economics. David Landes, an economic historian and a living national treasure if there ever was one, began this movement nearly 10 years ago when he looked in part to culture to explain “why some are so rich and some so poor” (the subtitle of his classic overview of world history).
But why not go one step further: If culture is responsible, where does it come from? Why do some countries have an economically helpful culture while others don’t? And, since no society got very far in economic terms before the Industrial Revolution, what caused the culture of the recently successful ones to change?
In “A Farewell to Alms,” Gregory Clark, an economic historian at the University of California, Davis, suggests an intriguing, even startling answer: natural selection. Focusing on England, where the Industrial Revolution began, Clark argues that persistently different rates of childbearing and survival, across differently situated families, changed human nature in ways that finally allowed human beings to escape from the Malthusian trap in which they had been locked since the dawn of settled agriculture, 10,000 years before. Specifically, the families that propagated themselves were the rich, while those that died out were the poor. Over time, the “survival of the richest” propagated within the population the traits that had allowed these people to be more economically successful in the first place: rational thought, frugality, a capacity for hard work — in short the familiar list of Calvinist, bourgeois virtues. The greater prevalence of those traits in turn made possible the Industrial Revolution and all that it has brought. (A lacuna in the argument is that Clark never says just how prevalent this Darwinian process made the traits he has in mind. Would an increase from, say 0.05 percent of the population to 0.50 percent have mattered much?)
Clark’s book is delightfully written, offering a profusion of detail on such seeming arcana as technology in Polynesia and Tasmania before contact with the West, Sharia-consistent banking practices in the Ottoman Empire and bathing habits (actually, the lack thereof) in 17th-century England. But Clark’s eye is fixed steadily on the idea he’s pushing; the details are fascinating, but they are there because they help make his central argument.
Second, Deidre McCloskey (pdf; unimpressed and somewhat aggrieved), via Marginal Revolution.
My FT review of the book is here. (I was fascinated, too, but I should have made more of my reservations.)
Ricardo Hausmann on Hillary on trade
This is from Dani Rodrik's blog, where Ricardo Hausmann made a guest appearance:
Dani has many complex and sophisticated arguments regarding his less than enthusiastic support for the Doha Round and his willingness to entertain the wisdom of a standstill. He argues in favor of Hillary Clinton’s position on this matter and against the view that if trade agreements do not go forward, they inevitably fall back.
This may be a tenable position for a trade theorist or for a trade policy wonk. However, suppose the question is the following: do you trust the motivations of this candidate or is the candidate just hiding behind plausible arguments to justify dangerous and wrongheaded policies? Is this candidate rationally worried about the welfare calculation Dani has in mind or is he/she just using our limited understanding of the relationship between trade policy and welfare to advance a different agenda? To ascertain these questions one is allowed to use not just the position of the candidate vis a vis the Doha Round, but instead her/his position on other policy issues as well.
Candidates have a clear opportunity to signal their type, as economists like to say, in their position vis a vis the free trade agreement with Colombia. Here is a country that is a triple frontline state. It is at the frontline in the devastating war against drug-trafficking, suffering most of the casualties both in human lives and in institutional damage. It is in the trenches in the war on terrorism, having to face the deadly and costly consequences of the kidnappings and drug-financed guerrillas. It is also in the frontline against the new totalitarian conception of society now espoused by neighboring Hugo Chavez and his floundering Socialism of the XXI Century.
The US has been aware of this predicament and, since the times of Bill Clinton, has been willing to assist the country with a few billion dollars in military and development support through the so-called Plan Colombia. Now the country has negotiated a free trade agreement with the US and has been able to gain a large support of domestic public opinion in its favor. But this agreement has not been approved by the US congress because of the opposition, among others, of Hillary Clinton.
The question is not whether the free trade agreement is good or bad for Colombia: that is the sovereign decision of Colombia and should not form part of Hillary’s decision. The question is what are the overall effects of Hillary’s position on the US, including its impact on employment and economic wellbeing of American citizens and the standing of the US as an ally in the many confrontations that this world posses to other countries.
It is difficult to see how Hillary comes out the way she does on this one. By the way, she also opposes a free trade agreement with neighboring Panama, a country of barely 3 million people, where the US ran its main industry, the canal, for almost a century.
A free trade agreement with the US is a much more limited offer than membership in the European Union. There are no fiscal transfers, no labor mobility, no monetary union, no acquis communautaire. In spite of its modesty, several democracies in the region have been willing to go for it. The fact that Hillary is unwilling to support a more integrated economic space in the Americas, which her husband espoused so much, makes it very clear to me that she may use Dani’s arguments as an excuse, but she does not share Dani’s goals.
The comments, and Ricardo's responses, are worth reading too.
Scroll down to December 6 for my earlier take on this.
December 10, 2007
The trouble with the Paulson plan
“This is a private sector effort, involving no government money,” Hank Paulson, US Treasury secretary, said last week, announcing the deal he had just brokered among representatives of mortgage-security investors and mortgage-service companies to freeze interest-rate resets on some loans. He emphasised that the compact was voluntary. “The industry standards announced today do not change the nature of responsibilities in the servicing industry – servicers will continue to modify loans when it is in the best interests of investors.” In short, he said, it is a “market-based approach”.
Give the man some credit for using that term without laughing. Is there a housing-finance market on the planet that is more pervasively manipulated and distorted by government than that of the US – even before this latest intervention?
Start with virtually unlimited tax relief on mortgage debt. Throw in the two giant “providers of liquidity”, Fannie Mae and Freddie Mac, key enablers of the mortgage securitisation surge, operating in the background under implicit government guarantee, with transactions accounting for 40 per cent of US mortgages on their books. Do not forget the Federal Housing Administration, the government mortgage insurer (6m loans and counting), which the administration has just asked to take on a much expanded role. And now this.
Totting up the explicit and implicit cost of these programmes, the mind reels. The tax deduction alone is nearly $80bn a year. It is a little late for a market-based approach.
You can read the rest of this new column for the FT here.
December 7, 2007
Subprime prevention and cure
My new column for National Journal contrasts the administration's proliferating (and most likely inadequate) measures to solve the subprime mortgage problem with the easy steps that, taken earlier, would have averted it in the first place.
If ever there was a case of "an ounce of prevention is worth a pound of cure," the subprime mortgage mess is it. The Treasury Department, late to the issue, is struggling to contain an increasingly scary problem. All of its efforts so far -- and the government, however reluctantly, may yet be drawn more deeply into the crisis -- are second-best and have drawbacks. Big costs for taxpayers are a distinct possibility. Many families will end up losing their homes, and the soundness of the financial system remains in question. If the economy does slide into recession, as many economists fear, the subprime fiasco will be substantially to blame. And yet the whole thing might have been averted if some simple fixes had been made in good time.
This would look like 20-20 hindsight except that at least one authoritative voice on the issue had been calling for action for years. Edward M. Gramlich, a former governor of the Federal Reserve Board, who sadly died earlier this year, did all he could to draw attention to the issue. He was not an alarmist. He insisted that subprime mortgages were, in many ways, a good thing. He underlined their success in broadening home ownership among the less well-off; subprime lending was not the same as predatory lending, he emphasized. But, he also pointed out, there had been poor lending practices and some outright abuse. Regulatory oversight was a confusing patchwork, full of holes. Mending it would not be difficult -- but if the job were left undone, the country could have a problem on its hands. And so it does.
You can read the rest of the article here (the link expires in a week, and the article goes behind NJ's subscription barrier).
December 6, 2007
Dani on Hillary and trade
Dani Rodrik has two interesting posts on what Hillary Clinton told the FT last week about trade policy, and on reactions (including mine) to her remarks. (The interview with Hillary is here. My first reaction to it is here. The FT also ran a disapproving editorial.) Dani writes:
Hillary Clinton has some generally sensible things to say on trade in today's FT, for which Clive Crook takes her to task. Basically, Hillary's point is that we need to take a breather from negotiating trade agreements on the accepted model, and think our way through what a new set of trade relationships might look like for the 21st century...
Clive Crook thinks this is all misguided and reflects a tendency for the Democrats to jettison multilateralism in favor of unilateral (read protectionist) trade policies.
I would agree with Clive that giving up multilateralism would be a bad idea. But I read Hillary's interview differently, as an argument in favor of a renewed set of multilateral rules...
The real risk facing globalization today is not that markets are not open enough, but that the political support for the existing set of rules is eroding to the point where it becomes difficult to maintain the openness we have...
UPDATE: And this whole thing about what Paul Samuelson said and meant and whose position it provides support for is such a red-herring. Hillary should not have brought up Samuelson, but I wish her critics would stick to the issues instead of chiding her for using his name in support.
Today Dani returns to the topic, responding to Peter Mandelson, the EU trade commissioner, who was quoted this morning in the FT criticising what Hillary said. Dani's response:
Here is what I do not understand. Why is it that anyone who says that the gains from the next trade agreement are not huge, that there are real social and distributional issues we need to confront before we strike the next trade deal, and that perhaps we need to rethink the basis of the multilateral trade regime in light of the severe legitimacy problems which it has run into--all true propositions--is immediately branded as a protectionist who wants to set the clock back?...
What is outlandish about all of this is that no respectable economic model suggests the completion of Doha will add more than 1 percent to world GDP some ten years out--and this under the most favorable circumstances. The mental model that people like Mandelson seem to have is that the moment you take a breather on trade agreements, the whole world trade regime will collapse. There is little to justify this "bicycle theory" at the present time.
Dani is right of course that having doubts about the current multilateral arrangements does not make you a protectionist. Raising trade barriers, or turning your face against opportunities to lower them, is what makes you a protectionist. I also agree with Dani that taking a breather on trade agreements does not mean that the global trade regime will collapse. But collapse is an extreme scenario. The danger is not collapse, but erosion.
Dani argues that to maintain the openness we have, we must improve the legitimacy of the existing arrangements and build political support for liberal trade. Yet again, we agree. The issue that divides us is whether Hillary Clinton's call for a time-out on trade advances or retards those goals.
Acknowledging that there can be winners and losers from trade, and developing better kinds of social insurance to ease the strain, makes sense. I am very much for that. But those policies do not envisage restrictions on trade. It is very hard to maintain that (a) trade is good for us in the aggregate and (b) it makes sense to go slow on trade liberalisation. If you are going to argue (b), before long you will find yourself failing to mention (a). And once you have forgotten (a), or decided it might actually be wrong, good luck in trying to "maintain the openness we have".
If liberal trade is not good for America in the aggregate, why even try to maintain it? Why not join forces with outright protectionists and pursue the "fair trade" agenda without inhibition? Hillary's reference to the Samuelson article is no red herring. What she and others (incorrectly) drew from Samuelson's assault on pro-trade pieties is precisely that liberal trade may no longer be good for us in the aggregate, because, as she said, this is the 21st century, and comparative advantage is so last season.
Acknowledge and respond to legitimate doubts about the virtues of liberal trade. But where the fears are exaggerated or wrong, our political leaders should say so. Unlike Dani, I think it is very dangerous to concede this intellectual ground. Once the US decides that liberal trade does not serve its collective interest--and Hillary, in effect, is proposing a time-out to think about this--the openness we have is indeed at risk.
December 3, 2007
Hillary on trade
Reading the interview with Hillary Clinton in today's FT took the edge off my morning (report here, transcript here).
FT: You have said that as president you would take “time out” on new trade deals. But the debate has mostly been focused on the smaller and more symbolic deals like Peru and Colombia. Would your principle extend to the stalled Doha round of world trade talks?
HC: Well what I have called for is a time-out which is really a review of existing trade agreements and where they are benefiting our workers and our economy and where the provision should be strengthened to benefit the rising standards of living across the world and I also want to have a more comprehensive and thoughtful trade policy for the 21st century. There is nothing protectionist about this. It is a responsible course. The alternative is simply to pick up where President Bush left off and that’s not an option. Now I’m trying to take the trade agreements that he has negotiated each one on its merits and I will support the Peru agreements because it has the kind of strong labour and environmental provisions that I’ve long called for. And it helps to level the playing field for American workers because as things stand most Peruvian goods already enter America tariff-free but the tariff that are attached to most American goods entering Peru make them less competitive. I have said I will oppose the agreement with South Korea because the auto provisions don’t go far enough and we have prior experience.
My husband’s administration tried to enforce a memorandum of agreement that they entered into with the south Koreans about opening up their market to American autos and it just didn’t happen. So it’s not that we’re starting on some totally different approach to trade it’s that we have to take stock of where we are today. And specifically with Doha and with these large global agreements, again we have to see what works and what doesn’t work. We have benefited through most of the 20th century from trade. It has helped to raise American standards of living, it has helped to create jobs. And I agree with Paul Samuelson, the very famous economist, who has recently spoken and written about how comparative advantage as it is classically understood may not be descriptive of the 21st century economy in which we find ourselves.
We know for sure that every other country wants access to our markets, because we have high levels of consumer spending since we don’t save anything in America and we have a very vigorous competitive market that is a real prize. On the other hand I want to see living standards improve around the world. I want to see environmental standards improve. And I am concerned by some of the provisions that would prevent countries from for example enforcing stronger environmental and worker safety rules under the WTO. I think we have to take a hard look at this and do it in the right way and that is what I am proposing to do.
It is sad to consider that the US might withdraw its leadership from the multilateral trade process--one of the few genuinely multilateral efforts (Democrats should note) where it has, over the years, been fully engaged, and where the results have been, on the whole, spectacularly good. And it pains me especially to see Paul Samuelson (who is no protectionist) invoked as giving his blessing to this new mood of disengagement.
Fannie and Freddie
Until recently it was possible to regard the US system of housing finance as one of the best – if not the best – in the world. Just as it was intended to, it has supported very high levels of home ownership, notably among the less prosperous. But the semi-public entities chiefly responsible for that success, and the financial technologies they devised and promoted, are deeply implicated in the housing market crash that now threatens the US and world economies. Will that turmoil lead to a scaling back of their role? Most likely no. They are cast as part of the solution. Their already dominant role in housing finance is set to grow still further.
Fannie Mae was established by Congress in 1938. At the end of the 1960s it was restructured and, in 1970, joined by Freddie Mac. Their role is to provide “liquidity and stability in the secondary mortgage market”, with an emphasis on supporting housing loans to the less well-off. They buy mortgages from originating lenders and either hold these directly on their books or else securitise them and sell them on with a guarantee to other investors. Freddie Mac devised the first conventional mortgage-backed security.
Few Americans have any idea what Fannie and Freddie actually do – but they certainly do a lot of it. According to their supervising agency, the Office of Federal Housing Enterprise Oversight (Ofheo), at the end of the third quarter they had $3,200bn of mortgage-backed securities outstanding and held another $1,400bn of mortgages and securities on their own books. Together, the two institutions accounted for fully 40 per cent of US mortgage debt outstanding.
You can read the rest of my new FT column here.
