Saturday, February 28, 2004

Russia not an exception in its failure ... a glass half full a reason to celebrate?

Talk about lowering expectations. Russia in a new article by Foreign Policy online magazine isn't an apparent failure despite its economic woes and widely recognized fallback into an authoritarian state. No, the authors claim that the problem is that the expectations were too high and that the Russia experience is the norm for a new country transitioning to democracy and free market economics.

" Conventional wisdom in the West says that post-Cold War Russia has been a disastrous failure. The facts say otherwise. Aspects of Russia's performance over the last decade may have been disappointing, but the notion that the country has gone through an economic cataclysm and political relapse is wrong--more a comment on overblown expectations than on Russia's actual experience. Compared to other countries at a similar level of economic and political development, Russia looks more the norm than the exception."

This is despite as the authors admit:
" Yet the mood among Western observers has been anything but celebratory. Russia has come to be viewed as a disastrous failure and the 1990s as a decade of catastrophe for its people. Journalists, politicians, and academics have described Russia not as a middle-income country struggling to overcome its communist past and find its place in the world, but as a collapsed state inhabited by criminals and threatening other countries with multiple contagions."

Consider for a moment Haiti's situation which is currently falling apart (MSNBC). This whole discussion is why even though the oldman liked the idea of removing Saddam he was so leery of invading Iraq. Here we have a similar situation played out. Duvaliar = bad man in power. Replaced by whom with (Clintonian) military force? Corrupt and inept (but elected) Aristide. Years after intervention? Still a sore spot on the globe and a black eye for American promotion of Democracy.

So yes, we removed Saddam and yes he was a very bad man. However the Iraqis like the Haitians don't necessarily have to materially benefit from this. This is especially true since we're introducing elections into a country that may not be ready for tolerant and diverse multiparty democracy, and we've already appointed opportunistic and ineffectual scumbags in the form of the IGC to power there - Chalabi the liar of Baghdad, Iranist theological operators who run militias like the BADR brigade, ineffectual traditionalists like Adnan Pananachi, token feminists without any real power base, etc.

And yes, just like Haiti it could all fall apart. This is the problem with the forward promotion of democracy, it's a great idea but it's incredibly hard to do properly. And you may end up stuck there or having it be a chaotic mess for years on end.

So yeah, Clinton failed in Haiti... and now Bush is on the verge of failing Iraq. There is no agreement yet (CSM) on the long term disposition of US forces, which means the situation is incredibly precarious (FPIF).

Proponents of the forward promotion of democracy (Oldman1787) tend to over-emphasis how quickly benefits can be attained and to downplay potential risks. But as Amy Chua (Guardian-UK) in her article "Our most dangerous export" has pointed out, the optimistic scenario is not the way history tends to play itself out!

" In May 1998, Indonesian mobs swarmed through the streets of Jakarta, looting and torching more than 5,000 ethnic Chinese shops and homes. A hundred and fifty Chinese women were gang-raped and more than 2,000 people died. In the months that followed, anti-Chinese hate-mongering and violence spread throughout Indonesia's cities. The explosion of rage can be traced to an unlikely source: the unrestrained combination of democracy and free markets - the very prescription wealthy democracies have promoted for healing the ills of underdevelopment. How did things go so wrong?"

So what do these authors do? Faced with the realities that interventions promoting transitions tend to lead to crony capitalism and corrupt authoratarian rule instead of genuine multiparty diverse democratic governments, forward proponents of the spread of Democracy are forced to argue for the lowering of expectations. Instead we are urged to regard the "progress" that Russia has made. I'm not sure anyone would argue that things are worse in Russia today than they were under the Communist regime, but that's not the point. The point is that those who promise authentic and transparent, democratic and capitalist societies can't deliver. The promise made to the American public and the world is never that American intervention in other countries will create slightly less repressive governments and pseduo-market economies with heavy government management, or worse as the Weekly Standard reports they become like Haiti which is basically a failed state now.

That is not what they are promising. And proponents of foward democratization at the cost of stability should be held responsible for promising more than they can deliver. Certainly if the United States is to put itself with blood and treasure on the line, the argument that we should do so to create only mildly totalitarian states with phony democracies controlled by economic oligarchies with possible intermittent civil wars that we will need to intervene in later is going to be less potent of a rallying crying than "making the world safe for democracy". But that is the truth of the matter! And the sad thing is that the proponents of Democracy discredit it by claiming to deliver more than they reasonably can ever expect to create in results.

Idealistic notions of how fast countries can culturally develop are unrealistic and a fools' gamble. We can help other countries, but in order to do so we have to realistic about how much can be achieved and what the cost will be. Otherwise America just ends up losing credibility and looking like a silly ass.

Wednesday, February 18, 2004

Keystone cops strike again ... Ashcroft part II

According to Knight-Ridder Washington Bureau a federal prosecutor files a lawsuit contending Justice Department mismanagement of terrorism cases:

" The federal prosecutor who won convictions in the government's first and only terrorism trial after the Sept. 11 attacks has filed a lawsuit against Attorney General John Ashcroft accusing the Justice Department of "gross mismanagement" in the war on terrorism.

" The highly unusual complaint was filed in U.S. District Court in Washington by Richard Convertino, the lead prosecutor in the conviction of three members of an alleged terrorism sleeper cell in Detroit.
"

The oldman has written about the Keystone cop antics of the Bush43 Administration and John Ashcroft before. It'd be one thing if they were arguing that they needed to take away our liberties to protect us. Right now however the trade that they're offering seems to be liberty for ... bungled inept bumbling and moronic mismanagement(?). Sorry, fraid the oldman prefers to take his chances rather than rely on ... shudder ... John Ashcroft to protect him from terrorists.

Monday, February 16, 2004

The Economist Agrees with the oldman,

The Economist agrees that the current situation of the dollar is going to become unstable at a future time:

"And the Americans will most certainly not intervene unless things get seriously out of hand. The Bush administration could not be happier about what is happening in currency markets now that John Snow, the treasury secretary, has learned to keep his mouth shut. For America it is, says one pundit, “the deal of the century”. The administration is delighted that the dollar has fallen as far as it has; insiders say that it would be more delighted still were the currency to fall another 15% or so. And it doesn’t much care who takes the strain. Europe is not the flavour of the month in Washington, DC, to put it mildly. If the ECB is so vexed about the unequal strain the euro is taking, why doesn’t it cut rates? That Japan’s policy sort of works means that it will carry on intervening. This is wonderful for the American economy. Any other country trying to devalue its currency would see its long-term interest rates rise (and sooner or later its short-term rates, too). But in America’s case, bond yields are actually falling, which helps fuel the recovery. In large part, this is because, as the yen rises, the Bank of Japan buys ever more dollars, and the dollars are usually parked in Treasuries: even in the Treasury market, $68 billion is a tidy sum.

None of the Asian countries wants to stop intervening, otherwise their currencies would shoot up and their economies would (more or less) shoot down as exports slowed. For now, moreover, they seem to be quite content to fund Americans’ profligate ways. Of course, this can’t continue for ever. America’s savings rate is just 1.3%, and even the Bank of Japan can’t carry on buying Treasuries like a Japanese housewife in a Gucci shop. At some point, though perhaps not yet, Americans will stop consuming so much, the Asians will stop buying so many Treasuries and everything will go crunch. As a friend says, “It’s a weirdly unstable equilibrium”. Rather like a duck-billed platypus, in fact, though perhaps not as long lived.
"

As the oldman has noted, the IMF disapproves of the fiscal deficit but does not disapprove of the currency revaluation. As the oldman has pointed out, as a rule of thumb he always assumes that the IMF is wrong. Despite the Weekly Standard's hand-wringing over Republican fiscal follies the main danger would be in the short term from the currency markets and a massive devaluation that could force up interest rates.

This would happen for three reasons. First to strengthen the currency (the price of money) it would have to raise interest rates. Second, Treasuries are denominated in dollars and a currency devaluation would include a sell off of T-bills and bonds (American national debt) causing a fall in their prices. In order to counteract that, a rise in their yeilds (again interest rates) would be necessary or the bottom might fall out of American denominated debt (which goes back to the fiscal follies). Thirdly, imports would become more expensive as the Greenback fell increasing CPI measured inflation which to combat the Fed would have to ... yes, raise interest rates. This would be touchy if at the same time the monetary supply was falling (as it seems to have been doing since September) already and generating an economic activity crunch (people borrowing and spending less) and triggering the exact same "tipping point" mentioned above of consumers spending less.

As Ingatius points out ...
"Discussing the falling dollar at a panel of the World Economic Forum here, a former U.S. senator said the greenback's decline was just a blip. The abiding fact was that for more than a century, in good times and bad, the world's investors have been in love with the American economy. And that ardor continues today.

Yes, responded a Chinese economist, but "love affairs always end.
"

If you want to, you can dig through Greenspan's Jan04'04 speech but basically what he says is that if inflation shot up (say if currencies became more volatile) he'd have to tighten monetary policy (raise interest rates). Using the IMF contra-indicator (always bet against the IMF) and Greenspan's deposition on monetary policy (never fight the Fed) we could be in real trouble here shortly.

This would of course also end up bursting the Real Estate Bubble I've blogged about before. How bad could a reset be? The Levy Economic Institutes has an analysis out by some economists indicating that besides a serious and broad stockmarket decline, we could see real estate prices decline in the United States by up to 25% in a short period of time. That would put some serious hurt on people who've borrowed against their houses using Home Equity Loans that have become much more popular in recent years.

Friday, February 13, 2004

Bush hurting now, Teflon wears thin

The Christian Science Monitor writes that the popularity of the war has fallen to all time low. The article includes some testimonials of former conservative pundits that have turned on the President as his actions have alienated on a variety of issues his core base.

Bill Oreilly
Conservative broadcaster Bill O'Reilly this week said he had been wrong to accept official claims that Saddam Hussein's regime had weapons of mass destruction. "I think all Americans should be concerned about this," said Mr. O'Reilly of Fox News, who pronounced himself "much more skeptical about the Bush administration now."

Peggy Noonan
Peggy Noonan, a speechwriter for former President Ronald Reagan, described Bush's interview as "not impressive." "He did not seem prepared," Ms. Noonan wrote on the Wall Street Journal website. "He seemed in some way disconnected from the event."

The CSM article pinpoints the issue as a growing "credibility gap". (The term credibility gap was first applied during the Vietnam-era Johnson Administration.) Quoting the CSM:

"The overriding issue is the expectation-reality mismatch," says retired Air Force Col. Sam Gardiner, who teaches at the National Defense University. "The war was supposed to be quick. We were supposed to be greeted as liberators. It was to pay for itself with oil revenues. And we were supposed to find chemical and biological weapons."

The WaPo has this very interesting graph showing how Bush is showing poor poll numbers. It doesn't help that the Democrats are "killing" Bush over domestic issues right now. Bush seems pretty vulnerable right now, even with his oppo researchers targeting Kerry and trying to find chinks in his armor (links via Daniel Drezner).

It's not over until it's over though. There's allot of time until the November elections, and anything could happen including a major domestic terrorist loss of life. Imagine waking up on Valentine's day 2004 reading about ricin poision striking Los Vegas, Los Angeles, and Atlantic City municipal water supplies. The victims would experience the horrors of "severe gastrointestinal symptoms followed by vascular collapse and death." Alternatively, we could nab ole Bin Ladin suddenly (Time Magazine). Wouldn't that be a pop in Bush's ratings!

In addition, the Bush Administration could always attempt to turn the topic toward war.

Thursday, February 12, 2004

Politics of Trade, a quickie appetizer before the main course

Introduction

The NYT reports that Bush backs down on trade comments by Mankiw:

" Mr. Bush's emphasis on not losing jobs to foreign employers was, at least in part, an effort to spackle over the political damage done on Monday, when the chairman of the White House Council of Economic Advisers, N. Gregory Mankiw, commented on the practice of American companies' farming out production and services to low-wage countries like China and Mexico...

The reaction to those remarks was immediate and unfavorable — and has not gone away.
"

Dan Drezner covers the actual comments and the pro-trade side at more depth. Brad Delong has come out supporting Mankiw on this subject, though he notes that Mankiw could have been more politic when dealing with the press in an election year. Kicking up dust that the President needs to back down about in the middle of a defensive period of bad press on various topics. Or is it payback for being forced to be a toady for so long? Brad Delong has previously written about the gaping holes in the "The Economic Report of the President" that Mankiw has been forced to endorse at serious cost to his own credibility as a serious professor of Economics at Harvard. Indeed Mankiw has been forced under this noxious Administration to publicly repudiate the very principles (WARNING: paraody) that he's espoused in his economic writings (that was a serious reference).

It is testifying on this very same (flawed) report before Congress that Mankiw got piled on about his comments on trade and that Bush has had to back down about.

Dissection: So what's all the fuss?

Mankiw is a serious economist, and he deserves a hearing. In addition the remarks should be taken "in context". Therefore oldman thinks the best way to view the testimony of Mankiw since according to his own admission is that it "covers a wide range of issues, including recent business cycle developments, tax policy, the health system, regulation, and the role of the United States in the world economy." is to go over the testimony point by point and then summarizing. At each point the oldman will give his judgement of the point Mankiw was truthful, misleading, waffling, or lying. At the end the oldman will recap. Call it an autopsy of an economic release gone very very bad. Whether or not one thinks Mankiw should have been blasted for his trade positions, it's clear that this report has been an absolute stinker and credibility sinker all around.

1A: "The U.S. economy made notable progress in 2003, propelled forward by pro-growth policies that led to a marked strengthening of activity in the second half of the year and put the United States on a path for higher sustained output growth in the years to come."

1B: (LIE) As Nathan Newman has pointed out, the money supply is falling. The money supply had been growing earlier. As you can see here, as of Dec 31'03 the money supply has been steadily falling for several months. If you want to you can dig through the Fed's own current numbers.

Well the point is that when money supply contracts then "Economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results." According to the Fed's own numbers, the economy is stalling out. Since money supply is a leading indicator, we can still have positive GDP numbers but the rug has actually been pulled out of the economy. Mankiw is a good economist, he should know this. That's why the oldman charaterizes this as a lie or deception.

2A: "The recovery was still tenuous coming into 2003, as continued fallout from powerful contractionary forces.the capital overhang, corporate scandals, and uncertainty about future economic and geopolitical conditions.was offset by stimulus from expansionary monetary policy and the Administration.s 2001 tax cut and 2002 fiscal package.

2B: (TRUE) The stimulus did increase economic activity.

3A: "The contractionary forces dissipated over the course of 2003..."

3B: (MISLEADING) As pointed out earlier, the money supply is contracting, but it did begin climbing back up before that indicating some economic expansion. The contractionary forces are back however.

4A: "The economy appears to have moved into a full-fledged recovery, with real gross domestic product (GDP) expanding 4.3 percent over the four quarters of 2003, significantly above the average growth rate since 1960 of 3.3 percent."

4B: (MOSTLY TRUE) His GDP numbers are right, and he should get credit for not trumpeting the higher initial numbers. However as pointed out, whether or not this recovery is sustainable is not clear and has some strong counter evidence at this point.

5A: "The Administration.s pro-growth tax policy, in concert with the dynamism of the U.S. free-market economy, has laid the groundwork for sustainable rapid growth in the years ahead."

5B: (WISHFUL THINKING) There has been no structural change whatsover in the overall economy. There's no basis for assuming that we're going to enter a period of "sustainable rapid growth". What the numbers look like indicate a weak or uneven recovery on various indicators including weak retail and jobless numbers as reported by the Financial Times.

6A: "The tax cuts must be made permanent to have their full beneficial impact on the economy. A stronger economy will also result from progress on the other aspects of the Administration.s economic agenda, including making health care more affordable; reducing the burden of lawsuits on the economy; ensuring an affordable and reliable energy supply; streamlining regulations; and opening markets to international trade.

6B: (LIE) As Dan Drezner has pointed out, the medicare entitlement program is going to be a disaster. The CATO Institute by no means a liberal hotbed documents why Federal Spending is up and why Republicans are to blame. The other stuff is just fluff or shaving pennies compared to this nightmare. However this paragraph let's us jump to the contentios TRADE ISSUES. However first let's give grades for Mankiw's testimony on the intervening parts - but only after we grade Mankiw on his testimony:

OVERALL GRADE SO FAR: Mankiw get's an "E". Sorry, he did try but there were just too many overtly wrong things in his testimony. Even though there were some correct statements he completely misled the audience by lacing them with incorrect and fallacious statements. As the old saying goes, the best lie is mostly truth because then it holds together better.

Mankiw's testimony on Macroeconomic Policy
Oldman's grade: C-. Mankiw uses decent numbers, but the rest is just hand waving. He accurately reports historical trends, but then extrapolates into thin air using the assumptions that Bush's economic plans are actually going to work. For the record, most politician's economic plans don't work. Anyone remember Clinton's health plan? Clinton actually ended up spending not that much, enforced by a disciplined Republican Congress. His proposed spending was quite a bit higher. Assuming that Bush's plans are both going to be implemented and work would be doubtful from a simple historical perspective of various Presidential Administrations. Assuming that they would yeild the uncharacteristic growth yeilds that Mankiw projects are ludricous.

Mankiw's testimony on FISCAL POLICY
Oldman's Grade: B+. What??? Didn't the oldman just get done raking Mankiw over the coals over how Brad Delong shot holes in his number projections? Yep. This was Mankiw's best moment in the testimony. Read for yourself:

"An important implication of the economic analysis of incidence is that, in the long run, a large part of the burden of capital taxes is likely to be shifted to workers through a reduction in wages. Analyses that fail to recognize this shift can be misleading, suggesting that lower income groups bear an unrealistically small share of the burden of such taxes and an unrealistically small share of the gain when capital income taxes are lowered."

Yeah, that's right, Mankiw just came out for capital gains tax cuts (like the dividend tax cut passed last year) that are the cherished first-born sons of the voodoo economists who misuse supply-side theory to justify madness as the oldman as written about. However the problem is that as the oldman has pointed, tax cuts without spending cuts are madness. Supply side theory may suggest that cutting taxes will increase investment, but no one thinks tax cuts and increased government borrowing will stimulate the economy (except loonies of course)!!!

The rest of Mankiw's testimony on this topic should be read carefully. It's kind of cloaked in obscure language. But overall it's a good thing if companies make more money, otherwise how could they pay their workers more? Profits so long as there is profit sharing is a good thing.

Mankiw's testimony on Regulation
Oldman's grade: B. Mankiw has a nice testimony here about regulations and the free market that mostly centers on energy and the environment. It's good in theory. The oldman disagrees with nothing except that there should be more research money put into the development of alternative fuel and higher fuel efficiency standards. The oldman does not believe in attempting to mandate technologies before they are market ready. However, that's no excuse to not bust hump trying to get them to market. Government must help lead the way there. The main shortfall is that the Bush43 Administration record on the environment is terrible. Mankiw's testimony is academically and theoretically true, but disjointed from the "ground truth" of the direction the Bush Administration is actually driving environmental policy.

Mankiw's testimony on Health Care
Oldman's grade: D-. Oh, yeah it was that bad... listen here to Mankiw himself:
"A strong reliance on market mechanisms will ensure that incentives for innovation are maintained while providing high-quality care in the most cost-efficient manner... Health insurance plays a central role in the workings of the U.S. health care market... Over-reliance on health insurance as a payment mechanism leads to an inefficient use of resources in providing and utilizing health care."

That's right. Mankiw thinks that Americans have too much health insurance that pays out "unnecessary expenditures". I wonder if Mankiw has ever had to live without health care? Raised a family without health care? If you look at the Census Bureau historical insurance coverage table you can easily see that private insurance coverage is dropping in percentage (%) terms and Medicare, Medicaid, and Uninsured categories have been rising since just the year 1987.

Total insurance coverage from 1987 to 2002 dropped by 2.3%, and the uninsured rose 2.3%. Hmmm ... wonder if there is any connection between those two numbers ... 2.3% may not sound like allot but in a population of some 280 million people, that means nearly 6.5 million more people have become uninsured. That's not counting those having to go to direct pay plans (pay for their own insurance out of pocket), and that's not counting the separate 3.2% or nine million more people that went on Medicaid that "that pays for medical assistance for certain individuals and families with low incomes and resources". That's just the increases since 1987 mind you and not the actual total number of insured or Medicaid recipients, the actual total number of uninsured and medicaid assisted persons in this country is 26.8% or over 1 in 4 out of the population, or about 75 million Americans. This is not a problem, this is a structural crisis that the market has not solved!!!

Mankiw also has blather / filler on Tort reform but the main part of the section is how he completely drops the ball on health care!!!

FINALLY: Mankiw on TRADE
Oldman's grade: (E) Mankiw starts out strong but quickly degenerates into what are arguably intentional attempts to dupe his lay audience!

Quote1: "Chapter 12, International Trade and Cooperation, discusses how growing trade helps to spur U.S. and global growth..."

Reaction1: (TRUE) The first paragraph is entirely correct.

Quote2: "New types of trade deliver new benefits to consumers and firms in open economies. Growing international demand for goods such as movies, pharmaceuticals, and recordings offers new opportunities for U.S. exporters. A burgeoning trade in services provides an important outlet for U.S. expertise in sectors such as banking, engineering, and higher education. The ability to buy less expensive goods and services from new producers has made household budgets go further, while the ability of firms to distribute their production around the world has cut costs and thus prices to consumers. The benefits from new forms of trade, such as in services, are no different from the benefits from traditional trade in goods... The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane."

Reaction2: (TRUE) Here Mankiw is talking about the classical side of trade. No one doubts the ability of foreign imports to bring down costs of consumer goods. In addition, the US has benefited from the ability to export goods and services (source: Dan Drezner). As long as the balance between imports and exports in goods and services are about balanced out, the economy benefits.

Quote3: "Outsourcing of professional services is a prominent example of a new type of trade. The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane."

Reaction3: (MISLEADING) Unfortunately, here Mankiw conflates outsourcing and "offshoring" with traditional trade. The oldman has argued that "offshoring" is NOT equivalent to a classical form of trade, since there are serious reasons to believe it is not equivalent to traditional trading mercantilism and that what it actually represents is that Americans are being unfairly outcompeted with both short and long term consequences both in terms of overall American prosperity declines and is driving a income inequality created by a lack of structural education reform.

If you notice what Mankiw has done, he's done something very clever. He's made a classical "trade is good" (even if it includes services) argument and then overlapped it with another argument - "offshoring is good" argument - because it's just like buying another good or service in the course of regular trade. Only he isn't answering the export side of the question "Okay, what are they buying back in return for this offshoring we're sending them?" Because if he had to answer that question, he'd have to answer the question of why new jobs aren't being created so that displaced workers can move into new professions.

Because then he'd have to answer questions about why the export side of the structural growth equation is stagnant. If we were losing jobs in some aspects to overseas competition or "offshoring" which is a form of importing, but we were also gaining jobs on the other side of the economy with increased goods and services exports then people wouldn't be complaining as much. Yes, some people would be losing jobs but others would be gaining them and somewhere in the middle there would be unfilled jobs for the people who lost jobs to move into. In addition he'd have to answer questions about the kind of jobs being created. With the competition / education crunch structurally choking off true growth that would provide competition for capital to stay here instead of move overseas, even last month's unemployment report showed that most of the 112,000 jobs created were in the retail services - holiday job sales positions versus a net absolute loss of manufacturing jobs.

Quote4: "When a good or service is produced at lower cost in another country, it makes sense to import it rather than to produce it domestically. This allows the United States to devote its resources to more productive purposes."

Reaction4: (MISLEADING) The problem here is that there is a big difference between absolute advantage and comparative advantage. When Mankiw is talking about "When a good or service is produced at lower cost in another country, it makes sense to import it rather than to produce it domestically." what he is talking about is Absolute Advantage.

Absolute Advantage occurs when "A country has an absolute advantage over it trading partners if it is able to produce more of a good or service with the same amount of resources or the same amount of a good or service with fewer resources." (e.g. more cheaply). There are many ways to establish absolute advantage. One is to have a natural abundance of a commidity resource. Another way is to artificially manipulate the exchange rate. Another is to develop technological superiority

Comparative Advantage on the other hand is a "win-win" situation. It is important to distinguish whether trading is being done on the basis of absolute advantage or comparative advantage because ONLY comparative advantage necessarily results in "win-win" trade specialization. Comparative Advantage does not depend on who can make the product or service cheaper. That is absolute advantage. Instead, Comparative Advantage depends on opportunity cost. There are many components to opportunity cost, which is why it's more confusing than the lowest cost which refers to absolute advantage. Labor, innovation, productivity, and capital costs are all involved. The simplest way to measure opportunity cost is to use the proxy of return on investment. Simply put, if you could get more $ profit from investing the same amount of money (capital) in venture A than venture B, then the ROI for A is greater than B. The opportunity cost is the cost of choosing A versus B or vice versa. So the lower the ROI the higher the opportunity cost - you could have made a bigger buck elsewhere, etc.

So when Mankiw is talking about how "This allows the United States to devote its resources to more productive purposes." he's really talking about Comparative Advantage and opportunity cost.

So again, he's done something very clever. He's taken two sentences, each which refers to two seprate ideas and put them one after another. Being an economics professor at Harvard I'd have to assume that Mankiw knew exactly how easy it is for most people to confuse the two topics. The average person (including most Congressmen and their aides) would say "But if you have the lowest cost production, don't you also have the comparative advantage?" NO!!!. Comparative advantage has to do with how much more you could have made with the same money elsewhere, not cutting costs here.

It means you should do what you are best at compared to what else you can do. This means if you make shoes best, it means you should do that even if you make shoes more expensively than someone else. Yeah. So going to the low cost supplier can actually mean giving up comparative advantage, and the theoretical benefits of trade. This is doubly true if the "low cost producer" is the low cost producer by artificial means such as lower social structure investment, currency manipulation, subsidies, product dumping at below cost, etc. that prevent equilibrium or parity being reached.

Mankiw is a sharp guy. He must not only know this distinction, he must know how endlessly this idea is confusing to the ordinary person.

Why is it important that he confused the two ideas? Well it is well known that large companies have always been able to use absolute advantage to create barriers to competition. If Mankiw admitted that Absolute Advantage was the basis of our trade treaties, then he would be admitting as much that other countries are running our companies and workers out of business. In fact, that is what is happening. Uneven liberalization means that other countries can compete for selling goods, services, and products in our economy without opening out their economy to our exports. They do this in many ways, consider that India is one of the world's most protected economies even as they compete for our markets.

Mankiw is too smart not to know the difference. Conflating the two kinds of advantages effectively means cloaking the unfair marketshare competition of other countries in our markets, without having to argue why reciprocal production in exports from us are necessarily flowing back to them to balance the equation. Given that Mankiw has just been shown to pull two such "fast ones" in a row makes it increasingly unlikely that he did so innocently. He must have known as a teacher of economics how his comments would be misinterpreted by the layman.

So the fact is that while Mankiw has been piled upon for defending job exports overseas by journalists and Democrats who cannot dissect his argument, he probably deserves it. While Brad Delong and Dan Drezner have defended Mankiw's defense of free trade, they have missed inside the body of his comments the rhetorical tricks he's pulled in order to justify using the known and approved the unknown and the egregious.

Quote5: "A series of financial crises in emerging market economies, however, has raised some concerns that financial liberalization can also involve risks... One approach to limiting the risks from capital flows when legal and financial institutions are poorly developed is to restrict foreign capital inflows. Experience suggests, however, that capital controls impose substantial, and often unexpected, costs. Instead, countries are more likely to benefit from free capital flows and minimize any related risks, if they adopt prudent ... policies..."

Reaction5: (MISLEADING) It's pretty bad how Mankiw glosses over the actual historical failure of the very policies he's suggested, such as the only countries that escaped the recent market meltdowns have been the ones that have rejected the very lifting of capital controls that Mankiw is advocating. This isn't a matter of opinion, but of factual and recent economic history. Malaysia's actions showed that the very capital controls that Mankiw was railing against are the only means of stabilizing economies in certain circumstances.

Quote6: "The Administration has promoted policies to help countries reap the benefits from the free flow of international capital... trade flows and capital flows are inherently intertwined."

Reaction6: (LIE) The administration is openly tolerating a huge China problem in trade and capital flows completely contradicting the very advice on how to fix the problems that Mankiw suggests just above! Mankiw in the previous sentence suggests that "countries are more likely to benefit from free capital flows and minimize any related risks, if they adopt prudent fiscal and monetary policies, strengthen financial and corporate institutions, and develop sound regulations and supervisory agencies."

However, as the BBC reports as of late 2003 "Observers need only look at the chaos caused by the Asian economic meltdown of 1997-8 as an example of how a weak banking system, floating currencies and loose capital controls can trigger crisis, said S&P.

"China's banking system is insolvent, with problem loans estimated by S&P at 45% of total loans, and its risk control systems are ill-prepared to deal with a rapid liberalisation,""

So clearly the Administration can hardly be promoting policies that help countries reap the benefits from capital when one of our largest trading partners' practices - China - are being tolerated even though they completely violate the very advice Mankiw is giving on capital controls. I'm not sure how much more of an outright contradiction you can have!

CONCLUSION

Why would Mankiw justify bad trade deals? Why would Mankiw say any of this nonsense? Well as has been pointed out in the previous parts of the testimony Mankiw has been willing to adopt completely unrealistic projections of economic activity or to retreat to academicly unrealistic models of what is actually happening in order to justify support for the President's economic plans. He is willing to do this even though mainstream economists absolutely cringe at his growth projections and will refuse to defend the fiscal policy he is advocating on behalf of the President. This is why the oldman went through the trouble of analyzing the whole testimony.

Overall it consistently shows a pattern of intentionally misleading, outright unrealistic, or perhaps even openly unsustainable lies all told in the defense and advocacy of President GW Bush's plans. Why should the subject of trade be any different? The journalists weren't sophisticated enough to pick up on it, and nor where the Democratic legislators or their aides. Mainstream specialists probably didn't bother to read and analyze line by line what they felt would just be fodder for the Administration's unrealistic plans.

Yes, Mankiw got jumped on because of his trade comments. Yes, he got jumped on for the wrong reason. Protectionist barriers are not the solution. Directly "stopping" job loss is not the solution. The solution is increased education that promotes competitiveness of the American labor force, equally liberalized trade deals that don't make America a one-legged man in an ass-kicking contest, and increasing R&D for export industries so that we can have something to trade back to the other guys. It's not about how many jobs we keep from being lost, it's about how many jobs we create because we can figure out new and nifty products and services in order to offer back in return. It's not about being against trade, it's about being for truly free trade instead of the imposter that masquerades for it and tries to use economic theory to defend misapplied government policies!!!

So he got pilloried for free trade, and got defended by mainstream economists in that regard. But frankly Mankiw deserved a verbal beating anyway for all the misleading or outright lying crap he put into his testimony to mislead his audience. Most of his testimony was riddled with bullshit that had nothing to do with the real world or played semantic games that hid the real destruction going on in this economy because of bad trade treaties and shitty economic policies. It doesn't matter whether you're on the right or the left, for trade or for jobs, any way you slice it when you look at this testimony carefully it was completely appalling and represents Mankiw completely selling out his integrity. Yes he got a cheap shot in the arm from other economists for "defending" free trade, but what he was actually defending had nothing to do with free trade and had everything to do with covering for a President who can't do the economic math. The numbers just don't add up and neither do the verbal sleights of hand.

Oldman's Final Grade for Mankiw's Testimony: Mankiw get's an "F" for failing - that's failing to tell the American people the truth through testifying to their representatives in Congress.

The whole thing reads like one giant cry for help!

Wednesday, February 11, 2004

Education is more than you think: Background for "America Resurgent"

NOTE: for all my faithful readers, you should know that I am almost done - less than 24 more hours - with dealing with my student midterms, etc. I am including this quickie piece now as background for a series I'm writing entitling it "America Resurgent" analyzing the trade and economic situation in this country and how the hemmorage of job reductions can be staunched. The oldman has already identified education as a key component of this situation, so I'll post this background piece so that I can refer back to it for the main series of articles.

Introduction: A Botched Education Reform
The Christian Science Monitor has a nice update piece out on "No Child Left Behind" (NCLB).

" From Utah to Virginia, a revolt is building in classrooms and legislatures against the biggest education reform in a quarter century. As elements of the federal No Child Left Behind Act take effect, state and local education officials, upset over the stringency of testing requirements and the cost of implementation, are openly criticizing the measure - and even threatening to defy it.
The rebellion, in some cases led by GOP lawmakers, could endanger a signature achievement of the Bush administration in an election year.
"

The oldman has written before about how Republicans are criticizing NCLB, and on how NCLB violates conservative ideals. The conservative blogger Andrew Sullivann has also criticized NCLB, saying "Where once education was the preserve of states, school principals and parents, this president has expanded the federal role in unprecedented ways. The No Child Left behind Act federalizes educational standards in a dramatic reversal of traditional Republican deference to localities and states."

The Role of Education in Prosperity

However, education is key to the continued prosperity of America and as the oldman has commented America is falling behind. In an environment where more and more there are growing wage inequities due to educational differences, it's clear that the only way to compete with China and India is to have a better education system. The United States of America cannot remain the wealthiest nation in the world if we are 19th or worse in science and math education.

As Brad Delong has written, ideally trade (when there is no trade deficit) only shifts jobs within an economy writing that:

" What trade does is to shift jobs, shift the composition of American employment: people in import-competing industries lose jobs, while people in export industries (or, with the capital inflow, construction and investment goods industries) gain jobs. Economists have lots of good reasons for believing that the jobs gained are better jobs than the jobs lost, and that there are more and bigger winners from expanded international trade than there are losers."

However this analysis assumes that countries remain competitive in offering trade goods to go back and forth. It says nothing about internal structural progress. For instance, suppose countries A and B trade back and forth. Suppose that country B starts falling behind in competitiveness because of deteriorating social investments and population education. What would happen is that imports would still occur to country B but its exports to country A would fall behind. So as jobs were "transferred" from the import indusries to the export part of the economy, you would have job losses but a lack of job growth (Oldman). Now doesn't that sound familiar? Could anything like that be happening in America, say like right now?

What about the role of Trade in Job Loss?

Trade by itself isn't the villian. Trade is not the cause of economic contraction. Trade however is the means of exposing a lack of structural reform or progress within an economy. It exposes that commercial creation of wealth and innovation is stangant. It's not that America is losing jobs overseas as the culprit that needs protectionist barriers to trade that don't really work anyway. But what is needed is an internal competitiveness reform to create jobs and not stop their loss. Trade is an easy target for accusations.

However, this doesn't mean that the oldman endorses current unfair "free" trade policies. This applies as equally as well to Americans as anyone else. Why is America still trying to maintain dominance in low margin agricultural commodity markets? Even if two countries have different absolute advantages in production efficiencies, they can still benefit if they trade by doing what each does best. The principle of comparative advantage states that given their resources (labor, innovation, and capital) nations should produce what each does best (or least worst) given their internal opportunity cost. That is if Country A can make a million dollars of socks for a thousand dollars of effort, but they can make two million dollars of shoes for the same thousand dollars of effort then they should make shoes instead of socks even if they're better at making socks than country B.

What to do about unfair trade policies

We should be writing our trade treaties not to encourage absolute advantage trade wars of low cost marginal production struggling for market share dominance. Instead we should be writing into our trade treaties bid-contract Ricardian comparative advantage trading markets. What does that mean? What that means is that two countries sit down and decide the bundles of goods they want to trade for another countries bundle of goods and services, and then negotiate a system where if buyers and sellers want to fill orders in another country they buy bid-fill contracts placed on an electronic market. This would expedite trade because buyers and sellers could meet in an informal marketplace that allowed them to offer their wares and their services. The marketplace would then according to treaty offer a regulatory body that would not mandate outcomes, but would be allowed to "buy" or "sell" bid-fill contracts according to the agreed trade ratios in order to influence (NOT mandate) the market outcomes.

Does that sound preposterous? The currency markets are run in a very similar way in fact, with countries setting targets and then intervening to meet goals set by Central Banks and Treasuries like at the recent G7 forum. This would allow a discretionary intervention mechanism in the marketsplace that could be negotiated directly by treaty without specifically mandating outcomes. If countries want to for instance open up certain markets, say 60% of American sugar purchasing they could then argue for instance 40% of Australian car purchasing.

To create this, the regulatory body would then offer a general negotiated number of bid-contracts that could be purchased and sold on the Ricardian market. Once a company bought this peice of paper, they could offer it to be filled by a bidder (low cost or other contractual stipulation terms) bidder who would sign the "fill" portion of the contract. As time went by, the regulatory body could influence the outcomes to try to manage targets by either releasing more bid contracts or buying them back from the marketplace participants. As I've mentioned currency markets already work something quite similar to this. Self-regulating marketplace functions like scarcity, demand, and supply factors would help keep the market within "negotiated" targets. For instance, a company C that wanted to fill more orders overseas could buy the contracts that D held - at a premium of course. This would work best with large quantity shipments (steel, rice, soybeans, etc.) or mixed product lump marketplaces ("all toy orders", etc.). In this way incremental marketshare shifts could be worked into agreements and could be made over a period of time, with currency floats and pegs negotiated into the overall deal regarding each countries "bundle" of goods and services.

This concept of a Ricardian comparative advantage trading markets is much more advanced in sophistication than the present trade treaties. But the oldman will be pleased to expound on that another time ... after more grading! Ack!!!

Tuesday, February 10, 2004

Teaching Kiddies,

I teach at introductory science courses at a Midwestern university. We just hit mid-terms. Ack. Anyway I'm buried. I've got all the sources lined up for the trade papers and the economic analysis I wanted to do. But they're going to have to wait at least another 24 hours as well as my poor long-waiting friend Beth to get her papers back and go over stuff. Until then, CYA! I intend to have stuff up as of Thursday evening ... at this rate it's the best the oldman can do. At least I got my laundry done! Next week will be clear sailing as well as this weekend however for posting.

Monday, February 09, 2004

Progress inequality ... or how a "rising" tide DOESN'T lift all boats

INTRODUCTION
Maybe it should be changed to how a receding tide leaves some folks stranded high and dry and others get shipped out to sea. Like the future of America! The Christian Science Monitor has a nice piece out on growing wage inequity (skewed market distribution) .

" The problem of widening wage inequality is not new, and is rooted in long-term trends. The rise of technology in the workplace, for example, puts a premium on educated workers and eats into the bargaining power of the less-skilled. The entry of about a million immigrants a year, puts downward pressure on wages in many low-income jobs. Offshore outsourcing of jobs and falling union representation also play a role.

" All these factors are still present," says Ann Owen, an economist at Hamilton College in Clinton, N.Y. and former Federal Reserve economist in Washington. "We can probably project a future growth in inequality."

" Particularly troubling: The challenge persists even as the economy is growing, at a 8.2 percent annual rate in the third quarter of 2003 and a 4 percent rate in the fourth quarter.

" The median weekly wage for the nation's 100 million workers was $625 in the fourth quarter last year. That's up 2 percent from the same quarter in 2002, barely beating inflation.
"

Meanwhile Dan Drezner has a post out on the new Australian Free Trade Pact. For the record, the oldman mostly approves except that he notes that once again "free trade" is limited to mostly manufacturing and services. This is a dead end. Free trade cannot work in the long run with such distorting market forces involved. It may seem a triumph to open up the market to manufactured goods, but the problem is that the remaining "unfree" trade will skew the rest. As it's already doing with China and India.

REACTION:

As the oldman notes:
Sugar really is one of those areas where idealistic Ricardian comparative advantage could simplistically take place. They sell us cheap sugar which they have a lower opportunity cost for, and we could produce and sell more sophisticated goods back. It would be a much better investment of our capital than the sugar industry. It's also one of the areas that wouldn't be prone to national security issues. Ditto pretty much for cotton. Why is the United States trying to stay a low margin agricultural commodity producer? We could use that money and invest in forward thinking industries instead.

SOLUTION ANYONE?

America has to get out of the business of using our money to do things we're not so great at, and at doing things we're better at. With an economy increasingly slanted towards a Information Economy America cannot afford anymore to neglect its schools and universities. Massive reform and restructuring has to begin taking place in the next five to ten years, or in the next two decades America will fall behind the rapidly advancing boom in Indian hi-tech led growth (USA Today):

" With China ascendant in recent years, it's been easy to overlook India. Not anymore. Thirteen years after starting to unshackle its Soviet-inspired economy, India is seeing a payoff.

Its world-class software developers are moving into high-margin consulting with the goal of taking business from the likes of Accenture and IBM. Its drugmakers, denounced as patent pirates a few years ago, are being wooed by the same global giants whose medicines they were copycatting. Outsourcing specialists are climbing the value chain, moving from filling orders for infomercial ab crunchers to handling financial analysis for Wall Street firms.
"

Kristof of the NYT notes in his column 'Watching the jobs go by' that:

"The topic today is the growing furor over the outsourcing of jobs to India — and, more broadly, educational lapses here. One reason for the jobless recovery in the U.S. is that it doesn't make much sense to have an American radiologist, say, examine your X-ray when it can be done so much more cheaply in New Delhi.

Indeed, why should computer software be written, taxes prepared, pathology specimens examined, financial analysis done or homework graded in the U.S., when all of that can be done more cheaply in Bangalore? I.B.M. is moving thousands of jobs to India and China, and Reuters says it will have Indian reporters cover some U.S. companies from there.
"

What is Kristof's analysis of the root of the problem? Education. Education. Education.

"The latest international survey, called Trends in International Mathematics and Science Study, found that the best-performing eighth graders were, in order, from Singapore, South Korea, Taiwan, Hong Kong, Japan, Belgium and the Netherlands. The U.S. ranked 19th, just after Latvia. (India and China weren't surveyed.)"

That's right, we rank 19th. And if we don't get up off our butts and do something about it our economy will end up ranking 19th as well!!!

This isn't sustainable folks. We're not so much losing jobs to outsourcing / "offshoring" as we're failing to create new jobs and economic ventures here in the States. That's why our economy and job growth is stagnant and we've got jinxed government figures that hide it all. Yep that's right, it's all a whitewash job and the oldman intends to expose it! (But after he's done with his student's midterms this week. Ack!!!)

Sunday, February 08, 2004

Frontline News from Iraq

NOTE: The oldman is still in the process of writing his articles on trade, the economy, and the jobs situation. He'd hoped to have them up this weekend, but right now he's having trouble getting his laundry done! Reminder to self: move to someplace where there is no winter. Until then, here's this tidbit.

The Washington Post has a great article dealing with frontline views of soldiers returning from Iraq and attempting to debrief their new replacements on the dangers there. As the article reports:

" As one of the biggest troop rotations in U.S. history gets underway in Iraq, with almost 250,000 soldiers coming or going, the seasoned units that are leaving are doing their best to pass on such hard-won knowledge to their successors, in e-mails, in essays, in PowerPoint presentations and rambling memoirs posted on Web sites or sent to rear detachments. And in the process, these veterans of Iraq have provided an alternate history of the Army's experience there over the past nine months -- one that is far more personal than the images offered by the media and often grimmer than the official accounts of steady progress."

Here is the site: www.companycommand.com.

For more "tell it like it is" and "calling a spade a spade" upfront talk from former soldiers, check out Hackworth's priceless site. As a taste here are excerpted quotes from an open letter to General Schoomaker:

" ... sounding the alarm that the Army personnel system is broken...

" According to the major: “Ticket-punching, rampant careerism and civilian corporate management policies have virtually destroyed a vibrant Army that was once only concerned with people, cohesion, teamwork and winning. Not self.”

" “The Army must change,” he says. “We have the finest soldiers in the world and our leaders aren't corrupt, but times have changed, and war has evolved from static fronts to global terrorism. To ensure we uphold our oath to defend America, the Army must transform itself.” "

More of that kind of straight talk can be found at Hackworth's site. For the record Hackworth was one of the most highly decorated soldiers of the Vietnam era and the author of a definitive military manual on (successful) Southeast Asian counter-insurgency tactics.

Saturday, February 07, 2004

UPDATE: Chaos in Iraq get's worse...

The NYT reports that assassinations are purging educated Iraqis:

" ...hundreds of intellectuals and midlevel administrators who Iraqi officials say have been assassinated since May in a widening campaign against Iraq's professional class."

The oldman previously wrote about the civil society of Iraq disintegrating in an earlier post. Here are some more oldman postings on Iraq. This is bad news folks ... without a civil society and educated discourse there is little to no hope for a peaceful and democratic Iraq. Even the Bush43 Administration is falling to pieces regarding what should be done (NYT) with no overall policy consensus on Iraq:

" But in recent days, it has been obvious in Washington that something has also gone awry in a White House that prides itself on never wavering from its message, especially when the subject is Iraq. At moments, Mr. Bush and his national security team — badgered for explanations about whether the country would have gone to war if it knew then what it knows now — have sounded as if these days, it is every warrior for himself."

It is a common misconception that the Vietnam War was a military failure. It was not. It was a political failure. Political decisions in Washington resulted in a corrupt and ineffective South Vietnamese government that was unable to prevent Communist takeover when the US troops withdrew. It is another common misperception that the US could have achieved military victory. Certainly the United States could have turned Vietnam "into glass" using nuclear weapons but this would have substantially weakened US interests worldwide and failed to achieve victory. Given that the United States was not willing to commit genocide and that the United States was committed to eventually withdrawing, the only hope of victory lay in establishing a strong and legitimate alternative government in the South. This political effort failed.

In a similar way, Americans are now replaying the past. Iraq will not be lost because of a military defeat by insurgents successfully throwing the US out, but American goals will fail because of the lack of a strong legitimate central government to secure law and order as well as democratically represent diverse ethnic interests.

As Amy Chua has documented, attempts to modernize third world countries with democracy and free markets often lead to ethnic conflict and civil war: " ...rapid switches to majoritarian rule and free-market democracy in many Third World countries benefit certain ethnic groups over others and lead to vicious sectarian strife". In Iraq the market-dominant minority are the Sunni Islamists. However, the oppressed Iraqi Shiite community is in the majority and attempting to seize control through direct elections. Meanwhile the northern Kurdish community agitates for autonomy which has regional countries with large Kurdish minorities seriously concerned.

If we Americans fail in Iraq it will be because of entirely foreseeable and avoidable problems that constitute a political failure to establish a civilian government to administrate Iraq. This has to be laid squarely at the door of Bush and co.!

For more insight into what happened in the Vietnam War read here at the CSM movie review about Moris's new film "The Fog of War" (Quicktime Movie Trailer) starring Robert McNamara (Flash 6 required) the SecDef during most of the Vietnam era.

Friday, February 06, 2004

Weaker Than Hoped: Monthly Employment Report

INTRODUCTION
Well the results are in, and after poking through the guts of the thing the oldman is satisfied that he called it just about right: not too warm and not too cool. According the the Bureau of Labor Statistics monthly employment report: "Nonfarm payroll employment increased by 112,000, with job gains in construction and several service-providing industries. Manufacturing employment continued to trend down, but the rate of job loss has moderated in recent
months.
"

Of course there is still the discrepency in the report between the payroll survey and the household survey. The oldman commented upon which one should be relied upon more in his post 'Oh where did all the jobs go?''. According to the BLS report, the household survey reported that "Total employment rose by 496,000" as opposed to the 112,000 number reported by the payroll survey.

According to my post 'It's not here, it's not there' the oldman had predicted that:

For the record, the oldman thinks that the employment report will be on the weak side. How weak, the oldman isn't sure but from what he's seen it may have improved but it doesn't feel all that strong.

Here is the commentary from MSNBC's coverage where they write that:

" WASHINGTON - Companies added 112,000 new jobs in January, fewer than expected, but enough to keep alive hope for a turnaround in the struggling job market... Employers added new jobs last month at a pace not seen in three years. The last time payrolls expanded more than 112,000 was in December 2000, when companies added 124,000 positions. But economists were disappointed, saying they had expected a larger increase of 150,000 new jobs or more."

This is fairly in line with the oldman's expectations. The good news is that the economy is trending positively but there is tremendous drag from foreign competition that has been created by unfair (in the oldman's view) trade treaties. As MSNBC notes:

" Businesses are being squeezed by intense competition from other countries, and are holding down costs by not hiring new, full-time workers in the United States. Instead, they are outsourcing, working their existing employees harder or shipping jobs overseas."

This has been the fifth month that the jobs creation has been positive, though it hasn't reached levels that would be normal for a healthy economy that has "recovered" from a recession. The oldman is glad to see the numbers climbing steadily toward normal but there is still a discrepency between the jobs being created and what one would normally expect for an economy at this point. As MSNBC quotes an economist saying:

" Added Ken Mayland, president of ClearView Economics: “This economy under normal circumstances should be generating 200,000 to 300,000 a month” in new jobs."

The oldman believes that the discrepency between the expected number of jobs created can be attributed mainly to two sources. The first is changing employment practices of companies reacting to intense foreign competition for marketshare, and the second is that the Federal Reserve and the BLS are underestimating inflation because they are relying upon measures like the CPI that do not accurately reflect the cost of living increases experienced by most Americans. Over the weekend, the oldman plans on posting two articles with one on the Real Estate valuations being overpriced by Federal Reserve intervention and the other on the impact of that and other changes on cost of living increases for Americans. A third article on the ins and outs of the real impacts of the present (unfair) trade paradigm on the American economy will also be forthcoming. If the true inflation number were based on the cost of living instead of the CPI inflation would be likely considered a few percentage points higher. This alone would explain most of the lack of economic growth since "Real" GDP is calculated from subtracting inflation from nominal GDP.

INTO THE BELLY OF THE BEAST

For a balanced presentation of both sides of this debate listen to this audiostream from NPR on the merits of job creation vs foreign competition. The oldman feels that this is similar to rearranging the deckchairs on the Titanic. Clearly with the increasing numbers of the working homeless are a sign of something dreadfully wrong with the system. Imagine that: people who work fulltime but live "on the streets"! There are even homeless shleters specifically catering to these people. Surely we've gone too far.

This criticism shouldn't merely be taken as liberal wanking. First the oldman is a conservative. Second hardly a bastion of anti-trade thought, the Financial Times criticizes the employment numbers as less than rosy:
" Economists have been forecasting a strong rise in payrolls for several months and have been disappointed on each occasion. The economy must add 150,000 jobs a month just to absorb new labour market entrants, such as first-time workers and immigrants. The administration took comfort from the fact that the 125,000 rise in private payrolls was the strongest since December 2000. The unemployment rate also declined to 5.6 per cent, its lowest level in 2 years.

" Goldman Sachs said the fall in unemployment appeared to be partly the result of would-be workers abandoning their search.

" Population growth should be driving the labour force up but instead fewer people are looking for work," said Jan Hatzius, an economist at Goldman.

" The rise in employment was also narrowly based with retail and food services accounting for most of the increase.
"

Read here NathanNewman's excellent weblog entry on the topic comparing the present economic recovery to the one in the nineties. Note that Nathan's peice was written in Feb'03!!! The situation has only gotten worse since then. Read here Nathan's more recent Nov'03 piece on whether or not the economic growth is even real.

Clearly the economic drag of our trade treaties has been reducing the worker compensation and job creation in the United States for quite some time. Also it should be remembered that the best job creation period in the nineties was the Internet boom which was not driven by foreign trade at all. Wired Magazine has a spirited editorial defense of outsourcing that compares jobs lost to computer automation to jobs lost to foreign competition. However this argument is fatally flawed. The profits and investments in computing were directly invested into the domestic economy. Every act of "offshoring" represents money lost to a foreign economy and not recycled back into the American economy. Wired Magazine also admits that it will not only be "call centers" or low-level service jobs that are lost overseas.

This shouldn't be blamed (solely) on President Bush. Clearly it's been around since the nineties under President Clinton with the phenomena of the "jobless" economy around since then and before. It's just that it's gotten so bad that it's becoming impossible to hide now!The process of the pillaging of the American economy has been apparently happening since the 1970's as reported by Znet:

" ...Since the 1970s, labor force withdrawal, and longer jobless spells, have been gaining ground, steadily and ominously, so that even the BLS "alternative unemployment measures," let alone the official one, increasingly understate true unemployment in the United States."

The oldman is committed here to investigating why this happens to be so, why the numbers have been so skewed, and what the true causes and state of the American economic situation to be. We shouldn't have to both see our children and grandchildren have to settle for a lower standard of living AND be lied to about it. The truth will out, hopefully with a little help from your friendly neighborhood oldman.

Thursday, February 05, 2004

It's not here, it's not there, did you hide it in your underwear? (Jobs)

Dan Drezner was written a nice piece arguing that the job-creation that current trade paradigm proponents advocate are happening, are in fact happening but at small firms. Dan writes:

" As I said in my last outsourcing post, anecdotes about large corporations laying off workers can crowd out information about smaller firms (traditionally defined as less than 500 employees) that are hiring more workers. Since two-thirds of all new jobs are created by small firms, the latter can more than compensate for the former... Obviously, this optimism must be seriously tempered by the shedding of jobs among large firms. Still, one hopes that this is a harbinger of healthy job growth across the board. "

Here is the body of my off-the-cuff response:

As for Dan, I applaud his stirring defense on job creation. Bravo! My rebuttal is this quote from Fed Reserve Governer Barnacke's speech. As he points out the payroll survey has already been revised to take into account startup and small business better. And this morning the oldman heard on the radio that unemployment numbers were up. However as is widely known, the payroll survey is a lagging indicator and the indices Dan cited are leading ones, so he may be right about sustained new job creation. Or the economy could just be having another hot quarter that will cool off again. Time will tell. Dan's defense was impressive. Most impressive. I look forward to crossing wits with him again in the future. Most definitely.

Until then, the oldman leaves you with the important excerpt from the Nov6'03 speech by Bernacke:

" On this latter point, however, a recent redesign of the payroll survey, which among other improvements allows new samples of employers to be drawn more frequently, has likely improved the survey's coverage of startup businesses. Indeed, the latest two benchmark revisions, in March 2002 and March 2003, both revised payroll employment downward; if the main problem with the survey had been a failure to measure employment by new businesses, the revisions would have been upward. "

This quote was previously cited in my 'Oh where did all the jobs go?' post.

Here is an MSNBC peice on tomorrow's widely anticipated unemployment report.

" This time around, some analysts again are expecting a big employment number, boosted in part by seasonal factors related to relatively weak retail hiring in the holiday season. On average analysts are expecting the government to report the economy added 125,000 jobs last month, which would be the best showing in a year but still barely enough to keep up with growth in the work force. But estimates are spread across a wide range of 90,000 to 300,000, according to Thomson Financial."

For the record, the oldman thinks that the employment report will be on the weak side. How weak, the oldman isn't sure but from what he's seen it may have improved but it doesn't feel all that strong. Which just goes to show that the oldman may have too small a sampling population to be representative of the nation. We'll see tomorrow.

More on this this topic, trade, Fed economic intervention, and more to come later this upcoming weekend.

Wednesday, February 04, 2004

By Reader Demand! Re: National Security Policy and Intelligence Oversight

NOTE: This article was originally posted to Daniel Drezner's weblog regarding a potential Major US offensive inside Pakistan (Chicago Tribute). As usual, the oldman shot off his mouth and someone asked him to back it up. Also as usual, the oldman was rarring to do exactly that. The only thing different was this time someone asked the oldman to post it to his blog. So the oldman will not only do that, but will follow it up with some more writings on what should be the United States of America's posture on the WoT. More to come as the presses spit out hot electrons at screen near you!

Published January 28, 2004

WASHINGTON -- The Bush administration, deeply concerned about recent assassination attempts against Pakistan President Pervez Musharraf and a resurgence of Taliban forces in neighboring Afghanistan, is preparing a U.S. military offensive that would reach inside Pakistan with the goal of destroying Osama bin Laden's Al Qaeda network, military sources said.


BODY OF COMMENT:

Mr. Buehner,

You write:
"So here's my question to you, Oldman (I'll address this to you as a Dean supporter, I'm not implying this is your personal position). Dean claims Iraq has distracted from Al Qaeda and Bin Ladin. He claims as president he will make that his number 1 priority. Now considering that we are already doing what you rightly suggested was the most effective and wise way to operate in Pakistan, and that we have been doing it for better than 2 years, what exactly more do you propose doing to destroy Al Qaeda that Bush hasnt done?"

You are absolutely right in asking this question, and you are absolutely right that ANY Dem candidate has to answer this hot potatoe or be considered a light weight. I will do so as best I can in this brief format. Clarifications like battle plans would take further detailing, but here's the nutshell.

We in fact have experience in breaking into these kinds of networks. It's just that it's in the DEA and ATF and not the CIA/FBI. (At least FBI counter-terrorism. We've had the wrong guys on this the whole time. We need Treasury guys and FBI organized crime.) The DEA has to break into close-knit, sometimes familial cartels, all the time. And has had success bringing in even notorious drug lords. I know the analogy isn't exact, but the key isn't more force. We have our guys over there, but they don't know what door to knock in. This whole military upping the ante is based upon a massive invasion style sweep. It might get lucky and it might arouse allot of blowback.

We need a dedicated dirty tricks style no holds barred hitting beneath the belt infiltration programme. We need deep-cover agents, we need to start setting up shell weapons dealers and financial institution fronts (including these informal network brokers that are used to send money by proxy) to lure these people in to get at their organization. Also terroist cells have been broken before. The Jordanian secret police broke the Abu Nidal terroist group by putting the pressure on the family members. We don't have to use torture, but financial coercion, bribery, charging them as accessories in RICO type actions, detention, wiretaps - the works. That's what it takes to roll these people. Everybody's got a family.

And this is exactly what we aren't doing. I can guarentee you that. Then when you start subverting their networks, you just move on up the food chain. That's the way it works and it's the only way it works. No amount of brute force charging into a wide area of Pakistan (sure to arouse large-scale patriotic resistance political or guerilla) will suffice to achieve the goals.

And yes it's just words but it has been done, can be done, and it will work. The details of course are problematic, but I'd be happy to outline them elsewhere. We can do this (and if Dean was smart enough to hire the oldman) the oldman himself would be happy to advise or head the project himself. It's a dirty job but somebody has got to do it. For the record, I'd do it for Bush too. It ain't about partisanship - it's about delivering for America. This is what needs to be done, and we gotta do what it takes.

Now mind you, just because I believe in using organized crime and anti-racketeering methods to go after these guys I don't mean that we should prosecute them as criminals. That's an entirely different matter. Once we flip them and get the baddies, by all means send in the Marines and hose their asses or send in Special Forces to put a laser guided bullet in their skulls. We just got to put the bullseye on the right house at the right time first or else it won't work.

UPDATE: MORE ON INTELLIGENCE

Brooks writing on the CIA (NYT) in an op-ed has discussed precisely why we need a balance between "head" and "heart". Here is the Brooks' document referred to, the Psychology of Intelligence Analysis. Here is also the Matthew Yglesias peice on the nous. The "Nous" is the Aristotelian and ancient Greek term for the intuitive capacity - the ability to make gut instinct decisions that naturally cut to the heart of an issue.

The oldman would argue that what the intel agencies lack is nous, which experience in academic analysis can actually undermine as the CIA article on the intelligence analysis confirms. Human intelligence is more than just gossiping with people you bribe in the field, it's a comprehensive knowledge of human nature both rational and irrational. Without it, abstracted numbers and messages can make very little sense at all. The sad thing is that the White House ejected both intuition and academic rigor when it decided to bet all that its convictions were apriori correct.

The oldman was not fooled, and argued before invasion on a regional radio outlet and in correspondence to a political science professor (not Dan Drezner) that there was little chance that Saddam had anything more than WMD programmes left. As it turned out, this hedge was itself even excessive. There were voices of reason, who like Scott Ritter (and even Richard Butler who argued for the war) refused to support the Bush43 Administration's more egregiously outlandish claims. When David Kay (trying to spread the blame evenly) said that "We were all wrong," he means everyone but the Isrealis, the UN, Hans Blix, Ex-inspectors like Ritter, and old reprobates hanging around from the Cold War like the oldman. All of us dissenters were vindicated by cold hard facts in twenty twenty hind-sight.

Of this hasn't stopped people who lined up to sell out like Tenet (NYT) and Rumsfeld (via Brad Delong) from attempting to defend the indefensible. This sort of crying wolf is hardly likely to do American credibility any good.

Tuesday, February 03, 2004

Oldman knocked woozy by icy blizzard doozy!

I guess the oldman's immune system just ain't what it used to be. Not only did the oldman come down with an insufferably miserable case of the flu this past year that stretched with secondary infections from Thanksgiving to Christmas, but now he's sick again! Of course part of the problem is that some of his associates have wives who teach little kids, and as everyone knows the little rugrats are like virus breeding farms.

In addition the oldman was hit by the need to keep up with his teaching schedule, shovel a mercilessly long driveway, and research his upcoming series of articles examining whether or not American standards of living have come under an assault not accurately reflected in the CPI. That came from the oldman's twin interests of examining the political economy of trade and the ongoing speculation about whether the Federal Reserve's intervention has set off a delayed secondary financial market crash about to hit properties near you sometime soon.

Faithful readers can reach the oldman at the following address: oldman1787 at the yahoo.com generic email box vendor. In order to prevent my personal reflections from becoming my employer's business, I've created this online persona. Related facts about the oldman's life are all true, merely couched in a way that isn't immediately obvious revealing of his identity and appearance.

Monday, February 02, 2004

Voodoo Economics II: Why Supply Side Economics says Bush's plans won't work!

INTRODUCTION: MARKET EFFICIENCY AS A DISCRIMINATING TOOL

In delving into so controversial a topic let us pose two elementary principles that will guide us in our discussions. The first is that supply and demand determine pricing only in an efficient market. The second important principle is that economic stability and growth depends upon neither supply or demand wholly but a balanced progress in both. The second principle definition derives from the first one. Economic stability and growth can only occur when a sufficiently efficient market can create a reciprocal shift to either a change in demand or a change in supply by changing the other. When the market response is to restore equilibrium this produces stability. When the market redistributes value, this creates growth. However, the problem is that in real life markets are not completely efficient or are as the oldman has discussed markets are not stable.

As the oldman has written of before, Keynesian economics advocates short term stimulation of demand in an economy in order to "cushion" shocks to the economic system and restabilize (cause them to approach efficiency) markets that have been destabilized (become more inefficient). Supply side economics advocates that growth and stability should be produced by encouraging the maximization of production and therefore the investment of capital to pursue that end. 'Free Market' or 'Free Trade' economists advocate that nothing should be done, since markets are already sufficiently efficient to restore their own stability.

As it turns out none or all of the above schools are correct depending upon the circumstance. If markets truly were perfectly efficient at the distribution of value then no intervention would ever be needed. Yet since people are irrational, speculative, and make choices based upon biased or incomplete information Keynesian demand stimulation cannot restore stability or growth if markets remain inefficient at distributing value. Likewise theoretically if we had more stuff (Supply side theory) then intuitively we'd be richer. But because of inefficiencies in markets in distributing value, often over-production can set off a "supply-shock" that will cause a deflationary price spiral and a market collapse in demand.

The appeal of each is pretty simple. Keynesians basically say that "Well if we spend more money now, then people will use it to buy stuff which will spur business growth to supply their demand.". Supply-siders basically say "Well if we make more stuff, people will have more to buy and they'll be more stuff to go around - making everyone richer." As mentioned above, in a perfectly efficient market either solution would work. Stimulating demand would create a compensating supply increase to meet it. Increasing production would cause prices to drop so that everyone could buy more goods and services. However inefficient markets and imperfect distribution means that sometimes neither solution will work straight-fowardly.

So as it turns out, what theory of advice one should follow depends entirely upon the current state of market efficiency and distribution of value or the likely prospects of restoring them.

UMM... WHAT IS MARKET EFFICIENCY OR VALUE DISTRIBUTION?

An efficient market is a theoretical ideal where all participants act rationally on perfect information that they all have about the true conditions of supply and demand in an economy, and all their actions are also transmitted transparently and instantly throughout the system. The theory of distribution was pioneered by David Ricardo, a truly great economist though he had his critics and detractors. The Distribution of Value is just a long-hand way of saying who get's paid what and what their labor should be worth.

SUPPLY SIDE TAX CUTS: DO THEY BRING GROWTH OR DEBT?
The present historical impetus for delving into all this economic arcana is a basic question: Do Supply-side inspired tax cuts stimulate the economy or just increase debt? Supply side advocates often refer to the "successful" Kennedy tax cuts as an example of a successful supply side tax cuts. Opponents of supply-side economics often argue that supply-side tax cuts enrich the wealthy. Who is right?

First let's correct some historical errors. Kennedy's tax cut did reduce the rate on the richest Americans, but it was primarily aimed toward increasing aggregate demand in the economy. In other words, it was Keynesian in aim and not meant directly to increase the investment of capital and production. That it did do so indirectly only supports the second principle proposed above, namely that supply and demand have to both progress for growth to occur.

Secondly, Bush's tax cuts were not supply-side tax cuts. The reason is that they were not matched by cuts in spending. Supply side theory calls for reduced taxes in order to spur investment and growth in production. The idea mainly is that the private sector can better utilize limited money as investment capital to produce higher returns than government social spending. If instead of cutting spending however, the Federal government borrows money and accumulates debt through the Federal Deficit then something worse happens. You see the money the government spends comes from being borrowed from the private sector so this is money not available to be used elsewhere. Not only that, but the money spent accrues interest which must be paid back. In addition, the ability to spend using borrowed money tends to produce fiscal immoderation causing growth in spending by government.

So for the growth stimulated by investment to be positive it must be a rate of return greater not only than the interest accrued by the debt borrowed by government, it must also outpace the growth in unchecked government spending. As anyone can see, this is an impossible task. Ironically all the modern tax cuts by Reagan and Bush43 have fallen into this pattern. So the Bush43 tax cuts are not supply side tax cuts!!! Whether or not one agrees that Supply Side economic theory works, it doesn't matter because even according to Supply Side economic theory the Bush43 tax cuts when not followed by cuts in government spending are simply prescriptions for disaster.

WILL AT LEAST THE TAX CUTS SPUR INVESTMENT AND GROWTH?

The answer is unfortunately, no. You can ask how the oldman can be so categorically sure of that. The answer is quite simply the subject first touched upon: market efficiency. Markets are not perfectly efficient even in their ordinary course of operation. When a market receives some sort of exogenous shock, it becomes even more inefficient. And government intervention into markets such as interest rate manipulation or changing monetary supply can actually prevent a return to market efficiency and equilibrium. As pointed out many many times, the Bush tax cuts are primarily slanted toward the rich. There are many arguments about why this is regressive or socially unjust. What the oldman would like to argue however, is that doing this kind of tax cut at this time is not unjust but moreover plain stupid.

Pretty much everyone can agree that the very wealthy already have more money than they can spend easily. Therefore having them keep more of their income doesn't directly boost demand. What happens to this money? Well the wealthy are wealthy partly because they invest. It's fairly noncontroversial to assume that the money they got from the tax cuts will be reinvested into the economy through businesses, stocks, bonds, etc. whoa! Isn't that exactly what Bush43 claimed however?

Well yes, but the problem is that the market hasn't returned to efficiency because of the Federal Reserve's intervention. In everyday plain talk what that means is that financial speculation or gambling with the money chasing ever higher short term returns is the major activity driving the financial markets right now. Investments always balance risk versus return, and this is necessary for a healthy market efficiency to prevail. But with the Federal Reserve promoting 'moral hazard' or basically the idea that the Central Bank will bail out investors if they get in over their heads then the perception of investment risk decreases. However precisely this attitude leaves them free of the fear of risks to pursue ever higher and higher returns. When this occurs to the majority of equity investors then speculation dominates the markets. The markets then cease to be efficient at pricing the "fundamental value" of actual aggregate supply-demand balance, and the market value rises so high as to be unsustainable and a crash inevitably follows.

So a series of tax cuts that feed a large amount of money into speculative market investments right into the teeth of a Keynesian intervention by the Federal Reserve is a "perfect storm" and threatens to cause a meltdown of the entire economic system. The oldman prefers like anyone else sane that work and innovation be rewarded, and that taxes be kept to a minimum needed to provide beneficial services. The oldman is also in favor of investment and growth, but the timing and execution in this case is god-awful and a recipe for a catastrophe. In this case, the money could have been much better spent in regulatory, trade, and structural economic reform that would have put a "bottom" into aggregate demand and deflated the bubble that the Fed only delayed and did not disappate by its intervention. After the economy recovered its equilibrium then give back the money in tax cuts to spur growth. (Note: No one but loonies thinks that if you expand government spending, borrow money, and cut taxes that it will spur economic growth.)

That would have been the right way to do it. As of now, it's just breeding a serious set of negative consequences that will have to be dealt with.