Thursday, April 29, 2004

Friedman get's it right on Economy, Dan Drezner get's it wrong, Fed see no evil with Housing Bubble

Friedman, who's gotten pretty trashed over his support of the Iraqi venture, returns to his roots as an economic commentator and hits a home run.

As it turns out, the NYT has Friedman's column where he writes that the Japanese economy is picking up. And it's finally being drawn out of the slump why? Exports to China!

So does this mean that commentators like Dan who advocate the benefits of trade with China and feel that trade concessions made by the Chinese currently are sufficient to achieve "free trade" are right? Well not so fast!!! Let's look at the fine print:

***
Because Japan (much more than the U.S.) has been able to hold onto a sophisticated manufacturing base — like high-end steel, machine tools, cutting-edge electronics and industrial robots — it's been exporting like crazy to China's start-up factories. This year, Japan's trade with China surpassed its trade with the U.S.

"Two-thirds of the reason for [Japan's] recovery is China," says the Japanese management consultant Kenichi Ohmae. China, and new Japanese plants in China, are sucking in so many Japanese exports there aren't enough ships to bring them over fast enough. China is literally dragging Japan out of its slump.

"There is [also] much more attention [in Japan] to restructuring than there was in the past," adds Jeffrey Young, Tokyo economist for Nikko Citigroup. "Companies are improving their efficiencies." And Japan's workers have proved more adaptable, in hard times, than commonly believed.
[emphasis added]
***

So it was exactly by rejecting the present "free trade" globalism model of trading in hi-tech manufacturing jobs on the assumption that jobs would be created in return and that a current accounts balance wasn't important that led to the revival of the Japanese economy against all odds.

Remember that "Free trade" advocates here in America have condoned sending away the manufacturing base on the assumption that jobs would be created in return. In addition, they've tended to ignore the glaring Trade Deficit or current accounts balance as being unimportant, since capital flows of debt and security purchases have tended to make up the difference.

The title of the report to Congress? The U.S. Trade Deficit: A Sign of Good Times

Disgusting.

Well every dollar taken away from export industries means less job growth there. Brad Delong has argued that free trade only switches jobs from import affected industries to export industries and therefore increases the synergy/specialization benefits of comparative advantage. This is true only if one of two things occur. One is that there is no current accounts deficit and import and export industries stand on equal footing before the government's eyes in light of currency flows. The other is that the market would correct any policy abberation produced by the Treasury and Federal Reserve banks.

However as it turns out Brad Delong is still mystified by the common fact that the market is often as inefficient as it is efficient, even about terribly obvious things like removing the discount to interest rate premiums for risk, restoring interest rate parity, and devaluing debt notes related to shifts in major currencies like the Greenback.

People in aggregate have irrational systematic biases in their economic decision making. One of these biases is that they're used to treating the US Treasury note as a risk-discounted financial instrument. It will take time for perception to catch up with reality.

When it does, because in the meantime there will have been an "overshoot", the correction will likely be sharp and sudden rather than a gradual adaptation. As Keynes pointed out however, no one knows when that will occur. As he stated, the market can stay irrational longer than you can stay solvent.

But one day it will correct and there will be much weeping and gnashing of teeth!

As it turns out the market is not properly assessing the price and costs of transferring large amounts of capital to the public debt of Treasury bills instead of investing it into export industries which would occur if the purchases were made in current accounts balancing buying from companies exporting abroad. These direct purchases into export companies goods and services would at a much higher ratio go into asset building and business expanding capital investment. Instead they come back as US Treasuries - public debt being the most inefficient investment possible in a given system of capital since it is subject entirely to complete political inefficiency rather than any market efficiency at all. When such capital flows don't go into US Treasures for the most part it will go into the secondary market of mature stocks or junk bonds - chasing speculative asset valuations of the highest returns. Overall this is much less efficient in spurring business investment than just buying a product or service from an export oriented firm!!!

This then creates a growth deficit, which needs to be masked by productivity / GDP growth artificial statistical illusions.

Amusing isn't it?

Well it would be except that it's our country!!! Clearly Friedman's accounting for the Japanese turn around (summary; Federal Reserve article) is putting the lie to the model that Free Trade proponents of the current globalization scheme have promoted. Japan is coming back because of good old-fashioned hi-tech manufacturing exports and significant improvements in employee education and flexibility.

The Federal Reserve page also carries an interesting article on "How Vulnerable Are Housing Prices?" but succumbs to a faulty assumption. Bubbles are never market wide, but focus on some commodity or paper asset that experiences marked valuation speculation compared to the rest of the market. Back in the heyday of the Internet boom for instance, small cap firms were routinely undervalued compared to big blockbuster large cap firms - like Enron, Worldcom, etc. The idea that a bubble has to be uniformyly inflated is ridiculous and not worthy of the intelligence of any person. It was tulips in Holland, tech stocks in the late nineties, and selected urban areas like San Francisco now.

Remember that the Fed routinely under-estimated and underplayed the potential of a stock market valuation bubble in the late nineties despite Greenspan's own remarks about "irrational exuberance", and recently Greenspan's speeches have included bizarrities like promoting Adjustable Rate Mortgages that if anyone had actually taken him up on the matter will pay dearly when as most agree interest rates rise even more - 30 year mortgage yields have already increased notably - latter this year.

On the other hand, US education is lagging in K-12 education (MSNBC) and leaving college with more and more debt on average, while at the same time wages are not keeping pace (EPI) with rising tuition costs meaning that the return for investment in a college education and creating a disincentive to invest so much for so little in return!

Which means that over time we will discourage ourselves from having a highly educated hi-tech labor pool, which is the exact opposite path that the Japanese are taking with high-achievement education of their labor force - or Chinese and Indians growth models (Asia Times) for that matter!

So with our blasted policy of "Free Trade" (TANSTAAFL), ignoring advanced manufacturing for nebulous "creative jobs", and failing to modernize our work force's education and skills we are enacting the exact opposite of how Japan learned to successfully trade with China!!!

Argh! Would only that these ivory tower academics be forced to put their necks on the line, or their own wallets, and then we'd see how many balked and how many could walk their talk!

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