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Monthly Archives: March 2011

Another great article from Ted Rall, this one–focused on US involvement in the Libya revolution–is mostly another critical analysis of American political corruption.

Since the Middle East began blowing up we’ve heard a lot of talk about Obama’s dilemma: How do we reconcile American values with American strategic interests? In a good country—at least a non-hypocritical one—they are the same.

Obama is employing circular logic. “Why strike only Libya, when other regimes murder their citizens too?” asks Chris Good in The Atlantic Monthly. “Obama’s answer seems to be: because the UN Security Council turned its attention toward Libya, and not other places.” But the UN reacted in response to the U.S.

In other words: We’re agreeing to a request that we made ourselves.

Ideology and policy must be consistent to be credible. If we have a policy to depose dictators, then all dictators must be targeted. We can’t just take out those in countries with lots of oil. We ought to start with tyrants for which we bear responsibility: our allies and puppets. At this writing the U.S. supports or props up unpopular authoritarian regimes in Saudi Arabia, Turkmenistan, Uzbekistan, Jordan, Yemen, and elsewhere.

The answer is that American politicians are focused on helping the people who paid to get them elected, the rich owners of large American corporations. Qadafi is not a puppet of those corporations, but maybe the rebels will be.

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An interesting article today on the US government debt and how to reduce it. The debt now is 62% of GDP and growing, so there is a sense of urgency to either raise taxes or cut spending–or both.

The problem is that raising taxes is politically difficult, and cutting spending is potentially disasterous. For example, retirement funds will soon fail to cover costs, and health care costs are rising as well.

In both cases, fixing those problems without increasing revenue isn’t feasible. For one, kicking grandma to the curb is not really an option in civilized society. And making adjustments to spending will not happen overnight.

Done right, benefit changes would have to be phased in so future retirees can adjust their plans accordingly. And reducing health care costs requires systemic changes over time.

What are the real costs of high government debt? It is not really explained in the article, but we know that government debt raises interest rates which discourages investment. Higher returns can encourage foreign investment, but at some point the government will have to pay even more for increasing deficits, pushing the burden on to future generations.

Without cutting into retirement or health care, the military is the obvious choice for cuts. That is a problem in the US, but I believe that is the direction the US should consider.

William Ratliff has published another interesting article, this one titled Cultural Values, Not Dictators Like libya’s Qaddafi, Are Chief Obstacle to Arab Progress.

The demands for freedom, democracy, and better lives for poor and often repressed peoples are compelling, but these outcomes are unlikely unless basic challenges are clearly recognized before inevitable frustration settles in. Real progressive change requires time and patient commitment.

To be sure, a rapid transition to some form of democracy would be a source of pride and accomplishment. But would it aid Arabs in confronting the deeper obstacles that have for so long prevented their political and economic development? The fever of revolution has not encouraged enough sober thought about the morning (and the decades) after.

For me, the point here is that these revolutions in the name of freedom and democracy are probably about something else. Ratliff mentions “traditional culture and values” as a possible motive, and later mentions Max Weber’s European Protestants, and that brings the real motivation. Those materialistic values of having a society where everyone has opportunity for success, financially or otherwise.

Ratliff claims that Africa, Latin America, and the Middle East are not there yet, but I believe he is wrong. I think those Protestant Ethics are widespread enough to bring great discontent to those living in authoritarian regimes.

It is largely a Marxist idea, that significant historical change happens  for materialistic reasons. That is also different than a revolution that is driven by ideals of freedom and democracy.

Amid all the news from Japan about the earthquake and tsunami, I wanted to write a post about the economic effects of that disaster. Of course the real costs come with the loss of life, but loss of infrastructure, electricity, and fresh water will cause hardships for the economy as well, as reflected in a lower valued Yen and lower investment levels.

Another article caught my attention today–China Says 3001 Arrested For Product Piracy. The article suggests that China may be getting more motivated to enforce patent and copyright laws. The suggestion was made that the ability to copy technology has prevented entreprenuers from innovation.

“Intellectual property protection is essential for building an innovation-oriented country and achieving a shift from `China manufactured’ to `China innovated,'” Li Chenggang, deputy director of the Commerce Ministry’s law department, said at a news conference. He was joined by officials of China’s commerce, intellectual property and other agencies.

My conversations with friends here, many of them managers of American or European factories, suggests that it will be a long time before the Chinese will be able to think and work in an innovative way. I suspect that these arrests are mostly to temporarily ease foreign complaints about piracy.

I also believe that the complaints are coming from production companies who are the main benefactors of patent and copyright laws. The real innovation comes from designers, authors, and musicians who are motivated more by their work than by profits.  Of course business is also capable of innovation, but much of the rewards for real innovation do not find their way to the individuals responsible, only to the people that hire them.

Uwe E. Reinhardt has published a story entitled The Debate on Free Trade Continues. As usual, the debate contrasts the economic view of free trade with the political difficulties that stem from lost jobs and income.

…there are more things in heaven and earth, economist, than are dreamt of in your philosophy.

There certainly is something to that perspective. What often makes an economist’s analysis so sharp and crisp is precisely that it tends to be simplistic and politically naïve…I acknowledge that our case for free trade should never be the end word in a conversation on the subject, but rather a springboard for more discussion.

While I agree that more discussion is never bad, to concede that free trade is sometimes best to avoid seems only an admission that we are wrong about free trade to begin with.

In a nutshell, in that branch of inquiry, economists view the world as a giant cattle farm to be managed in ways that maximize the collective weight of the cattle, totally in abstraction from the welfare of any individual animal. We call the collective weight of the cattle social welfare.

The cattle-farm model then allows us to say, with a straight face, that if a public policy bestows a gain of $2,000 on George but makes Martha $1,000 poorer, social welfare has been increased.

This dictum underlies the economist’s case for free trade. The cattle farm is global. Free-trade analysis pays little attention to the love people have for their own nation, which makes them assign more weight to the welfare of fellow citizens than to that of citizens of other countries.

In fact, free-trade economics shows that both domestic and foreign citizens gain from free trade. What has always made it difficult politically is that we can never be sure what domestic citizens benefit. For example, sacrificing jobs making tires in the US–that brings more jobs to Asia, but it also brings more spending power to Americans–spending that will create new jobs in the US in some industry where we have an advantage over foreign abilities.

But along with my Princeton colleague Alan S. Blinder, I do worry about what the dynamic impact of completely free trade would do to America, especially when some enterprises exhibit strong economies of scale and require longer-term investments, and other nations snub their noses are the rules of free trade.

This is only another concession to politics. If other countries ignore the rewards of truly free trade, of course the US must resist, but never to the level of rejecting free trade as a worthy goal. We already have the World Trade Organization in place to regulate those disputes.

I am actually disappointed that some of my economics colleagues accept concession on the point of free trade. Politics aside, the gains of free trade have made much of the world much better off over the last 50 years, and it can continue if we can manage to stick with good analysis on the topic.

The New York Times reports today that some American drug companies are soon going to face revenue problems as patents will soon expire for ten different medicines. One focus of the article is the drug company Pfizer.

At the end of November, Pfizer stands to lose a $10-billion-a-year revenue stream when the patent on its blockbuster cholesterol drug Lipitor expires and cheaper generics begin to cut into the company’s huge sales.

As the generic drugs come onto the market for lower prices, of course Pfizer and other companies will need to lower prices themselves. As we know, more competition increases efficiency and consumer gains will more than offset the losses of the producers.

The bigger concern with this story is that companies are expected to respond by cutting expenditures on research and development.

…it casts a spotlight on the problems drug companies now face: a drought of big drug breakthroughs and research discoveries; pressure from insurers and the government to hold down prices; regulatory vigilance and government investigations; and thousands of layoffs in research and development.

Of course the whole idea of patents is to allow monopoly profits so as to encourage innovation. Perhaps we are seeing diminishing returns to research expenditures as the number of treatable illnesses becomes smaller. Perhaps it is a better option now to subsidize research, but with the US looking to cut expenditures it seems unlikely to happen soon.

Will we see the research and development somewhere else?

This article is of interest for me because it is about Tianjin, my home for the last year and a half. It seems we are building a Wall Street wannabe in the Binhai district. The site is called Yujiapu, and the plan is to build the world’s largest financial zone over the next ten years.

Although not about to supplant Shanghai, home of China’s main stock exchange, Tianjin has been racing to hone its credentials as a financial hub. In the past three years alone, it has opened the Bohai Commodity Exchange, the Binhai International Equity Exchange, the Tianjin Climate Exchange and the Tianjin Ferroalloy Exchange.

Tianjin’s economy grew 17.4 percent last year, the fastest of China’s 31 provincial-level areas. While that would have been cause for celebration in the past, the local government has been modest in trumpeting its achievement.

Much of the article discusses China’s problems in trying to moderate its tremendous economic growth, hoping instead for consistent growth over the long term.

Fuzzy as it sounds, the concept is well understood in China to mean a more sustainable economic model: slower industrial investment, less pollution and a fairer distribution of income.

During the National People’s Congress this month, China will unveil a detailed policy blueprint for the coming five years. Hu and Wen will try to enshrine their agenda by setting an official goal of 7 percent annual growth from now until 2015, well down from the 11.2 percent average of the past five years.

Provincial governments are pushing for higher growth rates than the central government has targeted, and they have been successful, discounting the foreign perception of China as a very centralized economy.

“It’s quite clear that the central government will not be able to realize its goal,” said Yang Zhiyong, an economist in the Chinese Academy of Social Sciences, a top government think-tank.

Outsiders often assume that Beijing is omnipotent in governing China, bending far-flung cities and villages to its will. The reality is different.

Growth continues and the threat of loan defaults and a slow-down are ignored for now.

U.S. Federal Reserve Chairman Ben Bernanke is scheduled to testify before the Senate Banking Committee today, and this report gives a helpful glimpse at the difficulties he faces.

We learned in the 1970’s, when OPEC first managed to raise oil prices, about the double-edged sword of stagflation. Oil has become such a strong supply side influence that it can cause both inflation and slow economic growth.

Bernanke wants to maintain the Fed’s 600 million stimulus package to battle low growth rates and unemployment that is still around 9% in the U.S. The problem is that many Americans–and many in Congress–are afraid of inflation and the large public debt in the states.

It is a dilemma, but with inflation at only 0.8% over the last year, I agree that Bernanke is emphasizing the correct problem, despite higher oil prices. The time to fight inflation and deficits is when we see strong growth.

On the other hand, perhaps the American economy has reached income levels where more growth should not be emphasized.