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Tag Archives: economics

Statistics from March surprisingly show a new trade surplus for China. Good news for China and the rest of the world too.

The surprise return to surplus from February’s $31.5 billion deficit confounded expectations that trade would remain $1.3 billion in the red, with a solid 10.4 percent year-on-year bounce in sales to the United States helping exports grow faster than expected, customs data showed on Tuesday.

Imports undershot expectations, growing 5.3 percent on the year in March – consistent with other data suggesting soggy domestic demand in the first quarter of the year – but the trade numbers overall reinforced the view of analysts that China’s trade-sensitive economy is set for a soft landing in 2012.

Like many predicted, foreign demand for Chinese goods has not been hurt very much  by the increased value of the Yuan. The new Chinese trade surplus is being attributed to better growth in the rest of the world, particularly the US.

For skeptics who believe this is not good for the rest of the world, let me try–again– to explain.

The savings that consumers enjoy from buying foreign goods allows them to either save more money or to buy more goods. The savings might turn into better investment opportunities, and more demand for goods might come from either home or abroad.

This is an essential lesson in free-trade economics.

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Christopher Sims and Thomas Sargent are the newest winners of the Nobel Prize in Economics.

I have heard  and read about both of these guys for years, but I did not really know about their contributions until reading this article.

Apparently, they had much to do with the concept of rational expectations, and the role that expectations play in the influence of monetary policy.

They won their Nobel for “their empirical research on cause and effect in the macroeconomy,” in the academy’s words. What that means, in part, is that they have done some serious math. Today, ideas they largely formed in the 1970s and ’80s help shape the thinking inside the Fed and on Wall Street.

Their work goes beyond old labels like Keynesianism and the monetarism of Milton Friedman. They have shown that fiscal and monetary policy are inextricably linked, and their research reflects the broad shift in economics from words to numbers — toward a level of empirical analysis that few outside the profession can readily grasp. But it contains a kernel of skepticism appropriate for these troubled times. In a world of uncertainty and constraint, cause and effect may not be what they seem. As a result, we must test and retest our assumptions — and try to prepare for the unexpected.

“The most impressive thing about them as scholars,” says David Easley, an economist at Cornell University, “is that in recent years they have questioned the assumptions of the models they helped to create, and they have been at the vanguard of the efforts to go beyond them.”

This last paragraph is interesting to me. They agree that there is room for new ideas and models that might better predict the results of economic policy, something our new nobel laureates admit is still not done very well.

Mr. Sargent is tough on himself, saying the “rational expectations approach” and the techniques he has helped to pioneer don’t yet capture economic reality. How do people really think, as individuals and in a market? How should we account for changes in expectations as people learn? How should we incorporate human thinking more realistically into economic models? He’s grappling with such questions, seeking more sophisticated techniques that incorporate what he calls the theory of “adaptive learning.”

His own assumptions need to be continually re-examined “to capture a fundamentally uncertain, constrained, complicated world,” he says.

Simon Potter, director of economic research at the New York Federal Reserve, says he has taken Mr. Sargent’s message to heart: “Our profession hasn’t reached the stage where it can reliably forecast the economy,” Mr. Potter says. “Our collective failure to do so in the financial crisis shows this.”

Maybe the next Nobel goes to a newer model that solves some of those problems. Any volunteers?

An interesting and disturbing article came out today from Nancy Folbre on Economix. It describes how grants are given to universities–with strings attached–to hire economics professors with views that are consistent with conservative foundations.

No problem with grants to help fund the services of good professors, but when the political views of professors become the condition of hire, academic integrity is lost.

Concerns about this trend are often framed in terms of academic freedom, putting the onus primarily on universities. After all, if they don’t like the strings attached to donations, they can turn them down.

An editorial in the St. Petersburg Times, which recently broke the story about the Koch Foundation’s support for two professorships at Florida State for which it has the power to screen appointments, musters some admirably old-fashioned outrage.

But, as that editorial points out, the issue reaches well beyond principles of academic freedom.

In the marketplace of ideas, people with a lot of money can buy whatever they want, and that’s fine. Unfortunately, they also have the power to influence other people’s ideas in ways that violate principles of justice, undermine democracy and distort the truth.

I am optimistic that the best US universities recognize the poor influence on their curriculums and refuse such grants. Still, there are plenty of colleges and universities hungry for money that I can see them accepting, and apparently that is happening.

What a shame.

Today I happened on a great article by Scott Patrick Humphrey. It discusses the connections between big business and the US government, undeniable after reading the article.

Mr. Humphrey has obviously done some research and supports his arguments well. Another myth he dispels is that public employment is responsible for draining public funds and creating public debt.

According to the Current Population Survey-IPUMS by the Economic Policy Institute, the average compensation, including salary and benefits, by education level in the United States breaks down like this: if you have a high school education, in the private sector you make $50,596, in the public sector, $53,880. That is a difference of $3,284 in favor of public workers; a number that seems modest at best. If you have a bachelor’s degree you will garner $91,256 in the private sector and $68,290 in the public sector; a difference of $22, 966 in favor of private sector workers. With a professional degree the private sector worker gets $192,977, while the public sector equivalent gets $121,192, a difference of $71,785. There goes that idea. Yet while we fiddle and fight amongst ourselves, the game is afoot and we’re in the hole from the get-go. When is it enough? But ya know what? “… on average, 54 percent of state and local public sector workers hold at least a four-year degree compared to 35 percent of full-time private sector workers” (Jeffrey H. Keefe, Debunking the Myth of the Overcompensated Public Employee).

Another issue is the disappearance of pensions and health care.

But here are many of the facts that the tea-baggers have never seen, because facts are found in books. Let’s start with pensions: in 1988, 63 percent of workers in large private sector firms participated in defined benefit pension plans; last year it was 30 percent; pensions are disappearing. (BLS, National Compensation Survey: Employee Benefits in the US for firms with more than 100 employees – retirement benefits)

Fewer firms are offering retiree health care benefits. Among firms that had 200 or more employees in 1988, 66 percent offered retirement health care; last year it was 28 percent. Apparently even if you work your whole life with a company, there is no guarantee you will be able to have care during the stage of life when you will need it most. (Kaiser Family Foundation; Employer Health Benefits 2010 Annual Survey)

This–of course–is another way to transfer income away from the middle class to the rich.

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.

Wow. The Case for $320,000 Kindergarten Teachers makes a pretty solid case that good early childhood education makes a reliable and positive difference for people. If we could see a few more studies like this, and we privatize schooling enough, we might actually see teachers getting salaries that will attract talented people to teaching.

I can not help but remember my one year teaching second grade. That year ended with me feeling more accomplished than in any of the 25 years I have taught secondary and college. The kids, with a bit of my help, turned themselves into aggressive learners. At the time I had the feeling–I still have the feeling–that they would all be successful students and successful in life.

The point is only that I have much sympathy for this study. I really believe it is probably true, the link between good early education and a successful life. Then, we still face the problem, how do we know when a teacher is good or not? Who are going to give that big salary to?

Is Another Economics Possible–This article attracted my attention because I have been thinking, for a couple of years now, that another economics is necessary.

Disappointment followed as I read through the article. The views described are those of the World Social Forum, “based on more cooperative, sustainable, egalitarian and democratic institutions than those favored at (the World Economic Forum in) Davos, Switzerland.”

Textbook economics treats individuals as selfish optimizers, unconcerned about the welfare of others. Only recently have economists begun to explore the importance of fairness, reciprocity and altruism, and to consider the possibility that incentives to behave selfishly can undermine both moral norms and altruistic preferences.

Textbook economics also largely ignores worker-owned businesses and consumer cooperatives, although these are geographically widespread in the United States. Recent research suggests that many workers would like to play a larger role in the management of their companies and that “shared capitalism” works remarkably well.

Of course these views are only valid for a superficial sort of economics. In real economics, being a “selfish optimizer” includes our desires to help our friends and communities.

While I like the idea of encouraging cooperative enterprise and egalitarianism, those are not new ideas and there is not a new economics being introduced. only old ideals reborn.

A new economics needs to explain how the world’s markets are working, and how government policy can help or hurt social welfare. My opinion? We need to get away from the Keynesian measures of growth and employment. They are not the best measures of welfare and happiness and satisfaction with our lives. Ultimately, those are much more important than how much money and stuff we have.

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Robert Kuttner has a new article, Austerity Does Not Produce Prosperity. It is a strong statement that current thinking on the need to limit government debt is likely to extend the recession in Europe and the US. Kuttner makes it clear that he believes in Keynesian policy, and does not want to see the west succumb to concerns over debt.

The budget deficit here and overseas does need to return to a more moderate level — after we get an economic recovery. But the problem with the austerity treatment during a recession is that if everyone tightens their belts at once, there is nobody to buy the products; the economy shrinks and repayment of debt is even more arduous. As John Maynard Keynes famously wrote, “The patient does not need rest. He needs exercise.”

Kuttner goes on to review the recovery of the Great Depression, when the US experienced a debt/GDP ratio of 120%. Of course, they went on to pay-off debt with rapidly expanding incomes through the 1950’s and 60’s.  Kuttner claims the situation today is different because the spending came in the 40’s because of the war, and common folk were helping finance the debt buying war bonds.

I am not so sure the US debt has not been helped along with spending in the military activity in Afghanistan and Iraq. Rather, the difference might be that these wars are not creating new industry and new training for workers.

But all of the war spending recapitalized industry, re-employed and trained jobless workers; and after the war pent up consumer demand powered a record boom and rising revenues paid down the debt.

There was plenty of wartime sacrifice, but it was shared. Citizens bought war bonds and used ration books. There were wage and price controls. Surtaxes on high incomes were over 90 percent. Interest rates were administered through a deal between the Treasury and the Fed, and the war debt was financed with cheap money.

It seems to me that Kuttner is pointing out enough differences that there may be room to disagree with his main point, that we should follow history’s example.

Lately, the biggest story in the news is about the volcanic eruption in Iceland. The costs to Iceland are significant enough, but the real story is about the disruption of air flights in Europe.

The social cost of the flight disruption is phenominal. The cost of stranded travelers is enough, but there are also huge costs from the stranded cargo, like fresh fruit that can not get into northen Europe.

At least one industry is benefiting. In Europe, rental cars are in great demand now, and companies like Hertz are enjoying greater demand for their services. This is a clear example of a substitute good–obviously–but the real challenge of the economics here is how to measure the costs and benefits of the volcano.

It seems to me that the costs must outweigh any benefits by a great amount. Money costs lost by the airlines may be made-up by the gains from car rentals and other transportation, but the costs to delayed travelers and delayed delivery of goods is huge.