Savings: The Consequence, not the Cause, of Current Account Imbalances

You write stuff and hope people read it. Clearly the recent discussion on this blog and elsewhere of whether there is a savings glut over there or a savings shortage over here ignores completely the argument I made this year in Challenge. Was my case really that weak?

If Manufacturing Creates a Middle Class, What Does a Service Economy Create?

Dani Rodrik thinks about the Chinese billionaires and has this insight:

I think because incomes from real estate are based on scarcity rents: you buy the right property at the right time, and you get rich very quick. No-one can dissipate your rents. But if you are in manufacturing, you have to compete not only with your international competitors, but also with copycats and imitators at home. So the rents from successful ideas get dissipated quickly. It's not that the overall gains are not large, and even larger than in successful property investments. It's that the innovators can hold on just to a small share. So real estate creates billionaires; manufacturing creates a middle class.

The U.S. is seeing its manufacturing sector decline as job creation seems to be in the service-producing sector rather than the goods producing-sector. This source notes the total nonfarm employment rose from 121.232 million in January 1997 to 138.265 million last month. But the goods-producing sector fell from 23.619 million in January 1997 to 22.324 million last month, while the service-producing sector saw employment rise from 97.613 million in January 1997 to 115.914 million last month. Over this period, we have also seen an increase in income inequality. When I think of the service economy, I think in terms of bimodal distributions:

Bimodality of the distribution in a sample is often a strong indication that the distribution of the variable in population is not normal. Bimodality of the distribution may provide important information about the nature of the investigated variable (i.e., the measured quality). For example, if the variable represents a reported preference or attitude, then bimodality may indicate a polarization of opinions. Often however, the bimodality may indicate that the sample is not homogenous and the observations come in fact from two or more "overlapping" distributions.

Some service sector jobs require few skills and have intense competition. Think of burger flippers and those who clean hotel rooms. Some service sector jobs require an advanced degree and have all sorts of barriers to entry. Think of doctors and lawyers. So how much of the increase in income inequality comes for the U.S. moving from a manufacturing economy to a service economy?

Government, Corporations, Corruption, Money, Power, and Skirting the Law

I was stuck by three stories today in which the Government, Politicians, and Business used their influence for nefarious purposes.

The Washington Post reports that court documents unsealed in Denver this week suggest that the indictment of former Qwest chief executive Joseph P. Nacchio, who was convicted in April of 19 counts of insider trading, may have not have been guilty. The documents suggest that because Qwest refused to go along with illegal wiretapping, the government retaliated by yanking a lucrative contract that threw the company into turmoil. He is using the allegation to try to show why his stock sale should not have been considered improper.

http://www.washingtonpost.com/wp-dyn/content/article/2007/10/12/AR2007101202485.html?hpid=topnews

At the same time, Congressman Jefferson argues that his case should be dismissed because such an act is technically closer to influence-peddling than bribery.
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/12/AR2007101202217.html?hpid=sec-politics

Finally, Kathleen Brown of Goldman Sachs, who is also a miserably failed Democratic for Governor of California and who is also the sister and daughter of other governors of the state, was the person who first broached the idea that Governor Arny lease the state lottery to a private company. Arny is proposing that the proceeds from the lease will help to finance his health care proposal.

The New York Times also estimates if "privatization plans now being considered in four large states -- California, Illinois, Texas and Florida -- were to go through, Wall Street could conservatively reap a minimum of $250 million in fees alone.
http://www.nytimes.com/2007/10/14/business/14private.html?pagewanted=1&hp

Sucking Up the World Savings Glut

If the world has been through a savings glut, Michael raises a very good question as to why wages are not being bid up. Some of us, however, have wondered whether we have gone through a global investment deficiency. To some Americans, the notion of a savings glut sounds foreign as our graphs show that the nation’s “gross savings” as a share of GDP fell from around 14 percent to just over 10 percent – in part because of the Bush spend but do not tax policies. Net national savings, which is gross savings minus depreciation, has barely been above zero. We are thus running a repeat of what happened in the 1980’s when Ronald Reagan’s “save and invest” translated into less of each.

But notice something - the fall in U.S. savings did not translate into a one-for-one decline in investment. At first, U.S. exports declined but have recently returned to the same level of GDP as we saw in 2000. Also, imports as a share of GDP have increased so our current account deficit is doing as much as one nation seems to be able to suck up whatever world savings glut it can. But maybe this is the whole idea behind GOP fiscal policy – less saving means capital-shallowing rather than capital-deepening. Which of course as Michael notes – translates into less long-term wage growth.

Savings Glut Conundrum

If there is a global savings glut, why does capital get such a big share of the pie? If finance is so abundant, why is there not great competition for labor, bidding up wages?

Does Greg Mankiw Think the Long-run Budget Constraint is “Cute”?

In the comment box of this post, Greg Mankiw may have been the first to call this Angrybear cute. Why thank you! The point of Greg’s post is that the Federal income tax is quite progressive. My point is that talking about a subset of taxes is a bit disingenuous. Kevin Drum and the conservative Tax Foundation prefer to look at total taxes. My only complaint with their analyzes is that they did not factor in those deferred tax liability from George W. Bush’s fiscal irresponsibility. But then how could? This Administration is not telling us who will pay these deferred taxes. In their view, no one will.

Update: Greg took his graph from Chris Edwards who claimed:

The Bush tax cuts substantially reduced tax rates for people in every income group. Indeed, those at the bottom had the largest relative reductions in their tax rates … I’m for lower taxes for everyone, but I wish people would look at the actual data first before carping about the rich supposedly being specially favored by recent tax cuts.

So much malarkey, so little time. Chris and Greg know the following two things are true: (1) the long-run government budget constraint holds; and (2) Federal spending rose even as a share of GDP since George W. Bush took office. The implications are clear: George W. Bush has raised – not lowered – the tax bite. But Greg pretended he did not get my “cute” point at first. I find this truly amazing. After all – economists have been talking about deferred taxation ever since the 2001 tax deferral was signed into law.

Irony Alert: Stock Market Punishes American Airline for NOT Going Bankrupt

"During the industry downturn after the September 11, 2001, terrorist attacks, American was one of the most frugal spenders and, in some areas, aggressive cost-cutters as Mr. Arpey avoided the easier path taken by rivals in bankruptcy-court proceedings. Now, investments to improve operations for the long haul, including better customer service and new aircraft interiors, are adding to the carrier's high costs. "They have a lot more work ahead of them than other names because of the fact that they haven't been through bankruptcy," said Standard & Poor's airline equity analyst Jim Corridore, who has a "hold" recommendation on the stock."

Whatever Happened to the Efficient Market Hypothesis?

The Wall Street Journal has a front page story today about the lack of transparency in securities. Remember, one of the great accomplishments of the market is to provide accurate information to allow for something akin to perfect efficiency. Milton Friedman would tell us that there will be inefficient speculators, but the market will ruthlessly purged them, leaving only the great ones who can guide the economy efficiently.

Financialization and securitization was supposed to distribute risk even more efficiently. Unlike most fairytales, I suspect this one will not have a happy ending. Well, here is the article:


Pulliam, Susan, Randall Smith and Michael Siconolfi. 2007. "U.S. Investors Face An Age of Murky Pricing: Values of Securities Tougher to Pin Down." Wall Street Journal (12 October): p. A 1.

"Since the invention of the ticker tape 140 years ago, America has been able to boast of having the world's most transparent financial markets. The tape and its electronic descendants ensured that crystal-clear prices for stocks and many other securities were readily available to everyone, encouraging millions to entrust their money to the markets. These days, after a decade of frantic growth in mortgage-backed securities and other complex investments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors."

"The hazards of this new age of uncertainty became clear at Dillon Read in March, when rising defaults by homeowners were hammering the value of mortgage securities. John Niblo, a hedge-fund manager at the firm, acted fast. He twice slashed his fund's valuation of securities tied to "subprime" mortgages, knocking them down by about 20%, or nearly $100 million, say traders familiar with the matter. But managers at UBS AG, Dillon Read's parent company, were irate. The Swiss banking giant was carrying similar securities on its books at a far higher price, the traders say. In conference calls, the UBS managers grilled Mr. Niblo on his move. "I'm marking to where I could reasonably sell them," Mr. Niblo responded during one call, according to the traders familiar with the conversations."

"Today, "way less than half" of all securities trade on exchanges with readily available price information, according to Goldman Sachs Group Inc. analyst Daniel Harris. More and more securities are priced by dealers who don't publish quotes. As a result, money managers can no longer gauge with certainty the value of some assets in mutual funds, hedge funds and other investment vehicles -- a process known as marking to market. An official at the Securities and Exchange Commission said recently that some bond mutual funds might be using outdated or unrealistic prices to value their portfolios."

"Billionaire investor Warren Buffett advocates more transparency in pricing. "Some marks can be pretty imaginative," he says. "They call it 'marking to market,' but it's really marking to myth." He says that before funds publish financial statements, they should sell 5% of hard-to-value positions to gauge values."

"Some Wall Streeters have a motive to inflate marks: Their bonuses often are tied to the value of their holdings. A Lipper & Co. hedge-fund manager, Edward Strafaci, earned bonuses of $3.9 million between 1998 and 2001 based on improperly marked convertible bonds, according to the SEC. Mr. Strafaci overstated the value of the bonds he managed, despite warnings from his traders, according to a civil complaint charging securities fraud. The value of a $722 million Lipper hedge fund later was cut in half, and Mr. Strafaci pleaded guilty to criminal securities fraud."

TURKEY-ARMENIA-KURDISTAN: THE GREAT UNRAVELING

If I were in Congress, I would have voted for the resolution to identify the Ottoman genocide of Armenians a genocide as a matter of principle. However, I share with Juan Cole (http://www.juancole.com/) the sense that out of the 92 years since that horrific event, this is probably the most inappropriate year to have passed such a resolution, even though it is totally bizarre that the Republic of Turkey does not simply agree that its corrupt predecessor did indeed engage in such a genocide and then move on. Cole points out that while Turkey has been a super good ally of the US in NATO, ranging from providing troops in the Korean War to its continuing provision of the crucial Incirclik Air base, the US has: a) promised a billion in aid after the 91 Gulf war, only to renege, b) invaded and overthrown Saddam against specific desires of Turkey, thereby increasing the threat of Salafist Sunnis and fundamentalist Shi'is (including in neighboring Iran) and also leading to c) the newly empowered Kurdish Regional Government (KRG) allowing bases for PKK guerrillas who have killed 28 Turkish soldiers in the last few weeks, leading to Turkey threatening to invade Kurdistan, and d) allowing the KRG to control the police in oil-rich Kirkuk and also Turkmen-inhabited Tal Afar, with possible full control passing to the KRG, including of the massive future oil revenues to come out of that area.

Speaking of the KRG, Ben Lando at http://www.iraqoilreport.com/ reports that the KRG has signed two more oil exploration agreements, with two more pending. The new deals are with Heritage Energy of Canada and Perenco S.A. of France. While the KRG has declared that this is "come and get it now or miss out" time, the big oil majors continue to hold back due to the continuing opposition of the central Iraqi government in Baghdad to all these deals. Oh, and btw, Lando also reports that contrary to previous public statements, apparently a rep of Hunt Oil did discuss their impending oil deal with the KRG with State Dept. reps (AID to be precise) in Irbil on Sept. 5.

General Fund Deficit Tops $550 Billion for Fourth Year in a Row

My Angrybear post graphs and discusses the fact that total Federal debt has increased by more than $550 billion over the fiscal year – again! The White House will tout how the unified deficit has declined but since they will not tell you that this is because those Trust Fund surpluses are rising, I will. Please excuse my testiness in this AB post. It seems my old cave has been invaded by some of Karl Rove’s trolls.

Very Nice Interview about The Confiscation of American Prosperity

I just uploaded a copy of the first interview about my new book on our local NPR station.

http://www.archive.org/details/michael.perelman.KCHO_820

Free Trade: Bhagwati Takes on the Critics with Harsh Rhetoric

Dani Rodrik makes the following observation about a recent op-ed from Jadesh Bhagwati:

Jagdish Bhagwati is a sweet and courteous man in private, but his writing often makes me cringe. That is not because I frequently disagree with him, but because of the rhetoric he uses to attack his intellectual opponents. It's as if he has an evil twin that sometimes takes control of his writing hand.

The passage that made Dani cringe seems to have been:

But Mr Blinder seemed unaware of the fact that outsourcing via the internet was the mode of service transactions that the US lobbies were keenest about in the Uruguay round of trade negotiations: they saw that they would be the big winners, as no doubt they are. They hugely dominate transactions in high-skill and high-value services in architecture, law, medicine, accounting and other professions. Mr Blinder, when challenged, shifted ground to arguing that, as services became tradeable online, the number of jobs that would become “vulnerable” would rise pari passu, requiring adjustment assistance. However, there is hardly any serious trade economist who has objected to providing adjustment assistance. The first adjustment assistance programme in the US goes back to 1962. Virtually all trade legislation since has tried to improve on it. Many trade economists have written extensively on the subject. Mr Blinder, who started talking poetry, has therefore wound up talking prose. We free traders have no problem with him as he backs into our corner. But if he is to remain the new icon for those who oppose free trade, they have to be pretty desperate.

Something tells me that Alan Blinder can rise above this rough rhetoric. The specific passage that surprised me was the notion that the possibility that compensation might theoretically be possible cures all ills. Professor Bhagwati earlier had noted the 2004 paper by Paul Samuelson:

Autarky real per capita well being, does not deny that new technical Chinese progress in goods that America previously had competitive advantage in can, ceteris paribus, lower permanently measurable per capita U.S. real income. Nor does it deny that technical progress in China's export goods can, ceteris paribus, hurt permanently her own net measurable per capita real income itself when demand inelasticity prevails. Ergo, the winds of dynamic comparative advantage cannot be counted on to create in each region new net gains of the gainers assuredly greater than the new net losses of the losers. However, correct Ricardian theory does imply that worldwide real income per capita does gain net, so that winners' winnings will suffice worldwide to more than compensate losers' losings--some cold comfort in a scenario of many semi-autonomous nations.

Bhagwati would correctly note that the Chinese likely gain more than the losers lose –so in theory – the Chinese winners could compensate the American losers. But seriously – when do we ever see such compensation taking place?

The Obama Carbon Plan

2008 will be the year America debates climate change policy, hopefully without descending completely into election-year inanity. 2009 will be the year we get a policy. For an issue of this magnitude, that’s a fairly short time frame, so every turn of events counts.

Today Barack Obama has gone on record with his own approach. By my reckoning he got almost everything right, but there’s one huge missing piece. He is right on:

• setting a serious target: an 80% reduction in emissions by 2050 is the minimum we should aim for, if we take the scientific evidence seriously. We can get there only by starting soon and staying on course.

• capping carbon emissions: a cap is necessary if we are going to try to live within ecological limits, and it is far preferable to a carbon tax, as I’ve argued earlier on this august site.

• auctioning the permits: as Obama said, letting the cows out of the Barnes, “Businesses don’t own the sky, the public does...”

• rejecting offsets: he doesn’t even mention them.

• investing in a non-carbon future: we need basic R&D, infrastructure and other initiatives to turn our economy around.

The only element that’s lacking is a commitment to rebating most of the auction revenues back to the people on a per capita basis. Economically, this is necessary to protect real incomes and avoid a dangerous contraction of consumer demand. (The higher energy prices we will be paying under any reasonable cap will be in the hundreds of billions of dollars.) Politically, it is necessary to win support for tough limits on carbon emissions. After all, if it is true that we own the sky, we should share in the income it generates. Finally, a per capita rebate would constitute the most progressive income redistribution program since the New Deal, a big consideration at a time of spiraling inequality.

So how do you finance those green investments if you give the money back? Answer: by ending pork barrel subsidies to the nuclear and fossil fuel mafias ($24B give or take a few) and rethinking national security, for starters. NB: if rebating the auction proceeds on an equal share basis is highly progressive, withholding a big chunk of it for other uses is highly regressive. Finance public investment out of taxes.

Find me a lyrical economist

From a review in today's Times of a concert devoted to the work of Esa-Pekka Salonen:

(Salonen's music contains) "a recurring impulse to battle its own tendency towards lyricism, quashing a melodic passage in "Prologue," for instance, with a flatulent blat from the oboe."

I suppose "flatulent blat" is otiose - can there be a non-flatulent blat?- which just goes to show that non-otiosity (which may spell-checker says isn't a word) in writing isn't everything.

Would that we had economists with a tendency towards lyricism, to battle or not. Maybe some of Samuelson's history of thought papers would qualify, with elegant derivations undercut here and there with sly wit. Any other candidates?

A Tangled Web of the Old and the New Economy

Franklin, H. Bruce. 2007. The Most Important Fish in the Sea (Washington, DC: Island Press) tells the gruesome tale of the depredation of world's supply of menhaden, a fish that represents the basic feedstock for the carnivorous fish and which keep the overgrowth of algae in check. A single corporation, Omega, owned by Malcolm Glazer is the chief destroyer. Omega got the business from Zapata Oil, a company founded by Bush the First back in 1953. By 1961, Bush sold his stake in the company. By 1998, Zapata became one of the most ridiculous examples of the excess of the dot.com world.

Ofek, Eli and Matthew Richardson. 2002. "The Valuation and Market Rationality of Internet Stock Prices." Oxford Review of Economic Policy, 18: 3 (Autumn): pp. 265-87.

275: "As an example, consider our favourite illustration of Zapata corporation. Zapala was founded in 1953 by former US President George Bush as an oil and gas company. However, by early 1998, Zapata had transformed itself into a company, albeit still 'old economy', specializing in meat-casings and fish oil. On 27 April 1998, Zapata's management announced that it was going to form a new company to acquire and consolidate Internet and e-commerce businesses. Its first foray into this sector occurred in May when it bid for Excite, which was the second largest Internet search directory at the time. Zapata's bid was rejected by Excite's management for its 'complete lack of synergy', as quoted in Bloomberg at the time, covering Excite's press release. In July, Zapata made further announcements that it was purchasing about 30 Internet websites. As the market for Internet stocks deteriorated through summer and autumn of 1998, Zapata announced that it was re-evaluating its Internet business strategy and no longer purchasing the websites. On 23 December 1998 the company reversed course again. And stated that it was getting back into the internet business and would be forming the subsidiary, Zap.com. On this news, shares rose 98 per cent in New York stock-exchange composite trading. This type of example is not atypical and is representative of the Cooper et al. (2001) study." Cooper, Michael, Orlin Dimitrov, and P. Raghavendra Rau. 2001. "A Rose.com by Any Other Name." Journal of Finance, Journal of Finance, 56: 6 (June): pp. 2371-88.

[On 8 October 2007, Reuters reported, "Zap.Com is a public shell company that does not have any existing business operations. From time to time, Zap.Com considers acquisitions that would result in it becoming an operating company. Zap.Com may also consider developing a new business suitable for its situation.

http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=ZAP