China and US Macroeconomic Policies: More Expenditure Switching and Less Expenditure Adjusting Please

As we worry about a US recession, BusinessWeek says the Chinese are hoping for one:

In China, some people might be looking forward to a U.S. slowdown. That's because an American recession could do what Beijing has not been able to accomplish -- namely, cool off China's overheated economy, which in 2007 grew at its fastest pace in 13 years.

I had tried to summarize an interesting economist blog discussion a while back with a tribute to the Tinbergen condition and Brad DeLong got it right with this discussion of China’s policy conflict:

This policy conflict could end in one of several ways: (1) A sudden large burst of inflation in China, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the second to the first. (2) A sudden large rise in the value of the yuan, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the first to the second. (3) Slow and gradual versions of (1) and (2) as holders of nominal yuan assets in the first case and nominal dollar assets in the second let their wealth be gradually but substantially be eroded without ever taking steps to cut their losses. (4) Something more unpleasant.

Tinbergen might look at the problem this way (assuming a 2-nation model with China and US and the two nations). The US is worried about a lack of aggregate demand as well as a current account deficit, while China is worried about excessive aggregate demand. Now China’s current account surplus in a 2-nation model is essentially the same thing as our current account deficit. We have three policy tools: (1) US domestic demand; (2) Chinese domestic demand; and (3) a host of expenditure-switching policies. China is employing tight domestic demand policies, while the US is considering expansionary domestic demand policies. Both will tend to widen the current account deficit as China’s exports to the US will grow, while our exports to China will fall. While China will lament our expansionary domestic demand policies (at least according to Business Week), some American policy makers might be hoping to export more to China and would therefore be cheering against their attempts to control Chinese inflation. But what about policy option (3)? Of course, some American policy makers are advocating tariffs and quotas against Chinese goods as a form of expenditure-switching policy. Those of us who still belong to the free trade bandwagon on the other hand are hoping for more yuan appreciation – which was Brad’s (2). But to sacrifice full employment in the US so as to satisfy what the Chinese wish to do in regards their own macroeconomies strikes me as very short-sighted.

Jonah Goldberg's "Liberal Fascism": Some Big Problems

Jonah Goldberg is not wrong about everything in his mostly annoying book, _Liberal Fascism_. Thus, the term "fascism" has been too readily thrown about by many on the left; there were racist eugenicists among American progressives, with Hitler particularly copying the forced sterilization laws first pushed in the US by Woodrow Wilson, and indeed Mussolini was originally a socialist, and Italian fascism in particular had some socialist elements about it. That said, the book is crawling with numerous mislabelings and errors. I note only two here, at least one of which has not been pointed out so far by others.

That one involves the Church and corporatism. Goldberg identifies fascism as being against traditional Christianity. However, the central core economic doctrine of fascism was corporatism. The unequivocal origin of corporatism was encyclicals of the Roman Catholic Church in the late nineteenth century. I will also point out that a core concept held by all the fascist parties was to oppose democracy. Goldberg likes to label the American progressives as "fascist," (including Richard Ely, co-founder of the American Econmic Association), but none ever opposed democracy, and I am unaware of any current US politician who might be labeled a "liberal" who does either (or any who ever was who did). On the basis of these two points, Goldberg's book amounts to largely a partisan screed.

Barkley Rosser

Bank Failures in Second Life

I have never seen how Second Life works, but I am fascinated by the game's connections with the real economy -- often replicating some of its worst aspects. For example, players hire people in China to make play money for them & then sell the play money for real dollars -- a relatively obvious production of surplus value.

The Wall Street Journal just published an article about bank frauds and failures within the game.

Here are some extracts from the article:



Sidel, Robin. 2008. "Cheer Up, Ben: Your Economy Isn't As Bad as This One in the Make-Believe World of 'Second Life." Wall Street Journal (23 January): p. A 1.http://online.wsj.com/article/SB120104351064608025.html?mod=todays_us_page_one

"Yesterday, the San Francisco company that runs the popular fantasy game pulled the plug on about a dozen pretend financial institutions that were funded with actual money from some of the 12 million registered users of Second Life. Linden Lab said the move was triggered by complaints that some of the virtual banks had reneged on promises to pay high returns on customer deposits."

"The banks of Second Life were operated by other players, who enticed deposits by offering interest rates. While some banks paid interest as promised, others used depositors' money for unsuccessful Second Life land and gambling deals. Under its new banking rules, Second Life says only chartered banks will be allowed -- though it isn't clear any real chartered banks will operate in the virtual play world."

"The shutdown has caused a real-life bank run by Second Life depositors. Though some players managed to get their Linden dollars out, others are finding that they can no longer make withdrawals from the make-believe ATMs. As a result, they can't exchange their Linden-dollar deposits back into real dollars. Linden officials won't say how much money has been lost, but a run on another virtual bank in August may have cost Second Life depositors an estimated $750,000 in actual money."

"Steve Smith, who runs BCX bank under the avatar name Travis Ristow, yesterday said depositors -- who are owed a total of $20,000 -- will be able to get their money back next week. The bank, which had promised to pay depositors more than 200% in annual interest, is now allowing only small withdrawals."

"When virtual environments first started, they were viewed as libertarian dreams with no interference," says Behnam Dayanim, a lawyer who specializes in Internet law at Paul, Hastings, Janofsky & Walker LLP in Washington. "As companies that sponsor these environments become more accountable to investors or regulators, they are starting to encounter real-world limitations"."

"The banking crisis at Second Life surfaced during the summer, when Linden banned gambling on the site, citing "conflicting gambling regulations around the world." That caused a run on Ginko Financial, a Second Life bank that had invested heavily in the virtual world's gambling operations. Ginko capped withdrawals, and ultimately issued bonds to customers instead. The bank went out of business in August."

"Linden essentially acknowledges that the financial services being offered in its virtual society have evolved to the point that they need to be regulated in the real world. From now on, "proof of an applicable government registration statement or financial institution charter" will be required of anyone collecting deposits in Second Life, according to Linden. The company insists it "isn't, and can't start acting as, a banking regulator." "If this is real money, there is an argument that you need to follow real law," says Benjamin Duranske, a lawyer who runs the Second Life Bar Association and is writing a book on virtual law."

Andy Carnegie and Bill Gates

My recent post about the two faces of Bill Gates brought some comparison with Carnegie. There is an interesting difference between the two. Gates is a recent convert to philanthropy. Carnegie, however, began at an early age. He decided that he would make a fortune and use it to contribute to a better world.

Carnegie came from a family of radical Chartists. Philanthropy was his way of being radical. So, he felt justified in screwing anybody -- even sanctioning the bloody battle of Homestead to promote his philanthropy.

209: "... there are higher uses for surplus wealth than adding petty sums to the earnings of the masses. Trifling sums given to each every week or month -- and the sums would be trifling indeed -- would be frittered away, nine times out of 10, in things which pertain to the body and not to the spirit; upon richer food and drink, better clothing, more extravagant living, which are beneficial neither too rich or poor."




Carnegie, Andrew. 1895. "The Best Use of Wealth." in Miscellaneous Writings of Andrew Carnegie, 2 vols. Burton J. Hendrick, ed. (Garden City, NY: Doubleday, Doran & Company, 1933): pp. 203-18.

Bushist Ideology Runs Rampant Over Any Sense Whatsoever

The front page of the Washington Post today reports that the current US Transportation Secretary, Susan Peters, has thrown up impossible barriers to allowing the US government to provide $900 million out of an estimated $5 billion to extend a metro line from Washington through now-unserved Tyson's Corner to the area's main airport, Dulles International, far west of town. This project has been in the planning for 40 years, is supported by local politicians in all jurisdictions of both parties, plus local business people, would help the environment, reduce congestion, and end the absurdity of Washington being the only major capital city in the world from which an international traveler cannot get to downtown from its main airport by public transport. As it is, there is a monopoly on transport for the Washington Flyer, and one hears announcements over the loudspeakers asking people to report to the police anybody daring to offer one a cab or other kind of ride out of Dulles not from Washington Flyer, the only "approved" transport from the airport.

This decision is totally and utterly ideological, with Peters being an advocate of paid toll roads, automobile uber alles. Those involved in the negotiations have complained of "goal posts constantly being moved" with the various local governments having jumped through endless hoops to satisfy the DOT. This is one more sign of how much damage Bush can still do to US society and economy in the year he still has to remain in office as president, and given his appointments to the Supreme Court, for decades to come. (I am not against congestion tolls as are in place in London and Singapore, but those places provide good metro transport from their airports as well)

The Two Faces of Bill Gates

Gates just gave a speech advocating a kindler, gentler capitalism, posing a good brother to the poor. At the same time, Microsoft is embarking on the most far reaching monitoring of workers ever contrived in which wireless sensors could read “heart rate, galvanic skin response, EMG, brain signals, respiration rate, body temperature, movement facial movements, facial expressions and blood pressure”, the application states. The system could also “automatically detect frustration or stress in the user” and "offer and provide assistance accordingly".

Guth, Robert A. 2008. "Bill Gates Issues Call for Kinder Capitalism: Famously Competitive, Billionaire Now Urges Business to Aid the Poor." Wall Street Journal (24 January): p. A 1.

"In a speech at the World Economic Forum in Davos, Switzerland, the software tycoon plans to call for a "creative capitalism" that uses market forces to address poor-country needs that he feels are being ignored. "We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well," Mr. Gates will tell world leaders at the forum, according to a copy of the speech seen by The Wall Street Journal. Mr. Gates isn't abandoning his belief in capitalism as the best economic system. But in an interview with the Journal last week at his Microsoft office in Redmond, Wash., Mr. Gates said that he has grown impatient with the shortcomings of capitalism"."

Mostrous, Alexi and David Brown. 2008. "Microsoft Seeks Patent for Office 'Spy' Software." The Times (London) (16 January).

http://technology.timesonline.co.uk/tol/news/tech_and_web/article3193480.ece

"Microsoft is developing Big Brother-style software capable of remotely monitoring a worker’s productivity, physical wellbeing and competence. The Times has seen a patent application filed by the company for a computer system that links workers to their computers via wireless sensors that measure their metabolism. The system would allow managers to monitor employees’ performance by measuring their heart rate, body temperature, movement, facial expression and blood pressure. Unions said they fear that employees could be dismissed on the basis of a computer’s assessment of their physiological state."

"Microsoft submitted a patent application in the US for a “unique monitoring system” that could link workers to their computers. Wireless sensors could read “heart rate, galvanic skin response, EMG, brain signals, respiration rate, body temperature, movement facial movements, facial expressions and blood pressure”, the application states. The system could also “automatically detect frustration or stress in the user” and "offer and provide assistance accordingly". Physical changes to an employee would be matched to an individual psychological profile based on a worker’s weight, age and health. If the system picked up an increase in heart rate or facial expressions suggestive of stress or frustration, it would tell management that he needed help."

Why to Tax the Rich: How the Rich Get Richer

The Ken Griffin interview got me to think about some earlier contributions about his thinking.

A Pennsylvania businessman wrote a book with a revealing title.

Farquhar, A. B. in collaboration with Samuel Crowther. 1922. The First Million is the Hardest: An Autobiography (Garden City, NJ: Doubleday): p. 19.

Andrew Carnegie's rumination throws light on this subject:

2 & 15: "wealth has been produced as if by magic, and fallen largely to the captains of industry, greatly to their own surprise ....The community created the millionaire's wealth. While he slept it grew as fast as when he was awake."

Carnegie, Andrew. 1906. "Wealth." in Problems of To-day: Wealth, Labor, Socialism (Garden City, NY: Doubleday, Doran, 1933): pp. 1-39.

The Latest Recommendation from the Washingtoon Ethnic Dining Guide

Anybody interested in a spoof on Tyler Cowen and his Ethnic Dining Guide of Washington, link to: The Latest Recommendation from the Washingtoon Ethnic Dining Guide (.pdf)

Barkley

Fiscal Stimulus: Little Bang for the Buck

CNN reports on the politics of fiscal stimulus:

A one-time tax rebate is at the heart of an economic stimulus package being negotiated by House leaders and Treasury Secretary Henry Paulson on Wednesday … The tax rebate would be similar to the $300 to $600 checks that were sent out in the summer of 2001.While there is bipartisan agreement that a stimulus package should be moved quickly, Democrats and Republicans still disagree on who should receive the rebates.

As the politicians iron out their differences, let’s think about this from an economic perspective.




Those who preach the Life Cycle Model (LCM) would tell us that that one-time rebates will be mostly saved with very little aggregate demand stimulus. In other words, a big impact on the current deficit but little impact on consumption demand just when we likely need it.

There is a possible rebuttal to this LCM view that goes like this. Lower income households are likely liquidity constrained so a tax rebate is sort of like the loan they could not get from the bank. So if we target this temporary tax relief to lower income types, then maybe we will get a strong bang for the buck.

But back to the politics where it has been standard operating procedure for the GOP to shift taxes onto the young by giving most of the tax breaks to rich older dudes. And these rich older dudes are not likely to be so liquidity constrained, which means the LCM view likely is valid if we let the GOP have its way. But isn’t this the real problem with the use of fiscal policy – partisan agendas tend to trump what most reasonable economists would consider the most effective means of handling our economic issues.

Bush and Crew Lied 953 Times About Iraq

This is probably old news to most, but it is very precise and documented. At http://juancole.com today one can find a report on the Center for Public Integrity that documents 953 specific cases of outright lies by Bush, Cheney, Rumsfeld, and Rice about Iraq during the two years following 9/11/01. Some of these lies are simply outrageous and clearly fully conscious that they are lies by those uttering them when they did. Let the record stand.

Intelligent Design

In the Times today, the mathematician John Allan Paulos' new book Irreligion is reviewed. It is another critique of theism, a la Hitchens , Dawkins, Harris. While I'm on his side, here is an argument against ID I wish he hadn't used - although I've used it myself. He says, according to the reviewer, that the idea that we can infer a designer from a design is refuted by Darwinian natural selection and "free market economics" (e.a) It's the last clause I take issue with.

Of course the idea is that the spontaneous order exhibited by a laissez-faire economy is an instance of design without a designer. The trouble is that I can't think of any spontaneously ordered economies for which intelligent design (and I don't mean the Deity!) isn't implicated to some degree in the order achieved. A judicial system able to underpin a complex economy doesn't come into existence spontaneously. The Bretton-Woods system had intelligent designers - and so on and so on. The "market" is not a natural fact. It is embedded in institutions and to the extent that it functions with any kind of order, the intelligent designers of these institutions deserve some of the credit. We saw the fallacy of the belief in the spontaneous ordering of the market as a natural fact in the tremendous disorder following 1989 in Russia.

Just sayin'!

COMIC RELIEF

by the Sandwichman,

This doofus, Ben Stein, assures his readers that recessions aren't all bad. With the random clarity of an infinite number of monkeys typing at an infinite number of keyboards, he manages to come pretty close to accidentally explaining the collective behavioral cause of recessions in prescribing his individualistic "cure" for them.

"There is some good news in here."

"Even in a recession, more than 90 percent of workers who want to work will be employed. Even in a recession, most businesses will make a profit. Even in a recession in this era, more than 10 million men and women will need cars and trucks. Many millions will need new homes. Tens of millions will need retirement investment products and life insurance. In the United States, even in a recession, there are plenty of people with money to spend.

"Those who tend to their work, who get to the office or showroom or shop early, stay late, work hard, stay on the phones dialing for deals (as my pal, Barron Thomas, puts it), will make money. Those who stay sharp and make a point of befriending their clients will make money. Yes, some extra effort will be needed, but it'll pay off. There's still money to be made, even when the economy itself has slowed down.

"It's the guy or gal who puts in extra effort who stays ahead and even prospers when the economy is in a slowdown. The easygoing, laid-back time-servers get tossed overboard.

"Stay Hungry (Not Literally)

"There's another key truth about recessions: They always end, and the economy always goes on to a new plateau. It may take a while, but the stock market always moves on to a new high.

"So stay hungry. Work harder. Dig deeper. Keep investing in broad indexes. You'll come out all right on the other side."

That's right, sucker, run faster on your hamster wheel and you'll get to where you're going sooner.

The Market Panic in Perspective

Does anyone else see the irony in the ongoing panic in global asset markets? Last week we feared global imbalances; this week we fear they may dissipate.

Don’t get me wrong — the last thing I want to see is global rebalancing by way of a massive US recession. But why are investors from Hong Kong to Frankfurt getting spooked? They are signaling that they don’t think their economies are decoupled from ours, and that a US downturn means the global buyer of last resort is putting away his credit cards. The US will cease to be the bottomless export market, and sellers everywhere will stumble.

Maybe so, but drastically curtailing the US import habit is a necessary part of rebalancing; it is not possible for US exports alone to do the job. So the contagion we’re seeing demonstrates that the current imbalances have become addictive on all sides. (OK, rebalancing via recession lacks a terms of trade sweetener, but is that what the markets are freaking about?)

Why We Should Not Tax the Rich

Here is John Edwards' "employer" on taxes. The last line, as they say, is "priceless." Griffin is an exception, since he is not interested in money, but in creating wealth for the community and the sheer joy of working. Also, he would work less if faced with high taxes, but only as a matter of principle (or is it principal?).

"Kenneth C. Griffin, who received more than $1 billion last year as chairman of a hedge fund, the Citadel Investment Group, declared: "The money is a byproduct of a passionate endeavor." Mr. Griffin, 38, argued that those who focus on the money -- and there is always a get-rich crowd -- "soon discover that wealth is not a particularly satisfying outcome." His own team at Citadel, he said, "loves the problems they work on and the challenges inherent to their business." Mr. Griffin maintained that he has created wealth not just for himself but for many others. "We have helped to create real social value in the U.S. economy," he said. "We have invested money in countless companies over the years and they have helped countless people"."

"The income distribution has to stand," Mr. Griffin said, adding that by trying to alter it with a more progressive income tax, "you end up in problematic circumstances. In the current world, there will be people who will move from one tax area to another. I am proud to be an American. But if the tax became too high, as a matter of principle I would not be working this hard."

Uchitelle, Louis. "The Richest of the Rich, Proud of a New Gilded Age." New York Times (15 July).

Frontiers of Cost-Benefit Calculations

A little more than a year ago, in response to a Wall Street Journal article on airline travelers' lost luggage, an insightful reader offered a more in depth analysis:

"Airlines lose luggage because there is no incentive to correct the problem. It would cost money to fix the broken systems, and there is no meaningful penalty on airlines that lose baggage because our government allows airlines to pay pennies on the dollar for what is lost. Even worse, the threat of lost luggage actually benefits the airlines by forcing passengers to avoid checking luggage."

Armstrong, Arthur O. 2007. "Perpetual Curse of Lost Luggage." Wall Street Journal (27 January): p. A 5.

I have not heard whether or not the paper ever hired this contributor.