Dear Ole Dollar

Proposition number 1: the "weak" dollar is not something to get worried about by itself. Proposition number 2: the current trade deficit is not necessarily insurmountable or unsustainable. Check this out (from, of course, The Economist, June 2008):

Thanks in part to a weaker dollar, exports have helped prop up the
ailing American economy. But the current-account deficit has not
narrowed by as much as hoped.

So, a weak dollar is a natural and healthy economic response to a trade (current account) deficit.

Against other gauges, however, the greenback may still be overvalued. One is the fundamental-equilibrium exchange rate (FEER), which is the rate consistent with a steady economy at full employment and a sustainable current-account balance.

Not only may the "weak" dollar be healthy, but it might still have further to fall. Not only that, but the trade deficit (even if depreciation does not fully close it) is not necessarily unsustainable or even avoidable.

In a forthcoming paper, Richard Cooper of Harvard University points out
that America's relatively fast-growing population, secure property
rights and liquid financial markets make it a magnet for global
savings. The share of assets owned by foreigners is still lower than in
some other rich countries, so large trade deficits could plausibly
continue, if not indefinitely, then for many years.

The rationale for this is relatively straightforward. With flexible exchange rates, the main mechanism for offsetting a current-account deficit is through the capital account, i.e. net EXPORTS of asset claims. As long as the US has an institutional advantage towards attracting net foreign savings (and thus exporting CLAIMS against US banks, firms and public debt), not only is a current account deficit sustainable, it is almost inevitable.

At it Again

Professor Borjas took so much time off it I hardly noticed he was at his shut the door rants again. Citing a report from the British House of Lords, he sums it up as:

Let's see: (1) the net benefits from immigration to the pre-existing population are trivially small and (2) immigration redistributes wealth, and low-skill workers end up on the losing end.

So, let US see: (1) there ARE positive net BENEFITS to the pre-existing population on balance (Professor B. always likes to gloss over this fact or trivialize it); (2) the benefits to those who emigrate are NOT trivial they are positive, and; (3) natives in countries that send emigrants to other countries also benefit. No one denies certain distributional consequences, but the GLOBAL benefits from free migration. While those who lose in the US tend to be on the low-skill, low-wage end of the scale, please bear in mind that the ones benefitting from the other side of the border are from even more meager circumstances.

Maybe we should think of managing the distributional consequences in a more nuanced way instead of killing the golden goose (or shutting the "golden door").

Confidence.

Has anyone told consumers we aren't really in a recession, and that unemployment was worse from 2002-3 than now? While they're at it maybe they should tell the media so they'll stop giving people a distorted picture of how things are going?

Profits and Poppies?

Economically, it's difficult to understand why opium crops are so substantial in Afghanistan. The classical explanation would be that it's the most profitable use of that land and of those farmers' time. But, there's some research, summarized by The Economist, suggests that ain't so.

Recent research suggests that greed on the part of farmers, at least in
this part of the country, is actually a fairly minor factor in the
decision to plant poppy.
David Mansfield, a researcher for the Afghan Research and Evaluation
Unit, a think-tank, has produced statistics showing that Nangarhar
poppy farmers are rarely the richest people in their communities. Their
profits from poppy are often barely higher, and sometimes lower, than
those from legal crops, particularly where they have to use petrol
generators to pump water to their crops.

So what gives? One clue is that illegal smugglers might be the only ones filling a hole in the capital market and provision of public goods (adequate transport).

Smugglers would visit farms to buy opium. They made loans against
future production ahead of the planting season. Dry opium keeps for up
to two years, so farmers can save it as capital and sell when the
market looks favourable.

Hmmm. Interesting...Basically smugglers are making contracts with farmers for future delivery (futures markets), and the storability of poppy helps make up for the risk involved with poor roads and the inability to get your crop to morket before spoiling.

Reform Model

Instead of letting more models in, why not just more plastic surgeons? Or maybe our immigration policy should be to let more people in with some scrutiny instead of letting fewer people in arbitrarily.

When You Can't Have What You Want, It's Time to Start Wanting What You Have.

It turns out, we actually like something better once we have it. It's called the endowment effect, and it explains my cluttered office. Check it out.

This is Hilarious

Different folks are gonna laugh at this for different reasons: check it out.

The Beginning of WSJ's End

Media bully Rupert Murdoch has begun the dismantling of the Wall Street Journal's center-right pro-market staff and replacing it with his right-fringe pro-business (which is not the same as pro-market) henchmen, much as he did at the Sun. The talented and objective Greg Ip has moved from WSJ to the Economist. Cancel your subscriptions before he renames the WSJ "FoxNews Print Edition."