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."

You Heard it here first

I dunno, maybe someone else has already gone out on this limb, but have a look at this. I'm to cowardly to make it a prediction, but I would not be shocked one bit if gasoline is back to $3.00 within the next year.

Mark it, dude.

June 20, 2008:
............Reg.....Mid...Prem.
Curr. Avg..$4.075 $4.326 $4.482
Yesterday..$4.073 $4.325 $4.481
Month Ago..$3.807 $4.043 $4.188
1 Year Ago.$2.996 $3.181 $3.297

Those Enlightened Europeans!

Before you start thinking the Europeans are all enlightened, read these articles from yesterday's and today's New York Times, and you'll realize just how xenophobic the continent can be. The EU's European Parliament, which is basically set up to manage issues such as trade policy, immigration, and capital flows in and out of the EU, as well as other union-wide policy issues, has decided that it's OK to detain illegal immigrants for up to 18 months. I mean the economic BENEFITS of immigration aside, this is extreme. Many immigrants to European countries never get the right to vote or be citizens, and simply want to earn some small amount of money to send back home. Don't let Lou Dobbs see this story! He'll think it's a new great idea for making use of Gitmo!

It's All about the Children!

This is hilarious:


Study Finds Most Children Not In Favor Of Children2019s Healthcare

Enjoy!

I Told You So

Anytime my students hear me say something that doesn't affirm their bent for supply-sider cowtowing, they think I'm being a biased liberal political stooge, so this post goes out to them.

The Economist is considered pretty objective (this week's cover: "Iraq Starts to Fix Itself"), if not a bit rightish on economic issues. About a dozen times, when asked or when discussing an issue, I emphasized that there is often some ambiguity about the aggregate impacts of specific policies, and even if a policy is more efficient than the competing proposals it is not always the one that stands the test of democratic election cycles. So here are a few snips from an article on the competing proposals, as summarized by the Economist:

On June 9th Barack Obama began a two-week tour to battlefield states, his first as his party's anointed leader, with a big speech on economic policy. He accused John McCain of favouring George Bush-like profligacy by proposing tax cuts he can't pay for. Mr McCain shot back with a speech of his own next day, saying that Mr Obama will raise taxes and unwisely renegotiate trade agreements. Strangely, both of them may have a point.

So, as I've said, neither party has a monopoly on bad economics. The article concludes:

Mr McCain hopes he can avoid crushing deficits with mysterious spending cuts, while Mr Obama relies on varied measures his campaign claims would somehow raise almost a trillion dollars over a decade.
The figures are debatable, but there is one clear difference. Mr Obama's plan would redistribute cash to lower- and middle-income Americans, while Mr McCain's would skew benefits towards the wealthy. That's something voters may find it easy to take a view on.

In other words, the question is much more one of distrubution of economic benefits, not which are going to be greater on the balance of things.

Conscious Rap

I found this a pretty interesting audio from The Economist's "Democracy in America:"



I'm not sure what my take on it is, but it is funny to hear the British host use "gangsta" jargon in parts.

Pension and Protection

This Economist blog got me thinking about the differences between the US workforce in my generation vis a vis the last one.

So, I'm wondering how the change in how we save and contribute to our employer-sponsored tax-sheltered (kinda) retirement annuities affect the politics of trade protection. Maybe it's a stretch but a large part of the argument against trade agreements are thinking of the fifty something worker, many of whom have "defined-benefit" retirements - pensions - vest only after 5 or more years and are based on the tenure of service in the company (often times with 5- or 10-year "milestones" at which the monthly benefit takes a discrete jump). A fair case could be made that these are the folks most affected by the structural shifts brought by trade.

The generation that has followed them, saves for retirment in "defined-contribution" plans. These plans vest sooner, and usually do not require service with a single company over an entire lifetime to make a good retirment. The former plans are designed for liftime service to a company - the latter are designed for a mobile and flexible labor market. Workers who have pensions have a strong incentive to invest heavily in firm- and industry- specific knowlege and skills. These plans encourage worker loyalty, but also create the types of interest groups that would oppose changes to the economy that would render their industry skills less valueable.

I don't mean to say this in a way that "blames" workers because I feel for what their dilemma. They essentially entered into an implicit contract with their firm, industry, and town to keep their job viable while they work towards a pension that they've been promised. It may be stretch, but we've lived to see a decline in the political clout of unions as union membership has declined. As workers become more self-reliant for retirement, maybe there will be less lobbying to put up stumbling blocks to trade.

Consumption Smoothing and "Irrational" Savings

I'm just going to post a link to this, dedicate it to a certain special someone I know (who happens to feel strongly and differently about personal finance) and say nothing more than, "I'm not the only one out there who thinks this way."

Do What you Want to do and Excel at it

There's an old (bad) joke bout statistics (especially averages): They're like bikinis - what they reveal is interesting, but what they conceal is essential.

Statistics reveal that Engineering majors earn more (on average) than Economics majors, who earn more than Business, and Philosophy majors, respectively. But what these statistics conceal is that the choice of major is not random - not everyone has a knack or interest for engineering. In fact the sorting is pretty one-dimensional. As my undergraduate Money and Banking prof used to say, "theres people who can do calculus and people who can't."

That's not the news. What is, as Free Exchange points out, new research shows that individual differences in ability within each major explains most if not all of the difference. After all, an exceptional student in philosophy can go on to a great career as a lawyer.

Here's the bad news for the artsy-fartsies: the research underlying on which the post is based long-run lifetime earnings. So, if you're a philosophy major, be patient. You'll be surpassing your business major classmates around the time your kids are following in your footsteps as philosohpy majors.

Prohibition, the War on Drugs, Zero-Tolerance Laws, and Abstinence

The world is full of perverse unintended consequences in response to government attempts to eradicate markets, even when there is a well-intended reason for attempting to do so (usually to "save the children"). Fewer children drinking, using, driving under the influence or being sexually promiscuous is clearly a good thing. Does that mean that we should advocate for a monolithic policy of prohibition or should we take a more nuanced approach?

We certainly learned this lesson the hard way during prohibition. The prohibition of alcohol led to more crime, and while some individuals may have done without, significantly more folks simply used and produced alcohol more recklessly than they ever would have before prohibition.

There is also considerable dissent against the stupid war we are waging against drugs. This policy has driven the price of narcotics through the roof, created a monopolistic cartel market structure that has introduced an incentive to engage in violence to capture profits and other rents, and created entrenched bureaucracies in government that distort information and lobby for higher budgetary allocations and/or rights to retain money and property seized in raids. (A nice paper on this is Benson, Ramussen, and Sollars, “Police Bureaucrats, Their Incentives, and the War on Drugs,” Public Choice 83 n. 1, 21-45, 1995.)

Zero-Tolernce and lowering absolute thresholds in DUI laws also doesn't work. Under 0.10% BAC laws you've got a window of about 3 drinks before you're over. Basically, it has a divergent effect on use: a few more drinkers will abstain knowing that if they drive at about two drinks they're over the limit, but it raises the BAC levels of other social drinkers who drive after a party because being over the limit at 3 drinks is not much different from being over the limit t 5 drinks once you're caught. My friend Darren Grant has a neat forthcoming paper in Economic Inquiry on this.

If that weren't enough, check out this article from the Economist. Basically, Britain is trying to get kids to drink less by forbidding it, and forcing pubs to show more diligence in enforcing the 18 or older law on drinking. As a result, more teens are abstaining, but their volume of use is on the rise! As it turns out, for kids who were sidling up to the bar at 17, 16, 15 years of age, the old drunks and bartenders actually did a pretty good job of keeping an eye out and keeping them from obliterating themselves. Neat!

Growth, Emerging Economies, and the Leverage in the WTO

From the PBS NewsHour (click the picture to link to video).

Having your Cake and Eating it Too

I'll just post the link. Make your own judgements – I'd like to simply think about it in terms of opportunity costs.

Lou Dobbs, Hoax Victim

He's actually sunk to reporting urban legend as if it is fact. Thanks, Lou, needed more fodder! Check out these mythbuster articles by actual journalists: Seattle Times; Interntional Herald Tribune; The Economist. Wheeeeeeeee! (See Below):