The Power and the Money

Observatorio Argentino 9: A tale of two depressions

  Argentina seems to be slipping into its third major economic contraction in less than two decades.  (Actually, this may be the fourth.)  Leticia Arroyo asks:  what happened the last two times?

You can blame Mexico (not Canada, sadly) for the 1994 contraction.  Investors dumped their Argentine holdings in response to the mess in Mexico and as a result Argentine interest rates spiked and economic activity fell.  Argentina pegged its peso to the dollar at the time.  The peg survived the contraction, but recovery was slow and halting.   

The 2001-02 collapse was a different animal. 

It is harder to assign blame than one might think.  Argentina's internal and external accounts didn't look that bad in 1999 or 2000 or 2001.  (They didn't look that good either, but nothing to justify the scale of the calamity that followed.)  Investors, foreign and domestic, started to worry about a devaluation, charging the Argentine government higher and higher interest rates every time it had to refinance.  Why did they start worrying?  I am honestly not sure.

That said, what was clear by 2001 was that the currency peg had become too restrictive, but the government had no clear plan to transition out of it.   Fully dollarize, in order to end speculation of a future devaluation?  Devalue early?  Devalue, then dollarize?  The government punted.  People became more and more convinced that there would be a devaluation.  Speculation became widespread, and I mean crazily widespread, unimaginably widespread:  nobody wanted to accept pesos that could lose two-thirds of their value at any moment, and nobody wanted to spend dollars that might jump by two-thirds in local terms at any moment.  Call it hedging, call it speculation, call it crazy, but do the math:  by the time December 2001 rolled around, huge chunks of the Argentine economy had been reduced to barter. 

This sort of thing seems like a real fear in several Eastern European countries right now. 

Observatorio Argentino 8: Se disparó el tren bala

  Well, it's old news, but it looks like the tren bala is on hold.  Or at least so says Alstom, the lead contractor.

Under normal circumstances, I would say that this is not a bad thing, although Argentina probably needs all the fiscal stimulus that it can get.  Then again, I doubt the project was all that shovel-ready.

Below the fold is a not-safe-for-work profanity-laced rant about the project.  It's in Spanish, and had me chuckling, but seriously, every other word is a curse.  So listen at your own risk.  The weird thing, though, isn't the cursing, it's that El Gato Negro seems to be cursing in a Spanish accent.  Why is a Spaniard so upset about Argentine politicians?

The Wild East

  The history of the Chinese northeast settlement frontier, like that of the American southwest, is long and complicated.  This movie seems to be neither.  But I really really want to see it.

Macroblogging

 Greg Clark says some very smart things here.  Money quote:

The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1.  What is the multiplier from government spending?  Does government spending crowd out private spending?  How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.    

The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s.  There has essentially been no advance in our knowledge in 80 years.

It has seen people like Brad De Long accuse distinguished macro-economists like Eugene Fama and John Cochrane of the University of Chicago of at least one “elementary, freshman mistake.”

It has seen Treasury Secretary Timothy Geithner, guided by Larry Summers, one of the most respected economists of our time, produce a bailout plan for the US financial system stunning in its faltering vagueness.

Bizarrely, suddenly everyone is interested in economics, but most academic economists are ill-equipped to address these issues.

For the record, Fama did make several freshman mistakes.  Short version from a slow-bear B-school prof:  people can lend idle cash, people can write debt contracts without cash changing hands, and people can convert illiquid collateral into liquid obligations without printing money. 

Maybe I will start macroblogging!  Greg Clark says I'm “fully an equal of Summers and Geithner”!  Or not.

Another senate

  One rather strange thing, when you think about it, is the incredible influence that the United States Constitution has had over political structures in Latin America.  None of those polities developed under similar circumstances — the Argentine Republic comes closest, and it's not very close — and none of them had similar political traditions.  So its rather strange when you realize both how universal the American presidential-bicameral model has become and how durable it's proved. 

It turns out that Bolivia also has a U.S.-style senate.  Before the recent constitutional reform, each province enjoyed three senators.  Now each one has four.  Not much of a change there, unless the system for electing those senators (still undetermined) has the result of dividing the delegations from the other provinces while united the Media Luna ones, or vice versa.  That's remotely possible:  the old system worked like Argentina, giving the election winner two senators and the runner-up one, while the new system is proportional.  Depending on the election rule chosen, the effect would be to strengthen parties with overwhelming support within their province and split delegations from provinces with more divided electorates.  But we'll need to see both what proportional rules is chosen (the constitution seems unclear on whether the provinces or the legislature will set the rules) in order to know the actual effect.

In short, in terms of the Bolivian legislature, the new and awfully-named “Plurinational Legislative Assembly” doesn't change much.  Not only is equal representation preserved in the Senate; the new reserved “indigenous” seats in the lower house are designed to insure that the Media Luna's current representation will not change. 

My opinion of the Bolivian senate, however, is very different from my opinion of the Argentine, American, and Brazilian senates.  Those are undemocratic travesties that need to be reformed.  (Here's a much more democratic way of apportioning the U.S. senate among the states.)  Inertia and the power of special interests are the only reasons to keep them. 

The Bolivian senate, on the other hand, is a necessary compromise to hold a deeply-divided country together. President Morales's original proposal for a single-house FTFP legislature with a block of reserved “indigenous” seats would most likely have served only to keep fueling the political violence that wracked Bolivia last year.  Given that it's hard to see anyone benefitting from a breakup of the nation, the undemocracy of a senate is a price worth paying. 

¡Hasta la reelección siempre!

  I am starting to miss Anonymous.  He was obnoxious, abrasive, and arrogant, but I am now realizing that this blog is lesser sans his commentaries. 

But anyway, great news from Venezuela!  It looks like we just might have Hugo Chávez to kick around for a while more.  And I'll admit that I am in fact generally opposed to term limits.  What have they ever gotten the United States?  Eisenhower and Reagan were unlikely to have run again for health reasons, and a third Clinton term would have spared us ... you know.  All the stuff. 

Of course, Hugo isn't Ike, Ron, or Bill.  And there are circumstances under which term limits might make sense, especially in countries with histories of patronage politics.  But still.  In addition, the Bolivarian republic placed term limits on all elected offices, which is why Venezuelans voted on the following somewhat turgid question to change five different constitutional articles:

Do you approve the amendment of articles 160, 162, 174, 192 and 230 of the Constitution of the Republic, as approved by the National Assembly, that increases the political rights of the people by allowing any citizen holding elected office to be nominated as candidate for the same office for the constitutionally-established period of time, depending upon his or her possible election, exclusively by popular vote?

I like the “increases the political rights of the people” part.  Clever framing.  And, well, true. 

In short, as unenthused as I am with President Chávez, I can't view the outcome of this election as some sort of great loss for Venezuelan democracy. 

Plus, I'd bet against his victory in the next election.

Aaaaaaaugh!!!

  I'm on record as predicting three years ago that China's boom would come to an end within five years, as the country lost competitiveness either because the yuan shot upwards or domestic inflation raising dollar wage rates. 

I didn't expect China's boom to come to an end like this picture from Brad Setser:

Man oh man.  Looks like they really did make only high-elasticity commodity-like manufacturers. 

And read the link.  The combination of an increasing trade surplus with falling exports and imports bodes quite ill for the world economy.  Especially if it give evil people like me more pernicious ideas.

But still.  What's causing the export cliff dive?  China isn't alone; international trade everywhere outside the eurozone seems to be falling.  Can it really all be a lack of trade credit?  Help!

Pobre México gordo

  An unwanted sign of North American convergence has been the convergence of the Mexican waistline with the American one. 

Today's Financial Times ran a story about obesity in Mexico.  The figures are sobering, and obvious to anyone who rides a pesero in Mexico City, although you could miss it in Polanco or Condesa.  4.1 million 5-to-11 year olds — 26% of the total — are overweight or obese.  Two-thirds of male adults are overweight, as are 71.9% of females. 

We wrote a bit about this in Mexico since 1980, especially in chapter 6.  Diabetes was the number-one killer when we wrote.  What we didn't know was that treating diabetes consumes one-third of the health budget, according to the FT.  Now, I still don't know that we know that, and I don't trust the FT's numbers.  But I believe the trend.

The future in most countries, I think, is going to be Big Government.  Soon what you eat and how you eat it will be taxed and regulated.  I don't particularly like the idea.  I used to be a heavy drinker, by American standards if not by European or Mexican ones, and the only reason I don't smoke a cigar or two every day is that my wife won't let me.  (That's also why I'm no longer a heavy drinker, in fact.)  But the fact is that nobody pays for their own health treatment in later life:  either an insurance company does, or, if you're under insured, the United States will pick up the tab.  So unless some sort of miracle Singularity-related program activity comes along to either make us all capable of pigging out and staying thin, or making it healthy to carry about lots of excess adipose tissue, Big Government is going to get what you eat. 

Or so I think at this particular moment.  As those of you who've known me know, I change my mind a lot.  It may be the only way in which I resemble Andrew Sullivan.  So, in that vein, counterarguments?

Cars of Februaries past

  After World War 2 ended, pent-up consumer demand meant that the auto manufacturers could pretty much sell whatever crap their factories could churn out.  It took, in fact, four years for the carmakers to start selling new products incorporating all the technological advances of the Depression and war years. 

Oldsmobile kicked it off with the restyled Futuramic Rocket 88.  It included the Hydramatic automatic transmission and a brand-new V-8 engine.  Now, neither was new.  Olds introduced the automatic transmission in 1940 and it had been building V-8’s since 1932, but the two things hadn’t been put together in a designed-from-the-chassis up vehicle.  In addition, the Rocket V-8 was the first overhead-valve design, allowing the engine to take up much less space and producing less vibration when accelerating.  It also had an AM radio that could sorta kinda be heard with the top down at cruising speed maybe if you had lots of imagination. 

My father, therefore, wanted one.  But they were hard to find in February of 1949.  Yet the above pic from 1949 shows that he got one.  (Well, actually the Rocket 76 with the Big Six engine.) Only wanting is not having.  How did he make that leap? 

How bad is it?

  We really need a labor economist.  Anyone?  Anyone?  Kaplan?

Calculated risk produced a chart based on a chart published by Barry Ritholtz.   It shows the peak-to-recovery job losses for the recessions back to 1948.  So far, it's been about as bad as 1981-82.  I thought it would be interesting to add 1929 and 1937.  How does the situation look compared to the opening months of the Great Depression and the so-called “Roosevelt recession” of 1937? 

To do that, I had to use the “total employment” series from the BLS Current Population Survey in order to make the post-1939 numbers comparable to the Depression-era data.  What I got looked somewhat different from the charts currently running around the internets. 

The big red line is the current downturn.

Qualitatively, the above picture gives the same picture as the other charts.  The current downturn is more-or-less tracking 1981, 1974, 1957, and 1948, all pretty bad recessions.  And since past performance does not predict future results, we are not promised the same sort of rapid recovery we saw from those four.

But two things surprised me, and are very different from the other data. 

Cars

 So I was just in Washington on business.  But I managed to get in some fun, visiting the Auto Show on Saturday evening.  Very cool.  In one sign of the recession, they have put all of the spokesmodels in more clothes than is usual. 

Here's the car I want.

Here's the car I don't want, but would feel very patriotic to have.

Here's the car I really want, but can't possibly justify.  As in, its existence.  On any level.

And here's the car I really really want.  It even has a five-point safety belt and a racing roll bar, which I'm sure would make my wife much happier about spending $39,990 on a tricked-out death machine.

What I'm going to get, however, will probably be either a Mini Cooper Clubman S or the Honda Insight.  Unless I think of something better.  What car do you want?

International institutions 101

  What do international institutions do?  I'm not referring to the European Union, but the more garden-variety alphabet soup stuff, the arbitration panels and dispute-resolution mechanisms and the like?  After all, they usually don't alter domestic law, and when they do, the domestic law in question is usually pretty easy to un-alter.  There usually isn't a whole lot stopping countries from just breaking their agreement, and when there is, it tends to rely on sanctions from other individual states. 

Frex, the WTO.  Nobody has to write WTO rules into their constitution.  And the WTO doesn't sanction anyone.  All the WTO does is tell the aggrevied member state whether and how much it can sanction the offending party without breaking WTO rules.  In that case, what do you need the WTO for?

An answer below the fold.

Yet another modest proposal, in which I outrage my friends by advocating protectionism but please Canadians and Mexicans by saying it shouldn't be aimed at them

  The new stimulus bill requires that all steel be purchased domestically.  Brad Delong is unhappy:

“If there's little excess capacity in the U.S. steel industry — so that the price of steel is high enough to induce people to look outside for suppliers — then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost — in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great.”

Well, maybe.  Marginal cost can vary a lot, and there are two steel-producing nations whose companies enjoy almost as good access to American markets as their American competitors:  Canada and Mexico.  The price of the same product imported from the two countries varies between 14% and 65%.  (December price data below the fold.)  Meanwhile, China has achieved significant import penetration, despite prices which exceed Canadian ones by 40% on average, and by 11% in the chief product category China exports to the United States.  The implication is that American firms are high cost.

Normally, the fact that U.S. firms are high-cost wouldn't change anything.  It would make sense to buy the cheapest steel from wherever.  American consumers would save by going to the lowest cost producer, and Americans as a whole would be better off, even if American steel producers would suffer. 

Under depression conditions, however, I'm not sure the above logic still holds.  Under depression conditions, using public money to buy from domestic high-cost producers has three advantages that don't mean anything in normal times.  First, domestic high-cost producers will spend more of their revenues, not park them as saved profits ... after all, they have high costs!  Second, the workers and suppliers of American steel companies (who make up the chief costs of the domestic producers) are far more likely to spend their wages and earnings on American goods and services than their foreign counterparts, keeping the multiplier higher than it would be otherwise.   Finally, having steel mills shut down in American towns and American workers thrown out of work will have psychological costs for American consumers and businesses.  They could worsen the downturn.  Such costs will be much less if the workers being tossed on the dole are in Ontario or Hebei.   In short, when American resources are unemployed and their unemployment looks set to last, buy-USA provisions can make the country better off as a whole.   

More below the fold.