The Power and the Money

National health care, updated

  Megan McArdle, whom I respect, linked to a piece by Glenn Reynolds that basically says that his wife and father would be dead while his daughter and mother would have a much-impaired quality of life under socialized medicine.

But I have a question.  Two, actually.

(1)  The treatments for Reynolds' mother (hip replacement) and father (radioactive prostate cancer implants) were developed for a patient pool that is mostly subject to Medicare.  Which is socialized medicine by most definitions.  Why doesn't that fact show that the argument is fallacious?

(2)  If other countries generally force healthy young women to die or live impaired lives, why doesn't that show up in any of the comparative quality-of-life studies?

A third, fourth, and fifth might be:  Does Ms. McArdle really believe this argument?  If so, why?  And what does it have to do with any of the actual health care reforms that are on the table?

Meanwhile, Matt Yglesias points out why I have trouble staying friends with doctrinnaire libertarians.  This one's for you, Guy.

UPDATE:  Matt Miller has an interesting column in today's Financial Times.  He points out that save for the public option, the current reform plan essentially extends coverage using a basic template designed by Mitt Romney in Massachusetts.  In addition, one of the financing plans on the table (not my preferred one, I must admit, nor the President's) was basically proposed by John McCain.  Finally, the eye-popping cost is propaganda, caused by people's emotional reaction to the t-word; the right way to think about the cost is that it is 0.5% of GDP or 3% of total healthcare spending.  In short, the way to a compromise that should attract lots of Republican votes is obvious.

But I will add that since we aren't going to get any Republican votes, I will be very annoyed at my party and President should we get a bill that does not include a public option and that is not financed by a surtax on high earners like, uh ... really? ... my wife and me.

Great debate attempt #5

  Childless households making $200,000 a year in expensive Northeastern cities are undertaxed, and the acquaintance mentioned here gets no sympathy from me.  He is getting all bent out of shape about a tax rise of a couple hundred dollars:  4 percent of his income above $200,000.  Maybe.  And I lived in New York, I have friends living in New York, and no, it isn't that much more incomprehensibly expensive than Boston. 

My wife and I are in that category.  We are undertaxed. 

Sometimes the attitudes of my fellow citizens can be very depressing.

Great debate attempt #4: Some behavior really is random

  A few years ago, me and a friend scribbled down something we called “A pure theory of relationships,” based on a simple game-theory-based hostage model that we developed for this book. It was a joke, not meant for prime time or to be taken seriously.

And now I find that people are in fact using their time to seriously develop such models.  Me, I agree with James Kwak.  People are complicated, often driven by desires they don't understand, and small events can lead to behavior that is effectively random.  There are human situations in which people with the exact same set of outwardly observable characteristics will behave completely differently, and human situations in which a small unobservable change will cause the exact same person to behave entirely out of character.  Then add in the fact that some behavior (like, say, smoking) is addictive for some people but not for others, and exposure to the addictive trigger by the susceptible is a stochastic process. Trying to come up with a reduced-form model to predict such behavior strikes me as nuts.  Sure, you can come up with some sort of probalistic model for large populations, which is useful ... but not what the new modellers are trying to accomplish.

But what do I know? 

How can financial speculation affect oil prices?

  The Obama Administration just announced that they may limit the ability of financial companies to engage in speculative trading in oil futures.  The reason is the recent run-up in oil prices.  I don’thave a problem with the idea.  After all, I am a conservative of a sort, in the sense that I like to limit the animal spirits of those crazy market types on principle. 

But still, I don’t understand the point.  The reason why I don’t understand the point is that I don't understand how futures trading can drive up the spot price.  That doesn't mean that it can’t; that just means I don’t understand how it might in the absence of a rise in actual oil inventories. 

What’s a futures contract?  Simply put, it’s an agreement to sell a given quantity of oil at a given price at a given date in the future.  So let’s say you and I strike up a contract that says that I will sell a barrel of oil to you at $100 in a year.  How do I make good on that contract?  One way is to run out into the market, buy a barrel of oil, and sit on it.  That will drive up the price of oil, got it, very clear.  When a year rolls around, I sell you that barrel for $100. 

A second way is to wait around until the contract is due, buy oil at whatever the market price happens to be, and then sell it to you for $100.  I do not understand how doing so could possibly drive up the price of oil.  I can vaguely sort of see how it might increase volatility:  trading on the futures market presumably reveals information (if only information about the neuroses of futures traders) and that information will be used by traders on the spot market.  When they use that new information, prices will move.  More information revelation, more price volatility. 

But seriously, people aren't worried about short-term volatility.  They'’e worried about big run ups and sudden falls.  I don't see how you can blame the speculators for those, absent big swings in inventories. 

In fact, inventory changes in the oil market tend to run against price swings.  During the recent price plunge, unsold oil piled up in stockpiles and supertankers all over the planet.  Those stockpilers were going long on oil, but in the context of falling prices.  Now that the price has risen, those stockpiles are shrinking ... and some analysts (not entirely coherently) blame the price rise on the inventory fall.

Am I missing something, or is this whole speculation story nonsensical?

The new math

  I have a friend who is a professor of economics at Oxford. One of his students appears to have discovered an astounding new property of natural logs on an exam. It revolutionizes our understanding of, well, everything. 

Why costs rise

  Why do so many big projects regularly come in above budget?  Corruption?  Stupidity?  Or something else?  Well, I vote for “something else.”  Let's consider the French nuclear reactor project at Flamanville, which I had the honor to visit.

EDF initially costed the reactor in 2005 at €3.3 billion.  It is now estimated to cost €4.0 billion.  What happened?  Well, according to EDF, costs rose by €250 million due to inflation.  Special escalator clauses tied to the price of particular commodities (like steel) caused another €150 million.  Finally, an additional €300 million came from “évolutions techniques et réglementaires,” a fancy way of saying, “We learned on the job that some things are a little more complicated than we thought, but mostly the regulator kept changing the goal posts.” 

Considering that the head of L’Autorité de sûreté nucléaire, André-Claude Lacoste, actually said, “We wanted to show an example,” in regards to the construction of the first new reactor in 20 years, I find that last quite believable. 

More Doug in Senegal, and why you shouldn’t worry about the deficit

  It seems as though I start a lot of posts with the words “it seems.”  I will try to rectify this in the future. 

Ditto, “so,” a verbal tic I blame on my unbridled admiration for Doug Muir, who has, by the way, written a little more about Senegal.  He tells us about the Mourides, a powerful Muslim sect of which I am embarrassed to say I knew nothing.  He bemoans the crappy state of Dakar’s airport, and receives in turn a useful warning from Bernard.  Finally, he wraps his trip with a discussion of W, railroads, France, birds, the CFA franc (e.g., France yet again, although he doesn’t say so), the weather, the expats, and the clothes.  I am pretending not to be annoyed at not getting a shout-out on the France tip, which means that pique is not the reason why I am not explaining the story of the Senegalese railroads under French colonial rule. 

Which brings us to the U.S. federal deficit.  You hear a lot of worring about how interest rates are going to rise from all this wild borrowing.  Where will the money come from?  We are doomed, doomed!!  No links, because I actually like and respect many of the people doing the worrying.  But they need not.

I just had a colleague in my office with the latest BEA numbers, worrying about just that.   Where will the money come from?  So I pulled out a spreadsheet and showed him.  In the first quarter of 2009, annualized personal savings came to $620 billion, or 5.7% of personal income.  Total savings (again, annualized) came to $1,273 billion, or 9.1% of GDP. 

Personal savings is only going up.  If we assume that nominal GDP growth is flat in 2010 (meaning, most likely, that real GDP keeps falling), a rise in the personal savings rate to 10% will produce $468 billion of additional savings.  Retained earning are also likely to rise, say from 4.6% to 5.0% of GDP.  That’s another $47 billion.  Total of $515 billion in new savings ... just as the federal deficit is projected to fall by $393 billion.  Plenty of wiggle room should private investment rise (one can hope) or the current account deficit fall (which seems likely).  A rise in real interest rates does not seem like something we need to worry about.

Rather, what we need to worry about is a continuing shortfall in demand.  What if Americans don’t substitute domestic consumption for imports?  Final demand will fall.  What if domestic investment doesn’t quickly rebound?  (It was $2 trillion in 2008, a full 25% higher than in the beginning of 2009.)  Final demand will fall.  In that situation, we might be wishing for another round of stimulus, rather than worrying about the deficit. 

UPDATE:  The May numbers just came out from the BEA.  Looks like the personal savings rate hit 6.9% that month.  We are on track to exceed 10 percent in 2009, and in my opinion the country will permanently return to 1970s savings levels.  That said, past performance does not always predict future results.  Any counterarguments?

Growth is good

  I temporarily moved to Santiago in late 1991.  For the first few months, I had a room in a house owned by an elderly couple way out in upscale suburb called Las Condes, beyond the end of the metro.  (There were only two metro lines.)  Back then, it was a neighborhood of single and double-family homes.  Apoquindo Avenue was essentially a suburban strip, densely built-up by American standards, with the occasional high-rise and pedestrian-friendly sidewalks, but a suburban strip nonetheless.

I wouldn't've recognized the neighborhood (since I couldn't remember the name of the damned cross-street to save my life) if it hadn't been for the minor miracle that the Pizza Hut on the corner of Apoquindo and Capitanía was still there.  But I remembered the house was on Nevería, a block from the street that hit Apoquindo at the Pizza Hut, and with the cross-street I could locate it.  So I went looking.  And what did I find?  Big apartment buildings! 

Could that kind of change happen in America?  I have my doubts.  In my last post, I briefly discussed the high cost of American zoning laws.  Such laws prevent wholescale changes in land use, causing cities to sprawl more than they would have otherwise.  In other words, they lock in the existing pattern of land use, preventing the kind of wholescale change that in past decades gave us such delights as the boulevards of Queens and Wilshire, where high-rise corridors sprouted along formerly suburban strips.  Today, I don't know if that happens at all, with the exception of a few downtown districts.  When densification pressure starts in an American neighborhood characterized by single-family homes, zoning changes usually squash it, the way New York City has moved to protect the pristine environment of Queens from an onslaught of apartments.  Let alone, say, the Bay Area.  Imagine Palo Alto filled with high-rises and three times the population.

And no, Houston is not an exception.

Sometimes, libertarians have a point

  The New York Times today published a story on how foreclosures in New England are disproportionately hitting old triple-deckers.  “Triple-deckers” are squat three-story buildings common to the region (pictured below).  Most of them are condominiums these days, but many are owned by the resident of one of the units, who rents out the other two, or by absentee landlords. 

Unfortunately, the author didn't limit herself to simply stating that the foreclosures have disproportionately hit triple-deckers.  Instead, she decided to write a fact-free piece that implies, without any hard evidence, that the housing collapse is threatening to destroy the triple-decker, and with it, tear apart the urban fabric of New England.  What percentage of triple-deckers have are foreclosed?  We don't know.  What percentage of foreclosed triple-deckers are vacant?  We don't know.  We do hear stories about abandoned lots in New Bedford ... but New Bedford has been declining for decades.  Has the recent housing bubble really worsened things?  We have no idea.  It is a remarkably badly-written article. 

But there is one thing mentioned which, if true, is completely insane: 

Modern zoning laws, Ms. Friedman said, would never allow three units on such small lots.  “If we have four three-deckers on 12,000 square feet and could only get two on that amount of land now,” Ms. Friedman said, “we are losing six units. So it’s very important to us to sustain them.”

Can that be serious?  Boston zoning laws require less density than currently exists?  That is flat-out crazy.  I am not opposed to all zoning laws, of course.  I would hate to have somebody block out my ability to see the sun, for example.  But that is just egregious.  Of course, it’s only a problem if there is in fact demand for housing in the parts of Boston where buildings are being abandoned ... so I doubt the premise.  Ms. Friedman is probably worried about the housing for other reasons. 

That said, the general point holds.  Zoning is very costly in this country.  I do not approve. 

Philippine economy watch

  The latest figures indicate that the Philippine economy has started to shrink.  Truth be told, I'm surprised that it took so long.  The Philippines may be relatively less dependent on exports, but 38% of your economy is still 38% of your economy.  Meanwhile, the country is highly dependent on remittances sent home.  Latin American countries have seen such inflows plummet.  In the P.I., though, they've held up. 

Luckily for the Philippines, there isn't too much evidence that the place suffers from the strictures of emerging-market Keynesianism.  The yields on Philippine bonds rose at the bad economic news, presumably on anticipation of more government debt issues to combat the downturn, but only by 5 basis points.  That really is not a lot.  So, not much sign of crowding-out so far.

The peso fell, but that's probably a good thing.  It's good because it gives exports a filip and increases the domestic value of remittances.  It's bad because as of 2007 the Philippines owed to foreigners $23 billion in debt securities and $40 billion in other debts. 

We will see how it shakes out. 

High speed rail in Brazil

  I spent last week frantically writing about imperialism.  I need to spend this week frantically writing about nuclear power.  Instead I'm here writing about ... well ... high speed rail.

As our regular readers know, high-speed rail is dead in Argentina.  But it seems as though Brazil plans to have a line running between Rio de Janeiro and São Paulo by the time the 2014 World Cup rolls around.   Now, it isn't immediately a bad idea.  It will take about 80 minutes to cover the 258 miles between the two cities on the express train, which is competitive with the 55 minute flight, especially given the São Paulo airport mess.  Congonhas is overcrowded (when I lived in Brazil, I lived right next to the airport, with planes roaring right overhead) and Guarulhos may as well be on Mars.  In addition, unlike Rosario, Rio de Janeiro is a major metropolis and the traffic between the two places is massive, about 7 million transits per year, with an additional 11 million going between São Paulo and Campinas. 

So even given all the other infrastructure needs that Brazil has, this project can't be dismissed out of hand.

The catch?  The cost keeps skyrocketing.  The initial estimate was $11 billion; a new more-detailed report just upped that to $15 billion, with a worst-case estimate heading over $20 billion.  The financing will be via a public-private partnership, but they typically involve very large explicit or implicit government outlays. 

What do you think about the idea?  Should a country like Brazil build an HST?

Imperialism can pay ... the imperialized

  The French empire in Africa never really ended.  In 1960, the autonomous territories of the “French Community” got seats in the United Nations, but for most the change was less than dramatic.  Only Mali dropped the use of the old colonial currency.  The new African governments increased trade restrictions, bit by bit, and the French market closed to their exports, bit by bit, but Paris fought hard to keep the European market open for a very long time.  The Yaoundé and Lomé conventions granted the “associated” states preferential access to what later became the E.U. 

Empire didn’t go away in another more visible manner:   French troops remained on the continent, French nationals staffed the governments and newly-created armies, French companies (often state-owned) dominated the export industries, and France knocked over more than a few recalcitrant governments while propping up others. 

Niger, where the French found uranium, made for a particularly egregious example.  In 1963, French troops rescued the government of President Hamani Diori from a coup.  In 1969, the French discovered uranium, and two French companies got exclusive rights.  In March 1974, French, Nigerien, and Gabonese representatives meant in Niger’s capital to discuss Diori’s insistance that the country’s uranium contracts be renegotiated.  Coincidentally, Diori fell to a coup the next month.  It seems that all of Diori’s French military advisors had gone on vacation and no one picked up the phone in Paris when news of the violence arrived.  The New York Times went so far as to accuse France of abetting the coup because Diori wanted to give uranium concessions to Exxon.  The next guy kicked French troops out of the country, but the French remained in control of the mines ... and their troops came back in 1981 anyway.

So what did the combination of continuing French intervention and French uranium mining mean for Niger?  An unexpected answer below the fold. 

Venezuela cede

  The Bolivarian Republic just settled with the Argentine owners of Ternium over Sidor, its Venezuelan steel unit.  The Venezuelan government nationalized Sidor in 2008.  Chávez offered $800 million.  Ternium scoffed and asked for $4 billion.  They just decided upon $1.97 billion.  Is that a fair price?

Ternium bought Sidor for $1.79 billion in 1997 and subsequently invested a lot of money, but that doesn't really tell you anything.  On the other hand, Sidor enjoyed revenues of $2.4 billion in 2007.  At a discount rate of 10 percent, the agreed-upon price implies a Sidor profit margin of 8 percent, which is consistent with the steel industry's average margin during the 2001 recession.  Conversely, at a profit margin of 16 percent, about what the industry earns in a boom, the implied discount rate is 19 percent ... which seems reasonable for a high-risk area like Venezuela.  (Bernard?) 

Upon announcement of the deal, the price of Ternium shares jumped 49 percent, to $15.67.  That said, the stock peaked at $45.18 on July 2, 2008, before sliding to $34.01 on August 8, and then collapsing to $4.65 by November 20.  The problem with interpreting that price collapse as evidence that the offered price isn't fair?  President Chávez announced the nationalization in April. 

In other words, the price appears to be fair.  Another demonstration of the power of ICSID?  Perhaps. We don't know if the Venezuelan government offered more money out of fear of an adverse arbitration result, or if it offered more money at the urging of the “semi-dictator” of Argentina, or it offered more money because the President of the Bolivarian Republic decided that it was simply the right thing to do. 

But we do know that the foreign oil companies can go to ICSID, and that Caracas seems to be a bit worried about the prospect.  We also know that Cemex is pursuing the ICSID route.  So we will see if the empire strikes back at the Revolution.

P.S.  FWIW, Argentine embassy accounts in France remain frozen.

Back to Santiago

  The last time I was in Santiago de Chile was in 1991. It was a bad year.  The First Gulf War ended in February. The U.S. economy was in the toilet.  Unable to afford school fees, saddled with a large short-term debt dumped on me due to a bit of ... ah ... creative financing by a ... hmm ... unrelated family member, and needing to save to pay for my long-anticipated trip to South America, I stopped out of school and wound up doing odd jobs that paid enough to keep me sleeping in my car. Which was a 1980 Plymouth Champ.  If Marcia still comes here, she can probably say more about this period than I remember.  Or necessarily want to.

It wasn't the greatest time to decide to go gallivanting off to Santiago, but I managed to get enough money together enough to go.  I don't remember a whole lot.  I have a journal from the period, but the young fellow who wrote in it seems quite alien.  (At some point around 1995 the writer becomes a recognizable version of me.  Stupider and ignorant, but clearly me.  Before that ... who was that guy??) 

So now it turns out that I'll be headed back to Santiago for a few days next month.  It will be interesting to see all the changes.  In that vein, I'm going to begin an intermittent series of posts about Chile, starting with the following chart (you can click on it to have an expanded version pop up): 

It shows the PPP-adjusted GDP per worker (in 2000 dollars) for the United States and Chile between 1950 and 2008.  The data come from the Penn World Tables through 2003; afterwards, the U.S. data are from the Global Financial Statistics database (dividing real GDP by total employment) while the Chilean figures are derived from the Instituto Nacional de Estadísticas, under the somewhat heroic assumption that the growth in Chilean GDP per worker in 2004 pesos is the same as its growth in PPP-adjusted 2000 dollars.  Anyway, the approximation is good enough for a blog post, and unlikely to change this picture much.  (Besides which, I know how the PWT figures are produced, and they're not much more accurate.)

The data show that Chile had an economy about half as productive as the United States at the middle of the last century.  Chile more-or-less maintained that ratio until the economic collapse that hit at the tail end of the Allende presidency and the first few years of the Pinochet dictatorship.  There was a rapid recovery afterwards, but the economy went right into another tailspin in 1982.  The solid growth rates since then have only taken the country back up to the same relative position that it held at the end of World War 2. 

That said, the place is lot richer than it was when I was there in 1991.  Your average Chilean worker produces more than half again as much as he or she produced back then.  But what does that mean on the ground?

Right about now, Doug would probably turn to the human development indices.  Infant mortality, life expectancy, income equality, that sort of thing.  Me, I make like Gary Numan and look at cars.  The following chart ...

The President is smart!

  Regardless of your politics, it is refreshing to have a president who can talk intelligently about economic issues.  It is very hard to imagine George Bush having such a conversation, but that isn't the problem.  The problem is that it is also very hard to imagine Bobby Jindal having such a conversation, although he is also clearly a very intelligent man.  Could he do so and survive a Republican primary?

Baumol’s disease, perfect competition, and finance

  A colleague points out that Baumol’s model requires perfect competition.  If profits have risen in the financial industry, then it’s probably not the explanation. 

The above graph from Simon Johnson does not at first glance seem consistent with a diagnosis of Baumol’s disease.  The rub is that I don’t know what profits consist of in the financial services sector.  Are we sure that all profits are indeed profits, and not disguised labor payments?

If we are, then we may have to abandon the Baumol hypothesis.  Help?  Anyone? 

Baumol’s disease and the financial industry

  The Baumol effect (or “disease”) suggests that the parts of the economy with the slowest productivity growth are likely to grow the fastest.  Howzat, you ask?  Well, say productivity grows in widget-making but not in article-writing.  The cost of writing articles will rise, because the only way you'll get RA's to write them for you necessary research assistance is to pay higher wages.  Otherwise they'll all go away and make widgets.  So (if you make a bunch of other assumptions that I won’t get into here) the amount of money spent on article-writing will rise.

Simon Johnson recently published a disconcerting chart that showed finance profits rising dramatically as a % of all corporate profits, starting in the 1980s and peaking in 2006 at a rather mind-boggling 41 percent.  I’m honestly not sure how to think about that, so I went to the BEA and downloaded data on the financial industry’s share of value-added and employment.  That produced this chart, of data between 1948 and 2007:

 

Finance’s share of GDP grows monotonically over the last sixty years.  Employment in finance, however, grows about as fast as value-added until the 1980s, when it starts to accelerate, and the 1990s, when it takes off. 

There are three ways to think about this, it seems.  One is that productivity within the financial sector grew dramatically in the 1990s.  “Financial innovation” and the like, whatever that is.

The second is that the financial industry became much less competitive in the 1990s.  The bankers managed to extract rents from the rest of society and increase their share of the pie without producing any equivalent benefit.  Some of those rents went to finance employees, while others went to the firms’ owners and creditors, but is was all about the rents.

The third is that the relative productivity of the financial industry collapsed during the 1990s.  Capital and skilled labor could earn a lot more elsewhere, so the financiers needed to offer them more in order to keep their services.  Some of the higher cost per financial-service went to capital and some to labor, but the growth of the sector was due to Baumol’s disease.

The $64,000 — $64 billion, $6.4 trillion, whatever — question is:  how can you distinguish between these three different hypotheses? 

And the meta-question:  does knowing which of the three best fits the facts change the analysis of the financial collapse?  That is, does the question matter?

From Russia, without love? Or a Greek tragedy?

  There is no official definition of “depression.”  Tim Kehoe says a 20% deviation from trend growth over a decade.  Richard Sylla says double-digit unemployment for a period of months.  Brad Delong says unemployment staying in double-digits for three years, or peaking above 12%.  Michael Bordo says a two-year continuous output decline of at least 10%.  By any of those definitions, Finland suffered a depression in 1991-93, or even 1991-96. 

So what caused it?  Well, there was a discussion about that somewhere, but I can't find it.  Anyway, you can sum up the evolution of the conventional wisdom as follows:  “We thought it was the collapse of the Soviet Union, but then we figured out that it was actually caused by a banking crisis.”  Blaming it on the Soviet collapse exculpates Finns:  it all came from Russia.  Blaming it on the banks turns the episode into a Greek tragedy, which Finns unknowingly brought upon themselves. 

Evidence for the banking-crisis hypothesis can be found here and here.  (Another hypothesis holds that Finnish workers decided to take an extended vacation because managers forgot how to run their firms and the government raised taxes.  No, seriously.  I don't have a whole lot to say about that.) 

Now, however, a Ukrainian, a Mexican, and an American have entered the fray to argue that, no, it was indeed the sudden collapse of trade with the Soviet Union what caused the Finnish depression of 1991-96.  Their paper is here.  The argument is pretty simple.  (1) Yeah, there were some signs of financial weakness before 1991, but let's not get crazy.  (2)  Trade shock.  Huuuuuge.  Plus, when you look at the industries that went under first and fastest, it was the ones that relied on the Soviet trade.  (3)  The banking system didn't fall apart until after the trade shock.  Absolutely, it was a weak system, but few systems could have handled a shock that big.

Basically, they argue that you don't have to assume a lot of friction in the real economy to get a slow recovery from a trade shock of the magnitude that hit Finland in 1991. 

But there is that nagging question:  why did Sweden go into a (much less serious) recession around the same time?  Could the Soviet trade shock have precipitated the Swedish crisis somehow?  Or is all just a coincidence, kind of like a man getting hit head-on by a truck and then having a bicycle ride over his hand? 

It's an interesting paper, even if it turns out to be wrong.  Thoughts?

What's the matter with Texas?

  Nothing, really.  Oh, the governor seems to have gone a little crazy, but that's because his party has decided to do its damndest to commit suicide, and he's got to be crazy in order to win the primary.  Have you read its platform? 

But Texans aren't crazy.  First, the percent who support secession is less than the Crazification Factor.  Second, if you'd asked the question in November 2004, I think you could've easily gotten a similar percentage of Californians or New Englanders to say they support taking up their marbles and leaving.  Remember the "United States of Canada"?    Finally, unlike most of the red states, Texas does in fact generally pay more to the federal government in taxes than it gets back.  Red are payments, blue are receipts, all data in 2008 dollars.

Now, these figures are rough estimates.  Pre-2005, the data are from the Tax Foundation; for 2006-07, they come from me using the same methodology.  And they leave out a lot.  Frex, a lot of federal spending comes from borrowing, rather than taxes, and these figures have made no attempt to allocate the future tax liabilities generated by borrowing.  They also leave out a chunk of federal spending:  mostly interest payments, which aren't allocated to states (and much of which goes to foreigners), but also foreign aid and imports purchased by the federal government. 

In addition, of course, joining a fiscal federation gets you more than just net tax payments.  It makes Keynesian policy much easier:  European countries, for example, have trouble using this tool because so much of any stimulus will leak away to the neighbors.  It adds insurance against asymmetric macroeconomic shocks:  if something bad happens to the economy of your jurisdiction, your residents will pay fewer federal taxes and get more federal benefits.  Finally, it allows for economies of scale in the provision of public services.  All three are why it probably makes economic sense for Iceland to become a Commonwealth, even at a fiscal cost of $109 million per year. 

In short, (1) Texans are no crazier than anyone else, and (2) the Republican Party is really going off the rails.  It isn't just Governor Perry; it's state legislatures in Georgia, Oklahoma, and South Dakota, which have taken to voting in favor of secession.  In another country, these might be worrying in terms of national unity.  In this one, there's no worry about national unity.  (Although I recommend these comic books anyway.)  Rather, there is a worry about the emergence of a de facto one-party democracy.  I know I've got readers who still aren't sure that the GOP isn't in on the road to suicide, but even they have to admit that the Tea Parties and aftermath are a big step down that path.  Right?

Greece in recession

  The Greek economy is slowing, but it is not in recession.  Yet Athens looks like a city in the midst of a severe recession. 

Not in this picture, of course.  This picture is lovely.  Albeit not really because of Athens.

But on the drive in from the airport, you pass myriad empty storefronts, abandoned buildings, and what appear to be stopped construction sites.  

Downtown, you see much of the same.  Even brand-new construction looks empty.  When the storefronts are filled, you can spot tell-tale signs of empty offices.  And then there's the petty vandalism that haunts downtown:  graffiti on private structures, cracked windows, run-down buildings.  All the telltale signs of property owners who have decided for whatever reason that proper maintenance does not pay a sufficiently high return.  

If it had just been the central city, we would have concluded that Athens suffers from a European version of the American disease.  Or that it was just the after-effect of the December riots.  The thing is, the signs of economic distress are worse in the suburbs.  It honestly looks like someplace that suffered from a real estate bubble that has now collapsed. 

Of course, the central city doesn't look so good either.  It looks like someplace where rioters might indeed attack businesses with petrol bombs. 

That said, downtown Athens is not out-of-control the way much of New York City was in the 1970s and 1980s.  For example, when we got off the bus, the first thing that greeted us was a police raid against African street merchants selling counterfeit luggage.  Yet the prevalence of graffiti also suggests that the police (and the public) is fairly lax about enforcing standards; it's not something you see in Boston or London or Paris, not to the same extent, and not on private property.  (Although, once again, much of New York's outer boroughs looked like this back in the 1980s.) 

In other words, while the Greek economy might not yet officially be in recession, our careful powers of observation lead us to predict that the numbers are going to get much worse very quickly, as the statisticians catch up with reality.

So what's happening?  And what is to be done?

Happy tax day!

  So today is tax day in the United States.  I feel like celebrating.  Man, taxes are low in this country.

Democracy and the modern central bank

 Libertarians, like Marxists and deep greens, generally drive me nuts.  Why?  Well, they have no objective function outside their beliefs about social organization.  Their preferred way of organizing society is good regardless of the outcome ... something especially infuriating when they refuse to admit it, and insist, fairly crazily, that their desired form of social organization will produce good outcomes and we can't compare the “really existing libertarianism” that the U.S. and much of Europe lived under before 1914 (or 1933) because it wasn't perfect super libertarianism.  Something about the ICC, or maybe the Homestead Act.  I don't know.  Aargh. 

Megan McArdle is not like that at all.  She's a very smart non-doctrinaire libertarian.  She certainly makes you think, even when she's infuriating, and I don't get the impression that she would refuse to change her opinions in the face of facts. 

Here she isn't discussing libertarianism.  Rather, she's thinking about democracy as a way of organizing society.  Her conclusion is that small-d democracy isn't compatible with modern central banking, because “what the Fed is doing now is not much different from what most [non-democratic ideologues] want the Supreme Court to do on some issue or another:  rule it out of the bounds of majority debate.” 

But that's just wrong!  The Fed can be abolished at any moment.  All you need is 218 representatives, 60 senators, and the president to say so.  Less drastically, the Fed's mandate can be changed.  In fact, Congress has done exactly that.  In institutional terms, the Federal Reserve is not one of the undemocratic parts of the American constitution, for the simple reason that it's not in the American constitution.  The only reason that the Fed behaves independently is because there is a democratic consensus in this country that it should. 

The Federal Reserve is like the EPA, or OSHA, or the FAA, or the military.  A somewhat autonomous organization with a mission set by elected officials, plenty of oversight all the way, and an ever-existent possibility of abolition.  I don't see anything undemocratic about it. 

Am I wrong?

Observatorio Argentino 10: French lawyers declare war!

  It seems as though some French lawyers have decided to do a Rogers on the Argentine Republic. 

A few years ago, in 2005, Argentina repudiated a big chunk of its foreign debts.  Since then, the jilted bondholders have been trying to get it back.  On April 7th, the famous NML-Elliott announced that their lawyers managed to get a French bailiff to put a stay on all Argentine accounts in the country.   “The frozen assets in France are not diplomatic, and therefore are not protected by sovereign immunity,” said an Elliott spokesperson. 

Well, Buenos Aires wasn't going to take this lying down.  Elliott had already tied up funds held in France by the Banco Hipotécario and Banco Central.  The Argentine embassador to France, Luis Ureta, complained to the French foreign ministry.  The French diplomats were not happy to hear the news.  “On Monday night, a bucket of cold water landed on the heads of the diplomats at the Latin American Desk of the French foreign ministry,” was how La Nación described it.  The Argentines asked France to unfreeze the accounts “by any means necessary.”  (Argentines are not Filipinos:  I don't think the phrasing was deliberate.)

The French response?  Well ... it was rather American, actually.  A spokesman expressed support for the Argentine position, and then told the Argentine government that if they didn't like it, it was up to them to appeal.  In the interim, the Argentine embassador is paying for burnt-out light bulbs and the like out of his own pocket.  I suppose the embassy employees are getting paid back in Argentina and withdrawing their salaries out of ATMs, or some such.  The account itself is only a million euros or so, but man is it a pain to have to run a big office without any access to, you know, modern finance. (Although many Argentines have some recent experience of doing exactly that.)

Anyway, it's a bit of mess.  Argentina has already lost access to several hundred million dollars worth of bank accounts and all of the nationalized pension funds held abroad.  About the only bright light in the legal firmament is that a New York judge just declared that the recently-nationalized Aerolineas Argentinas is “not an alter ego or agent of the Republic, and the recognition of Aerolíneas’s independent status won't serve as a fraud or injustice against the Republic’s creditors.”  So that's one bright spot.  

In other news, I've added an “empire” tag to this blog.  I'm still not sure what I mean by it, but once I figure that out, I'll try to reclassify past posts appropriately.  Suggestions?

Oh, and go listen to Will.  I need help with this stuff!

When lawyers declare war!

  You know, the more I learn, the more I think that President Correa of Ecuador is really playing with fire in defaulting on his debts.  Brazil is mad at him, and you don't want to get the new imperial rulers of South America mad at you.  But more importantly, he's got his American creditors mad at you ... and it seems as though those creditors may have a rather powerful legal recourse.  It'll all depend on the definition of a “central bank.”

But let's start at the beginning.  What happens when lawyers declare war on a country?  Well, remember this post, on the U.S. sanctions against Manuel “La Piña” Noriega ?  Turns out that the sanctions weren't really Elliot Abrams' idea.  Rather, the credit goes to a lawyer, William Rogers, acting on behalf of his client, former President Eric Delvalle of Panama. 

La Piña, you see, had an anger-management problem.  He decapitated Hugo Spadafora, one of his political opponents.  When the President of Panama, Nicolás Barletta, made the mistake of thinking that he, you know, ran the country, and decided to investigate the head-chopping, Noriega locked him in his office and threatened his family.  At 3am, President Barletta appeared on national television and offered his resignation, which the National Assemby accepted in a late-night emergency session.  Eric Delvalle, the education minister, then became President.  A little while later, Delvalle decided to pass on to La Piña an American offer to let him peacefully resign with all his ill-gotten gains.  In response, Pineapple-face ejected Delvalle from the presidency.  Delvalle got word that he was going to be arrested the next day, and managed to make it to an American military base.  His ambassador-at-large hired Rogers, and then ...

Things could be worse

  A while ago I posted a chart that seemed to show that employment losses in this recession rivalled the early stages of the Great Depression.  That chart is true.  By the measure of “total employment,” things don't look all that out of line. 

But the U.S. economy was much more agricultural back then.  In fact, a full 36% of all employment in 1929 was agricultural.  (That figure still startles me, as much as I know that it shouldn't.)  Agricultural employment was far more resistant to the ravages of the Depression, even if agricultural incomes were not. 

If you restrict yourself to nonfarm employment, which is what Justin Fox did, you get a somewhat more reassuring figure.  We don't seem to be tracking the Depression, and the many interventions of 2008 and 2009 have done more than a little good:

I suspect that the 1929 data are seasonally-adjusted, since the NBER cites the source as:  “For raw data: Survey of Current Business, March and August 1941; For adjusted data:  Federal Reserve Bulletin, June 1941.”  But since that is ambiguous, I included the unadjusted modern data in green.  It doesn't really change anything ... except inasmuch as all the people laid off after the Christmas rush in 2007 slowly went back to work over the next few months (as is standard), whereas that is not happening in 2008-09. 

So, yes, we're now officially worse than 1981-82.  By this point then, recovery had set in.  But we aren't close to a second Great Depression.

In this country.  Worldwide, not so clear.

The end of the Chimerican balance of terror

  There is some evidence that the era of the “financial balance of terror” between the United States and the People’s Republic is coming to an end.  The financial balance of terror, also called “Chimerica” by Niall Ferguson, are names for the situation in which the U.S. depends on massive inflows of capital from China to keep interest rates low, and China depends on massive outflows of goods to the United States to keep its people employed.  China sells widgets to the U.S. and buys dollar-denominated debt, in the process keeping the price of the dollar high and U.S. interest rates low. 

The balance of terror recently made an appearance in a discussion thread on Charlie’s blog.  The idea was that Chinese holdings of U.S. debt limit American freedom of action ... although the Chinese, of course, would be damaged by an attempt to use their leverage. 

I contend that the balance of terror is rapidly coming to an end, to China’s relative disadvantage.  Emphasis on relative, of course, because everyone will ultimately benefit from getting out of this rather insane situation in which poor countries lend huge sums to rich ones.

Consider the recent indirect exchange between the President of the United States and the Chinese government.  China worried about the value of its Treasury holdings.  The President said, “Pshaw,” and went on to tell the G-20 that they could not expect the world of America as a consumer of last resort to return, and the Chinese president seemed to agree.  Meanwhile, the head of Chinese central bank emulated St. Augustine.  “America should buy less, and we should consume more, but not yet.” 

In other words, the Chinese are starting to flex their muscles just as they begin to atrophy.  More below the fold.

Why is trade collapsing?

 Hans-Joachim Voth has a blog.  I recommend it.  He's one of the smartest economic historians that I know, and his insights are worth reading. 

Here he speculates that the collapse in Chinese exports may be due to an inability to get trade credit.  We here at TPTM wondered about the same phenomenon a while ago.

“Now, it's one thing that big-ticket capital items like printing presses are not selling quickly (the same thing is hammering German machinery exports). But Chinese exports? A quarter fewer DVD-players, shoes, and toys? The demand elasticity for these goods cannot possibly be high enough to get declines on this order of magnitude. Incomes are down a few percentage points at most in developed countries, where the bulk of Chinese exports go. My guess is that it's export financing that has taken a hit.”

I'm not so sure.  A lot of Chinese exports are consumer durables:  televisions, radios, phones.  They are the kind of purchase that can easily be postponed.  Imagine you run a delivery service, and your guys have thirty cellphones, three of which you replace every year.  Now, times are bad, so you only replace the one that actually got crushed by a motorbike.  Demand for cellphones just dropped by two-thirds.  Even the stuff that aren't consumer durables per se kinda are:  most people in the developed world can easily postpone the purchase of a T-shirt. 

Like this one.  The purchase of which probably should have been postponed.  But it was a gift, and just as with Che Guevara images, I can't resist the irony.

 

Department of WTF, once more

  These are not like things.  The data do not say what the people making the connection seem to think that they say. 

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. 

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.

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?

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. 

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.

Another modest proposal

  What, no interest in annexing Iceland?  Ni modo.  Let's turn instead to the stimulus plan winding its way through Congress.

To this observer, it seems quite brilliant as Keynesian countercyclical spending.  Such a stimulus works best when all the money is spent on labor-intensive stuff and spent quickly.  That's why the recent Republican lie that a CBO report indicated that only $45 billion would be spent in the first two years got so much traction.  Sadly for the Republicans, the CBO didn't say what they said it said.  (What did you expect?)  The report is here; it covered a now-withdrawn $61 billion bill proposed in September.  Getting $45 billion of a $61 billion full of big infrastructure projects out the door in two years ain't bad, but like I said, H.R. 7110 is moot. 

So how does the new bill, the American Recovery and Reinvestment Act of 2009, stack up?  I went through its $543 billion in line items and grouped them as follows:

1. An Army of Roofers: people doing stuff like weatherizing homes, retrofitting office buildings with energy saving windows, or replacing old car engines with new ones.  Plus some building of small-scale stuff like schools and army housing.  $91 billion.
2. An Army of Programmers:  people redoing computer systems across government bureaucracies and the health care system.  $24 billion.
3. An Army of Hardhats:  people building bigger cooler stuff like new electrical transmission lines or freeways.  Or, yes, sewers, lots of sewers.  $60 billion.

That comes to $176 billion spent pretty quickly on stuff that's already pre-approved or pretty simple to ramp up from scratch.  Call it 2.0 million jobs for an outlay of 1.2% of GDP.

But there's more:

1. Keeping bureaucrats employed:  $173 billion in temporary aid to state and local governments.
2. Handing out cash:  $116 billion in various types of temporary aid to individuals.

That's an additional $289 billion that will do a lot to maintain demand, since the governments getting the aid will have to pay the associated salaries (instead of laying people off) and the individuals getting the cash are all people in serious economic trouble.  (There's another $79 billion in there that I couldn't classify, mostly R&D and educational spending of various types.)

Anyway, as a Keynesian stimulus, the package seems pretty brilliantly designed to this observer.  A lot of it will even have long-term payoffs in terms of lower energy use and higher administrative efficiency.  No high-speed trains, no universal health care, but a lot of money out the door very quickly in a way designed to maximize the chance that it will be spent.  Not bad, new Administration, not bad at all.

A modest proposal

  I have really got to start cross-posting on AFOE.  They've given me permission; I just don't feel like my Europe stuff lives up to their standards.

Anyway, the Economist had an interesting column about Iceland and the European Union.  The conventional wisdom is that Iceland would like the euro.  But there are political difficulties.

So why not associate with the United States?  I don't mean become a state, that would be stupid.  Icelanders aren't Americans, and truth be told, they don't seem real likely to become Americans.  They don't listen to reggaetón or country, they don't build malls, they don't put neon-tubing on the underbodies of their cars or shoot guns for fun.  (Cue Jussi telling me that I'm a nationalist.  I am coming around to his point of view.  That is not a good thing.)  But what about becoming a Commonwealth, like Puerto Rico or the Northern Marianas?  They'd have to give up membership in the European Economic Area, but what has that ever gotten them?  They wouldn't have to give up membership in all those Nordic agreements, although they would have to allow Americans to become Icelandic citizens after one-year residency, same as Puerto Rico does. 

So what would this magnanimous move cost the American taxpayer?  Nothing!  Icelanders over age-65 wouldn't qualify for social security under current law; they haven't paid anything in.  But let's say the U.S. waived that, and paid Icelandic pensioners the minimum benefit, just to be nice.  What would be the cost?

A back-of-the-envelope calculation:

Recoupling

  Andrew asks me to say something about “decoupling.”  (I am going to resist the temptation to embed an image of an infamous Economist cover.)  The idea was that the U.S. was now a smaller part of the world economy than before, and thus U.S. trouble was unlikely to spread.  Why, he asks, did it turn out to be wrong?

My temptation is to take issue with the premise.  Was the world ever really coupled?  The research on business cycles is mixed, but the upshot appears to be that business cycles were never all that synchronized.    Even when limited to the big economies, there isn't much sign of coupling.  The implication is that although economic troubles do seem to spreading worldwide, they could have spread a lot further and a lot faster. 

You can also take issue with the premise from the other side.  Could it be that emerging markets are holding up well given the scale of the troubles?  After all, Brazil (and elsewhere in Latin America) are certainly coping a lot better than they would have a decade ago; even Mexico is experiencing a slowdown rather than a collapse.  (And you don't get more coupled than Mexico, do you?)  It used to be that when the U.S. sneezed, Latin America caught cold; now Latin America seems to just start sneezing as well.  That's some sort of decoupling.  The same could be said for China and India:  hit but not clobbered.

Finally, there is a third way to take issue with the premise:  “decoupling” was always a hypothesis, and never an accepted part of the conventional wisdom.  That's why the March 2008 Economist article on the subject has the phrase “even if it is the source of a great deal of controversy” in its second sentence.

But I quibble. The decoupling optimists were wrong. Basically, they missed three things.

1. World business cycles have always been more correlated than the underlying trade linkages would suggest. 
2. Lots of financial institutions overseas had exposure to the U.S. market.  There was this bizarre (but explicable) flow of capital from the poor world to the great United States over the past decade.  The good part was a build up of reserve cushions.  The bad part ... well.
3. Lots of financial institutions started borrowing in currencies with low interest rates and lending in currencies with high interest rates.  Whoops.

A fourth may be added soon:  the drying up of trade credit leading to far bigger falls in trade than anyone would have expected. 

Thoughts?

The country of the future

  Randy McDonald pointed out this odd article about Brazil in the Globe and Mail.  The author lauds Brazil as a particularly good exemplar of economic management over the past few years, while blasting Canada: 

“On the other hand, Canada should have done much better too: Our economy grew dramatically, fuelled by a new resource boom, and our banks stayed on a short leash, so none failed.  But for the most part, we were among the champagne-sprayers. Our wealth fund, which shamefully lies in provincial hands, is needlessly tiny. And a decade of lacklustre government spending by both parties has robbed us of the chance to become a world leader: Our measures of equality and poverty are no better than they were at the beginning.” 

To which I respond:  bollocks!  (I like that word.  I don't think I've ever actually spoken it.  I don't think anyone in the United States has actually naturally spoken it since 1892, although I have been known to say “bollixed up.”)  Brazilian economic management has been fine, but not exemplary, whereas Canada has done everything it was supposed to do. 

Point #1:  yes, Brazil paid off its debt to the IMF.  Very nice ... but Canada never had any IMF debt to pay off.

Point #2:  yes, Brazil reoriented its social spending to bring real results in improving public health and reducing malnutrition ... problems Canada does not have.

Point #3:  Between 1998 and 2008, Brazil managed to hold its net federal debt to 25% of GDP.  It also managed to redenominate most of its debt into its domestic currency.  Both excellent accomplishments.  But Canada's debt was already denominated in its own currency, and in the same period Ottawa reduced the federal debt from 63% of GDP to 30%, a much more impressive accomplishment, and exactly what the author accuses Canada of not doing.   

Two more points below the fold.

The expropriation that wasn't

  Kevin Drum and Dan Drezner wonder why the oil companies would get back into Venezuela after the way Hugo Chávez treated them the first time around.  The answer is simple:  Chávez didn’t treat them badly.  When oil prices head back up, they’ll do fine even if he plays the same movie all over again. 

“What???” you say?  How can that be?  Simple.  Between 2004 and 2006, the Bolivarian Republic of Venezuela expropriated the marginal surplus generated by the run-up in oil prices.  It did not, however, reduce the revenues of the oil companies.  They took home about $10 a barrel when the contracts were signed in the late 1990s, and they took home about $10 a barrel in 2008.  In fact, some of the companies that had signed service contracts under the old regime received more money under the Bolivarian regime than they would have under the original rules.

So why not get back in?  It isn’t like there are a whole lot of places around the world for the oil companies to invest in, especially not on-shore.  Most oil reserves are closed to the majors, and political risk is everywhere, including Alaska under its radical socialist governor.   The companies have little chance of enjoying the upside from a return to high prices, but with estimated costs of $6-$7 a barrel, Venezuela is still a good bet. 

Details and money graph below the fold.

Data I'd like to have

  Where can I find time series on:

1. Gazprom's revenue, by market;
2. Russia's transit fee revenue, by originating market;
3. The average wholesale price per standardized unit for Russian gas and other gas, by market.

Get me that data, and I might be able to make some sense out of Russian policy.  I will say that current events make me think that Russia doesn't want to snarfle off bits of Ukraine.  You can extract a lot more surplus out of a neighboring vassal than you can out of your own citizens.

Barbados, Jamaica, institutions, and a great reason for a research trip

  There is a debate inside the economics profession about the importance of institutions, broadly defined.  One side of the battle holds that institutions are everything.  Countries can institute all sorts of bad policies and still prosper over the long run if they have “good” institutions — France is a common example.  A subset of this group likes to argue that a particular set of legal institutions is very important.  You can sum their argument up as “Common law good, civil law bad.” 

The “institutions as epiphenomena” side of the debate has mostly given up, with the valiant exception of Greg Clark.  That said, strong opposition still exists in the form of two arguments: “institutions aren't everything” and its subset, “legal origin theory is total b@ll$#/t.”

One obvious experimental laboratory is the British West Indies.  Not a whole lot of good came out of the collapse of the West Indian Federation, but one bit of lemonade coming out of that lemon was that it left us with a collection of independent and quasi-independent states with a similar institutional background.  Now come two authors with a comparative paper on Barbados and Jamaica, arguing that it is macroeconomic policy, not the legacy of history, that explains the different paths of the two nations since independence. 

Are their arguments convincing?  More below the fold.

The resource curse doesn't exist, and please stop talking about it

  My friend Will hopes that oil prices stay low, in order to insure that the Russian Federation remains behaved.

My response:  Please get the stupid, and I mean truly monumentally stupid, idea of the resource curse out of your heads?  It's a well-accepted idea, but it's just plain wrong.  No matter what Tom Friedman writes about it.

Stephen Haber and Victor Menaldo have a paper coming out that shows that there is no, squat, zero, ningún relationship between democracy and oil resources.  Haber and ... uh ... me ... will eventually have a paper showing the same thing for civil war. 

But hell, maybe Russia is different.  So my question for you all is simple.  Why would an authoritarian government, no, why would a dictatorship give up power because its export revenues went down?  That makes no bloody sense.  It could default on foreign debtors.  It could blame foreigners for any crisis.  It could shoot dissidents, you know, the way Panama did under Noriega. 

Is there any reason to believe that a fat Russia would be more democratic and less expansionist than a lean Russia?  No.  F@&k no.  There isn't any reason to believe the opposite either, of course ... but by God do I wish that people would stop fooling themselves.  Resource money has fueled democratic transitions and dictatorial takeovers, foreign expansion and foreign engagement.  Those who know Russia better will be able to predict that country's idiosyncratic political reaction to declining export revenues ... but why any of the information in this story, about governments trying to crack down on the bearers of bad news, would make an observer hope for sustained bad news is beyond me. 

Ah, here comes my first AFOE cross-post.  But your reactions first.  At least until I can find the damned keys to that blog.

Taking the C-levels

  Peter asks, was a sea-level canal possible in Panama?  The answer is yes. 

The French initially planned a sea-level canal.  Of course, they failed.  But the American government also considered a sea-level plan.  They rejected it only when a group of consultants presented a report that killed the idea on something other than cost.

First, they calculated the rate at which dirt could be moved away from the excavation, and figured that a sea-level canal would take at least 15 years to build.  (The actual canal took 11 until the first transit and 17 until full commercial operation, but it was planned to take only 8½.)  Second, because a sea-level canal would be pretty narrow for most of its length, transit times would be longer.  (Narrow is a relative term:  the above and below pictures show one of the narrowest parts of the Canal.)    Third, it would be shallow for long stretches.  (41 feet, in fact.)  Finally, it would require locks anyway:  the Pacific tides are twenty feet higher than the Atlantic tides.  Without locks, there would be a 4.5 knot current ... on average.  In fact, it would vary quite a lot, making navigation much tougher. 

In addition, it would be just as vulnerable to sabotage (lots of talk of dynamite-laden vessels in the 1906 report) and require a 180-foot masonry dam on the Chagres, rather than the 135-foot earthen dam actually constructed.  Which would look cool, but be vulnerable.

Later plans were much more grandiose. 

Expansion!

  In 2006, the Panamanian electorate voted in favor of a plan to expand the Panama Canal.  The reason was not that the Canal had reached full capacity:  in fact, by a back-of-envelop calculation done by myself and a fellow named Andrew Baldwin, the Panama Canal is at roughly half its maximum throughput in terms of the number of ships.  (The ACP, I should add, does not agree with us.)  Rather, the reason is that 35% of the planet’s commercial shipping consists of ships too large to fit through the current locks, and Panama wants a piece of that business.

The current locks measure 1,050 feet by 110 feet.  They can accomodate ships meausring up to 965 and 106 feet.  An expansion project started by the Americans in 1939 and abandoned in 1942 would have built a third set of locks measuring 1,200 feet by 140 feet, with 45 feet of depth.  The abandonment turns out to have been a great thing for the Panamanian economy:  the new project will build locks measuring 1,400 × 180 × 60, capable of accomodating ships up to 1,200 × 160.  (And to be honest, I suspect that will eventually be pushed up to 1,315 × 176.) 

How large is that?  Pretty f----n’ large.  The new notional Panamax will be 1,200 × 160.  The real new Panamax will be closer to 1,315 × 176.  Well, Malaccamax is 1,543 × 197.  Still not big enough for supertankers, but big enough to capture a lot of the new traffic.  (And Nimitz-class aircraft carriers, should it ever come to that.)  The plan is for the expansion to be finished by 2014.  (Uh huh.) 

The abandonment of the American project also turns out to be a great thing for the Panamanian ecology.  Every time one of the current lock chambers is filled, it drains 26.7 million gallons of fresh water from Lake Gatún.  The problem is that rainfall has been falling in Panama.  The American new locks would have increased that number to 40.8 million gallons for every ship to head through the new passages. 

So the new locks will recycle the water, pumping it out of the locks into reservoirs.  It should allow the Canal to use only 10.7 million gallons per lock crossing, despite the larger size of the locks.  

  

Questions or comments? 

By the power of ICSID

  How vulnerable are Latin American nations to international arbitration? 

Venezuela makes the answer easy to find.  The Bolivarian Republic owns $14.5 billion in direct investments abroad, mostly Citgo refineries and gas stations.  It also enjoys $22.9 billion in accounts receivable, mostly for oil delivered by not paid for.  Some of that are debts incurred by the Petrocaribe countries, but most of it is with the United States, and it is all potentially attachable in a settlement.  (The liquid assets are probably owned by the central bank, which has $39 billion in reserves, and are considered immune.)  Blocking those accounts receivable is the 21st-century equivalent of parking a gunboat in the harbor.  Hugo needs to tread very carefully, and considering that Cemex is still being run from Monterrey, it looks like he has been.

How about Argentina?  Mecon gives the answer for 2007 right here, on page 15.  The Argentine government owns $8.2 billion in foreign assets.  Sounds vulnerable!  It's not, however.  $6.0 billion consists of “créditos por financiación de entes binacionales.”  The big one is the  Yacyretá dam on the Paraguayan border, an $11 billion project.  I suppose one can imagine a world in which ... uh ... no, I can't really imagine a world in which foreign investors in Argentina could go after Yacyretá.  And given that it loses money, I'm not sure that they'd want to.  Another $1.5 billion represents Argentina's paid-in capital to multilateral lending organizations like the IMF and World Bank.  In theory, I suppose, that money is very vulnerable to an adverse ICSID (aka CIADI in Spanish) ruling, considering that ICSID is part of the World Bank group.  In practice, I don't know of any cases where the a multilateral institution has reassigned capital from a national entity to a private interest.  I don't even know how that would work, accounting-wise:  the multilateral entity would need to find cash to pay the private investors for its shares, since only governments can hold capital stakes in multilaterals.  That would get beyond messy right quick.  In short, Argentina isn't all that vulnerable to the postmodern imperialism of the 21st century.  So why not nationalize the airlines?

What about Ecuador?  Sadly, its central bank does not make the figure easy to find.  It does not track Ecuadorean foreign direct investment at all.  And what it does track is not broken out into public v. private, save for central bank reserves.  (Which is an odd concept in a dollarized economy, but the number is there.)  I'm still stumped. 

Improved carrier asset utilization

  If that title didn’t put you to sleep, then you either work in logistics or didn’t bother to read it.

 

In 1998, one year before it took complete control of the Canal operation, the Panama Canal Authority (ACP, for its Spanish initials) granted the rights to rebuild and operate the Panama Railroad to a joint venture of the Kansas City and Southern Railroad and a logistics company with the awful name of Mi-Jack.  When the U.S. controlled the Canal Zone, the Panama Railroad carried mostly Panama-bound freight from the port of Colón to the southern towns in the C.Z. or Panama City.  In the 1950s, the railroad lost much of that business to Panamanian trucking.  (There is a great story there, which I'll tell later.)  By the time the U.S. handed the railroad over to Panama in 1979, it had already gone into decline.  It was never officially abandoned, but some pictures from the late 1990s are enough to make you wonder.

 

Allowing the railroad to decline was the wrong call.  The right call was that a functioning railroad would allow shippers to enjoy “improved carrier asset utilization.”  What that is and why it allows the Panama Canal to charge more is below the fold.   

The sad state of the Mexican service sector

  One of the more striking figures that we uncovered while researching Mexico since 1980 can be encapsulated in this graph:

       

It surprised me.  Surely the entry of foreign banks and foreign retailers must have done more to improve service productivity?  All those Wal-Marts!  That new Banamex logo!  Nada?  De veras?? 

Yes, de veras.  And here is some more sad evidence:  despite a 30% fall in the value of the peso and flat economic growth, middle-class Mexican shoppers continue to flock across the border in search of bargains.  It probably isn't just measurement error. 

Why is service (particularly retail) productivity so flat in Mexico?

Correa lo hizo

  “Hay gente que rectifica lo que dice, hay mucha gente que se contradice.”  —René Pérez

Well, it appears that Ecuador just went and defaulted on its foreign debt.  I think that this is a bad idea.   The problem, of course, is that I am on record as supporting the U.S. decision to allow its financial protectorates in Latin America to default in 1931.  The only reason that I think Britain’s subsequent decision to default was bad is that is prevented the union of Trinidad and the United States.  I have also argued that Argentina’s much later default was a good idea. In fact, I have even implied that I think there might be good arguments in favor of an Argentine default right now.  (Really.  Read the linked post closely.  I more than imply that.) 

So why do I think that this move is stupid?  After all, Ecuador is suffering from a collapse in oil prices.  What’s the problem? 

First, Ecuador does not have to default.  Debt is around 21% of GDP, and debt service is only around 1%.  A balance-of-payments crisis this is not, even with the crash in oil prices.

Second, Ecuador is vulnerable.  I don’t know how vulnerable.  Why don’t I know?  Well, I haven’t been able to find Petroecuador’s balance sheets, so I don’t know how many American assets it holds.  Nor do I know how many commercial assets the Ecuadorean government may hold.  And I certainly don’t know how many payments to the Ecuadorean government pass through vulnerable payments centers.  But the fact that I don’t know these things make me think that the country is very vulnerable.  Call it a hunch, but a lack of transparency often means that there is something to hide.

I should point out that I have met the fellows from Greylock and Elliott who will be going after the country.  They are very very good at what they do, and they are very motivated. 

Third, Ecuador could use access to the World Bank.  It will probably lose that.  It has already lost access to Brazilian development funds. 

It could still be a bluff.  This is just a default; many stand to profit from such a thing.  The Ecuadorean government may just be engaging in a complicated political redistribution, and it will restart payments once the relevant parties have taken their profits.  Alternatively, should a second Great Depression really emerge, then early default will seem like a brilliant move. 

But short of those two possibilities — a short-term move or a prediction of disaster — it just seems unwise to me.

Emerging market Keynesianism

  On November 25th, the Argentine government announced a $21 billion public works plan.  No details as yet, other than that Buenos Aires intends to divide the money into three categories:  “minor” projects that can be launched immediately and finished within a year (like repaving bad roads or fixing dilapidated school buildings), “regional” projects that will take some time to ramp up and will last more than a year (like building new roads or replacing sewer systems), and “structural” projects that will “change the entire economic or environmental scene.”  (Like, I fear, the Tren Bala.)  Sound familiar?  It should.  President-elect Obama proposed a very similar plan a few days ago.

The thing is, the Argentine Republic is not the United States.  So there are two questions.  First, does Argentina need a big fiscal stimulus?  Second, if Argentina can use a fiscal boost, will one work, or do the laws of economic motion work differently there?

L’énergie atomique

  The Economist has an interesting article on French nuclear energy.  You read about it here first.  Be sure to check out the comments if you click the link. 

I have a terrible feeling that the emerging potential depression has changed the economics of nuclear power, such as they were.  First, the cost of traditional energy sources has plunged along with the overall demand for energy.  (I don't think today's low prices will outlast the downturn, but the fact remains.)  Second, the credit markets are pretty messed up at the moment.  How would you finance a project based on the idea that energy prices will rise in the long term?  In the long term, everyone is bankrupt.  Third, nuclear power plants as they are currently designed seem to be pretty bad as a Keynesian fiscal demand boost.  The lead times are far too long; it'd be years before a project leads to a dime of actual purchases.  That means that governments will be ill-advised to include subsidies to nuclear power in the capital projects that they are going to undertake over the next few years. 

Still the energy of the future.  Perhaps the article's relative optimism will prove justified.  I hope so, but it isn't how I'd bet.