The Future Uncertain

From The Wall Street Journal (hat tip: Koreanfornian Cooking):

Kogi, a humble lunch truck, became instantly famous in Los Angeles last November when it began selling Korean tacos: grilled short ribs marinated in Korean flavorings, topped with Asian slaw, and wrapped in Mexican tortillas. Today, Kogi, has three trucks, a lounge, 36,000 Twitter followers, and lines around the block wherever they park.

Kogi had a great Internet-era, come-from-nowhere run selling something no one else had—until now, maybe. It’s not surprising that Korean-style tacos are popping up at restaurants around the country. But Baja Fresh, 283-unit casual Mexican food chain went a step further last month when it tested a version of the Korean taco at one of its restaurants and called it “the Baja Kogi taco.”

Highway robbery? No, says the corporation: “There were certainly no intentions to rip off a name or a product,” says Chuck Rink, president of Fresh Enterprises, which owns Baja Fresh.

This is an only-in-America story. It has dynamic and valuable cultural evolution. The Korean taco trucks have quickly become the hottest thing in LA, despite their humble circumstances. And it has cultural fusion: Korean insides wrapped in a Mexican outside. Not to mention that the spokesperson quoted in the article for the taco-truck company, Caroline Shin-Manguera, has a last name that bespeaks neither Latino nor Asian culture, but something altogether new. The addition of lawyers to the mix is what officially assimilates the tale into the melting pot.

The success of the Korean taco truck, and the need of a big corporation to get in on it, is a lesson in how foolish a lot of thinking about culture in the age of globalization is. Culture is never pure. It is always subject to outside influences, which are not bacterial contamination but instead experimentation, often for the better. "Protecting" some imaginary pure culture ideal form is thus equally foolish. And, contra anti-globalization hysterics, this an instance of the big corporation having to adjust its behavior because of innovation from below, and in so doing bringing a new cultural form - the Korean taco - to far more people. This is culture in a globalized world, and we are lucky to be alive to sample it.

Labels: Globalization

The BBC analyzes the Indian election outcome:

The latter predicted a neck-and-neck race between the Congress- and BJP-led coalitions. They said that the Third Front of regional and caste-based parties would play a pivotal role in forming the government.

The Communists even spoke about Congress being forced to support such a government.

Then there were the traditional woes of the ruling party - the three previous prime ministers had lost elections after one term.

But Congress bucked every trend and has emerged triumphant in a victory analyst Mahesh Rangarajan calls a "historic moment" in India's democracy.

The victory is emphatic and with the caste-based regional parties suffering setbacks in states like Bihar and Uttar Pradesh, India's political landscape suddenly does not look so deeply fractured.

Some years ago I published an article in which I predicted that sectarian (or in Indian language, "communal") concerns would more and more dominated Indian politics. Since I made it, it seemed to be becoming progressively more true with every election. But in a result that is fortunate for India's future, and for geopolitical stability generally, that trend appears to have stopped.

There are two things to applaud. The first is the decimation of India's vigorous communist movement. While it is generally confined only to a few parts of the country, in those parts it was routed. This means that the economic reforms that began in the early 1990s have borne enough fruit for Indians to justify continuing to support them. Given the stake the world has in mainstreaming 1.1 billion Indians into the global economy and the miracles it generates, this is something to applaud. That India is choosing to go this route while America and Europe turned more collectivist gives those of us in the latter nations some reason for hope. Only people who have really lived under socialism know its true cost.

In addition, India appears to be turning away, somewhat to my surprise, from fractious sectarianism. Both the Bharatiya Janata Party, which pitches itself to the high ends of the Indian jajmani ladder, and the Bahujan Samaj Party, which aims toward the socially weaker but democratically powerful castes, did worse than expected, perhaps due to the comical megalomania and corruption of and the serious charges of serious crimes against, their leader, Mayawati. The BJP has been a friend of economic reform, perhaps out of recognition that it is necessary to make India strong, but so too is the Congress party-led winning coalition. They insist on a lot that a purist would reject, such as extensive farm subsidies, but half a loaf is better than none.

That Indians have endorsed reform and individualism during these turbulent times is undoubtedly partly due to the fact that the Indian economy has not been racked as badly as others. But it is also a sign that delivering and adhering to true reform pays off, and generates political support and additional reform. Heading down the opposite road, on the other hand...

Labels: Globalization

Power consumption is a decent indicator of economic activity. Here is what it has done in China in recent years:

2005: 24.24% increase
2006: 33.13% increase
2007: 14.93% increase

And Nov. 2007- Nov., 2008? According to Barron's, electricity consumption in that period fell 9.6%.

Whatever the official data say, the China bubble is popping, hard. Just as some of us have long thought, even if the timing, and the global impact, are different from what we expected.

I thought then, and I still think, that the combination of Chinese repression, 20 years of established growth generating hundreds of millions of middle-class people with first-hand memories of the bad times, and Chinese nationalistic pride will allow the government to ride this out. But we are about to find out.

Hat tip: Ambrose Evans-Pritchard, for alerting me to the China power-consumption data.

Labels: China, Globalization

The global financial crisis happened because the US, by failing to oversee lending markets, recklessly let a housing bubble develop. When it popped the whole world, having bought into the bubble through securitized mortgages, fell too. Right?

Think again. Oh, it's true that the US housing market developed a bubble. As I have noted here , that is because of the politicization of housing loans by the federal government, which made lenders' job difficult. But it is also true, as I've argued here, that the crash is more likely a function of the global boom that unfolded, depending on one's preferred starting point, in 1982, 1991 or 1998. This boom was profound, changing hundreds of millions of lives, but ended the way such booms always do, with a backlog of mistaken ventures in need of cleaning out. At worst, the U.S. housing bubble was nothing more than the needle that popped the bubble that particular day.

Can this be? Below is a chart that links two numbers. On the vertical axis is the percentage fall in stock markets around the world in 2008. On the horizontal is the country's rating for clean governance by Transparency International, an anti-corruption group.

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Note the close relationship between lack of transparency (i.e., more corruption) and the size of the fall. Indeed, the correlation between the two quantities for the 28 countries I arbitrarily chose (because market data were easily available) is 0.69, which in social science is very large.

So what does it mean? In any society economic actors make mistakes relative to what they know after the fact. In societies with a lot of corruption (which masks information, because each government bribe is by construction hidden from the investing public) or with miserable accounting or other problems with financial information the number of such mistakes over any interval is larger. Thus, this crash is a major cleaning out of a large pile of accumulated mistakes, not an outburst of irrationality or the residue of some strangely unprecedented spasm of greed. The correlation would undoubtedly be even more impressive if it used the quality of financial reporting and information instead of overall government transparency, but is very informative as it is.

For more evidence that this is a rational resolution of a rational bubble (driven by the emergence of many countries with great potential but unknown strengths and low information conductivity into the global system), note that China suffered one of the biggest market declines despite the fact that foreigners are not allowed to trade in its stock markets to any significant extent. How can that be if the crash is simply contamination from U.S. housing? Pakistan too has suffered a dramatic fall, despite the lack of importance, I suspect, of U.S. housing securities on the Karachi exchange. The U.S. and the U.K., in contrast, despite being the epicenter of the housing bubble, had (relatively) modest declines.

What is going on is, as I have said before, an information problem, not a liquidity problem. Only by discovering the information many want but few have - information about which ventures undertaken during the great bubble are sustainable, and which were errors; about where, in other words, the remaining unexploded economic bombs lie - can order be restored.

But why let the data get in the way of a good political fable?

Labels: Economics, Financial Crash, Globalization

When I was in graduate school getting a Ph.D. in economics, I had the hardest time passing my macroeconomics comprehensive exam. I found much of the material counterintuitive, and the mathematics more difficult than in microeconomics or the field exams that I took.

Well, now I have my revenge. Macroeconomists, and those in policy circles they have trained, aren’t coming off looking too good right now. Here is Marketwatch on the Fed running out of interest-rate ammunition in its attempt to get the U.S. economy moving again:

Rates are already very low and are not playing much part in the credit crunch that is strangling the economy.

Investors should know that the Fed still has plenty of ways to stimulate the economy, even with rates near or at zero, economists said.

The bottom line on Fed policy is supply of money. The Fed typically targets the price of money, but, with the price so low, it will focus on increasing the quantity of money through its balance sheet.

Vince Reinhart, a former senior Fed staffer who is now at the American Enterprise Institute, said the Fed will make a promise in its policy statement "to use the balance sheet to help foster economic recovery and better-functioning markets."

Macroeconomics is premised on the idea that there is this single entity called “the economy,” and “the economy” can be treated the way a diseased organ is. But “the economy” is really the coordination of the conflicting desires of 300 million people (or, nowadays, six billion people). At any moment, changes will leave some people worse off, some better off. Even now, recent economic changes are operating in favor of some people. Lower oil prices are making truck drivers better off, lower home prices are making homes more affordable, etc.

If the collective sum of everyone’s changed circumstances is on balance negative at any moment, we can defensibly talk about the abstraction called a “recession” or “depression.” It is no fallacy of composition to say the economy right now is on balance terrible. But it is such a fallacy to suppose that the remedy lies in treating the entire “economy.” Undergraduate textbooks still speak of how “spending” and “the economy” respond to particular actions by the government, in the same way a doctor can say how a bacterial infection will respond to an antibiotic. But the economy is not an organ; it is not even a body, in which all the parts generally work together to advance the prospects of reproductive success. Instead, it is a network of people both competing and cooperating as they try to advance their interests, based on the rules of the game. The macroeconomic measures of trouble we are observing are really the sum of millions of microeconomic mistakes (in conjunction with a smaller number of successes). Those mistakes have to be liquidated, no matter how painful it is.

There is a reason that interest rates have failed to do the trick, and that is that what we face is not a liquidity problem but an information problem. People are not yet certain how many financial bombs remain unexploded, and the only way out is to let them blow up so we can learn what we need to learn as fast as possible. There is no magic tool in the Fed’s workshop – not interest rates, not the “balance sheet,” not anything else – that will do what rate cuts have failed to do. Nor can any crude stimulus package coming out of Washington, which operates on the mistaken premise that some mistakenly conjured aggregate abstraction called “spending” is too low. (Large cuts in taxes would be somewhat more effective, not, as even a now-and-then smart economist like Paul Krugman argues, because spending will go up, but because politicized decisions about resource use will be replaced – in fact, more than replaced, because of greater incentives to take risks – by market ones.) Washington can however easily make things worse by constantly rewriting the rules of the game – voiding debts if the borrowers have enough political strength, bailing out this guy but not that, announcing a big spending program and leaving it to the future to figure out how to pay for it – etc. Political uncertainty multiplies market uncertainty. The unpredictable effects of both Congressional and Fed responses to current circumstances are making things worse.

All macroeconomic problems are fundamentally microeconomic problems, and the continued defiance of this fact by our ruling classes is costing us a fortune.

Labels: Economics, Financial Crash, Globalization

In one of my classes I have long given a lecture on how the US and Europe are so different with regard to economic policy, and how this has generally redounded to the benefit of the U.S.

It was one of my favorite lectures, but I may now have to scrap it, and throw into the digital trash all of the data and wonderful anecdotes I have collected over the years. One of the most striking things about this electoral turn of events is how much more like Europe we could soon become. According to India’s Economic Times, Jose Manuel Barroso, Europe’s chief bureaucrat, could hardly repress his satisfaction as he said he looked forwarding to crafting with President Obama a “new deal for a new world.” Among the items he looks forward to reworking is “financial reform,” by which is meant attempts to bring the global flow of funds under the control of the state.

It is possible, although the odds are in my view less than 50/50, that the next two years will see the introduction of a European-style single-payer health system. In that regard, the worst election news in my judgment did not come from the presidential race, but from Arizona, where a proposition asserting that Americans do not lose their freedom to contract with private parties even when the contract in question involves health care appears to have gone down to a very narrow defeat. Not even half the Arizona population, in other words, agrees that a resident of that state and a medical provider have the right to strike an agreement in their mutual interest. Further European-style privileging, East India company-style, of labor unions as monopoly bargaining agents, with all of the corruption, intimidation, economic stagnation and the annihilation of individual creativity unions bring, is also on the agenda. The Constitution makes radical change difficult, so the worst excesses may be trimmed, but an agenda that would be familiar to Clement Attlee may at least be on the table.

This battle will be lost. Not necessarily the political battle, but the battle with economic reality. It may well be that the result of the election is to make America much more like Europe, the opposite of what people (including me) were predicting until very recently. But the world has other ideas. Countries full of hard-charging, creative, innovative people all over the world (whose talents have thus far benefited America tremendously, but need not continue to do so) are not interested in the welfare state or the rights of unions or other alleged “stakeholders.” They are interested in achieving great things on their own, in escaping from the smothering hand of collectivism rather than embracing it. As an Indian official recently memorably said, “We find the Europeans fighting for a 35-hour week, and we in India are fighting for a 35-hour day.“ For the Americans too, the battle will be futile, but only at tremendous cost to the American standard of living and national interest.

Labels: Economics, Globalization, Liberty

Next month there will be a summit involving something called the G20 on the global financial crisis, says Pres. Bush, according to The Chicago Tribune:

"This summit will be the first in a series of meetings aimed at addressing this crisis. The summit will bring together leaders of the G20 nations -- countries that represent both the developed and the developing world. And the summit will also include the heads of the International Monetary Fund, the World Bank, and the Financial Stability Forum, as well as the Secretary General of the United Nations.

"During this summit, we will discuss the causes of the problems in our financial systems, review the progress being made to address the current crisis, and begin developing principles of reform for regulatory bodies and institutions related to our financial sectors. While the specific solutions pursued by every country may not be the same, agreeing on a common set of principles will be an essential step towards preventing similar crises in the future.

The idea that a bunch of heads of state, joined by a bunch of bureaucratic micromanagers of the sort who tend to populate the World Bank, the UN and particularly the IMF, can hold a meeting in the de facto capital of the world, Washington, and fix what ails the world economically is misplaced. We got into this mess because of years of accumulated mistakes that inevitably arise during a a great boom, which must be cleaned out. In this case the problem is worse because of the extra noise in housing markets introduced by Washington’s social engineering, which, combined with the global securitization of mortgages, has allowed everyone else to first enjoy our bubble and now imbibe our bitter medicine.

The only way out is the same approach that Andrew Mellon, President Hoover’s Treasury Secretary, was said (by Hoover) to have recommended: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." Once the mistakes are out of the system, growth resumes. The mistakes have piled up because of combined dramatic growth-driven economic uncertainty and political uncertainty. Recent evidence – stock markets continuing to decline around the world despite one Keynesian/FDR remedy (stimulus, bank bailouts) after another – suggests that we cannot use macroeconomic management to get us out of this mess. There is nothing that a bunch of leaders can do from on high to fix a problem that is fundamentally, like all economic phenomena, an individual one – this individual decision now seen to be a mistake, that one not, that one over there a wonderful opportunity yet to be exploited.

What the summit does represent is risk – political risk in particular. This is because politicians and bureaucrats will want to do what they like to do - enhance their control, try to be seen as doing something right now instead of telling their constituents that it will be necessary to wait a bit. The combination of a lame-duck U.S. President, a more micromanagingly interventionist Administration and Congress in the wings, and Asian nations looking to reengineer global economic management for their own political interest while European nations look to increase state control for philosophical ones, is an explosive one. A quarter century of economic progress is at risk. If we take the 1930s way – control, management, administration, regulation – and forget Mr. Mellon’s advice, the results will be the same.

Labels: Economics, Financial Crash, Globalization

What caused the housing bubble? Greed, lack of regulation, or too much regulation?

Below (a little fuzzy, unfortunately, but I think the story is clear) is a plot of home ownership rates in the U.S. from 1965-2008, from the Bureau of the Census (Table 14).




You can see that historically ownership rates fluctuated between 63-65%. But beginning in roughly 1994 they began a rise to historically unprecedented levels. What happened? Between 1993-7, particularly in 1994 (the Wikipedia history is a little fuzzy) the government increased pressure on banks in a variety of ways to lend to those who didn't get loans, particularly the poor and those in inner-city neighborhoods. This was a shock to the financial system - a changing of the rules that required lenders to reevaluate their risk exposure. Against traditional risks of nonpayment on one side had to be weighed new, unclear risks concerning the risk of government punishment for not meeting government targets about loans to politically favored but financially troubling borrowers.

Added into the mix was the decision by the Federal Reserve after Sept. 11 to loosen monetary policy dramatically. (We all remember how nervous everyone was about the economy after the attacks, with Wall Street falling badly on the day the markets reopened.) As much as economists like to think no one with rational expectations would fall for it, politicians know through their repeated use of the tactic that they can rely on money illusion to give the economy a short-term boost. And so easy credit followed easy money, and this combined poisonously with the CRA reforms to generate the pattern above. All financial bubbles have their roots in a combination of new developments and broad uncertainty, and that is what the CRA reforms, in combination with the new subprime mortgage-security instruments the financial industry developed to help companies navigate them, did. In hindsight it is clear that the bubble popped in 2006, and took much of the global economy (how much remains to be seen) with it.

The numbers do not lie. Markets correctly solve the problem of who should and shouldn't own a home, once we take cognizance of the fact that for some people to have a home will impose very large costs on others. This is a disaster made in Washington, by politicians for their short-term interests at the expense of the rest of us.

Labels: Economics, Financial Crash, Globalization

Spengler has what is even by his rarefied standards an amazing essay at Asia Times on American exceptionalism:

Abraham Lincoln, the next best thing to an American prophet, called his countrymen "this almost chosen people". Most Americans still would agree with him. Americans may not love their country more than other peoples, but they love it in a different way. This love is visible at any small-town celebration of Independence Day, in the tearful eyes of older people. They have not forgotten the humiliations that drove their antecedents out of their countries of origin European states always have been the instruments of an elite; Americans believe their government, is there to defend them against the predation of the powerful.

For all its flaws and fecklessness, America remains in the eyes of its people an attempt to order a nation according to divine law rather than human custom, such that all who wish to live under divine law may abandon their ethnicity and make themselves Americans. The rights of Americans are held to be inalienable precisely because they are a grant from God, not the consensus of the sociologists or the shifting custom of a particular historical period. Ridiculous as this appears to the secular world, it is embraced by Americans as fervently as it was during the Founding. Even worse for the secularists, it has raised a following in the hundreds of millions in the Global South among people who also would rather be ruled by the divine law that holds their dignity to be sacred, than by the inherited tyranny of traditional society.

America the individualist annihilator, America the individualist redeemer. An American world in which the individual is king, and the group and its petty demands subservient to him. This is why we are so essential, yet so hated. Read the whole thing.

Labels: Globalization

One of the oldest clichés in journalism is interviewing a taxi driver to find out what the man on the street thinks. The radio show Marketplace Morning Report has been running stories from Egypt all week. Here is one in which the reporter interviews Khaled Al Khamissi, who has a forthcoming book about what you can learn about life in Cairo from its taxi drivers. This excerpt struck me as particularly telling about the costs of big, intrusive government:

Khaled Al Khamissi: Many people speak about oppression in terms of political oppression. But what we suffer here in Egypt, it is the economical oppression. Egypt has a potential, and this potential is gone 100 percent.

Jagow: One hundred percent. That sounds pretty hopeless.

Al Khamissi: Yes. I think we are in a hopeless situation, and the people has to work 20 hours a day to survive.

Jagow: Khaled, can you give me a story, one that stands out to you, that might represent the book?

Al Khamissi: I can tell you one story. It's about a taxi driver. He told me that a police officer, after one hour in the taxi, he ask him, "Give me your ID." And he knew that he wants money. And then he gave him 5 pounds. And the officer told him, "This is not enough." He gave him 10 pounds. And these 10 pounds are the only this taxi driver has in five or six hours' work.

If the officer had stuck his gun in the driver’s face and demanded 10 pounds straight up, we would call it armed robbery. I am hard-pressed to see the difference.

Labels: Globalization

Earlier this year I briefly noted that Pakistan may be on the verge of a significant economic takeoff, something very much out of character for that country in recent years, and something that India began to do years ago. The Wall Street Journal has now noticed, on their front page:

Pakistan's political scene is growing more clouded, but a clear demonstration of confidence in the country's future is coming from an emerging economic force: entrepreneurs.

Scores of new businesses once unseen in Pakistan, from fitness studios to chic coffee shops to hair-transplant centers, are springing up in the wake of a dramatic economic expansion. As a result, new wealth and unprecedented consumer choice have become part of Pakistan's volatile social mix.

The article goes on to note, accurately, that political uncertainty - the looming return of two astonishingly corrupt prime ministers (Benazir Bhutto and Nawaz Sharif) who ran the economy into the ground in the 1980s and 1990s, and the ever-present threat of Islamist mayhem - could still undo the incipient miracle. And the vast, desperately poor majority of Pakistan's huge population has yet to taste much of the fruit of several years of growth. But economic reform has stimulated entrepreneurship and foreign investment, and Pakistan looks a lot like India c. 1995 or China c. 1982. Pakistan may be a test of the hypothesis that economic growth corrodes support for radical Islam. It bears watching.

Labels: Economics, Globalization

The BBC has a report on violent street protests in Santiago, Chile. They raise concern over whether Chile has finally made the acquaintance of Mancur Olson.

Olson, in his classic book The Rise and Decline of Nations, noted that prosperous nations and empires decline when pressure-group warfare over the redistribution of the national wealth becomes fatally toxic to continued economic dynamism, i.e. to the creation of the wealth to be redistributed. Evidence of this is legion in Western Europe, and the U.S., with its tax code crammed with special-interest provisions running to thousands of pages in length, is hardly immune.

Chile is an anomaly -- a country that works in a continent full of countries that don't. All of this is due to the legacy of the economic policies enacted under the brutal dictator Augusto Pinochet, who stumbled accidentally into a set of radical free-market policies that completely transformed his nation. After his 1973 coup, the initial impulse of the military government was to do what comes naturally to dictators (and probably with most government officials), to use its power to try to run a command economy. But he ultimately settled on a set of advisers known as "the Chicago Boys," so named because of their Ph.D.'s in economics from the militantly free-market University of Chicago. They enacted reform that would look radical now and was more than radical in the 1970s, when outright socialism was still a viable economic idea. After initial stumbles amid the general global economic dysfunction of the 1970s, these policies launched a great boom that totally remade that nation, moving it solidly into the ranks of middle-income countries and causing it to draw illegal immigrants from the collapsed economies around it.

When he left office, General Pinochet left behind a constitution and a climate of fear that made reimposing a command economy difficult. But the social acid of pressure-group warfare is ultimately hard to resist, and Chile may be reaching that point now. Its current president is a socialist, as was her predecessor. The previous president only tinkered around the edges of Chilean economic policy, and Michelle Bachelet promised much the same during her campaign. But the redistributionists are ever restless, and now appear to sense an opening. There may be more agitation for greater restrictions on the labor market, for higher levels of social spending funded by higher rates of taxation, and for manipulation of the other levers of national decline.

In the BBC story, its own reporter is quoted as saying that “a family of four, without thinking of pension plans and health insurance etc, needs about $1000 to $1,500 a month to live comfortably.” But this is a nice problem to have in that neck of the global woods. In many other countries in South America, the poor worry not about pensions and health insurance but about slums, cholera, basic health care, gangland crime, etc. They worry, in other words, about poverty of the traditional Latin American sort, not the sort of rich-country poverty that preoccupies the much more comfortable residents of Chile. The next time Chileans contemplate taking to the streets in protest over such lofty concerns, they might give some thought to the sort of economic policies that allowed them the freedom to worry about these problems to begin with. Chile has in the last couple of years, like Venezuela and elsewhere, drawn a good hand because of rising global commodity prices (Chile is a major commodity exporter), but over the next several months, is a country that definitely bears watching.

Labels: Economics, Globalization

So what is going on with all this subprime housing mess anyway? Economists are always much better at explaining the past been predicting the future, so take what follows with several grains of salt. But the turmoil on Wall Street around the world is revealing in several respects.

I often tell my students in the class I teach on globalization that rapid financial-market meltdowns following sustained run-ups are really just a weeding-out process, the elimination of mistakes that occurred, perfectly justifiably, during the boom. In particular, whenever there is some significant change for the better in economic policy or economic potential, investors know that there is great potential out there, but there is also tremendous uncertainty. And so for a time they throw their money at everything, uncertain of exactly how the new potential will play out. Ultimately, many of these bets turned out to have been misplaced, and so they have to be liquidated. The rapid crash following the long, sustained buildup, accomplishes this.

The stock market has been rising for some time, and I confess that the underlying economic fundamentals in the US seem unable to explain it. However, the rest of the world is undergoing what Fortune magazine, with lamentable timing perhaps, recently called "the greatest economic boom ever." And American companies of course have been deeply wrapped up in the amazing transformations going on in places like India, China, in Vietnam.

But in some respects this crash almost seems like the reverse -- the uncertainty is not about the upside in the past, but about the downside in the present and near future. Many commentators are saying that huge numbers of companies and funds all over the world are turning out to have been enmeshed in the American housing mess, and right now financial markets are in the process of discovery -- of trying to figure out just who owns what bad assets. In the meantime, they punish stocks across the board. This is not "panic," but a rational reaction to the information set available -- lots of whatever the opposite of potential is, plus great uncertainty about how it is distributed. Eventually the markets will oversell, and bounce back; the fundamentals of the global boom are still in place. I wish I knew when, but if I did, I would be living the life of a Corona beer commercial instead of toiling away in the groves of academe.

The first lesson I take away from this is that the United States is still critical to the global economy. During the financial turmoil 1997 and 1998, it was the resilience of US financial markets that largely prevented disasters in East Asia, Russia and Brazil from turning into a global recession. The strength of the tech boom in the US led to many a week in which markets would decline all over the world until some gigantic rally on Wall Street would save them. That seems not to be happening this time, which has led some to suggest that the US is a substantially diminished economic force

In recent years there has been a lot of comment about how the rise of China and India means that the US economy is less important to the global economy than it has been in many decades. The US can stagger, and yet emerging markets can continue to surge forward. And yet it is really surprising to see how investors all around the world react badly to perceived weakness in the US economy. There does not seem to be any obvious reason why credit-market difficulties in the US should devastate markets in Europe and Asia, unless the US continues to be a bulwark of the world economy. The US still matters, a lot.

The second thing that is worth saying is a few words in defense of subprime mortgages. The narrative that always takes hold during these times -- of financial excesses, criminal behavior by predatory fraudsters, etc. -- is already beginning to rear its head, and it is best to strike it down now. It is certainly true that the innovative mortgages created in the last 10 to 15 years have left a number of people -- overstretched home buyers and investors alike -- in significant financial trouble. But it is also true that they have allowed many people to buy homes who otherwise never could.

The chart below is from a doomsaying Website called The Market Oracle:



How do we interpret this? Very optimistically, if we think about it in terms of enabling people to achieve their dreams rather than in terms of what are in the big picture momentary financial-market fluctuations. Five out of six subprime mortgages are not even delinquent. Only seven percent are in actual default. Thus, significant corrections will have to be made to account for those sections of the housing-credit market having problems, but the big picture is that these innovative instruments (which the website calls “toxic waste”) have put people who -- either because most of their income is in cash or because they have poor credit relative to the price of housing where they live -- could not make use of conventional mortgages in a position to achieve the American dream of home ownership. These new instruments will long outlive the nitpicking criticism of them that currently prevails. Assuming, that is, they are not regulated to death in a hysterical overreaction to an ordinary part of the business cycle. Such controls will have the same effect that they always do -- penalizing the most economically vulnerable, and preventing the vast majority of responsible people among this group from achieving things that the rest of us take for granted. The subprime mortgage should be celebrated as a tremendous financial innovation.

We are still living in economically transformative times, the momentary ups and downs of particular markets in particular countries (and breathless reporting of same by the media in need of a good story) notwithstanding.

Labels: Economics, Globalization

China has executed the head of its equivalent of the FDA for corruption. The most interesting aspect of the story is not the execution per se, as capital punishment is as workaday as mowing the lawn in the People’s Republic. The story is what the scandal that led to his death says about changes in China, changes in the direction of freedom.

Some months ago the media and government in the U.S. ascertained that the deaths of pets in the U.S. could be attributed to a mislabeled ingredient that originated in China that was placed in pet food. The Chinese government initially did what they do best, played hardball and contemptuously stonewalled. Chinese diplomats were told to argue that American food products exported to China also had safety issues, and could be subject to retaliation. It was a small problem affecting a few companies, not an overall indictment of the Made in China brand.

But then globalization, which has done so much for China, bit back. Consumers and governments worldwide began to express concern about a whole array of Chinese products, including tires, toys and food. And, most strikingly, the Chinese media itself propelled public outrage forward by reporting on shoddy construction. According to the Globe and Mail, a Chinese paper broke the story of China’s trophy high-speed railway from Beijing to Shanghai being endangered by bogus materials used in its construction.

Even the portion of the Live Earth concerts held in Shanghai is illustrative in its way. Culture is for totalitarians the most important industry – control the culture and you control power. But the message of the greenies – restrain economic growth for the earth’s sake – is, while false, one that cuts directly against the view the Chinese government seeks to promote. As Charles Paul Freund noted in 2002, pop culture has a profoundly corrosive effect on totalitarian regimes because of its emphasis on individualism. By agreeing to the concert, which appeases the young of Shanghai eager to network with the world, the Chinese government concedes that its monopoly on hearts and minds is no more.

Milton Friedman argued that economic freedom is not sufficient for political freedom, but it is necessary. (If true, bad news for ever-more regulated and centralized Europe.) In China, we are seeing that – people ever more in charge of their own destiny, demanding ever more of what someone once called consent of the governed. The journey has many miles to go, as a quick perusal of the State Department human rights report on China demonstrates. (That the agency head described at the beginning was executed so perfunctorily is also informative in this regard.) But going back now seems inconceivable, and more prosperity is leading Chinese toward more freedom.

Labels: Globalization

The rock singer Bono has been making the rounds at the G-8 summit, trying to scold national leaders into keeping their promises to increase aid funding to poor countries. As an economist it is sad to watch this, because the ineffectiveness of such aid in improving the lot of people in such countries is one of the few things (along with rent control making apartments harder to get and a handful of other propositions) that most economists agree on. An interview with a Kenyan economist in the English language version of Der Spiegel (hat tip: The Belmont Club) pungently begs Western countries to stop sending foreign aid. Here are some choice excerpts:

The Kenyan economics expert James Shikwati, 35, says that aid to Africa does more harm than good. The avid proponent of globalization spoke with SPIEGEL about the disastrous effects of Western development policy in Africa, corrupt rulers, and the tendency to overstate the AIDS problem.

SPIEGEL:
Mr. Shikwati, the G8 summit at Gleneagles is about to beef up the development aid for Africa...

Shikwati: ... for God's sake, please just stop.

SPIEGEL: Stop? The industrialized nations of the West want to eliminate hunger and poverty.

Shikwati: Such intentions have been damaging our continent for the past 40 years. If the industrial nations really want to help the Africans, they should finally terminate this awful aid. The countries that have collected the most development aid are also the ones that are in the worst shape. Despite the billions that have poured in to Africa, the continent remains poor.

SPIEGEL: Do you have an explanation for this paradox?
Shikwati: Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. In addition, development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa's problems. If the West were to cancel these payments, normal Africans wouldn't even notice. Only the functionaries would be hard hit. Which is why they maintain that the world would stop turning without this development aid.
…
SPIEGEL: The Americans and Europeans have frozen funds previously pledged to Kenya. The country is too corrupt, they say.

Shikwati: I am afraid, though, that the money will still be transfered before long. After all, it has to go somewhere. Unfortunately, the Europeans' devastating urge to do good can no longer be countered with reason. It makes no sense whatsoever that directly after the new Kenyan government was elected -- a leadership change that ended the dictatorship of Daniel arap Mois -- the faucets were suddenly opened and streams of money poured into the country.
…
Shikwati: Why do we get these mountains of clothes? No one is freezing here. Instead, our tailors lose their livlihoods. They're in the same position as our farmers. No one in the low-wage world of Africa can be cost-efficient enough to keep pace with donated products. In 1997, 137,000 workers were employed in Nigeria's textile industry. By 2003, the figure had dropped to 57,000. The results are the same in all other areas where overwhelming helpfulness and fragile African markets collide.

The whole thing is worth a read, as is William Easterly’s The White Man’s Burden, which readably documents the catastrophe that is foreign aid.
Let us be clear: the state of current economic research, whose practitioners agree on little, is that foreign aid does not work. Rather, it sometimes makes things worse in recipient countries. How can this be? Intelligent foreign aid, closely monitored, can be used for specific, socially productive tasks such as buying malaria nets or drilling wells. What could be wrong with that?

A lot, it turns out; aid has several disastrous flaws. It generates vast corruption among recipients – not just recipient governments but the development aid groups that oversee the use of the money. And the fact that so many have a stake in its success means that once aid begins it can never be truly cut off, as the endless procession of officials from countries like Côte D’Ivoire (over 20 IMF structural-adjustment loans since the early 1980s) to IMF headquarters can attest. Both pushers and takers of these loans become addicted to them. (See my sketch of the Palestinian territories, more destroyed by aid than anywhere else on the planet, here.)

But Easterly’s most compelling criticism is the ultimate futility of trying to manage development – radical transformation of preindustrial societies into societies of modern prosperity where people can be in charge of their own fate – through the drawing up of aid and loans from desks in Washington or Paris. Foreign aid would fail even if it weren’t stolen, even if it didn’t prop up cruel dictators, because it is central planning. It is no more sensible for the World Bank to decide, with taxpayer money, that a dam needs to be built in country X than it is for a Soviet agricultural planner to decide what the price of beans in Kiev should be. Those dams and wells, for all the good they do at a particular location, affect incentives and create a problem economists call path dependence, where decisions today require us to adopt a particular future tomorrow. (The classic example is the QWERTY typewriter. Despite its alleged inferiority to other keyboard designs, it is said to persist because it would be too expensive to switch because typists are all QWERTY-trained, which gives manufacturers and incentive to make more QWERTY keyboards, which gives typists an incentive to be QWERTY-trained.) In the foreign-aid context, the construction of a dam means decision-makers in that country now take the dam as given, and re-orient economic decision-making on that basis. Since the dam was not constructed based on local entrepreneurial initiative, capitalizing on local information about that society, it is likely to be a white elephant.

Development is a complex, far from entirely understood problem. But one thing we know is that it doesn’t happen by imposition from the center. It happens from the bottom up, one entrepreneur at a time in an environment, such as China since the early 1980s or India since the mid-1990s, in which people have a sense that their efforts and ambition will pay off. It is almost a problem of epidemiology – the spread of the (beneficial) virus of the mentality of self-sustaining growth into more and more regions – as much as economics. And foreign aid has nothing to do with whether that virus spreads; if anything, it is an antiviral agent.

Labels: Economics, Globalization

China and India are now grabbing headlines through their rapid economic transformation (more dramatic and longstanding in the Chinese case). Some highly respected people are saying some very surprising things. Recently the Princeton economist Alan Blinder, a pillar of the profession and a long-time free-trader, noted that the rise of India in particular, with a giant population well-endowed with technological skills and English fluency, will make tens of millions of American jobs “outsourceable.” In the article linked above, he indicates that this should be dealt with by training to prepare people for face-to-face work such as law, which is less subject to outsourcing. While Prof. Blinder is still a free-trader, The Wall Street Journal recently interpreted his stance to be skeptical toward globalization overall. The left-wing magazine The Nation documents the trend while interpreting in the usual anti-corporate way, arguing that opposition to globalization is rising among surprising people because corporations have been unmasked as disloyal.

The argument that the rise of China and India , and poor countries generally, is bad for the U.S. because they are cranking out so many skilled people and posing greater competitive threats is a bad one. Not just because it overstates the technical prowess of all those Chinese coming out of school with the label “engineers” despite the low level of their training, nor because it underestimates the power of skilled immigrants to the U.S. and our advantages in transparency, market flexibility and the other more important ingredients of rising standards (although it does both these things). Rather, the argument fails on basic fundamentals, the most important of which I lay out here:

More trading partners is a good thing. Would you rather have one car-repair shop or ten to choose from? One brand of bread or 100? One gastroenterologist or 12? Clearly, the more the better from your point of view. The same is true for the seller as well – the more potential customers, the better off he will be. That is all the rise of China and India is – more trading partners brought into the global trading networks that Americans always take for granted. The more they are woven into the global trading system, the better.

Knowledge is free. As I have argued before, more traders in the global economy also means more creation of new ideas. Much knowledge is nonrivalrous, meaning that you can use it without diminishing the amount available for others. A technological or scientific breakthrough in India is just as true and useful in Kansas City as in Bangalore. It is true that the Indian firm may (justifiably) be able to patent the breakthrough, but the underlying principles and ideas are still freely available to all. Each breakthrough provides the raw material for more. The more competitive experimenters, the better.

Job destruction is a precondition of job creation. The hard truth is that jobs are created and destroyed all the time, often for reasons having nothing to do with globalization. It is when they are being created and destroyed at the most rapid rate that human progress is most dramatic. The Industrial Revolution completely remade the employment profile of every country that went through it, moving people from the farms to industry, but only as a side-effect of completely remaking human possibilities. To a lesser extent the information revolution has done the same, and the merging of billions of people into the global economy will do the same perhaps even more spectacularly.

There is a fallacy that everyone who talks about jobs being “destroyed” is invoking, that the status quo is somehow to be privileged. This is the path of France, of Germany, of decline. In fact, jobs come and jobs go, and wastefully idle workers are the entrepreneur's workshop The only way this is not true is if labor markets are rigged to protect current job-holders, as is the case in countries like the aforementioned. In that case technological change leads to substitution of capital for labor, lower growth despite that, and high levels of unemployment. This pretty much describes the Continent in a nutshell.

Countries do not compete; individuals do. Countries do not in an economic sense meaningfully compete. Rather, the individuals within them cooperate for mutual gain, and sometimes compete to make trades with others, whether as employers seeking workers, employees seeking jobs, or businesses seeking customers. There is no way in which “America” and “China” compete in that sense. The individuals who compose the two countries have so many different interests, possess so many different resources, etc. that the differences within countries are far more important than the differences across countries treated as unitary actors.

The rise of China, India, Brazil, or any other country does not intrinsically make any nation poorer. Rather, it serves to lift the residents of other nations up. This is the way it was with the rise of the U.S., of Japan, and every other successful country. The addition of billions of new hard-charging, industrious, clever, creative people into the global trading mix is going to be one of the greatest developments in the last several centuries of human history. Of course, this is purely an economic argument; the rise of India and especially China can certainly have geopolitical consequences. More on that later.

Labels: Globalization

The International Herald Tribune has been running a series (latest installment here, with links to previous articles) on the rise of English worldwide. It is pretty obvious to me that the number of speakers of English is for the foreseeable future going to rise, because the world needs a standard language and the marginal cost of English is smaller, given the number of people who already speak it. This is not an issue of replacing other languages, but of having a common backup language for all to communicate in. The use of English as the world's common tongue explains, among other things, why Americans and the British lag so badly in learning other languages; the marginal value of mastering another one, given the extent to which English can already be used to communicate, doesn't justify the marginal cost.

I bring it up because the series confirms most of the points I made awhile back in Some Economics of Language, which drew some vigorous dissent in the comments section.

Labels: Globalization

Today marks the release of a movie about an extraordinary event and an extraordinary man. The movie is called "Amazing Grace." It tells the story of how the British parliament, moved by the force of will of one man, William Wilberforce, rose above narrow financial interest and achieved one of the greatest moral victories in the history of democratic governance – the abolition of the Atlantic slave trade. In the wake of the passage of Wilberforce's bill, not only were British companies and seamen prohibited from participating in the trade, but soon the British Navy went out on a truly moral mission that arguably cut against Britain's economic self-interest to try to stop the Atlantic slave trade. (The US abolished the slave trade at roughly the same time, but unlike in the U.K. slavery continued in the country for almost 60 years.) The 200th anniversary of Wilberforce's triumph will be upon us on March 25. I do not really sense that it is getting the attention it deserves, and if ultimately it does not, lost amid all the coverage of the diaper-clad, lovesick astronaut and the sordid struggles over the dead Playmate, it will be an immense shame.

Wilberforce was an intensely religious man, motivated purely by religious faith to end what he thought was a Christian disgrace. Indeed the song after which the movie is named tells the story of a former slave-ship captain who "once was lost, but now am found" and ended his participation in that wretched business. John Wesley a Methodist leader after whom colleges are named all over the U.S., wrote Wilberforce and called slavery "that execrable villainy which is the scandal of religion, of England, and of human nature." It is thus a little bit lamentable, if this story and this one are to be believed, that Michael Apted, the movie's director, intentionally downplayed the religious aspect of the battle in favor of emphasizing how politics can achieve great things. From the International Herald Tribune:

Apted, whose recent credits include "Enigma," in turn saw an opportunity to emphasize the importance of politics, then and now. "I wanted to do a story about the corridors of power," he explained. "I am trying to shine a light on the value of politics."
…
As it happens, Bristol Bay Productions initially wanted a biopic focused on Wilberforce's faith, "which is why I and a lot of other people didn't want to make it," Apted recalled. "I wanted to center the whole film on the anti- slave trade debate, and they agreed. To me, it is about people who have a moral or religious sense of purpose and yet manage to operate in the world."

The victory, the result of a 20-your struggle (the first anti-slavery Bill was filed in 1787, and another version lost in 1796 by only four votes), was clearly partly about politics. But it is manifest revisionism to ignore the role of religious principles in achieving this great victory. Had Britain not been the Mother of Parliaments, the traffic would not have been abolished; nor would it have been if Britain were only a democratic nation and not a Christian one. But it is certainly better that the movie be made this way than that it not be made at all.

What makes the movie and the anniversary so bittersweet is that the global slave traffic is still a gigantic phenomenon. In absolute numbers (although not as a percentage of the world population), there may be more people in bondage now than then. Estimates range from 4 million to 27 million people. Unquestionably the same lower transport costs that have brought so much prosperity to so many places has also made the slave trade easier. The U.S. State Department issues an annual report (go here for the most recent one) that tries to document the extent of the global slave trade. The most common kinds are trafficking in women for prostitution (which typically involves women from poorer countries being deceptively lured to wealthy ones in Europe, Japan and North America and being held captive thereafter), bonded labor in Africa and South Asia (extremely poor people incur debts and must work the rest of their days paying it off by making bricks or working plantations, with the debt sometimes even being passed on to their children), and workaday house slavery in several countries in northern Africa, especially Mauritania and Libya. This is far from an exhaustive list.

The global slave trade is the single greatest outrage in the world today, drawing tens of millions of people into its fatal whirlpool. The organization Antislavery International has numerous harrowing individual stories on the section of its website marked "Slavery Today," as does the introduction of the State Department report. Sadly, the traffic is not nearly as widely knows it should be. The Google toolbar on my computer fills out the most common searches that finish an incomplete typing of the search I plan to do. When I type out "slavery," most of the common searches based on that term are about slavery in centuries past. Several years ago, in an address to the United Nations, President Bush made an explicit reference to modern slavery and called on the world to fight it. I was never prouder of an American president (I am 42 years old) than at that moment, and hoped that there would be aggressive follow-up. Since then, the State Department's annual report has become more prominent, and European nations in particular are working much harder to combat it within their borders, but I was disappointed that he did not continue to give the issue the prominence that only the president of the United States can lend. But the more rapidly word spreads, the more rapidly Wilberforce's mission will be completed.

Update

I have now seen the movie. Any charge that the movie downplays Wilberforce's Christianity is misplaced, as it is obvious that that's what drives him. As for the film itself, some of the dialogue is wooden, and a fair amount of historical knowledge is taken for granted. But the issues it raises - evolution vs. revolution, the border between dissent and sedition, etc. - are interesting to this day.

Labels: Globalization

Pakistan may be catching the (beneficial) virus of rapid, transformational economic growth. From 2001-2005 the country has had five consecutive years in which the real GDP growth rate has exceeded the growth rate the year before, with growth in 2005 of approximately 8% on top of 6% growth year before that. Anecdotally, there are reports in the Pakistani press of construction booms in cities like Karachi (a city known thus far mostly for the relentless gang warfare between militant Sunnis and Shiites there); indeed, from 2003 to 2006 production of cement doubled. Before growing a modest 5% last year the Karachi stock market had also been booming for several years. The country is an increasing destination for foreign investment, although inbound flows are still dwarfed by those into India.

Based on recent history, Pakistan would have to be judged to be an unlikely candidate for the kind of growth that China and increasingly India take for granted. It is a society crippled by religious extremism and where significant chunks of the country such as Waziristan and Baluchistan are almost untouched by the central government. The existence of social norms far removed from those demand by globalization is also a problem, as evidenced by my previous post, is also problematic. And for all its recent growth Pakistan is still an extremely poor country, with per capita income of less than $1000.

And yet, taken as a whole recent events seem to me to have that feel of embryonic modernization about them. I cannot point to anything concrete, and a skeptic could certainly be forgiven for pointing to Pakistan’s past history, which was also marked by occasional spurts of growth followed by years of stagnation. But it feels different this time. The country certainly has immense problems of social norms that must be transformed to be modernization-friendly, but then again, so too did China round about 1978 or India shortly before the 1991 reforms. That this growth spurt has followed a series of economic reforms involving taxation, telecommunications liberalization, and other controls is also suggestive. In no sense has Pakistan undergone shock therapy, but for all his many faults the Pakistani president, General Pervez Musharraf, seems to get globalization and what it takes to accommodate a country to it.

In terms of the rigidity of the social structure, the seeming enormity of the task of reform in a country with so many bad economic policies, Pakistan now is indistinguishable, I think, from India in the early stages of its reform. There are of course political differences – India is a solid liberal democracy – and differences in the extent of religious extremism – Pakistan has more. And there are still gigantic policy problems to solve – Pakistan is still in the lowest quartile of most of the World Bank’s measures of governance quality, including corruption control. And of course there is always geopolitical risk (much larger in Pakistan than in most places). But there are also numerous precedents for takeoff growth starting in one country and spreading quickly to nearby countries, as they catch the virus and economically engage with the first country to boom. One could think of the growth boom spreading from Japan in the 1950s to Korea, Taiwan, Hong Kong and Singapore in the 1960s, and from there to Thailand and Malaysia in the 1970s. Pakistan may be benefiting somewhat, either because of direct economic ties or perceptions of similarities among global investors, from the Indian boom. It is still a bit of a crapshoot, but if you are a person with a lot of tolerance for risk you could do worse than to bet that Pakistan has turned some sort of corner.

Labels: Globalization

India Daily reports on rioting over the weekend in the Indian city of Bangalore. Why is this a big deal? Such events are common in many countries; as I write this there is civil unrestin Guinea and Bangladesh over various political grievances. But such rioting in Bangalore demands comment, because the events are certainly discouraging to one of my favorite hypotheses, that free commerce limits ethnoreligious conflict. Bangalore is after all the hub of cutting-edge Indian commercial activity, justly famous as a rising center of high-technology production and innovation, and the one place where we should best hope for civil peace and cooperation among India's extraodinary tapestry of tribal groups. (Indeed, much of the coverage at Google News is emphasizing that outsourcing ventures have been unaffected as much as the cost of the rioting itself.)

The violence (one killed, dozens injured, stores burnt) apparently began after a protest demonstration by Muslims over the execution of Saddam Hussein. And, lo and behold, it is apparently sectarian politicians who are stoking the flames. This report from AKI indicates that hardline Hindu sectarians took advantage of the tensions, and this one from CNN/IBN quotes ordinary people blaming politicians for stirring up tribal passions. Indian politics have for years been becoming more tribal – on both religious and caste grounds – even as the economy has continued to liberalize. One could even argue that for those who benefit from sectarian divisions, politics will soon be the only arena left.

And so the lesson is that globalization and economic liberalization are no instant magic bullet, particularly with tribalization and discrimination patterns that have been centuries in the making. But over the long haul I am optimistic; this stury (pdf) describes the power of the crazy entrepreneurial environment in Silicon Valley to dissolve the traditional barriers of language, caste and religion among Indian entrepreneurs, which they replace by a pan-Indian identity. To be sure, that is not the ideal endpoint (which comes when they cease thinking of themselves in any tribal terms at all, merely as businessmen), but it is a start. The anti-discriminatory urgency demanded by globalization means Bangalore has come a long way, but the rioting shows Bangalore has a ways yet to go.

Labels: Commerce, Diversity, Globalization