Archive for the ‘International Economics and Development’ Category
Create Jobs? China Currency Bill Is at Least 300 Percent More Likely to Destroy Jobs
Supporters of the so-called China Currency legislation fall into two camps. There are those frustrated by the fact that the Chinese government no longer asks “How high?” when U.S. policymakers shout “jump!” For this camp, the legislation is a therapeutic exercise in venting – the legislative equivalent of road rage. It might make trade relations and the economy worse, but boy does teeing off on those Chinese upstarts sure feel good. This is hardly the recipe for smart policy.
The other camp of supporters believes that the Currency Exchange Rate Oversight Reform Act of 2011 will, in fact, produce a positive outcome. This camp accepts three sequential premises (whether they realize it or not): (1) the legislation under consideration will compel China toward faster yuan appreciation; (2) a rising yuan will reduce the bilateral trade deficit, and; (3) a smaller bilateral trade deficit with lead to U.S. job creation. In short, this camp sees the legislation as a jobs bill.
But the likelihood of that sequence of events playing out is remote. Indeed, the ensuing analysis finds the legislation under consideration to be at least 300 percent more likely (or, if you prefer, four times as likely) to destroy U.S. jobs than it is to create them.
Let’s start by evaluating the second premise. What is the likelihood that a rising yuan will reduce the bilateral trade deficit? Well, from 1997 to July 2005, the yuan was pegged at a dollar value of about 12.08 cents. Between July 2005 and July 2008, the value of the yuan in dollar terms increased by 21 percent to 14.64 cents. Surely, proponents of the legislation would want to cite the dramatic reduction in the bilateral trade deficit that followed this period of yuan appreciation to support their position. Alas, during that period, the bilateral trade deficit increased by 33 percent from $202 billion to $268 billion. Since June 2010, the Yuan has appreciated by another 7 percent against the dollar. And the bilateral trade deficit? It’s on target for to be one-third larger in 2011 than it was last year.
So, recent evidence doesn’t support the premise of an inverse relationship between the value of the yuan and the size of bilateral U.S. deficit. Instead, both have increased simultaneously. Yet proponents of the law insist that a rising yuan will lead to a reduced bilateral deficit. Where is any evidence of this?
The truth is that the relationship between currency values and final goods trade flows has been complicated by the fact of intermediate goods trade. Globalization and the proliferation of transnational supply chains—which means far more intermediate goods trade than in the past—has dulled the impact of currency values on final goods trade.
Competitiveness: Let Markets Lead the Way
The American Enterprise Institute’s Kevin Hassett held a conference the other day on the idea of international “competitiveness.” He invited me to comment on his new co-authored paper that tries to nail down the murky meaning of the word.
The paper suggests that for a solid definition of “competitiveness,” we should look to the literature on Tiebout competition, which is competition between local jurisdictions for inflows of labor and capital.
Kevin and co-authors suggest that as global labor and capital mobility have increased, countries are now competing with each other the same way that local jurisdictions do. In Global Tax Revolution, Dan Mitchell and I discuss why Tiebout competition is a positive force promoting fiscal reforms worldwide. This is competitiveness in a good way.
By contrast, Paul Krugman wrote an excellent article in 1994 criticizing the vacuous way that “competitiveness” was thrown around by pundits such as Robert Reich and Lester Thurow. Books by such authors suggest that the global economy is a giant wrestling match, and that other countries will slam Team America to the mat unless we have more government planning and subsidies.
At the AEI forum, I noted that America does have to adapt to the realities of globalization, but most of that adaptation can and should occur in the private sector. For example, America needs larger and more efficient seaports to handle rising volumes of international trade. But rather than shoveling more taxpayer money into our government seaports, we should privatize them so that they can expand in response to rising market demands.
The World Economic Forum publishes a well-known index of country competitiveness. Kevin and coauthors think the index is dubious, but the WEF report is packed with interesting data. One WEF indicator of competitiveness (page 391) is “quality of seaports.” Hong Kong is ranked #1, and its seaport is privately financed, owned, and operated. American seaports are ranked #22, and they are generally government-owned.
The upshot is that when thinking about America’s “competitiveness”—however it is defined—we should think about the proper roles of the public and private sectors. The public sector can pursue tax reform to make us more of a magnet for capital and skilled labor. But when it comes to such things as infrastructure, education, and investing in “industries of the future,” the government should get out of the way and let entrepreneurs and markets drive America’s prosperity in the global economy.
China Currency Legislation Is a Desperate Mistake
The good news for those craving harmony in Washington is that that mythical elixir called bipartisanship has been spotted in Congress. The bad news is that it is finding its expression in an outbreak of self-destructive China-bashing.
After 8 years of threatening punitive action to compel appreciation of the Chinese currency at a pace deemed acceptable by U.S. politicians (a period, by the way, in which the Yuan appreciated by 30% against the dollar in nominal terms—and by much more in real terms), lawmakers may just pull the trigger this time. If so, their action should be seen for what it is: a vote of no confidence in themselves as a body capable of producing solutions to the nation’s economic stagnation and monumental budget and debt woes.
China currency legislation is a diversion – a shell game. Despite the opinions of Harold Meyerson and Fred Bergsten, there simply isn’t any evidence that a stronger Yuan will produce a smaller bilateral trade deficit or that a smaller trade deficit will boost employment. Indeed, policymakers shouldn’t be targeting trade deficit reduction in the first place—let alone a bilateral trade deficit, which is meaningless in a world dominated by trade in intermediate goods.
As explained here and here, globalization with it transnational production sharing and cross-border investment has mitigated the impact of currency values on trade flows. Because the value of imported inputs accounts for about half of the value of Chinese exports, a stronger Yuan reduces the prices of imported inputs used to manufacture and assemble products in China for export to the United States and elsewhere. This dampens any expected impact of a rising currency. In fact, between July 2005 and July 2008 the renminbi rose 21% against the dollar, to $.1464 from $.1208, where it had been pegged since 1997. But the U.S. bilateral trade deficit increased from $202 billion to $268 billion over that period. Since June 2010, the Yuan has appreciated by 7 percent against the dollar, but the bilateral trade deficit is on target to be 34% larger in 2011 than it was last year. And (as described here and here) there is no discernible relationship between trade deficits and employment.
Broader support on Capitol Hill for currency legislation boils down to this: with public approval ratings hovering in the low-to-mid teens, an embattled Congress is looking for plausible scapegoats for the dismal state of U.S. economic affairs. Thanks to a lot of media-driven hype about China’s inexorable rise at U.S. expense, Americans fear China almost as much as they loathe Congress. A vote to reclaim American jobs stolen by China—as the currency legislation is so disingenuously characterized by some of its supporters—enables politicians to return to their states and districts with concrete evidence of the seriousness of their efforts.
Only it’s not serious. It’s deeply dismaying. Instead of working hard to change homegrown U.S. policies that inhibit investment, job creation, and growth, our elected officials would choose to lay the blame for our woes at China’s feet, then cross their fingers and hope that their provocative, unilateralist legislation doesn’t unleash a torrent of adverse consequences that would make economic matters even worse. Can there be a stronger admission of failure than to launch such a desperate Hail Mary?
Tolerance à la Mode Français
Given America’s at best mixed record on free speech, I am usually reluctant to point fingers at other countries, but Thursday’s fining of two French women for wearing a full face veil was a little over the top. Don’t get me wrong, I’m no fan of the burqa — as it leaves far too much to the imagination for my tastes — but I am a fan of tolerance and religious freedom.
I’m still trying to decide which is more absurd, that the law in question allows an exemption for clown masks (more rulings like this should take care of that need) or that in addition to a fine, the two women will be required to take lessons on “tolerance”. It seems to me the whole experience has already provided them a pretty clear lesson on French tolerance.
In much better news, Saudi Arabia announced “that the nation’s women will gain the right to vote and run as candidates in local elections to be held in 2015.” While such a change is obviously long over-due, and one can reasonable ask why wait until 2015, it is a positive change and should be celebrated.
Free Market Capitalism vs. Cronyism in Russia
Russian philosopher Leonid Nikonov explains the differences between socialism, cronyism, and free market capitalism. Nikonov is a contributor to The Morality of Capitalism, a new book that is being distributed worldwide by the Atlas Network and the Students for Liberty. (You can download the introduction to the book here.) Students can obtain copies of the book here; all others can obtain copies here.)
Calderón Hints at Drug Legalization Again
Mexican President Felipe Calderón seems to be experiencing a dramatic change of mind regarding his war against drug cartels. Soon after a drug gang set fire to a casino in Monterrey a few weeks ago killing 52 people, Calderón told the media that “”If [the Americans] are determined and resigned to consuming drugs, they should look for market alternatives that annul the stratospheric profits of the criminals, or establish clear points of access that are not the border with Mexico.” Many people interpreted that as a veiled reference to drug legalization.
Yesterday, during a speech to the Americas Society and Council of the Americas in New York, Calderón was at it again: “We must do everything to reduce demand for drugs,” he said. “But if the consumption of drugs cannot be limited, then decision-makers must seek more solutions—including market alternatives—in order to reduce the astronomical earnings of criminal organizations.”
After launching a military offensive against drug cartels that has resulted in approximately 42,000 people killed in drug-related violence thus far, it appears that President Calderón has finally realized that the war on drugs is a futile endeavor and that drug legalization is the only alternative to the mayhem.
Calderón has flirted with an alternative approach before. A year ago, he said that it was “fundamental” to have a debate on drug legalization. Shortly afterwards, Colombian President Juan Manuel Santos openly supported the call for a debate. However, Calderón soon recanted, firmly stating that he was against legalization, and the possibility of a high-level hemispheric debate on drug reform died there.
If we take his recent statements seriously, perhaps the massacre in Monterrey finally broke Calderón’s faith in his war on drugs. His two immediate predecessors, Ernesto Zedillo and Vicente Fox, have been vocal proponents of drug legalization in the years since they left office. Calderón still has over a year left in his term. He has been very assertive in the past, demanding that Americans reduce their demand for drugs and change their gun laws in order to curb violence in Mexico. But his rhetoric has proven fruitless time and time again, all the while thousands have needlessly died. Calderon must remain assertive towards Washington, but now he should demand a change in drug policy in the U.S.
Nothing will reverse the damage that his war against drugs cartels has inflicted on his country. But Felipe Calderón could do his country a great service if he becomes the first sitting president to raise his voice to Washington and demand an end to the war on drugs.
Sweet Commerce in South Asia
Tom Palmer is very fond of this quotation from Voltaire on the connections among commerce, toleration, and the erosion of prejudice:
Go into the Exchange in London, that place more venerable than many a court, and you will see representatives of all the nations assembled there for the profit of mankind. There the Jew, the Mahometan, and the Christian deal with one another as if they were of the same religion, and reserve the name of infidel for those who go bankrupt. There the Presbyterian trusts the Anabaptist, and the Church of England man accepts the promise of the Quaker. On leaving these peaceable and free assemblies, some go to the synagogue, others in search of a drink; this man is on the way to be baptized in a great tub in the name of the Father, by the Son, to the Holy Ghost…
You can find it in Tom’s essay “Globalization and Culture,” which is included in Realizing Freedom: Libertarian Theory, History, and Practice.
I found a very similar thought in a Wall Street Journal review of the book Ghetto at the Center of the World by Gordon Mathews. The book focuses on “the most notorious flophouse in Asia,” which accommodates people from all over the world, but especially from Africa and South Asia and especially merchants who trade cheap Chinese-made goods to buyers from other countries. The review notes:
Interpersonal relations at the building, the author says, might not be reliably friendly, but “they are generally peaceful.” He adds: “As a Pakistani said to me vis-à-vis Indians, ‘I do not like them; they are not my friends. But I am here to make money, as they are here to make money. We cannot afford to fight.’ “
Voltaire and Mathews, like many other observers, have noticed that people trying to make money don’t generally get too upset about other people’s race or religion. This is part of the “doux commerce” or “sweet commerce” thesis that goes back to the Middle Ages. Albert O. Hirschman wrote about it in 1982, and much of Deirdre McCloskey’s current work explores the idea of “doux commerce” and bourgeois virtues.
Soft Heart, Soft Head?
Yesterday, I came across a short Atlantic essay on the plight of children in Accra’s Abogbloshie slum entitled “The Hardware Scavengers of Ghana.” One particular sentence stood out for succinctly crystallizing the problem, and for its near-perfect internal inconsistency: “These kids are shortening their lives, but they don’t have any other options.”
You see, if they have no other options, the toxic job of electronics recycling—burning insulation off copper wires, applying degreasing solvents with bare hands, and so on—is extending their lives, not shortening them. According to the underlying article and interview on Mongabay.com, many of the recyclers come from Northern Ghana to escape poverty, maltreatment, “food insecurity,” and sectarian strife. The choice is not between recycling and school. It is between encountering carcinogens and neurotoxins or encountering violence, starvation, and death.
The Atlantic and Mongabay.com articles focus on the environmental and biological consequences of e-waste, and the responses they broach do the same. The Ghanian government might limit import of used electronics, but this would shrink the nation’s access to valued and productive communications equipment. Had it the capacity, the government might try to prevent dumping of e-waste where these recyclers can access it.
Solving the problem of e-waste might be a comfort to readers of the Atlantic concerned with their own environment and susceptibility to cancer. But if the statement about poor Ghanians’ options is true, such “solutions” would consign children and young men to death of starvation, violence, and war. That’s not the outcome I would prefer, even if it’s hidden from me.
A couple of lessons emerge from this compact tale. One is: never, ever invite me to your cocktail party. I will go about picking the scab off group consensus on faraway economic and social problems. And I will say, “See? That redness and pus? You haven’t fixed this.”
More importantly, the solutions that extend the lives of electronic waste recyclers may have nothing to do with controlling “e-waste.” These articles frame the problem as we would in the green, wealthy west. Economic development of all kinds in Ghana may give these youth better options than e-waste recycling, according them sustenance and safety, and perhaps eventually access to education.
I don’t know what improvements in trade policy (ours or theirs), rule of law, taxation or regulation might bring the wealth to Ghana that sustains its people better. I wish Ghana the relative luxury of controlling toxic waste, moving people from slum to suburbs, and so on. But if softness in our hearts leads us to soft-headedly sweep Ghana’s poorest from bad health conditions into conditions of death by starvation and violence, I think that would compound the tragedy.
Europe’s Debt Problem in Microcosm
Rachel Donadio reports in the New York Times:
COMITINI, Italy — With only 960 residents and a handful of roads, this tiny hilltop village in the arid, sulfurous hills of southern Sicily does not appear to have major traffic problems. But that does not prevent it from having one full-time traffic officer — and eight auxiliaries.
The auxiliaries, who earn a respectable 800 euros a month, or $1,100, to work 20 hours a week, are among about 64 Comitini residents employed by the town, the product of an entrenched jobs-for-votes system pervasive in Italian politics at all levels.
She goes on to explain that much local spending comes from the national government, which is now in dire straits:
But what may be saving Comitini’s economy is precisely what is strangling Italy’s and other ailing economies throughout Europe. Public spending has driven up the public debt to 120 percent of gross domestic product, the highest percentage in the euro zone after Greece’s.
Ackermann and Dimon 1; Bernanke and Geithner 0
My last blog on bank capital requirements concluded that the push to implement Basel III, which mandates increases in bank capital-asset ratios, is a deadly cocktail to ingest in the middle of an economic slump.
Shortly after, the Chairman of Deutsche Bank Josef Ackermann weighed in during a Frankfurt speech with a blistering attack on raising capital-asset ratios in the middle of a slump. He was armed with heavy artillery – namely, “The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework,” a 123 page Institute of International Finance report that was hot off the press.
Today, the Financial Times reports that Jamie Dimon, Chief Executive of JPMorgan, has gone even further than Ackermann. Indeed, Dimon suggests that the new Basel III capital requirements are “anti-American” and that the U.S. should consider pulling out of the Bank for International Settlements in Basel, Switzerland.
Both Ackermann and Dimon are right. The cheerleaders for the imposition of higher bank capital requirements in the middle of a slump – like U.S. Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke – are wrong.
We can demonstrate the validity of this conclusion with ease. Higher capital-asset ratios are “deflationary.” If we hold the level of a bank’s capital constant, an increase in its capital-asset ratio requires that the level of its assets must fall. This, in turn, implies that the banking system’s liabilities – demand deposits – must contract. Since the money supply consists of demand deposits, among other things, the money supply must, therefore, contract.
Alternatively, if we hold assets constant, an increase in the capital-asset ratio requires an increase in capital. This destroys money. When an investor purchases newly-issued bank shares, for example, the investor exchanges funds from a bank deposit for the new shares. This reduces deposit liabilities in the banking system and wipes out money.
It’s no surprise that Sir John Hicks – a high priest of economic theory and 1972 Nobelist – thought there was nothing more important than a balance sheet.
If Geithner, Bernanke and other members of the official chattering classes insist on higher bank capital-asset ratios, the U.S. might, unfortunately, revisit 1937. It’s time to listen to Ackermann and Dimon.
Note to Charles Krauthammer: Economic Growth Averaged 2.9% (not 5%) under Ike’s Military-Industrial Complex
In an effort to defend spending $1.3 trillion on wars in Iraq and Afghanistan, the Washington Post’s hawkish columnist Charles Krauthammer writes, “During the golden Eisenhower 1950s of robust economic growth averaging 5 percent annually, defense spending was 11 percent of GDP and 60 percent of the federal budget.”
In reality, economic growth averaged only 2.9 percent a year while Eisenhower was president from 1953 to 1961. Krauthammer is erroneously crediting Ike with the ephemeral Korean War boom of 1950-51 when defense spending was much smaller (7.6 percent of GDP), but consumers emptied the shelves due to fears that rationing would return.
Real GDP growth averaged 5.2 percent from 1962 to 1968, as President Kennedy’s plan to cut marginal tax rates by 23 percent was implemented. We then switched to a mix of high tax rates and easy money, starting with surtaxes in mid-1968, and annual growth slowed to 2.6 percent from 1969 to 1982. From 1983 to 1989, after President Reagan gradually cut marginal tax rates another 23 percent by mid-1983, economic growth averaged 4.3 percent a year.
A strong economy can afford a strong military, but foreign military adventures are nevertheless an economic burden.
Are Tax Havens Moral or Immoral?
Being the world’s self-appointed defender of so-called tax havens has led to some rather bizarre episodes.
For instance, the bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.
On a more amusing note, my efforts to defend tax havens made me the beneficiary of grade inflation and I was listed as the 244th most important person in the world of global finance — even higher than George Soros and Paul Krugman.
But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policymakers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.
Sort of like convincing thieves that it’s a good idea for houses to have alarm systems.
And it means I’m also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.
Here’s a typical example. Paul Vallely has a column, entitled “There is no moral case for tax havens,” in the UK-based Independent.
To determine whether tax havens are immoral, let’s peruse Mr. Vallely’s column. It begins with an attack on Ugland House in the Cayman Islands.
There is a building in the Cayman Islands that is home to 12,000 corporations. It must be a very big building. Or a very big tax scam.
As I’ve already explained in a post about a certain senator from North Dakota, a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.
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