New School Politics

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Senator Obama has offered little, if anything, remnant of an independent streak in Congress. He has practically been toeing the Democratic Party line for the entire three weeks (or three years–I can’t remember) he’s represented Illinois. Despite cries to the contrary, it shouldn’t be much of a surprise why the National Journal ranked Senator Obama the most liberal Senator in 2007, and one of the most liberal in the body over his short career. Nor does he have any notable legislative accomplishments (to the extent of my knowledge and research), but that shouldn’t come as much of a surprise.

Now, there is nothing necessarily wrong with Obama being a partisan and/or left-winger if that is what he truly believes. But, if that is the case, the problem is that he is trying to mask it. He has run on the idea that he will transcend the politics of the past; that he is the reformer–the breath of fresh air who is immune to partisanship. At the same time, as a Senator he has been the Democratic Party Platform manifest, even before he started running. So while he is (incorrectly) claiming that McCain is running for Bush’s third term, he, himself, is running for little more than Harry Reid and Nancy Pelosi’s ascension to the White House.

To be sure, John McCain still shares many of George Bush’s policy stances (and has strangely–and by strangely, I mean politically conveniently–shared an increasing number of those positions at least since 2001/02), but he has also demonstrated a long-standing streak of thinking for himself. Not only has McCain dissented from his party in his career (perhaps) as many times as Barack Obama has casted votes in the Senate, but he has shown a far greater tendency to be an independently minded politician than the Jr. Senator from IL.

In light of the facts, it is clear that the rolls are the reverse of what Sen. Obama would have many think. For better or for worse, John McCain has been his own man for much of his career in DC, while, in his short time in Congress, Barack Obama has been playing something along the lines of “follow the leader” with Democratic Party Leadership.

In Economic news, a notable panel of economists, including five Nobel Laureates, were put to task discussing various, global economic policy proposals. They assessed 40 different ideas and prioritized them, in utilitarian fasion, in order of how much good they would do for the welfare of the world’s population. The top of the list included relatively cheap nutrition and immunization for third world youth (tens of millions), which would yield hundreds of millions to billions of productivity in the future.

The top also included global expansion of free trade coming out of the Doha trade talks, which, according to studies by present economists could produce as much as $113 trillion in new wealth in the 21st century at a maximum opportunity cost of $420 billion from displaced industries.

What was perhaps most notable however was that Global Warming mitigation (as well as research and development to that end) came in at 39 and 40–the very bottom of the list. The explanation was that the costs of proposed policies to economic production and growing dynamism of the world economy will be very great, while the reasons and benefits for such overhauls have been speculative, and in some cases minimal.

Also of note: an opinion piece in today’s WSJ reminds us of the daily, yet revolutionary change that the market has offered America–and the world–over the course of history as well as in modern times. This sort of change, which coincides with unprecedented growth in standard of living, in the US and around the world, is produced by innovation and free trade both within and between nations–another sobering fact to those partial to a different type of change.

Popularity: 35% [?]

The notable economist Greg Mankiw had a very sensible article in the Economic View column of the New York Times regarding Nafta, trade, and this campaign. Its main contentions include:

1. That economists are far more fond of free trade than the general public. For instance:

A 2006 poll of Ph.D. members of the American Economic Association found that 87.5 percent agreed that “the U.S. should eliminate remaining tariffs and other barriers to trade.”

On the other hand, a minority of the general public (around one in four according to many polls including one mentioned in the article) think that free trade is beneficial to the economy.

2. John McCain has been a constant champion of free trade throughout his career and is the only of the three candidates who will stand strong for the concept as president.

3. The issue of trade has become mired by populism recently and divorced from economics which could lead us towards more protectionist policies.

Its a good article which reaffirms one of the themes that I have been focusing on especially during this campaign: how populism and economic illiteracy is driving protectionist rhetoric and proposals from politicians not entirely limited to the left (will Mike Huckabee please stand up).

Popularity: 51% [?]

One of the reasons Steven Landsburg, a professor of economics from the University of Rochester, is one of my favorite economists around today is because he writes articles like the one he wrote this week called, The Case for Foreclosures. Here is part of his explanation:

I predict with great confidence that when I say that foreclosures create new homeowners, a sizable chunk of my readers will scoff that “the people who can afford them would have been able to afford nice homes anyway.” I could use economics to explain why those readers are mistaken (a glut of homes on the market leads to falling prices, etc.), but that’s unnecessarily complicated. All it takes is the simple observation that there cannot be more homeowners than there are homes, and if one home becomes vacant, then there can be one new homeowner. Call it the law of conservation of homes.

Its nothing more than a logical consequence of the price system that as people cannot pay their mortgages and demand goes down, prices will also go down to compensate and reestablish equilibrium in the housing market. The alternative, such as a freeze in foreclosures or interest rates as proposed by Hilary Clinton, could not change the fact that many residents cannot afford to pay their mortgages under the presently readjusted, the peril of which would be that more lenders would go bankrupt and less lenders would be able to initiate new mortgages for buyers looking to purchase homes on the market at reduced market prices.

Indeed it is contrarian to encourage foreclosures, but that’s not exactly what Landsburg is doing; Landsburg is, in reality, encouraging market forces and the price system as a means of achieving the optimal outcome in a below-average situation and warning against the unintended and unseen consequences of manipulating those natural forces. Indeed, much of my blogging on economics aspires to have the same effect whereby it defeats anti-market conventional wisdom by enumerating all the possibly hidden or misunderstood effects of anti-market policies.

Hahvahd professor Greg Mankiw also pointed out that it should come as no surprise that such an economist would be making a case for something as indefensible and callous as home foreclosure, considering he has also praised Ebenezer Scrooge. Of course this too sounds unfathomable considering the way the very name has become a household admonishment on any individual accused of selfishness.

In this whole world, there is nobody more generous than the miser—the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

In many ways his approbation of the miser is not only a approbation of the classical principles of savings and thrift, but also a rebuke of consumptionist-Keynsian thought. Either way, it is particularly brilliant in the tradition of “pop economics,” which dates back to Fredric Bastiat and Henry Hazlitt, for looking at “that which is seen, and that which is unseen.”

Today, popular economics has reached its apex, namely in the fame of the book Freakonomics. But what most don’t recall is that in modern times, before there was Steven Levitt–or anyone else for that matter–there was Steven Landsburg who wrote The Armchair Economist written in the late ’80s with a greater emphasis on logic, incentives, and larger economic trends, compared with Levitt’s nuanced microeconomic empiricism.

Finally, I found this video of Professor Landsburg on John Gibson’s Fox News show from a couple of years ago. He was brought on to talk about trade and a rising protectionist inclination among the American people, and in the face of those sentiments he makes the case that protectionism is xenophobic, irrational, and not dissimilar to racism. The exchange is heated but Landsburg sufficiently owns Gibson on his own show. And with trade and NAFTA emerging as a leading issue in this campaign cycle, the video is particularly relevant.

You can watch it by clicking the link directly below:

Lire le reste de cet article »

Popularity: 50% [?]

Now that Obama has decided to shed a fraction of his flowery rhetoric in favor of more specific ideas, especially on economic issues, he is beginning to paint a better self-portrait of himself as a policy man. But when listening to him talk substance, I cannot help but raise an eyebrow relatively often. Here was a absurd comment from his Chesapeake victory speech:

It’s a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart.

This contention is just completely wrong and makes almost no economic sense. It is illogical and there is no data to support it. Not only is it sensationalism and Wal-Mart bashing, but seems that there is no reason to say it unless it were aimed at scaring people into supporting Obama and his economic plan. There is really no other explanation to why he said it other than it is pandering and, ironically, fear-mongering from the man who pontificates about hope all the time.

If he was economically literate he would take note of the fact that over half of those working minimum wage are under the age of 25 (and more than a quarter in their teens), while almost nine of every ten minimum wage workers do not have any dependents (BLS). Moreover, he would also recognize that freer trade allows for more capital mobility and for businesses and people to remain more productive, thus delivering more, cheaper, and better products to consumers. Bill Clinton was honest enough to embrace free trade even when it went against his party’s grain. Now even his wife isn’t brave enough to stand up against her party. Worse yet, Republicans like Huckabee, and to an extent Romney when he was still in the race, underhandedly went after free trade, using the unoriginal line, “I believe in free trade, but it has to be ‘fair’ trade.” Talk about a lepor’s bell. Among candidates on trade, however, McCain has demonstrated that he is most consistently in favor, even telling Iowans that he is in favor of eliminating all farm an ethanol subsidies.

One of America’s most prominent economists, Greg Mankiw, writes:

An open question in my mind is whether Barack Obama is going to align himself with the economic centrists in the Democratic party or with the populists on the far left of the party. A key litmus test is trade, and so far it does not look good.

And, for that matter, it doesn’t look so good for the other Democrat in the race as well.

From the Washington Post, here are the candidates records on earmarking which should serve as an indicator to how much fiscal restraint and responsibility they will practice on the whole:

Sen. Hillary Rodham Clinton helped secure more than $340 million worth of home-state projects in last year’s spending bills, placing her among the top 10 Senate recipients of what are commonly known as earmarks, according to a new study by a nonpartisan budget watchdog group.

Working with her New York colleagues in nearly every case, Clinton supported almost four times as much spending on earmarked projects as her rival for the Democratic presidential nomination, Sen. Barack Obama (Ill.), whose $91 million total placed him in the bottom quarter of senators who seek earmarks, the study showed.

Sen. John McCain (Ariz.), the likely GOP presidential nominee, was one of five senators to reject earmarks entirely, part of his long-standing view that such measures prompt needless spending.

On the issue of disparity in pay between men and women, the candidates positions serve as an indicator of their overall attitude towards free exchange and market forces, as well as their willingness to use government to stifle those forces. From the WSJ:

There are actually two versions of comparable worth legislation, the Fair Pay Act and the Paycheck Fairness Act. The former is co-sponsored by Sen. Barack Obama; the principal sponsor of the latter is Sen. Hillary Clinton (Mr. Obama is a co-sponsor). Both would push companies to set wages based not on supply and demand — that is the free market — but on some notion of social utility. The goal is to ensure that jobs performed mostly by men (say, truck drivers) are not paid more than those performed mostly by women (paralegals, perhaps).

President Ronald Reagan correctly called comparable worth “a cockamamie idea.” A great lesson of economic theory, not to mention historical experience, is that government-set wages and prices not only curtail freedom, but lead to shortages, surpluses and market disruptions.

The writer is right on the money with his conclusion, but I will add that the arrogance of the candidates who think that the millions upon millions of individual economic actors determining supply and demand, while working in their own self-interest, should be manipulated on a whim by government edicts is becoming increasingly ominous. While I have traditionally said that Obama would be slightly more rational on the economy than Clinton, it is clear that their platforms are very, very similar (Clinton even accused Obama of copying her ideas) on these issues and that neither are very desirable Presidents at least in terms of how they would handle the economy. And even though McCain has his fair share of economic setbacks, not to mention the fact that he claims to not know much about the economy, he appears to be a more consistent backer of limited government and the free market than either Democrat would wish to be accused of in their wildest nightmares.

Popularity: 45% [?]

From Walter Williams:

Professor Don Boudreaux, chairman of George Mason University’s Economics Department, wrote “If Trade Surpluses Are So Great, the 1930s Should Have Been a Booming Decade.” According to data he found at the National Bureau of Economic Research’s “Macrohistory Database“, it turns out that the U.S. ran a trade surplus in nine of the 10 years of the Great Depression, with 1936 being the lone exception.

During those 10 years, we had a significant trade surplus, with exports totaling $26.05 billion and imports totaling only $21.13 billion. So what do trade surpluses during a depression and trade deficits during an economic boom prove, considering we’ve had trade deficits for most of our history? Professor Boudreaux says they prove absolutely nothing. Economies are far too complex to draw simplistic causal connections between trade deficits and surpluses and economic welfare and growth.

I think Boudreaux, who writes at Cafe Hayek, is right on the money. It is no surprise that the depression years were the years in which America experienced its most “favorable” balance of trade. After all, if you look at the US trade deficit compared to GDP over time the US trade deficit has tended to grow in times of prosperity (mid/late ’80s, mid/late ’90s, early/mid ’00s) and shrink in times of slowdown (early ’70s, early ’80s, early ’90s).

Nevertheless it’s all too often that we hear politicians demogauging about trade imbalances, especially that with China, whose devalued currency is responsible for delivering even cheaper goods to the market. Policy-wise reducing the trade deficit would require some sort of trade barriers (i.e. tariffs), devaluing our currency (which we are indirectly doing by making money easier), or compelling other nations (like China) to stop devaluing their currencies. Either way, the policy means higher prices and less purchasing power for the American consumer. Moreover, it does not make the US any more productive, and as a matter of fact it makes us less productive by discouraging foreign investment.

But amidst the Fed’s devaluing of our currency and our economic downturn, I would expect the anti-trade polls to be happy because our trade gap has been narrowing in the meantime (at least in the past year since our financial woes began).

Moreover, recently released numbers show that the trade deficit closed in December and in 2007 overall as bad economic news continues to pour in.

Ultimately, as Boudreaux said, the trade deficit doesn’t really matter because as Adam Smith first articulated specialization and comparative advantage and other intricacies govern trade balance. However, based on theory and data, I must take my conclusion one step further to say that a trade deficit is usually indicative of economic strength and growth, rather than an economic problem. I say this because in any economic system you can only consume as much as you produce (Say’s Law) and concurrently a nation can only import if it has the purchasing power to compensate. The more a nation produces the more it can buy, hence the more it imports. Moreover, the greater share of global product it produces, the greater share of global goods and services it will import. This is why American slowdowns have resulted in less imports and a tighter trade gap. And most importantly, upon realizing this, it is imperative that our country does not submit to economic sensationalism, and does not spite itself by instituting protectionist policies which only hamstring American living standards.

Popularity: 22% [?]

George Soros is convinced that the world is about to enter a serious recession.  Unfortunately, it seems as if most of the financial world is similarly convinced. The latest trend in stock markets seems to be, “Sell!  Sell!” as traders don’t know what’s going to happen in trading today in the United States, which just opened at 10AM.  The Federal Reserve, in an attempt to head off the recession, cut interest rates last night in a rare between-meetings announcement.   News from the Asian markets isn’t good, with Forbes saying that the environment is rather negative.  One Japanese trader seems to have summed up the mood.

“It’s like a funeral in here,” said Ken Masuda, senior equities dealer at Shinko Securities in Tokyo.  ”No one knows what’s going to happen tonight in New York.  It’s like we’ve gone blind, you don’t know what’s coming.

“Until we see New York, all we can do is sell.” 

We can hope that the United States can stave off recession with an economic stimulus package and without pushing the stock market lower.  Unfortunately, the stimulus package seems far off, as Democrats and Republicans cannot agree on how to reinvigorate the economy.  Sen. Charles Schumer [D-NY] predicts that the stimulus package will be passed some time in March.  If the market drops today as it has been predicted, this may be too late.  Europe, meanwhile, is convinced they won’t be affected by the US’ possible recession.  We’ll be covering the financial situation all day, and we hope that our next post comes with good news instead of bad.  In the meantime, as Eftychis suggested, stick to Forbes, The Financial Times, The Wall Street Journal, Bloomberg News, and financial aggregators like Google Finance & Yahoo Financefor up to the minute reports on the stock market’s position.  As of this writing, the NASDAQ was down approximately 117.68 points, or 5.03%, while the DJIA has seen a drop of 59.91 points [or .49%].

Popularity: 94% [?]

Along the same lines of voter irrationality, especially on economics, here is a link to a compilation of polls on issues of international trade. Despite the fact that economic theory such as the logic of comparative advantage demonstrates how global trade is omni-beneficial–that the relative majority of economists agree that freer international trade is healthy–and that all the evidence points to more international trade corresponding with higher living standards, most people in America still believe it is a detriment. The most recent of the polls give you an indication of public opinion: 

NBC News/Wall Street Journal (12/14-17/2007)  

Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheep labor? 

Good: 28%

Bad: 58%

Equal 11%

Unsure: 3%   

Popularity: 33% [?]

Arnold Kling of EconLog writes:

From my point of view, the first-best world is one with (i) open borders and (ii) limited government. One argument against (i) is that it would eventually undermine (ii)…

However, I can think of a number of reasons that the correlation between (i) and (ii) could be positive rather than negative. For tyrants, open borders would offer a powerful check on power. Robert Mugabe would have a harder time exploiting his people if they all just got up and left. Our own government would be smaller if we said that its job did not include interfering with peaceful transactions between American employers and non-American-born employees…

Kling offers a stance on immigration that both parties in America are currently sidestepping. On one hand the GOP would never think of providing (illegal) immigrants with entitlements, but they also want to retard immigration and criminalize all undocumented immigrants. On the other hand the Democrats want liberalized immigration but they are also more than willing to give social services to all kinds of immigrants at the same time. At the same time neither party offers a true free market solution.

The free market solution to immigration should encompass (a) liberalized immigration restrictions and (b) no welfare benefits for undocumented immigrants. I have no problem with “illegals”. Their added labor puts more muscle power as well as mind power into the system, while–as long as (b) holds true, and they do not receive vast amounts of social welfare–they drain nothing from it.

Open borders are a pure sign of freedom, so it is troubling that there is currently such ill-will in America towards it. As Kling implies, it is indicative of a dictator to close borders to keep people in (i.e. Soviet Union), but it is also authoritarian to close borders to keep them out. In a free country people should be able to move freely not just within its borders but across them too.

Some may warn, that if we allow too many of a certain demographic (in our case Hispanics) to come, they could eventually sway the policies of our country in the direction of their native governments (i.e. bigger). There are two ways of preventing that–and it certainly must be prevented. (A) Don’t give many of them citizenship. Just because they should be able to come here freely doesn’t mean that we should sacrifice to accommodate them. They can stay here but they need not be citizens; this way they can neither vote nor collect public welfare benefits. (B) There should be provisions written into the law to prevent the government from becoming to big. Perhaps the founders would have been upset with how far their successors have stretched the elastic clause, but the fact of the matter is that there could be greater specifications limiting the size of our government. (For instance: “The Federal Budget may not grow above 15% of GDP…” etc.)

Additionally, open borders provide capital mobility, which is of great benefit to the market. If we can have mobility of inanimate capital (in the form of imports, exports, outsourcing, insourcing, etc.), we should have mobile human capital. Free trade and free markets should include freer immigration, shouldn’t it? As I see it, it would only make our economy stronger.

Popularity: 65% [?]

Often we hear populist politicians complaining about both the trade deficit as well as the outsourcing of jobs. They say that both are problems that face the American economy, but can that be true? The trade deficit signifies an inflow of capital–from foreign markets to the domestic market–while (a net rate of) outsourcing signifies an outflow of human capital.  If there was an inflow of capital in general, wouldn’t there most likely be an inflow of human capital as well? (Overall the insourcing/outsourcing of jobs is very hard to assess and should certainly not be trivialized politically. Here and here data suggests that jobs are being insourced to the US at a higher rate than are outsourced.)

Subsequently, these politicians offer various policy measures to curtail outsourcing as well as narrow the trade deficit. But wouldn’t such policies contradict each other as one pulls for an inflow of resources while the other pushes for a net outflow? And even if these policies achieved there individual and exclusive ends, would they not cause a glut of human capital in the American economy?

I think the answers are pretty clear and that for the sake of balance and equilibrium it is best when market tendencies are determined by the market, not by sensationalist pols.

Popularity: 30% [?]

In an editorial today, the Times criticized Bush administration policies for worsening the state of American savings as well as the dollar:

Over the last several years, America’s imbalances in trade and other global transactions have worsened dramatically, requiring the United States to borrow billions of dollars a day from abroad just to balance its books.

The only lasting way to fix the imbalances — and reduce that borrowing — is to increase America’s savings. But the administration has steadfastly rejected that responsible approach since it would require rolling back excessive tax cuts and engaging in government-led health care reform to rein in looming crushing costs — both, anathema to President Bush. It would also require revamping the nation’s tax incentives so that they create new savings by typical families, instead of new shelters for the existing wealth of affluent families — another nonstarter for this White House.

Stymied by what it won’t do, the administration has gone for a quicker fix — letting the dollar slide. A weaker dollar helps to ease the nation’s imbalances by making American exports more affordable, thus narrowing the trade deficit….

In the absence of leadership from the White House, the presidential candidates could elevate the issue, outlining their own plans to boost savings. But until the administration — either this one or the next — is willing to acknowledge the source of the economy’s imbalances, and starts addressing them seriously, the dollar is likely to remain weak.

Greg Mankiw, the Harvard economist, offers an intelligent critique on his blog.

First of all, I agree with the Times that policies need to be adjusted to account for America’s dismal savings rate. Such reforms should include tax reforms that shift taxation to consumption rather than income, so that greater savings is encouraged, as well as spending cuts–especially entitlements which account for a large portion of the budget, not including the fact that their costs will grow further out of hand.

However, what the Times failed to acknowledge is that an increase in national savings will only make the dollar weaker by virtue of the fact that greater savings means lower interest rates which corresponds to lower exchange rates. Thusly, the inflationary worries associated with a week dollar–that the editorial was worried about–would persist.

But, greater savings putting downward pressure on interest and exchange rates is completely natural and nothing to worry about. While there are certainly imbalances that we need be worried about in our economy, they are not the ones that the Time mentions. Rather the concerning fact is that interest rates are so low and the dollar is weak at the same time that savings is also low. That is truly an imbalance and something to be seriously worried about.

Popularity: 28% [?]