Apologies to my economist friends

As seen on Metafilter:

An engineer, a chemist, and an economist are shipwrecked and stranded on a desert island. Luckily, several cases of catering-size cans of food have washed up on shore alongside them. Unluckily, they have no can opener. They decide to think on it for twenty-four hours, then present their solutions to the dilemma.

The engineer goes first and says “I’ve calculated the strength of the cans based on a rudimentary finite-element stress analysis, and I think if we drop a large rock onto them from 6 feet, they’ll burst open”.

The chemist goes next and says “I’ve estimated the rate at which seawater could rust through the tinplate, and I think a couple more days in the brine will do it – the cans will just fall apart”.

The economist goes last, and, looking pleased with himself, begins “Suppose we had a can opener …”

Meet the new boss

To summarize: the members of Obama’s Transition Economic Advisory Board are too old, too uninspiring and too much part of the problem to deliver the change America needs and to keep alive the hope that Obama may have inspired through his election. A wasted opportunity.

(From FT.com | Willem Buiter’s Maverecon.) That sucks, but I can’t say I’m surprised. I’m prepared for more of the same in other political arenas, albeit with a flashier presentation than we’re used to. Buiter does overstep a bit in dismissing all lawyers outright, but in general he’s right that there aren’t enough serious economists on the team – especially given the significance of today’s crisis. And the number of protectionists on the board seems at odds with a need for a Bretton Woods III, as John B. Judis puts it. (I highly recommend this last article; it puts aspects of global economics of the last century into sharp perspective.)

Belaboring the bailout

Because I love nothing more than to belabor, I bring you this MeFi thread, in which there are two excellent This American Life episodes discussing the financial crisis. One of the salient points made by Adam Davidson:

“One option is I come and I give you a thousand bucks, and I take all the crap out of your basement, and you get to keep the thousand bucks – that’s the Paulson plan. The other option is I come and I give you a thousand bucks, and I get to move into your house, I become a co-owner of the house, I might get to kick you out of the house and take all of your stuff.”

The latter option he describes is a stock injection plan, a plan that would have a far more beneficial effect on the economy, if only for its punitive value. For the banks (and their influential lobbyists), it’s pretty simple: a stock injection plan was never an option. However, apparently a clause was eventually included in the bill that was passed that allows a stock injection option at the Treasury Secretary’s discretion. This is excellent news, considering that our government’s money is actually our money, and I’d like for it not to evaporate.

If you’d like a really accessible summary of the situation, see The Financial Crisis, As Explained to My Fourteen-Year-Old Sister (also found via MeFi).

Stiglitz on the bail-out

Booyah.

Americans have lost faith not only in the administration, but in its economic philosophy: a new corporate welfarism masquerading behind free-market ideology; another version of trickle-down economics, where the hundreds of billions to Wall Street that caused the problem were supposed to somehow trickle down to help ordinary Americans. Trickle-down hasn’t been working well in America over the past eight years.

The very assumption that the rescue plan has to help is suspect. After all, the IMF and US treasury bail-outs for Wall Street 10 years ago in Korea, Thailand, Indonesia, Brazil, Russia and Argentina didn’t work for those countries, although it did enable Wall Street to get back most of its money. The taxpayers in these other poor countries picked up the tab for the financial markets’ mistakes. This time, it is American taxpayers who are being asked to pick up the tab. And that’s the difference. For all the rhetoric about democracy and good governance, the citizens in those countries didn’t really get a chance to vote on the bail-outs. Had they, most would have suffered the same fortune as Paulson’s.

Read the rest, he actually is quite optimistic about the future. See more Stiglitz at the Guardian.

Chomsky on economics

I’m going to unwisely quote Chomsky out of context here, in the hopes that it will whet your appetite for the whole article:

The designers of the international economy sternly demand that the poor accept market discipline, but they ensure that they themselves are protected from its ravages, a useful arrangement that goes back to the origins of modern industrial capitalism, and played a large role in dividing the world into rich and poor societies, the first and third worlds.

This wonderful anti-market system designed by self-proclaimed market enthusiasts is now being implemented in the United States, to deal with the very ominous crisis of financial markets. In general, markets have well-known inefficiencies. One is that transactions do not take into account the effect on others who are not party to the transaction. These so-called “externalities” can be huge. That is particularly so in the case of financial institutions. Their task is to take risks, and if well-managed, to ensure that potential losses to themselves will be covered. To themselves. Under capitalist rules, it is not their business to consider the cost to others if their practices lead to financial crisis, as they regularly do. In economists’ terms, risk is underpriced, because systemic risk is not priced into decisions. That leads to repeated crisis, naturally. At that point, we turn to the IMF solution. The costs are transferred to the public, which had nothing to do with the risky choices but is now compelled to pay the costs – in the US, perhaps mounting to about $1 trillion right now.   And of course the public has no voice in determining these outcomes, any more than poor peasants have a voice in being subjected to cruel structural adjustment programs.

A basic principle of modern state capitalism is that cost and risk are socialized, while profit is privatized. That principle extends far beyond financial institutions. Much the same is true for the entire advanced economy, which relies extensively on the dynamic state sector for innovation, for basic research and development, for procurement when purchasers are unavailable, for direct bail-outs, and in numerous other ways. These mechanisms are the domestic counterpart of imperial and neocolonial hegemony, formalized in World Trade Organization rules and the misleadingly named “free trade agreements.”

(Emphasis mine.) Think about that highlighted phrase: essentially our system of credit burdens all of us with the risk, and bestows upon us none of the reward. And as for companies being too big to fail, I think Senator Sanders is right when he says, “If a company is too big to fail, it is too big to exist.”

The Chomsky article as a whole is actually much more broad in its scope than the financial crisis and bail-out; but then, Wall Street’s relationship to government is much broader in scope than just money. It’s very thought-provoking stuff, especially if like me, you rarely take South America’s role into account. History is being written on this mess right now, and it’s bigger than just bad debt causing companies to fold. We need a major philosophical paradigm shift in the corporate financial model if we want something that is sustainable and shields the average person from harm.

Stagflation!

For some reason, whenever the economy has come up in the last couple of years, my typical response has been to enthusiastically shout “stagflation!” Like economist Jeffrey Sachs, I’ve been seeing a few similarities:

The similarities with the first half of the 1970s are eerie. Then as now, the world economy was growing rapidly, around 5% per year, in the lead-up to surging commodities prices. Then as now, the United States was engaged in a costly, unpopular, and unsuccessful war (Vietnam), financed by large budget deficits and foreign borrowing. The Middle East, as now, was racked by turmoil and war, notably the 1973 Arab-Israeli war. The dollar was in free fall, pushed off its strong-currency pedestal by overly expansionary U.S. monetary policy. And then as now, the surge in commodity prices was dramatic. Oil markets turned extremely tight in the early 1970s, not mainly because of the Arab oil boycott following the 1973 war, but because mounting global demand hit a limited supply. Oil prices quadrupled. Food prices also soared, fueled by strong world demand, surging fertilizer prices, and massive climate shocks, especially a powerful El Niño in 1972.

He also draws another connection:

Then as now, Dick Cheney was close to the helm. Whats more, the erroneous lessons he took away from the 1970s contribute to the problems that haunt us today. Cheney was Gerald Fords chief of staff in 1976, when soaring oil prices helped doom Fords reelection campaign. Cheney became obsessed with the fight to control the flow of Middle Eastern oil. That obsession, which by many accounts contributed to Cheneys urge to launch the Iraq war, has made the United States much more vulnerable in terms of energy, not only by tying the United States down in a disastrous military effort but also by diverting attention from a more coherent energy strategy.

It’s an interesting piece, and he does offer a suggestion or two for how we can avoid the mistakes of our last stagflation recovery. If you’re going to be influencing monetary policy for a large governing body, I highly recommend you read it. If you’re Ben Bernanke, hopefully you’re taking all of this in.

Zakaria’s ‘The Post-American World’

I meant to post this thought-provoking article yesterday, but just remembered it now. It’s an interesting and insightful look into how America fits into the world – and how that has changed a lot over the last few years. While Americans still consider much of the rest of the world to be “anti-American,” in reality, they’re “post-American” – they’re just, like, totally over us.

Excerpt: Zakaria’s ‘The Post-American World’ | Newsweek International | Newsweek.com

Look around. The world’s tallest building is in Taipei, and will soon be in Dubai. Its largest publicly traded company is in Beijing. Its biggest refinery is being constructed in India. Its largest passenger airplane is built in Europe. The largest investment fund on the planet is in Abu Dhabi; the biggest movie industry is Bollywood, not Hollywood. Once quintessentially American icons have been usurped by the natives. The largest Ferris wheel is in Singapore. The largest casino is in Macao, which overtook Las Vegas in gambling revenues last year. America no longer dominates even its favorite sport, shopping. The Mall of America in Minnesota once boasted that it was the largest shopping mall in the world. Today it wouldn’t make the top ten. In the most recent rankings, only two of the world’s ten richest people are American. These lists are arbitrary and a bit silly, but consider that only ten years ago, the United States would have serenely topped almost every one of these categories.

The article’s not all doom and gloom; he points out the positive aspects of this global shift:

The post-American world is naturally an unsettling prospect for Americans, but it should not be. This will not be a world defined by the decline of America but rather the rise of everyone else. It is the result of a series of positive trends that have been progressing over the last 20 years, trends that have created an international climate of unprecedented peace and prosperity.

I know. That’s not the world that people perceive. We are told that we live in dark, dangerous times. Terrorism, rogue states, nuclear proliferation, financial panics, recession, outsourcing, and illegal immigrants all loom large in the national discourse. Al Qaeda, Iran, North Korea, China, Russia are all threats in some way or another. But just how violent is today’s world, really?

Obama’s Speech on the Economy

It’s like a brief history of US economics, a nice refresher course for those of us who have forgotten a lot since college. I do like that he opened with a quote from Alexander Hamilton and speaks in-depth with apparent subject knowledge, rather than superficially with sound bites (though he does throw in a few one-liners for good measure – he’s a politician, not a professor, after all). I feel I may be warming up to this Obama fellow; still, rhetoric is one thing, and policy decisions are another.

The great task before our founders was putting into practice the ideal that government could simultaneously serve liberty and advance the common good. For Alexander Hamilton, the young secretary of the treasury, that task was bound to the vigor of the American economy. Hamilton had a strong belief in the power of the market, but he balanced that belief with a conviction that human enterprise, and I quote, “may be beneficially stimulated by prudent aids and encouragements on the part of the government.” Government, he believed, had an important role to play in advancing our common prosperity. So he nationalized the state Revolutionary War debts, weaving together the economies of the states and creating an American system of credit and capital markets.

You can watch the video of the speech here, or read the transcript here.