By J.D. Seagraves, on July 29th, 2008
If one accepts the basic free-market concepts of comparative advantage and division of labor, it naturally follows that free trade and liberal immigration—the hallmarks of globalization—are good things. Virtually no economists dissent from this premise, and yet so much of the American public remains hostile to globalization. Why is this the case?
Many people erroneously believe that immigrants steal American jobs, and free trade results in lower living standards. Not only are these beliefs contradictory to widely accepted economic theories, but they’re objectively false as well. Study after study shows that immigrants—even illegal ones—benefit the U.S. economy, and the same can be said of expanded international trade.
Many anti-globalists also complain that immigrants “take money out of the economy” by transferring U.S. dollars to Mexico and elsewhere. While this is undoubtedly true, taking money out of the domestic supply diminishes the inflationary effects of the Federal Reserve’s monetary expansion, thus keeping prices lower than they would be otherwise. Furthermore, international transfer promotes the global acceptance of the U.S. dollar which is another artificial bulwark against domestic price inflation. If total immigration were cut back to levels currently allotted for legal immigrants, not only would prices rise due to the higher wages demanded by Americans for doing unpleasant work, but the money these Americans were paid would remain in domestic circulation, causing even further price inflation. The logic of this is fairly straightforward, and yet there are still blue-collar nationalists calling for confiscatory taxes on international money transfers. It’s like they’re demanding to pay higher prices!
U.S. Debt Purchases
A similarly off-base argument is made against allowing foreign governments to purchase U.S. debt. When the federal government spends more than it takes in—as it always does—it has to issue debt instruments (bonds, bills and notes) to cover the shortfall. These instruments are sold on the open market, and about a quarter of them are purchased by America’s own central bank, the Federal Reserve. Americans then pay taxes to cover the interest paid to the Fed, which pays its expenses (including a 6% divided to its mysterious shareholders), and then dumps what’s left—the profit—back into the Treasury. This is really a shell game. What’s essentially happening is the federal government is printing money to fund about a quarter of its deficit. How do you imagine this affects the price of groceries and gasoline as denominated in dollars?
We are very lucky that China and other producer nations trade us real goods in exchange for paper debt obligations. After all, if China did not step to the plate, just think about what would happen:
1. With less demand for government bonds, prices would rise. This would mean the effective interest rates of the bonds would be higher, and since most private interest rates are based in large part on the yields of U.S. Treasury securities, this would result in higher interest rates across the board; slowing economic growth. Or…
2. The Federal Reserve would have to buy more than a quarter of the government’s bonds, thus expanding the supply of money and causing additional price inflation. After all, when the Fed buys a bond, it simply creates the money to purchase it out of thin air. This money then circulates throughout the economy causing the prices of all goods and services to rise.
China, by contrast, cannot print U.S. dollars, so any money it spends on U.S. bonds is money that already existed. China’s role in the U.S. economy is to keep prices down, both through the production of cheap exports and through the acceptance of U.S. debt obligation in return for those exports.
Putting Things in Perspective
The truth of the matter, however, is that the anti-globalists are on to something. The welfare state, which they blame immigrants for putting undue strain on, is unsustainable, as is the U.S.’s trade deficit. But the former is something we need to contend with irrespective of immigration, and the latter is a result of America’s widely accepted fiat money. After all, under the gold standard, long-term trade imbalances are impossible, since countries have to produce something of value in order to trade it—they can’t just fire up the printing presses to purchase foreign goods.
Immigrants and foreigners are often turned into scapegoats during times of economic uncertainty. Today, many Americans know something is not quite right, but they incorrectly blame others rather than looking in the mirror. It is our welfare state and monetary system—not immigrants or foreigners—that threaten our continued prosperity. We can close our borders to trade and labor if we want, but we shouldn’t expect a different outcome from when President Hoover did the same thing—right before the Great Depression.
By Evelyn Black, on July 29th, 2008
Not too long ago, I confess I was in a rather panicked state of mind about the economy. This was after Bear Stearns tanked but before IndyMac was seized by the FDIC. I thought that if the U.S. government could intervene in a big way and refinance homeowners who were facing foreclosure, then the free fall in housing values could be stopped and the economy could be stabilized.
Now that a housing rescue bill is about to be signed by the president, I’m not so sure.
The bill contains a variety of features, including incentives for first time home buyers and the now infamous Freddie and Fannie bailout. However, the part of the bill meant to help families facing foreclosure will only apply to a small portion of homeowners.
Certain requirements must be met in order for a borrower to be eligible for the program. First, the borrower must live in the home. Second, the mortgage has to be at least 31% of the borrower’s gross monthly income. Third, the borrower’s income must be verified even if the initial mortgage was a ’stated income’ mortgage that required no verification. Fourth, the mortgage company or bank that made the initial loan must agree to a refinance at no more that 90% of the home’s current value.
In other words, the bank holding the mortgage has to agree to take a loss or the whole deal is off.
We don’t really know if lenders will agree to this last requirement. A loss of 10% doesn’t sound that bad on the surface, but the terms are 90% of the home’s current value. In some parts of the U.S. where the housing bubble was especially out-of-control, home values have already dropped by as much as 30%, so if a buyer has a 100% “creative” sub-prime loan on a property like that, the lender will have to agree to a 40% loss. Thus far, lenders have not been anxious to rework loans or agree to short sales on homes facing foreclosure. It’s hard to know why they would be motivated to do so now.
Other terms are also problematic. If a borrower makes $32,000 a year, the mortgage payment on the soon-to-be-foreclosed property would have to be in excess of $826 a month in order for the borrower to qualify. That will cut out a lot of people in trouble on their loans. So will the income verification requirements. While it is certainly sound and sensible to require verification, chances are good that if the buyer couldn’t produce it for the original loan or couldn’t get a loan with proper income verification, that buyer won’t be able to get the refinance either.
Estimates on the total number of foreclosures expected within the coming year range from three to five million. Say the lower number is correct. That means the help this bill provides is a possibility for about 13% of the homeowners currently facing foreclosure. And of those 13%, only the ones who can get their original lender to accept a loss of anywhere from 10-40% will be successful.
That’s not very encouraging.
Before Bear Stearns failed, Benjamin Bernanke was asked about how to stabilize the housing market, and he made a suggestion that he said he knew would never be taken but he thought might work. His suggestion was that each original lenders rework the loans made during the housing bubble so that the loans were more in line with the property’s current actual value; that is, that each lender take a loss by reducing the principal on the loans. That would immediately make the loans good: the property value would match the loan against it. He knew however, that lending institutions would be loathe to do this.
Again and again we come back to this issue of lender responsibility. We all know that individual people can and do make terrible financial decisions. Faced with the prospect of rapidly inflating home values, lots of people jumped into loans that didn’t make sense on properties they really couldn’t afford, hoping it would all work out over the long haul as their homes grew more and more valuable.
Financial institutions however have a fiduciary responsibility to themselves and their customers to be smarter than that and to take the long view. We all know now that they did not do anything remotely close to that. In fact, not only were too many sub-prime “creative” loans made, they were then repackaged and sold as rock solid securities in ways that spread the contagion throughout the entire financial system.
Looking back, I think Bernanke had it right the first time: the correction should occur at the initial lending institution, and if it goes down as a result, so be it. That’s the market at work, right? Doing what it does best, killing off the weak and the poor decision makers. What we have now is the government stepping in to offer tepid help to a very few and attempting to back private bad debt with public bad debt.
The bailout portion of the bill is fodder for another post.
By even the most conservative reckoning, housing values still have a long way to fall before the market stabilizes. Many are putting that bottoming-out somewhere around 2010 or even beyond. In the worst case scenario, home values drop so precipitously that even “good” loans go upside down (that is, the borrowers suddenly owe more than the home is worth) and Fannie and Freddie have to actually start tapping Uncle Sam for cash to stay solvent.
If that happens, the terms of the rest of the bill won’t really matter anymore.
I think the bill can work if it isn’t used. That’s a weird place to be, and not a comfortable one.
By Jennifer Bunn, on July 29th, 2008
Medical tourism may be defined as seeking healthcare outside one’s own country. This is becoming more common as people search for affordable healthcare. In the U.S., patients travel to countries that perform the procedure they need for a fraction of the cost of the same procedure done domestically. In Canada, where healthcare is essentially free but where wait times may be unacceptably long, people are choosing to go to places that can perform the necessary procedure on the same day of arrival if desired. Some patients like to kill two birds with one stone and combine surgery with a holiday in an exotic locale.
What are the advantages for patients/consumers? As mentioned, costs may be considerably lower in other countries, allowing patients to combine a holiday with their procedure. Having surgery in another country can also cut down considerably on wait times for those patients who come from countries such as Canada, where wait times for elective surgery may be months. For example, wait time for a hip replacement may be longer than a year in Britain and Canada. In the U.S., restrictions on the patient’s choice of facility, surgeon, and the type of prosthetic used may be factors in patients choosing to receive medical care out-of-country. Additionally, many international hospitals have improved their facilities and standards of care to attract international patients. Many international hospitals have become JCI-accredited, which makes them even more attractive to foreign patients.
What are the disadvantages for patients/consumers? One disadvantage is that patients traveling to foreign countries for healthcare may actually expose themselves to infectious diseases to which their immune system has had no experience in dealing with (i.e. TB, malaria, hepatitis). Also, travel after some surgeries may not be recommended for some time and may be very uncomfortable. Post-operative care may not be to the same standard that some patients are used to, although many foreign hospitals are striving to remedy this.
Other considerations concern legal issues. Patients who are dissatisfied with their surgery results, or who have an adverse outcome, may have little recourse in other countries. Doctors in other countries may not have to adhere to the same insurance and malpractice standards as physicians in countries such as Canada and the U.S. Patients who suffer a poor outcome may have a difficult time finding a doctor in the U.S. who is willing to take on their care.
It seems the trend of medical tourism is here to stay. Patients who are considering receiving their care in a foreign country should thoroughly research the doctor and hospital where they will be receiving their care. They should also research insurance options for themselves before departure. Lastly, choosing a facility that has been JCI-accredited may provide some reassurance that the hospital they have chosen is maintaining basic standards of care.
Reference:
Health News Today, July 10, 2008. Washington Post, Wall Street Journal Examine Issue of Medical Tourism. http://www.medicalnewstoday.com/articles/114520.php.
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