By Ajay Shah, on November 3rd, 2011
For once, I am pleased at how India played it: India gave Pakistan MFN status way back, in 1996, without getting into the silliness of reciprocity. A hallmark of professional competence in international trade is the idea of unilateral liberalisation: Even if another country is silly enough to have barriers against us, we should not have trade barriers against them. Removing barriers against India’s globalisation is a favour to us, regardless of what it does to anyone else. India often gets into cul de sacs by obsessing on reciprocity – e.g. we won’t open up to imports of agricultural products because the Europeans won’t. We won’t allow foreign banks to operate in India because some other countries have barriers against the operations of Indian banks. And so on. But for once, in this case, our guys seem to have played it right (and way back in 1996, too!).
And now, we have a nice next step: Pakistan will give India MFN status. What might happen next? Here are some conjectures:
- At present, there is significant Indo-Pak trade; it merely gets routed through Dubai. Once Pakistan gives India MFN status, the entrepot trade that was going Bombay -> Dubai -> Karachi will go Bombay -> Karachi. This is bad news for Dubai and for individuals and firms which are invested in the future of Dubai as an entrepot centre. Trade data should show a fairly sharp decline in India’s exports to UAE and a fairly sharp rise in India’s exports to Pakistan.
- There will be a boom in shipping, communication and trade serving the direct Bombay -> Karachi route. Similarly, the ports of Gujarat will do a lot of business directly to Karachi.
- At first blush, little changes: the goods that used to go via Dubai would now go directly to Karachi. But a recurring theme in economics is the extent to which apparently small frictions loom large. The removal of fairly modest frictions matters a lot for business activity. So when the cost of shipping goes down by roughly 3x, even though the cost of shipping may be small in absolute terms, this would have a big impact on trade. Another dimension of cost is the cost of the middleman in Dubai. The establishment cost of this middleman in Dubai would be eliminated.
- Important dynamics will now set in amidst firms in Pakistan. Firms that compete with exports from India will suffer. Firms that consume imported inputs from India will thrive. Creative destruction will take place; resources will shift from one group of firms to another. Exporters will be better able to export to India, both because of access to cheaper labour and capital that’s freed up by firms that die owing to import competition, and because of improved competitiveness that comes from cheaper raw materials. Exports from Pakistan to India will go up significantly.
- Large Indian and Pakistani corporations will look much more seriously at the opportunities that lie just beyond the national border. Over time, human capacities and human networks will build up on both sides, supporting cross-border operations. This will take time to ripen, but when it does, the effects will be large. A huge fraction of global trade is intra-firm trade, so it’s very important to have large firms of both countries having operations in both countries, in order to get growth of trade.
- The biggest gains in India will be in Gujarat, given the myriad ports in Gujarat which are a short distance away from Pakistan. But in the future, if road and rail links open up, then there are big opportunities in Punjab also. Wouldn’t it be nice to have a NHAI style road running from Ahmedabad to Karachi, and from Amritsar to Lahore?
To the extent that we’re merely rerouting trade, bypassing Dubai, this will impose no new stress on ports and airports in Pakistan. But to the extent that new trade is created – as I expect it will (and as argued above) – then new work will be required in Pakistan on enhancing the capacity of ports and airports. I would personally be surprised if the effects are not large.
In the intuition of economists, there is a gravity model in the affairs of men. Proximity and low transactions costs are incredibly important. The natural opportunity for India to grow international integration on all dimensions (goods, services, people, ideas, capital) lies in our immediate neighbourhood. India’s connections into the region are shockingly below those seen for all other large countries. Doing better on connections with Pakistan would be a nice step forward.
Consider a product like cement, which is ordinarily considered a non-tradeable. Transportation of cement is so hard, there isn’t a unified national market in India. There are a series of regional markets. But even in this, modifications of transportation have mattered greatly. E.g. when Gujarat Ambuja came up with the innovation (back in the mid 1990s) of sending cement from Saurashtra to Bombay, by sea, this was a very big deal. By that same logic, cement from the coast of Saurashtra can go to Pakistan (or vice versa, depending on who produces at a lower price). We should not see trade in goods in isolation. All dimensions of globalisation are intimately connected to each other. To do more trade in goods and services, we need more movement of people. Ergo, the silly visa restrictions that both countries impose on each other need to be eased. Finance follows trade: So where trade in goods and services leads the way, bigger financial integration will inevitably follow with trade financing, cross-border banking, payments, purchases of information, operations of multinationals and FDI, INR/PKR currency risk management, and investment flows. More will need to be done on investment guarantees, export/import trade financing, etc.
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By Ajay Shah, on May 27th, 2011
The recruitment of the IMF MD has turned into quite a controversy. For an interesting set of views, see this page on the website of The Economist. In a remarkable development, the EDs of India, China, Russia, Brazil and South Africa came out with a clear
joint statement on the silliness that is afoot.
There are four perspectives on this question which are worth noting:
- There is an obvious gap between the power structure at the IMF, which reflects the way the structure of the world economy after the Second World War, as compared with the present reality. As an example, at present, the Netherlands has 2.08% while India has 2.35%. But the Indian GDP is now $1.6 trillion while Netherlands is at half that.
- The world would benefit from a competent and capable IMF. The best man (or woman) for the job will not be obtained by having any restrictions on nationality. As an example, in today’s world, a name that leaps out to me is Stan Fischer. But he’s not European, and hence was never even considered for the top job in the last decade. (As with Montek, he is now over age 65 and is hence not eligible for the job today). Given that a large fraction of the top economists of the world are not European, this rule yields a less capable IMF.
- I feel that a quota system where the IMF MD must now be from an emerging market is as bad as a quota system where the IMF MD is only recruited from a European country. The key is to get away from all these quota systems, to only recruit the best person for the job. The emphasis should be on technical capability. The person recruited should be a technical expert and not a politican. As an example, see how in the UK, they recruited an American into their Monetary Policy Committee.
- In the standard narrative, one hears the idea that in this crisis in Europe, the Europeans are gaining from their
control of the IMF. I feel this is absolutely wrong. In the Asian crisis, it was good for Asia that the IMF was not conflicted
by considerations of domestic Asian politics. Similarly, the IMF program in India in 1981 and 1991 was uncontaminated by domestic Indian political considerations. This helped produce a technically sound program, which helped jumpstart India’s growth. It is not accidental that we see structural breaks in India’s GDP growth around these two dates.
What Europe needs most is a tough IMF, which will be a stern taskmaster, which will force difficult political choices so as to heal the economy. Economic policy in Europe today needs to be cruel to be kind. Instead, by placing a string of career politicians from France into the IMF MD’s job, the valuable role which the IMF could have played in solving the European Crisis is being negated. This damages Europe. The wise thing for Europe today is to say: Give us a tough and competent taskmaster, and let him be
anything in the world but let him not be a European politican. The biggest loser from the present arrangement is Europe.
By Ajay Shah, on January 11th, 2010
I wrote a column in Financial Express on Friday: How leftist is India?. This draws on the data shown in this previous blog post. I just noticed a piece in The Economist which dwells on related themes which is well worth reading.
Many people wrote me email about this piece. An important criticism of this evidence is that individuals parse questions differently across countries. In India, it’s easy to construct questions such as: The government must setup more PSUs so as to give jobs to the people where it will seem that there is overwhelming support for a more socialist position. The main advantage of the Pew data is that they are doing it, across time, and across countries. More fine-grained measurement of political attitudes would surely be nice to have. But we don’t yet have such household survey databases in India. The CMIE Consumer Pyramids is good data – but on politics they ask really only one question, that of the most favoured political party.
By Rok Spruk, on October 5th, 2009
Gary Becker (link) and Richard Posner (link) opened a discussion on how unions influence policymaking decision. Recently, president Obama imposed punitive 35 percent tariff rate on imported Chinese tire (link) risking the coming trade war. Indeed, China may file a case against the U.S at the WTO, and the WTO may rule against the U.S for imposing illegal and discriminatory trade practices.
Many believe that president Obama enforced trade protection to win the support of the unions in health care reform. In fact, the bailout of GM and Chrysler was one of the major efforts to help unions, particularly the United Auto Workers, in paying the health-care and pension benefits that GM and Chrysler couldn’t actually afford to pay.
Recently, the Congress has been split up on Employee Free Choice Act which suggests giving mandate to unions representing employee in arbitrating union-management contracts. I believe the Congresional Budget Office will yield a meaningful research on the economic effects of the act.
The empirical evidence on union activity is, in fact, quite clear. In OECD comparison panel (link), there is a strong, negative and significant relationship between the density of union membership and labor market rigidity. Sweden, for example, hasn’t enforced a general level of minimum wages. Yet in 2007, over 7o percent of the working population was unionized. High union density further contributed to inflexible labor market structure which led to low employment growth, low productivity growth and exerted a strong upward pressure on real labor cost.
Yet, there is a distinctive character of trade unions within Europe. Traditionally, unions in Europe possessed a stronger influence on political decision in areas such as taxation, income redistribution and government size. However, there are significant disparities in union activity throughout Europe. In 1990s, Denmark enforced a series of reforms that deregulated labor market structure towards greater flexibility. Today, Denmark’s labor market is cited as the most competitive in the world (link). From 1990 to 2007, union density decreased from 75.3 percent to 69.1 percent. On the other side, labor market structures in Continental and Mediterranean Europe are known for inflexible features, regulation and rigidity. Meanwhile, Anglo-Saxon countries, Britain and Ireland, are known for flexible labor markets and few barriers impeding labor market performance. Dismissing and employee costs 10 weekly salaries in Ireland compared to 56 weekly salaries in Spain.
Although variation in trade union density over time explains a relatively large part of variation in productivity, union activity and influence in political decision-making could be the decisive factor in explaining cross-country variation in labor market outcome. That would requiring the design of principal indicator that could measure union influence on the quantitive basis. The influence of trade unions has, in my opinion, a strong common connection to cultural patterns and informal institutions.
For instance, countries with weak rule of law, persistent corruption, high tax burden and barriers to trade and investment, tend to have larger underground economies. Empirical estimates on the size of underground economies suggest that, in Europe (link), Mediterranean countries (Italy, Spain, Greece, Portugal) have the largest share of shadow economies. There is a significant cross-country variation. The estimates of shadow economies for 28 transition countries is 40.1 percent and 16.3 percent for the OECD. So, could union activity affect the size of shadow economies
If unions, as an interest group, exert a strong influence in politics, their political philosophy will probably lean left. Thus, if unions influence decisions on taxation issues, welfare benefits, pension schemes and government size, the outcome will probably induce more complexity, more regulation and more barriers to trade, entrepreneurship and investment. The combination of those factors can strongly influence labor and business incentives and, hence, also determine and productivity growth.
By Trace Mayer, on June 2nd, 2009
Political risk is increasing and predictably the Treasury bubble has been bursting. There are major machinations going on in the bond market which will significantly affect you.
On 3 January 2009 I wrote United States Treasuries Are The Biggest Bubble Of All and on 18 January 2009 followed it up with Why And How The Treasury Bubble Will Burst concluding with “Taking possession [FRN$s] eliminates at least two types of risks. First, is any potential counter-party risk with whoever is holding the Treasury Bill for you. Second, ‘political risk’ which is a much larger threat. ” On 7 May 2009 I wrote about the key ratios moving and have been vindicated.
THE CRACK-UP BOOM
As Ludwig von Mises predicted decades ago in chapter 20 of Human Action, ‘The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. … But then finally the masses wake up. … A breakdown occurs. The crack-up boom appears.’
The crack-up boom is in process and the intensity accelerating. Everyone knows or should know that the United States government is unable to perform on their debt in regards to purchasing power. The United States government is a failing counter-party and the FRN$ is doomed.
POLITICAL RISK INCREASES
The Great Writ of Habeas Corpus provides for individuals to challenge their detention. The United States Constitution decrees in Article 1 Section 9 Clause 2 that “the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.” The Sixth Amendment provides:
In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defense.
The Supreme Court struck down the three great American tyrants in their attempt to violate this clause with Ex parte Milligan, Korematsu v. US and Rasul v. Bush.
29 July 1921 Adolf Hitler assumed leadership of the NSDAP and became Der Führer. During 1923 the Reichmark evaporated and Hitler was released from prison 20 December 1924. Conditions continued deteriorating and on 28 February 1933 the Law for the Protection of People and State or Reichstag Fire Decree is enacted providing in § 1:
Articles 114, 115, 117, 118, 123, 124 and 153 of the Constitution of the German Reich are suspended until further notice. It is therefore permissible to restrict the rights of personal freedom [habeas corpus], freedom of opinion, including the freedom of the press, the freedom to organize and assemble, the privacy of postal, telegraphic and telephonic communications, and warrants for house searches, orders for confiscations as well as restrictions on property, are also permissible beyond the legal limits otherwise prescribed.
By 14 July 1933 Hitler has declared the success of the Nazi revolution and it became the only party in Germany with all others banned.
OBAMA ANNOUNCES PREVENTIVE DETENTION
On 20 May 2009 the New York Times reported:
President Obama told human rights advocates at the White House on Wednesday that he was mulling the need for a “preventive detention” system that would establish a legal basis for the United States to incarcerate terrorism suspects who are deemed a threat to national security but cannot be tried … Human rights advocates are growing deeply uneasy with Mr. Obama’s stance on these issues … — a concept he criticized bitterly as a presidential candidate. The two participants, outsiders who spoke on the condition of anonymity because the session was intended to be off the record, said they left the meeting dismayed. They said Mr. Obama told them he was thinking about “the long game” — how to establish a legal system that would endure for future presidents.
This talk about establishing a legal system that will endure for future presidents baffles me. Why will President Obama not open up a copy of the Constitution and read it? There already is a legal system that has endured for centuries and is the supreme law of the land.
While the Obama administration is intentionally exacerbating the greater depression; in addition why does President Obama feel compelled to rewrite ad hoc tyrannical procedures that undermine essential principles of free and open societies? President Obama has accomplished more in his first four months than Hitler did. This is like the caterwauling of a cougar instead of the screetching tunes of someone learning saxophone for the first time.
GOLD AND POLITICAL RISK
Fiat currencies represent the common stock of nations. This decade all fiat currencies have been evaporating relative to gold. Those who did not follow my warnings in the two articles about the Treasury bubble are probably down between 30-50% depending on how their positions were setup.
There have been rumors which I have been unable to verify that United States embassies around the world have been instructed to acquire local currencies.
While reviewing the logs for my site I came across someone who searched Google for “how to buy gold delivery”. While this is not unusual what is unusual is who it was and how long they spent on my site.
I wonder what briefing or meeting the Department of Homeland Security employee was in that prompted them to search on “how to buy gold delivery” in Google? It seems as if governments and their officials in their cute little costumes seem to be getting increasingly scared.
I wonder if they were trying to figure out how to buy gold coins or gold bars. Maybe they were even venturing into the less prominent area but lately more profitable and trying to learn how to buy silver coins or silver bars.
KEY RATIOS MOVING AS PREDICTED
As I wrote about in the key ratios moving, “While the DOW may continue its rally I highly doubt it will breach 11.5 gold ounces before it resumes its downward destiny and reaching 5-6 ounces sometime this year. Silver will likely continue its upward ascent and return to a more normal ratio with gold around 55.”
Since Obama’s tyrannical declaration regarding preventative detention gold has moved from $920 to $980 or 6.5% while silver has moved from $13.75 to $15.75 or 14.5%. The gold to silver ratio is currently about 62.5 while the DOW/Gold has moved to 8.9 from 9.32. The DOW/Gold will likely encounter some volatility because the failures General Motors and Citigroup have been replaced with Cisco Systems, Inc. and The Travelers Companies, Inc.
Gold is currently 1.14x and silver is 1.31x their 200dma. These trends will likely remain in place until the price of gold is about 1.3x its 200dma while the price of silver is about 1.5x its 200dma.
For those who do not own the precious metals yet, even though a good portion of this latest up-leg has passed, now is a good time to consider how to buy gold or silver. A useful third-party service is GoldMoney which allows for physical delivery at any time as opposed to the problematic GLD or SLV ETFs.
Meanwhile the Treasury bubble has burst and the USD index is now below 80.
CONCLUSION
Gold and silver and not mere barbaric commodities but essential checks and balances in the political machinery. This is why they are in the United States Constitution.
Obama is outdoing Hitler regarding the acquisition of tyrannical power. Like the American tyrants Abraham Lincoln, Franklin Delano Roosevelt and George W. Bush; President Obama’s administration is like a bad nightmare.
Gold, silver, oil and stocks are moving predictably while the Treasury bubble is bursting as the FRN$ is breaking down. The bottom line: political risk is increasing and gold is moving. Hopefully you have a 72 hour kit, have learned how to buy gold or silver coins or bars and are prepared because The Great Credit Contraction has only begun.
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By D H Smith, on April 24th, 2009
1. The careful reading and valuable insights of Harriet Baldwin, Charles Burns, Timothy Gildner, Cameron Adams, Swee Hsien Tsung and Terry Zou are gratefully acknowledged.
2. Other plans to fix the housing market focus variously on one or more parts of the problem: they aim to shore up the capital of banks, re-constitute the mortgage markets with private or government investment, re-work loan terms to mitigate foreclosures and keep people in their houses, clear the market oversupply of houses, and stop the spiral of house price declines. No single plan acts upon all of parts of the problem. Most act upon more than just one part. No useful plan acts upon only one.
3. The following are the key points of the well-known real estate plans, no doubt digested to the point that their originators would not recognize them:
a) The Zingales Plan (Luigi Zingales, of the University of Chicago) — A decline in an index of local property prices triggers a government-mandated reduction of principal balance on securitized mortgages; lenders thus crammed-down may recapture some of future price appreciation in underlying assets.
b) The Columbia Plan (Glenn Hubbard and Chris Mayer, Columbia Business School) — Calls for nationalized institutions Fannie Mae and Freddie Mac to provide home loans to new and existing borrowers with positive equity on such terms as would be available were markets working normally e.g 4.75% for 30 year loans.
c) The Feldstein Plan (Martin Feldstein, Harvard) –Proposes “mortgage-replacement” loans from the treasury at low cost (e.g. 2%) for all mortgage holders, up to 20% of their outstanding mortgage debt, to reduce their cost of debt service. These loans are full recourse, in first place ahead of mortgage, and aim to reduce the incentive for owners to abandon their properties.
d) The Immigration Plan suggests allowing an increased flow of immigrants to take up the excess housing stock.
e) The National Association of Realtors Plan: Expand and extend the home purchase tax credit, increase conforming loan limits, use TARP funds for mortgage interest buy-downs, and keep banks out of Realtors’ traditional business.
f) The National Association of Home Builders Plan: Extend tax credits of 10% of purchase price up to $22k to all new home buyers, and use TARP funds to buy down interest on conforming mortgages.
g) The Fix Housing First Plan (Sen. Johnny Isakson, Republican of Georgia, et. al.) — Extend tax credits as per the NAHB plan, applicable to 2008 income tax, and make them monetizable, so that buyers can apply them at closing.
h) The Stimulus Plan as signed on 2/17/09 — Expanded a program of $8000 tax credit for first-time homebuyers, repayment not required.
4. Most of the well-known real estate plans have their good points, but the one thing none of them do is allow the American people a free choice to apply their own existing resources in the service of their own economic interests.
By Greg Glider, on April 22nd, 2009
This is a copy of the letter I originally emailed to the President, several key Congressmen and women, and news agencies, with no response. I am now sending it out to everyone I can, hoping it won’t be discounted before someone qualified will take a moment, to investigate and evaluate the concepts. For all our sakes, I pray someone will have the vision.
Granted, these are radical ideas, but radical measures are needed, and quickly.
To the President, or anyone who can reach him,
I previously wrote to you, about some ideas I have to restore a robust economy, hoping you could evaluate them. The President keeps saying he wants everyone’s ideas, but so far, no response to mine. Since then, in my economics history reading, I think I may have found something, a method that’s been used successfully to stem economic collapse in other countries, and, in several banking circles, during our own Great Depression.
Basically, it’s the introduction of a temporary, substitute currency, like a scrip, that the government can give out freely to its people, to spend like the US dollar. This idea was originally detailed in 1933, in the US, by Irving Fisher, the prominent economist. Silvio Gesell, a German “quasi-economist”, used one such currency, the wära, to revitalize Schwanenkirchen, a Bavarian coal mining village, in 1931. It worked and prosperity returned to them, after which, they phased the wära out. Here’s a link to a website about it:
http://www.economist.com/finance/displaystory.cfm?story_id=12998254
Apparently, Roosevelt also considered the use of a national scrip, but opted for Federal Reserve notes instead. This was a mistake that may have prolonged the depression, but some bankers saw the potential of scrip, and there were locally introduced versions that worked very effectively, and quickly, within their small circles. These circles expanded as the word spread of new prosperity, and may have actually been more instrumental in pulling us out of the depression, along with Roosevelt’s measures, which included a price freeze, to stem inflation. The name “scrip”, which originally had been a private currency used by company towns, until federal law outlawed all such tender, may put some people off, but I believe a nationally used version would effectively stop the meltdown. Below is a link to a historian’s EBAY website. His narrative details Roosevelt’s actions. Contacting him directly to pick his brain would be a good idea. He sells original notes of scrip on EBAY.
http://reviews.ebay.com/Depression-Scrip-of-the-1930-apos-s_W0QQugidZ10000000001039397?ssPageName=BUYGD:CAT:-1:LISTINGS:1
So how could we do it here?
Introduce a scrip, a temporary proprietary currency, or substitute new money, which the President would decree to be legal tender, like cash, until the emergency eases. The government would distribute it directly to the people, free, to spend at the stores, for food, bills, vehicles, construction, mortgage payments, wherever. Each household, every homeless family, would get a designated amount each month, according to their individual needs. The only requirements would be that they spend it that month, to get the next month’s allotment, and they must be actively, and verifiably, seeking their own new income sources. The ripple effect would immediately stop the meltdown and kick start the economy. An agency (more new jobs!) would be needed to administer and monitor this process.
People would love it, and the President who augmented it: free money!
The new money wouldn’t replace the existing, but work side-by-side with it. People could use either one, but they must spend their Scrip allotment every month. It would only be for the US, not a world currency, and, as things picked up again, we would phase it out, back to the greenback. It would also stop inflation and devaluation of the USD, and it would stop the need to borrow trillions from China, or other scary sources. As the situation improved, the scrip flow would eventually begin to terminate at the banks, for exchange to the Fed for USD again.
This brings me to the second part of the plan: the banks. Instead of inundating them with cash, hoping they’ll decide to ignore the present freefall and use the funds to begin lending again, we need to federally guarantee the loans, at the bank-to-bank, and bank-to-borrower levels. With the loans all federally guaranteed, and the infusion of the scrip making people flush with cash, the banks would free up credit, and the money would start flowing again.
I don’t think I’m off base with this. Please, please, for all of our sakes, check out the above websites about this method, and share these ideas with others for evaluation. The positive changes would come fast, but we must act fast. It should be becoming evident that, because of the speed and scope of our economic collapse, the present government bailouts will be needed monthly, and only temporarily ease the symptoms, not the cause. We need to address the root of the problem: the flow of money. Bail us out at the root, the American people, and don’t use USD as our working currency, until our economy is better again.. This will avoid major inflation and deflation, possibly simultaneously. With scrip, who cares if there’s some inflation, it’s a discard after we’re back in the saddle again.
By D H Smith, on April 21st, 2009
I know a lot of market participants have been looking for this break long before today. My sense has been that they are wrong and the market recovery in the six weeks through Friday can carry a long way, surprise everyone, and ruin the bears’ year as the prices will be set by investors looking beyond the current recession earnings trough. At the moment, I am holding on to that view. But I can be persuaded that I am wrong, and switch my position accordingly.
Recently I have had correspondence with Professor Christopher Mayer of Columbia Business School, regarding his Mayer-Hubbard Plan and my Household Initiative Plan. He says he has been in Washington lately and senses a real loss of momentum for all these plans. I think you can generalize that. There has been a loss of momentum for all the administration’s economic schemes as they have had other things on their plates such as foreign summitry, stem cells research, climate change, torture memos, and so on and so forth. Also, Congress has been on Easter recess. It may be a coincidence that the market took a swan dive on the day Congress returned and the administration held its first cabinet meeting. But on the other hand it may not — market participants have ample cause for concern about the administration of the TARP, the independence of the Federal Reserve, the possibility that Ben Bernanke is not reappointed, and the dawning realization of the scale and scope of the budget deficit to come. And with government back in full domestic operation, players may be pricing that in, and the previous six weeks could turn out to have been a pleasant holiday from hard reality.
By D H Smith, on April 3rd, 2009
Whatever you think of the young administration of President Barack Obama, you have to admit the man does not lack for ambition. He promised that sea levels would fall and the lame would walk, and everyone understands that will take at least a couple more months. But taking over the motor industry, well that’s just the work of a couple of the President’s bright sparks over the weekend. It’s great knowing that I’ll be able to go into my Congressman’s constituent services office when I need parts for my old Dodge truck.
My sources in Washington tell me that the next thing to come out of the salvation lab is a major currency reform. The American Dollar, the Yankee Greenback, it has served us so well for so long, but now it’s lame too. Better just to repudiate all claims and start over, as they are wont to do in the countries of South America that have lately emerged as models of public administration.
I hear the new buck will be called the O-buck.
By Winton Bates, on April 3rd, 2009
When Jim asked me whether I was an economic rationalist I thought he was just stirring. The term “economic rationalist” has been used mainly in Australia and doesn’t seem to be used much anywhere these days. I don’t think there were ever many people in Canberra who called themselves economic rationalists. Those of us advocating economically rational policies just thought of ourselves as economists doing what economists should be doing. We knew that when people referred to us as economic rationalists they were probably intending to be offensive, just as most of those who refer to classical liberals as neo-liberals are intending to be offensive. But I don’t think the label worried us much. When people referred to me as an economic rationalist I knew that I was among good company.
I admitted to Jim that people had sometimes referred to me as an economic rationalist. Jim then asked me if I thought John Smith (name changed to protect Jim) would be an economic rationalist. I don’t know that I have ever met Smith but he has the reputation of being a good economist, having held senior positions in the Treasury as well as other government departments at a time when major economic reforms were being undertaken. I told Jim that I thought that Smith could be relied on to provide good public policy advice.
Jim then seemed to change the topic of conversation. He asked: “Do you think economic considerations should be taken into account in quarantine policy?” I replied that economic considerations were obviously relevant. For example, it doesn’t make economic sense to implement policies that will raise consumer prices by a huge amount in order to protect a tiny domestic industry, even if scientific evidence suggests a high probability that diseased imports will damage this industry.
Jim said: “So, are you suggesting that quarantine decisions should all be subject to a full blown 100-page cost benefit analysis?” I acknowledged that a full-blown analysis would be too expensive to do every time and is not necessary in most cases because the answer that such a study would come up with was usually obvious. I suggested that the legislation should incorporate a national interest test and require that the economic advice used to apply that test should be made public when decisions are made.
Jim replied: “But wouldn’t that make it difficult for politicians to take account of things like impacts that are concentrated in particular electorates, their concerns that voters might attribute damage to industries from highly improbable events to their mismanagement – and other irrationality that people exhibit on risk.” I said: “So what! If you are designing public policy rules in the interests of the whole community then you want the rules to make life difficult for populist politicians who pander to such concerns”.
Jim said: “I thought you might say that. But John Smith tried to sell me a very different line when I spoke to him in Canberra recently. He said that it would be important for the analysis of quarantine matters by the advisory economist to place higher weights on extreme events and on things with concentrated impacts and to make other adjustments to account for the irrationality that people exhibit on risk.”
I was stunned. All I could say at the time was that I could now understand why Jim had asked me whether John Smith was an economic rationalist.
Jim’s story makes me wonder how many other Canberra people who once advocated economically rational policies have lost their marbles by getting too close to politicians.
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