Archive for the ‘economics’ Category

The Japanese Bubble — some causes and effects?

November 3, 2009

A couple weeks ago a classmate of mine clarified the whole Japanese bubble thing with a couple simple diagrams. This is my attempt to replicate them before I forget what his reasoning was. OK:

diagram-1a
Diagram 1

The classic model of the Japanese economy (Diagram 1) was a tight-knit, government enforced structure with a number of interesting features: first, individuals couldn’t buy corporate stocks, so they had to save their wages in banks. Banks basically had to loan money to corporations regardless of those corporations’ profitability — part of this was policy, part of it was the tradition of corporate groupings or “keiretsu.” Not pictured in the diagram: corporations made money via foreign trade, which was pretty easy to do through much of the “high growth period,” partly because the Yen was pegged to the dollar at an artificially high rate.

Now in 1971 Nixon took the US dollar off the gold standard and floated it on the market, which ended the Occupation-era policy of having the Yen pegged to the dollar. So the exchange rate (which had been 360 yen to the dollar from 1950 – 1971) went down to 290 yen to the dollar by 1972

This meant that export producing industries in Japan started to suffer, since foreign folks paying foreign currency now had to pay more of it per yen.
So the government decided to introduce capital market liberalization, allowing corporations to get the capital they needed from non-traditional sources, like foreign investment and stock markets. They ditched domestic banks, which then found themselves without lenders — they should have shrunk at this point, but they were unable to do so because of strict “too-big-to-fail” type rules. So instead the banks started lending money to whomever would take it, esp. in the real estate sector. Corporations also started pumping their extra cash into real estate (Diagram 2)

diagram-2a
Diagram 2

This elevated prices, and wages, across the board — the Bubble — which made everybody happy! Until the Bank of Japan raised interest rates, making loans more expensive, which sent artificially high prices tumbling and triggered a contraction that is still plaguing Japan.

The silver lining is that this chaos may have created the political momentum to clean up Japan’s notoriously corrupt bureaucracy and dominant political party — which make our system look like Scandanavia (or, you know, some other utopian metaphor). In 1993 the dominant party lost power for the first time since the 50’s, which everyone said was significant, but they regained it soon after. BUT this July they lost it again! And tomorrow I’m planning to go to a lecture/panel discussion that will hopefully clarify whether this is significant. We shall see.

Two Stories

October 29, 2009

Story A: The legacy of colonialism left Third World governments with a bitter taste in their mouths, so they set up high barriers to trade, keeping Western multinationals out, and attempted to develop their own industries which would free them from having to buy imports (import substitution). But without other income or access to international capital, they had to borrow money from the World Bank/IMF to finance these operations, which turned out not to be profitable. Then they had to *keep* borrowing to keep their industries afloat or even just to pay off the interest on the original loans, which resulted in a “balance of payments crisis.” Finally, thanks to new “structural adjustment” loans which carried the condition of lowering trade barriers, multinational corporations came in and, by integrating isolated countries into the global economy, effectively helped to treat the disease of global poverty (globalization).

Story B: The great powers got together at the end of WWII to determine the way the world would be under the new rubric of “development,” which carried with it a civilizing mission more or less similar to that of the outmoded imperialist ideology, and created World Bank/IMF. They used these as instruments to assist multinational corporations in their systematic search for cheap labor and materials to fuel growth. Meanwhile multinationals are irresponsible (cf. bad working conditions, the Union Carbide disaster) pervert politics in poor countries by co-opting local elites, and depend on the militarily dominant West to secure their interests (cf. the CIA-backed Allende coup, the fall of Mossadegh in Iran, etc.) Poverty is a matter of course as the super-rich strive to get even richer (globalization).

Is it possible to believe Story A and Story B at the same time? That’s kind of where I am right now.

Two Development Economists — No Conclusions

October 3, 2009

The poor remain in poverty not because they want to, but because of the many barriers deliberately built around them by those who benefit from their poverty

— Mohammad Yunus, founder of Grameen Bank

——————————————

Last month I read two development econ books which appeared to be radically at odds with each other, representing a colorful and much-publicized conflict amidst what is generally presumed to be a fairly drab sub-field of study. The books were “The End of Poverty” by Jeff Sachs (2005) vs. “The White Man’s Burden” by Bill Easterly (2006). One makes the case for ramping up foreign aid, the other is adamantly opposed. (These authors’ ongoing feud was made public when Easterly delivered a scathing review of Sachs’ book for The Washington Post, to which Sachs has responded at least once.) But should we internalize one author’s points and discard the other’s? Or is there something to be learned from reading both books in tandem?

Well. Sachs, he of the Earth Institute at Columbia University, weaves the interesting story of his own involvement in the field, mostly helping middle-income post-communist countries get into the groove of market capitalism and economic orthodoxy. Sachs claims that the way to end poverty is to strategically deploy foreign aid by investing in basic infrastructure (like water, sewage, roads) low cost public health initiatives (like malaria nets, preventive medicine) technology for boosting agricultural output, education (the so-called improvement of human capital) and so forth. Sach’s goal is to help extremely poor folks — about one sixth of humanity — break free from the “poverty trap” comprised of “disease, physical isolation, climate stress, environmental degradation, and…extreme poverty itself. Even though life-saving solutions exist to increase their chances for survival…these families and their governments simply lack the financial means to make these crucial investments.”

Easterly, a professor at NYU, wants to debunk wishful thinking about aid by pointing out how the gross failures of the current system actually fit into a long history. Western aid agencies, rather than being part of the solution, have been a big source of the problem: they’re usually politically motivated, unaccountable to the people whom they are supposed to serve, they often funnel money to brutal and corrupt regimes throughout the Third World, and they possess a kind of evangelical certainty and utopian idealism that smacks of old school colonialism. Easterly claims that the “poverty trap” is an invented notion to drum up support for the aid industry. For Easterly, instead of writing out a big plan for strategic investment via IMF/World Bank et al., what we should be doing is looking for piecemeal solutions to local problems…or acting to encourage local entrepreneurs who would do so in our stead.

On the one hand, I agree with Easterly: I’m swayed by the notion that aid bureaucracy is harmful and dysfunctional largely because it’s common knowledge that Western aid propped up evil dictators in Haiti, the DRC, Zimbabwe, etc. Also, generally in big organizations it is considered advantageous to spend what’s in the budget, and quickly, if you expect to see more next year. Paul Collier (economist #3) puts it succinctly: “people get promoted by [within aid agencies] by disbursing money, not by withholding it.” Plus, the historical context of the emergence of the World Bank after World War II suggests that said agencies are in fact instruments of imperialism and Cold War political posturing on the part of the US.

(Historical Interlude! Anthropologist Arturo Escobar does a good job of describing the context for the “development of development” at the end of World War II: “The end of the war…confronted the advanced countries, particularly the united Sates, with the need to find overseas investment opportunities and, at the same time, markets for their goods, a reflection of the fact that the productive capacity of US industry had nearly doubled during the war period. Economic development, trade liberalization under the aegis of the nascent giant corporations, and the establishment of multi-lateral financial institutions (such as the World Bank and International Monetary Fund, founded in 1944) were to be the main instruments to satisfy these requirements and advance the new strategy.”)

On the other hand, I agree with Sachs: it’s absurd to claim that “poverty traps” do not exist. The poorest sub-Sarahan countries, for example, are landlocked, riven with ethnic conflict, hit by drought and subsequent famine…and for people who live in this situation there is no way to simply apply gumption or entrepreneurial spirit to lift a country out. When there is a total lack of basic goods and capital in an area, then there is no way out of poverty without some kind of outside assistance. Meanwhile, the folks who can escape from such grim situations obviously will; hence massive migration to urban slums — a problem which will only escalate as climate change worsens.

I also see some points where the authors themselves agree: both writers criticize previous efforts at eradicating poverty, which they see as having failed largely because they were one sided, relying upon one-size-fits-all formulas for economic growth, blind to regional particularities of culture, geography, and history. Both writers also criticize the way that Western aid agencies tend to focus on hot topics — the AIDS epidemic, for example — while avoiding the more severe if less sexy ones, like diarrhea, malaria, basic sanitation, etc. And of course both agree that *something* needs to be done to help the billion + people at the very bottom of the ladder, not just for obvious moral reasons and both (being economists) see “development” as the ultimate goal.

To boil it all down, both authors argue that top-down strategies by aid agencies and their political benefactors have been ineffective because they are too simplistic and out of tune with the complexities on the ground. Sachs seeks to remedy this by raising awareness (e.g. having Bono pen the forward to his book) and proposing a vast, very complex strategy that he hopes will cover all bases. Easterly, on the other hand, hopes for reform that will enact incentives for aid agencies to succeed or fail according to their effectiveness, thus using “market magic” to generate better outcomes.

Fascinating points made by all, but I must admit I remain skeptical of both. Here’s why: neither one of them really looks at the mechanics of power in this situation. Easterly comes closer to the mark with his Chomsky-esque revisionist treatment of foreign aid as a tool for US global governance. But while both authors are critical of current patterns of aid disbursal, neither looks at the way that this system became institutionalized as part in parcel with the global growth of capitalism and the *idea* of development. What I mean is: both authors seek to tweak the current model of development by getting rid of some of the inefficiencies produced by the top-down hierarchical element of it, but they miss the point that hierarchy is wired deep into the world system. Power thrives on powerlessness, something which economists tend to leave out of their calculations.

OK I hope you enjoyed this book review, I am off to make chicken pot pie(s)! yay!

Executive Pay

September 21, 2009

Do I really want to weigh in on such a contentious issue? No. Or at least, not without another cup of coffee.

I just wanted to point out a correlation between what Paul Krugman said in his NYTimes column this morning…

“What’s wrong with financial-industry compensation? In a nutshell, bank executives are lavishly rewarded if they deliver big short-term profits — but aren’t correspondingly punished if they later suffer even bigger losses. This encourages excessive risk-taking: some of the men most responsible for the current crisis walked away immensely rich from the bonuses they earned in the good years, even though the high-risk strategies that led to those bonuses eventually decimated their companies, taking down a large part of the financial system in the process.”

…and a passage from UCSD Prof. Chalmers Johnson (whose various treatises on Japanese industrial policy have been required reading for more than one class so far):

“Morita Akio, chairman of Sony Corporation [circa 1982], believes that the emphasis on profitability has been a major cause of American industrial decline. He asserts, ‘The annual bonus some American executives receive depends on annual profit, and the executive who knows his firm’s production facilities should be modernized is not likely to make a decision to invest in new equipment if his own income and managerial ability are judged based only on annual profit.’ Morita believes that the incentive structure of postwar Japanese business has been geared to developmental goals, whereas the incentive structure of American business is geared to individual performance as revealed by quick profits.”

Johnson argues that the Japanese developmental state was predicated upon cooperation between the state and private interests — especially the strategic allocation of rewards for management other than short-term profit. The grossly oversimplified result was long-term planning, which, in addition to other factors institutional, geopolitical, and (possibly) cultural, led to the post-war Japanese economic miracle.

Of course the irony is that the industry-government kabal in the Japanese finance sector proved disastrous when their own bubble burst…

That said, what Krugman seems to be looking for is some kind of give and take between the state and the finance sector: government gives you a huge taxpayer bailout, you should respond by giving the government some measure of slack. This kind of arrangement has eluded the U.S. in every sector save the military.

TAX BADS NOT GOODS

May 5, 2009

I think this is going to be my fiscal policy mantra from now on.

I feel like I’m rarely in agreement with economic orthodoxy — but yeah, wouldn’t economists tend to agree with me on this point? Why should I pay tax on *my* income — value which I have added — when I could be paying a tax on value which I have consumed or depleted in some way, via pollution for example?

Like I said in my previous post, value ultimately comes from the biosphere rather than from human industry. If we want better environmental outcomes, we should recognize this. Fiscal policy-wise that means the government should tax our consumption of natural value (i.e. natural resources) rather than taxing value added via human industry. That way we have an incentive to actually use less, which we clearly need to do.

In related news, I am officially in love (or intense like) with Herman Daly from whom I took this idea. I also dig the folks over at the Center for the Advancement of the Steady State Economy.

The Fiscal Problem of Being Washington, DC

February 3, 2009

“Washington, DC: America’s visible, invisible city. Actually two cities; one rich, one poor. One with power, another relatively powerless. It’s white, it’s black, it’s there…but it’s not.”
— Anthony Bordain (from a particularly good episode of No Reservations)

Public policy matters!

I sometimes find myself in the curious position of having to defend this idea from those who would dismiss government as a sham and policy as, “some kind of dodge, or hussle.” Of course I do have sympathy for these folks, because the State tends to be violent and oppressive and there is a good body of evidence to suggest that government is not particularly good at solving social problems. However, there *are* real gains in human happiness that can be achieved by tweaking bad policy into good.

Dr. Alice M. Rivlin from The Brookings Institution has provided a poignant example. (it’s a PDF)

The gist of the chapter is that DC can’t collect taxes for income earned within its borders by non-residents, creating a kind of tax haven for the federal government and those who provide goods and services to said government. These people are the rich (and white) who tend to work within DC but for the most part live outside of it. The District then finds itself cash strapped and unable to provide basic services to its largely poor, black population.

Why is DC so messed up? Rivlin estimates that it misses out on 2/3rds of its revenue base! That might have something to do with it!

The pecuniary problems of the District have been apparent to me at least since I started middle school. I would carpool in from the outskirts to go to a Catholic school in Northeast and every day I would see the obvious signs of poverty as we went eastward. You just don’t expect to see urban decay and de facto segregation in the capitol of the richest country in the world. Indeed the whole reason I was making this trek was to avoid the notorious DC public education system — which is only one aspect of the District’s creaking infrastructure.

It’s snowing as I write this. I like winter’s haunting beauty as much as the next guy, but it is annoying to know that the DC side of Western Avenue will not be plowed for days while the Montgomery County side gets the royal treatment…

Ask Why

September 29, 2008

If you never saw (or read) “Enron: The Smartest Guys in The Room”, you should check it out.
As of this writing it is posted on youtube — albeit lo-res, parsed into 11 segments and featuring Spanish subtitles (which I kind of enjoy…)

Since you may not have the time to watch the whole thing, I’ll go ahead and embed the last segment:

The energy firm’s spectacular failure, propped up as it had been by elaborate (and borderline hilarious) financial deception and boundless corporate greed, is looking pretty familiar these days. I bet the government reaction to the Enron crisis — essentially to frown but do nothing of consequence — will recur this time around. Why? Why do people invest in the first place?

Well inflation is pretty much always on the rise, so your money is always worth less than it was the last time you looked. So you must invest in something or you’ll be losing money. Since you have to invest, but you don’t necessarily want to be a captain of industry yourself, you might as well put your finger in corporate stocks, bonds, market indexes, funds, etc. This is because corporations, and the financial instruments that exist on their behalf, represent large amounts of capital by way of lots of different stockholders who are not liable to know or care where that money comes from. So you minimize risk *and* responsibility! You get easy money (or at least you beat inflation) and corporations get the equity they need. It’s win-win! Investors in and executives at Enron were just doing what the system was designed for them to do!

But why is inflation always on the rise? Why is the global economy always growing? Why is there no limit to its growth? Why does the drive for profit trump every other value? Why can’t we just industrialize the whole world, produce and sell more and more stuff? Why can’t we make money forever? Why can’t every generation be richer than the last, with an endless bounty of natural resources and happy, faceless laborers?

The Coal Economy

September 19, 2008

I’m probably going to be reading and writing about China, the environment, and energy policy for what remains of the semester…so I thought I might use this forum to offer periodically some speculations on various related things.

So In his latest “We Can Solve It” email, The Man Himself Al Gore sums up current US energy policy with aplomb (a quality notoriously absent from his 2000 presidential bid.) He says: “We’re borrowing money from China to buy oil from the Persian Gulf to burn it in ways that destroy the future of human civilization.” Word. But we don’t want oil stealing the limelight!

Of course US foreign policy has been driven by considerations of oil at least since World War I (before that it was cotton) but oil is not the source of most of the energy that you and I use. Coal is. Furthermore, the trade that we’ve built with China over the past few decades is also coal powered.

Now consider the fact that China now produces more greenhouse gases then any other country, having recently overtaken the US for that dubious distinction. While per-capita energy use in China is very low, this is because the majority of China’s outrageously large population are farmers who don’t use much energy. Most of the energy used in China comes from coal and goes towards the industrial sector. Coal has fueled Chinese development — it’s primarily used to power the extraction of steel and other minerals as well as the manufacture of consumer goods for US and European markets. These activities bring in enough revenue for the PRC to have billions laying around to lend the US. The other source of revenue is the 25% income tax on Foreign Direct Investment, mostly levied upon corporations who also want to produce things for export.

So when China lends us money, it’s because our consumption is the source of their revenue. They need us to stay afloat. American mass consumerism depends on electricity that is also primarily powered by coal. So, what we have is a vast system for extracting and burning coal — they extract it and burn it so as to make and sell stuff to us; we extract it and burn it so as to buy things from them. The very fact that I can type this post (on my Made-in-Taiwan laptop) and you can read it (presumably on yours) is predicated upon this relationship.

In light of this thought, check out this ad from “We Can Solve It”:

Like I said in my previous post, we’re all familiar with what happens when you elect representatives of the oil industry to high political office. It’s bad. So I’d be in favor of “breaking big oil’s lock on the government.” But if you agree with my above statement that the Chinese and US economy are linked inexorably through coal production and consumption, then in order to stop pumping carbon into the atmosphere we would have to stop (and retool) the whole machine. We would have to stop the global economy and change out its rusty old engine.

Besides the fact that this would be catastrophic to our daily lives, both here and in China, it’s also completely impossible for governments to undergo such an action.

I’m currently interning at an outfit whose goal is to use the market and a growing network of business/civil society folk around the world to try to fix the problem not by lobbying government per se but by promoting investment in renewable energy, which is a very dynamic industry right now. It’s exciting stuff. But I don’t believe this tactic will be very effective, simply because it’s grounded in the very market ideology that created the problem.

Free Love and Free Trade: What’s Ben Stein’s take on International Finance?

July 16, 2008

The unparalleled Ben Stein wrote a good column in today’s NYTimes business section proclaiming best practices in love — a few economic hints on how to have a rewarding romantic relationship.

Stein advises the reader to stick to long term, low risk investments — this strategy tends to ensure reciprocity such that when you invest love, you are also receiving it back. “The impatient day player will fare poorly without inside information or market-controlling power. He or she will have a few good days but years of agony in the world of love,” writes Stein. That’s good advice!

But why end the analogy there?

Example: Free market theorists say that the liberty to trade and invest in anything, unhindered by government or other regulation, will bring stability and all-around prosperity in the global economy. Free love theorists have a similar take on protectionist arrangements such as marriage or monogamy. These visionaries say that boundaries to love or capital are artificial and antique; they should be made obsolete. Instead, if freed from hierarchy or relationships of power, love/trade would better the human condition. (Of course true believers in these ideas tend to be unabashed but relatively hard to find, since it’s so easy for poseurs to use “free trade” or “free love” simply as an excuse for gratification)

I should point out that the love/economics analogy is well worn in some areas of social studies, as in post-colonial history and women’s studies. This is because rape is an excellent word to describe the economic relationship that occurred between the European powers and the inhabitants of myriad other territories around the world throughout modern history.

So what’s a good word to describe globalization — the dominant paradigm of contemporary economic affairs — in terms of love?

Let’s look at some facts:

“In 1970, about 90% of international capital was used for trade and long-term investment — more or less productive things — and 10% for speculation. By 1990, those figures had reversed: 90% for speculation and 10% for trade and long-term investment.” – Noam Chomsky

Chomsky’s sweeping claims usually seem a bit suspect to me (besides which the book from which this quote is taken is almost 15 years old by now). In this case, however, Chomsky was referring to work by none other than (Lord) Professor John Eatwell, President of Queen’s College, Cambridge.

So I went ahead and emailed Lord Eatwell about it.

From Eatwell’s response:

“the figures derive from dividing the sum of foreign exchange transactions worldwide by the value of world trade and long-term investment (that it might be expected forex transactions were used to finance). In 1970, prior to financial market liberalisation this number would be roughly 2. Today it would be about 80 (Chomsky’s figure of 10:1 is far too low).

The change illustrates the internationalisation of financial markets. But not all of this can be labelled “speculation”. A significant proportion is hedging, and a large proportion is arbitrage.”

Wow, thanks Lord Professor Eatwell. This figure is much more recent and much more alarming than Chomsky’s.

For the layman (i.e. myself): Speculation is buying something with the expectation that you’ll be able to sell it for a profit in the near future. Arbitrage is buying something in one market and selling it in another so as to make a no-risk profit. Hedging (like “hedging your bets”) is buying something while also taking measures to reduce risk and ensure that something’s continued value — like taking out an insurance policy. (One way this can be done is through buying two related assets, to protect against the sudden collapse of one of them.)

In any case, it would seem that international finance is no longer about investing on foreign shores towards some perceived end goal — but rather it’s about brokering for short-term capital gain.

According to Joseph Stiglitz, capital market liberalization is “not so much the liberalization of rules governing foreign direct investment, but those affecting short-term capital flows, speculative hot capital that can come into and out of a country.” International trade of this kind, evidently the most common kind by overwhelming majority, is simply the movement of capital across national borders.

As we’ve seen, the scale of this activity has expanded enormously since 1970. Who really benefits from this development? Perhaps large corporations with international holdings. Certainly not the poor.

Stiglitz and Andrew Charlton, in their paper “Capital Market Liberalization and Poverty” (2004, draft) suggest that

“the poor are least equipped to cope with increased volatility, and they are most affected by financial crises. Capital mobility reduces their bargaining power relative to capital and leads to a decline in the labor share of output. Financial openness delivers the poor few benefits in terms of increased access to credit and other financial services, and it constrains governments’ redistributive efforts and anti-poverty fiscal policies…a compelling case that capital market liberalization is bad for the poor in developing countries.”


Capital markets are risky — and the poor bear the brunt of the risk of CML without any of the benefits.

In any case, to return to the analogy, the trend seems to be that this process of “globalization” has engendered a continuing decline in long term relationships while so called hook-ups (whereby the international financial market is like a nightclub geared towards promiscuity, perhaps) have become vastly more popular.

Interesting.

Incidentally, if long term investment bodes well for love (Stein’s theory), then I’ll postulate that the reverse is also true. Speculation in love, like breaking up with someone just to “trade up” to a better romantic partner, generally will not lead to satisfaction. Similarly, love arbitrage would be impossible as such since there is no such thing as risk-free love. Hedging your bets in love usually leads to disaster. (e.g. Zach Morris’ attempts on Saved By the Bell to take out more than one girl on a date at the same time always blow up in his face — but he never becomes a more conservative investor!)

On a final, and unbelievably hippie-tastic note, finance and love are both systems of communication. They just demand more or less opposite strategies for success — the one requires you to be ruthless and greedy and ignore everybody except yourself; the other rewards trust and generosity and mutual understanding. Not a sermon, just a thought.

Doc to Dock

June 13, 2008

Just wanted to take a moment out of my busy (?) workday to post a quick plug for a local charity organization that I’ve worked with a couple of times called Doc to Dock. Check out their site!

The idea is simple: During surgery, doctors open up huge bags of sterile medical supplies but typically use only a small number of them. The rest of the stuff, which is all packed in kits and individually wrapped and thus sterile, must be thrown away. (Then of course all of this crap, most of it plastic, goes either to the landfill or to the incinerator.)

That’s the law! Because of it, hospitals in America waste thousands of tons of brand new medical supplies per day. I posit that the point of said law is not to protect us from some looming public health risk, but rather to artificially boost sales for medical supply companies. (And in turn their suppliers, the plastics industry. And what does plastic come from? Oil!) We need to re-evaluate the conventional economic wisdom that production and consumption growth are always good — the late great Galbraith had a point.

Anyway, Doc to Dock works with hospitals to establish a recycling system so that unused medical supplies, still in mint condition, can be donated. Then Doc to Dock employs volunteer laborers (like myself) to sort the supplies, then ships them to hospitals in Africa where said supplies are desperately needed. So it’s good work! If you live in Brooklyn, you should go down there and help some time. They are cool.

For good measure:

Medical supply companies and their corporate parents are getting what amounts to a subsidy for overproduction — hospitals are required to buy more than they need. This boosts our GDP (yay!) but is not good for consumers. Put yourself in the producer’s shoes: Why bother trying to compete for a hypothetical African market when you’ve got a permanent customer in your pocket?

Tyco, known to all of us as the friendly purveyors of toy trucks and electrical equipment, is also the world’s fourth largest medical supply company. So they’re reaping the rewards of this arrangement; indeed Tyco executives are notoriously greedy. And they have no qualms evading local labor laws in Latin America (as when they were requiring female workers in Mexico to submit to pregnancy testing.) Love those toy trucks though!