Gone to the beach
I am taking a few days off. Rachel Ziemba and Christian Menegatti — my former colleagues at RGE — will be guest blogging here. I should be back on Labor Day.
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I am taking a few days off. Rachel Ziemba and Christian Menegatti — my former colleagues at RGE — will be guest blogging here. I should be back on Labor Day.
To state the obvious, this blog looks a bit different today than it did last week. It was redesigned as part of a broader redesign of the Council’s web page — and the webpage of the Center for Geoeconomic Studies. Most of the early kinks have been ironed out I hope — but if anything seems off, let me know.
If all goes according to plan, my blog will be migrating to cfr.org later this week. The transition should be pretty seamless — at least that is the goal.
It obviously is a bit of a change for me, after being a part of the RGE site for so long. I am particularly grateful that Nouriel and RGE hosted my blog for the past several months, even after I moved to the Council on Foreign Relations. It also will be a bit of a change for the Council and for the Center for Geoeconomic Studies. I trust that the high quality of comments that has distinguished this blog will continue - and that the comments will remain focused on global economic issues. I’ll have more later in the week.
On Monday, Bob Davis of the Wall Street Journal argued that the world isn’t flat, or at least it “isn’t as flat as it used to be.” National borders matter more. Barriers to the free flow of goods – oil as well as grain – are rising. Barriers to the free flow of capital too.
He is right. I actually think he didn’t push his thesis as far as it could be pushed.
Consider energy. Most oil exporters sell their oil abroad for a higher price than they sell their oil domestically. That means that the same good has one price domestically and another price internationally. It isn’t hard to see why they have adopted this strategy: if opening up to trade raises export prices, it can leave those who consume the country’s main export worse off. Only exporting what cannot be sold domestically is one way of mitigating that effect. And for most of the oil exporters, it is one (small) way of sharing the bounty that comes from the country’s resource wealth.
This isn’t new. Saudi Arabia and Russia have long sold oil domestically at a lower price than internationally. What is new is that a host of food exporters are adopting a similar policy.
Argentina was perhaps the first. After its devaluation it taxed its agricultural exports – that was a way of raising revenue, but also a way of keeping food cheap domestically. As global prices have increased, Argentina has stepped up its restrictions on say beef exports – helping to keep Argentina’s national food affordable domestically.
Argentina’s farmers aren’t happy. They prefer selling for a higher price abroad than selling for a lower price domestically.
But with food prices rising, more and more countries seem to be adopting the same policies for their rice and wheat that Saudi Arabia and Russia have adopted for their oil. They only export what cannot be sold domestically at a price well below the world market price. That helps domestic consumers at the expense of domestic producers.
It also is a way – per Rodrik (”if you are Thailand or Argentina, where other goods are scarce relative to food, freer trade means higher relative prices of food, not lower”) — of assuring that the consumers in a food exporting country aren’t made worse off by trade.
Actually, in the current case, it is more a way of assuring that consumers in exporting countries aren’t made worse off from a shock to the global terms of trade that dramatically increased the global price of a commodity. But the principle is the same.
Such policies have produced a more fragmented world. Beef is cheaper in Argentina than in the rest of world. Rice is cheaper in rice-exporting economies than many rice-importing economies. Oil is cheaper in oil-exporting economies. And so on.
Then throw in the subsidies that many oil and food consumers have adopted to mitigate the impact of higher oil prices. China sells oil domestically at a price below the world market price. The Saudis are subsidizing food imports. That implies that the same good sells for a different price in “importing” countries – not just for a different price in importing and exporting countries.
For all the calls to adopt a coordinated response that guarantees that exporters won’t take steps — like taxing exports — that hurt the importers as well discouraging increased production in the exporting economy, my guess is that the food crisis will produce more government intervention in the market, not less.
Put it this way: after seeing various food exporting countries take policy steps that would reduce their countries’ profits from exporting to keep domestic prices low, is China’s government more or less likely to trust the market to deliver the resources the Chinese economy needs for its ongoing growth? Or will China conclude that it needs to invest and exercise some control in the production of the resources if it wants to guarantee the stability of its supplies?
Then there are capital flows. Davis highlights the growing presence of sovereign wealth funds in global markets and — – citing a forthcoming Council on Foreign Relations report by David Marchick and Matthew Slaughter — the possibility that the US and Europe will respond to the rise of state investors by stepping back from their existing, fairly liberal, policies for inward investment. He also notes that many countries with sovereign funds looking abroad limit investment in their own economies. China is a case in point.
Here I don’t think Davis goes far enough.
Sovereign wealth funds are a lot smaller than central banks. Their assets aren’t growing anywhere near as fast. The overall increase in the presence of the world’s governments in financial markets is much broader and deeper than an analysis that focuses on just sovereign funds would suggest.
MORE FOLLOWS
Unions in the American manufacturing sector used to have the bargaining power to secure a middle class wage for their members. Not any more. And no one else – apart from corporate CEOs, hedge fund managers and star athletes – seems to have all that much bargaining power either.
The chart that accompanies Justin Lahart and Kelly Evan’s report on voter angst in Pennsylvania is worth the price of the Saturday Wall Street Journal. It isn’t (yet?) available online; for some reason it isn’t part of the graphics package that accompanies the online story. It shows the enormous gulf between the income of the top 0.1% of the income distribution and the rest of the population. It also shows that family income, adjusted for inflation, has fallen by 4% for the bottom 90% of the population while rising 22.2% among the top .01% (all parts of the top one percent saw income gains greater than 5%, but the gains were biggest at the top. The graphic I liked is based on the Piketty/ Saez data, and the income calculations exclude capital gains.
UPDATE: the key graph can be found here; hat tip to an anonymous contributor.
I am not sure than Makiw’s explanation – a fall-off in educational achievement and slower growth in the supply of highly-skilled workers – is a sufficient. The top 5% of the American families are all reasonably well-educated. But even among the 5%, almost all the income gains have been concentrated at the top. A fall-off in educational achievement can perhaps explain why the real income of the top 10% of American families is rising (a bit) while the income of the bottom 90% isn’t. But it cannot explain increasingly inequality among those at the top.
It isn’t that hard to see why so many Americans think the US is on the wrong track. Most Americans didn’t benefit from the expansion of the past few years. And now the economy isn’t expanding.
It also isn’t hard to see why public support for “trade” has eroded dramatically, despite the Bush Administration’s ongoing rhetorical critique of “economic isolationism.”
The Doha round has stalled. Trade hasn’t. China’s exports increased from under $250 billion in 2000 to $1220 billion in 2008. It isn’t clear that increased trade with low-wage countries has contributed to lower wages for less-skilled workers in the US. Krugman didn’t find a strong link. But increased access to cheap goods clearly didn’t keep family income – adjusted for inflation and excluding capital gains — from falling for 90% of American families. The impact of globalization on prices isn’t all that clear: competition for oil has pushed its price up. Cheap oil was a big part of the post-war American lifestyle. Cheap financing from the rest of the world did make it easier for Americans to make up for falling wages by borrowing against their homes. That strategy was never sustainable, and it has clearly run its course.
Paul Krugman (who hardly needs a plug from me), Macro Man and Steve Waldman (of interfluidity) have all written posts that I wish I had written.
Krugman elegantly shows that a lot of American stereotypes about Europe are based on data from the 1990s. By some measures, Europe’s labor markets no longer look more sclerotic than America’s labor markets. The percentage of French men between 25 and 54 without jobs is now pretty much the same as the percentage of American men between 25 and 54 without jobs.
The similarities don’t end there. The European Union as a whole also now runs a current account deficit financed in no small part by the world’s emerging economies.
Macroman had the brilliant idea to compare the most recent G-7 Communique to the G-7 (and G-5) communiqués that marked big changes in the foreign exchange market. The most recent communiqué clearly contained new exchange rate language – language no doubt intended to give a boost to the sagging dollar. But the G-7’s new language lacked the vigor of the key communiques of the past. Back in 85 and 95, the G-7 didn’t just complain about disruptive moves. It indicated the direction it wanted the market to move.
Moreover, as Macroman notes, the G-7 countries themselves aren’t necessarily the key countries setting G-7 exchange rates. The amount of dollars that China, Russia and the Gulf want to sell for euros, pounds and other currencies also matters:
“it’s far from clear that the G7 are the relevant authorities; after all, it’s not Japan or Germany or the UK that is buying billions of EUR/USD every month; it’s China and Russia and the Middle Eastern Countries. And Macro Man didn’t see their names attached to any document expressing concern.”
I also recommend Dr. Chinn’s analysis and — if you have an RGE subscription/ receive BNP research - Lee and Speranza’s post G-7 rant (link is through the RGE subscription service). They argue that the G-7 spent its time focusing on currencies when currency markets aren’t the problem — as dollar weakness basically reflects weak US fundamentals — and didn’t do anything to address distress in the credit markets. Lee and Speranza, speaking to the G-7:
I thought that the KU Jayhawks had a shot to comeback from their mini-slump late in the second half that allowed Memphis to open up a lead when Collins stole an inbound pass late in the game and then hit a three from the corner to cut the lead to four. I thought the Jayhawks had a shot when CDR (Chris Douglas-Roberts) missed two free throws late in the game. I also thought that they lost their shot when KU couldn’t rebound the Douglas-Roberts miss. But Derrick Rose only made one of two, Collins somehow passed the ball to Chalmers as he was falling down, and then Chalmers hit THE SHOT.
When Texas won a national title in a sport that folks down in Texas tend to think matters, I seem to remember that someone over at Angry Bear painted the Angry Bear site Texas orange. I don’t have the same ability to change RGE’s color scheme, but if I could, I would.
Commentary on less important matters will resume soon.
There is one big reason why haven’t quite gotten around to focusing on the economic data and financial market moves this weekend.
Next Saturday is going to be interesting. UCLA-Memphis and Kansas-North Carolina. Wow. I wonder how many entries in Econbrowser’s pool had all four number one seeds advancing.
UPDATE. Econbrowser question answered: 16 entries, including one by Dr. Hamilton himself, correctly picked this year’s final four.
I will be away most of this week and will not be posting regularly.
In the interim though, the quality of this blog is likely to go up.
Jeff Frankel of Harvard (who recently started his own blog) has agreed to contribute a few guest posts. And Rachel Ziemba of RGEmonitor — who co-wrote a series of papers with me on the Gulf’s sovereign funds and contributes to RGE’s economonitor — will be chipping in as well.
There no doubt will be plenty to discuss.
I am not just referring to current financial market conditions, even though by all accounts the credit market is facing severe distress. The gap between Agency MBS and Treasury spreads feels a bit like the gap between on and off the run 30 year Treasury bonds back in 1998.
Agencies aren’t quite Treasuries (though Ginnie Mae bonds are quite close). But it is hard for me to see the US government walking away from the Agencies right now. Not when the Fed is more and more willing to accept Agency MBS as collateral. Not when the Congress is counting on the Agencies to mitigate the impact of the fall in private demand for mortgages. Not when the world’s central banks already own $900b billion of Agencies (see the Fed Flow of Funds, L107, line 13) — about 12% of all outstanding Agencies (counting Agency MBS). America’s creditors wouldn’t be happy if the US walked away from its implicit guarantees …
That though is a political judgment, one quite independent of the actual health of the Agencies’ individual balance sheets. And right now investors seem to care about the actual health of the Agencies’ balance sheets.
Nor am I just referring to former Secretary Summers’ assessment of the current conjuncture:
“I believe we are facing the most serious … economic and financial stresses that the US has faced in at least a generation, and possibly much longer. …. We are in nearly unprecedented territory with respect to financial strain.”
Nor am I just referring the apparent state of risk management at many of the United States (and Europe’s) leading financial institutions. Hat tip, Thoma.
Rather I am referring to the fact that the credit extension the fueled the most recent boom didn’t generate any real income gains for most Americans. Times weren’t all that good for most Americans even before the credit bubble burst.
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