Tag Archives: economics

do we want a strong or weak dollar

This Economist article tries to explain whether a stronger or weaker dollar is better. The answer is both or possibly neither. A strong dollar makes imported stuff at the store cheaper for consumers, but it lowers the demand for exports and makes it hard for those same consumers to get well-paying jobs making stuff to export. It encourages trade deficits (more imports than exports) for this reason. Because it holds down wages for the working and middle classes, it makes income inequality worse. All other things being equal, the value of the currency should fall relative to foreign currencies in this situation until things are in balance again. This doesn’t happen to the U.S. dollar because it is the world’s reserve currency, meaning other countries are always willing to buy it – people consider it a safe investment even if it is paying very little interest. So this is one thing that is holding our interest rates artificially low. The author concludes that being the only reserve currency is actually not in the country’s long-term interests.

An overvalued currency and persistent trade deficits are fine for America’s consumers, but painful for its producers. The reserve accumulation of the past two decades has gone hand-in-hand with a soaring current-account deficit in America. Imports have grown faster than exports; new jobs in exporting industries have not appeared in numbers great enough to absorb workers displaced by increased foreign competition. Tariffs cannot fix this problem. The current-account gap is a product of underlying financial flows, and taxing imports will simply cause the dollar to rise in an offsetting fashion.

America’s privilege also increases inequality, since lost jobs in factories hurt workers while outsize investment performance benefits richer Americans with big portfolios. Because the rich are less inclined to spend an extra dollar than the typical worker, this shift in resources creates weakness in American demand—and sluggish economic growth—except when consumer debt rises as the rich lend their purchasing power to the rest.

Chalk the headaches generated by low interest rates up to the dollar standard, too. Some economists reckon they reflect global appetite outstripping the supply of the safe assets America is uniquely equipped to provide—dollar-denominated government bonds. As the price of safe bonds rises, rates on those bonds fall close to zero, leaving central banks with ever less room to stimulate their economies when they run into trouble.

One thing I know from painful experience is that when you live abroad, a falling dollar can hurt, because I was getting paid in U.S. dollars and had to pay my rent in Singapore dollars. So my rent was going up every month in U.S. dollar terms, and also going up every year in Singapore dollar terms. Ouch. Well, the life experience gained had a certain value I suppose. That was one of the only times lately that the U.S. dollar has been falling relative to Asian currencies, so I am just unlucky.

peak bacon?

This headline in USA Today says Nation’s bacon reserves hit 50-year low as prices rise. That pretty much covers it. The reason is not lack of supply but increased foreign demand.

In December 2016, frozen pork belly inventory totaled 17.8 million pounds, the lowest level since 1957, according to the U.S. Department of Agriculture.

As a result, prices are on the rise. The council reports pork belly prices have increased 20 percent in January. Officials said increased foreign demand might account for the decline in inventory. Hog farmers export approximately 26 percent of total productions, the council said.

The Great Equalizer

The Great Equalizer by David Smick book is #8 on the New York Times nonfiction best seller list. Here’s the Amazon description:

The experts say that America’s best days are behind us, that mediocre long-term economic growth is baked in the cake, and that politically, socially, and racially, the United States will continue to tear itself apart. But David Smick—hedge fund strategist and author of the 2008 bestseller The World Is Curved—argues that the experts are wrong.

In recent decades, a Corporate Capitalism of top down mismanagement and backroom deal-making has smothered America’s innovative spirit. Policy now favors the big, the corporate, and the status quo at the expense of the small, the inventive, and the entrepreneurial. The result is that working and middle class Americans have seen their incomes flat-lining and their American Dreams slipping away. In response, Smick calls for the great equalizer, a Main Street Capitalism of mass small-business startups and bottom-up innovation, all unfolding on a level playing field. Introducing a fourteen-point plan of bipartisan reforms for unleashing America’s creativity and confidence, his forward-thinking book describes a new climate of dynamism where every man and woman is a potential entrepreneur—especially those at the bottom rungs of the economic ladder.

Ultimately, Smick argues, economies are more than statistical measurements of supply and demand, economic output, and rates of return. Economies are people—their hopes, fears, dreams, and expectations. The Great Equalizer is a call for a set of new paradigms that inspire and empower average American people to reimagine and reboot their economy. It is a manifesto asserting that, with a new kind of economic policy, America’s best days lie ahead.

 

Bradford Delong on…I’m not sure what

I have a sense that this long blog post by Bradford Delong contains some key insights or kernels of wisdom, but I just don’t quite have the language skills to translate from econospeak to English. I’ll give it a shot:

  • The human economy consists of two layers – the supply-and-demand market system governed by prices as envisioned in economics 101 textbooks, built on top of something more biological, our “propensity to be gift-exchange animals”.
  • Gift-exchange animals want to form relationships. We want wealth, but we want to feel like we have earned that wealth. We want to give, but we don’t want to feel like we are being taken advantage of.
  • What we are paid actually has a lot to do with what country, city and family we were born into, and all the knowledge and groundwork that was laid by the people who came before us in that location, and in the world/economy more generally.
  • Based on the above, he claims to be for some system of fair income or wealth allocation – “we need to do this via clever redistribution rather than via explicit wage supplements or basic incomes or social insurance that robs people of the illusion that what they receive is what they have earned and what they are worth through their work.”
  • He never quite explains what this would look like. He quotes another blogger, who suggests infrastructure, education, entrepreneurship, and something about removal of urban land use regulation that doesn’t quite make sense.

So I don’t quite know what my personal take-away from all this is but I feel like there is something there and if I ruminate on it for awhile it might come to me.

Trump and the military-industrial complex

This article published in Forbes the day after the election pretty much says it all: For The Defense Industry, Trump’s Win Means Happy Days Are Here Again. So much for “draining the swamp” and sending the special interests packing. (By the way, this isn’t fair to swamps. Before Washington D.C. was drained and became a cesspool of legalized corruption, it was a highly productive wetland ecosystem. And what I just said isn’t really fair to cesspools which are a low-tech but highly cost-effective means of treating wastewater. How about we just go with shit-pile? But that’s not really fair to shit-piles, which contain valuable nutrients…)

First, Trump has repeatedly stated that he will modernize the nation’s aging nuclear arsenal, which consists of missile-carrying submarines, land-based missiles in Midwestern silos, and long-range bombers.  The Obama Administration has nuclear modernization plans, but it hasn’t explained where the money will come from.  Now, it is sure to come.  Big winners: General Dynamics and Huntington Ingalls Industries which make subs, Lockheed Martin which makes sub-launched missiles, Northrop Grumman which is building a new bomber, and Boeing which builds tankers and airborne command posts to support the nuclear force.  One of these companies will also be tapped to replace land-based Minuteman missiles.

Second, Trump has proposed significantly increasing the size of the Army and Marine Corps, which will require major equipping initiatives.  Vehicle makers BAE Systems and General Dynamics will benefit not only from new production, but also upgrades to the existing fleet making it more lethal and resilient.  Helicopter makers Boeing and Lockheed Martin will almost certainly get more money, as will companies like BAE Systems and Raytheon that provide radios, electronic warfare gear, and ground-based air defense systems.

Third, Trump has stated an intention to expand the Navy’s fleet to 350 warships from less than 300 today.  That probably means buying aircraft carriers and surface combatants faster, which would be good news for General Dynamics and Huntington Ingalls Industries — the nation’s two leading producers of warships.  The Obama Administration already has programmed fairly robust spending on Virginia-class attack subs (not to be confused with ballistic missile subs) which are built in partnership by GD and Huntington; Trump’s win will do nothing to undermine that plan, and may expand it.  If the Marine Corps grows, Huntington Ingalls will also be building more amphibious warships.

Apparently, a lot of this assessment comes from a report card on the military by the Heritage Foundation, which rates our nation’s military as “marginal” and the army in particular as “weak”, despite the fact that we outspend our “enemies” by orders of magnitude.

A think tank from the opposite end of the spectrum called Center for International Policy had this to say in 2011:

Current reductions must also be measured against the unprecedented growth in Pentagon spending over the past 13 years. Since 1998, the Pentagon’s base budget has grown by 54% (adjusted for inflation).4 Moreover, with the country turning the page on a long decade of war in Iraq and Afghanistan, the planned reductions represent a historically small drawdown when compared with those following the end of Korea, Vietnam, and the Cold War…

We spend more on the Pentagon and related military activities than all of our potential adversaries combined – over four times what China spends – and roughly double what we spent in 2001. 6 Defense spending includes not just the Pentagon’s budget, but also intelligence, veteran’s affairs, defense-related atomic energy programs, defense-related interest on the national debt and other defense-related agencies such as the Department of Homeland Security. Altogether, this constitutes 23% of the entire federal budget, more than half of discretionary spending, or $832 billion…

Our conventional and nuclear forces are more capable, better equipped, and better trained than any other military force in the world.14 For example, as former Secretary of Defense Robert Gates explains, with 11 large, nuclear-powered carriers, the U.S. Navy can carry twice as many aircraft at sea as the rest of the world combined, and the Marine Corps is the largest force of its type, exceeding in size most nations’ armies.

Let’s look at a few more numbers. I’m piecing together numbers from multiple sources and years here so I don’t expect them to be highly accurate, just to give a general idea.

  • U.S. federal government spending is about $3.85 trillion for 2016. (Source: http://www.usgovernmentspending.com, which sounds like an official government website at first glance but is obviously not.) $916 billion of this is for Social Security. $595 billion on Medicare. If I can do math, this leaves $2.3 trillion for everything else.
  • So let’s take that $832 billion estimate from above for all security related spending. 22% of all federal spending, and 36% of spending outside of Social Security and Medicare, which are funded mostly by their own dedicated taxes rather than income tax. In other words, more than a third of our federal income taxes go to support the military and national security.
  • The federal budget deficit in 2016 was $587 billion. This sounds bad at 15% of federal spending, but sounds less bad at about 3% of GDP. Our creditors (which include ourselves) don’t worry too much because we could probably cut spending and/or increase taxes by this amount if we absolutely had to. Just like my mortgage, my creditors don’t actually want me to pay it off, they just want to know that I could if I had to.
  • The nuclear weapons “modernization” program (this is a code word for new nuclear weapons) has been estimated to cost a total of $1 trillion over 30 years. Ignoring inflation, interest, and all principles of finance and accounting, this is $33 billion per year, which doesn’t sound so big next to the other numbers above. It is a diabolical fact that nuclear weapons are relatively cheap compared to conventional weapons. This is one thing that makes them so hard to get rid of – we could never afford to replace them with an equal amount of conventional power, so to get rid of them we would have to give up some power relative to the other countries of the world.

So, let me come up with some of my naive policy prescriptions just for fun:

  • The Army and Marine Corps obviously do the same thing. Get rid of one of them. I would tend to get rid of the Army since the Marines have more experience riding on boats and getting from the boats to the shore.
  • Keep the Navy the way it is or even strengthen it a bit, as it is probably the branch of the military most likely to be needed.
  • Two out of three branches of the nuclear “triad” are completely useless – land based missiles and bombers. Get rid of them. If you can’t just throw them away, cancel the modernization program and retire them as they become obsolete. Store them safely or use them to generate carbon-free electricity in developing countries under UN supervision.
  • Keep the submarine-based missiles for the time being. Use them as bargaining chips and retire them little by little as we convince other countries to give up their own nuclear weapons.
  • The Air Force will have less to do now that it doesn’t have any nuclear weapons. Get rid of that part of it. Also get rid of most of its airplanes because the Navy has plenty of those. It will still have some satellites and what-not to take care of.
  • Change the Constitution so military-industrial companies can’t buy politicians and write the nation’s laws in their favor.
  • Change the Constitution so income tax revenues can be spent on the military only up to 2% of GDP. If the political system agrees to more funding, fund it through a national sales tax on everything the citizens buy, with a message printed on every receipt telling them exactly how much of every purchase goes to the “war tax”. Let them puzzle over why there is a war tax if there is no war.
  • Reform the Security Council by giving up the veto in exchange for everyone else giving up the veto and replacing it with some kind of rational consensus process.
  • Grow the economy, reduce the deficit, create jobs, build great infrastructure, provide great education, protect the environment, help the poor, etc.

inflation

The Economist says inflation could be on the verge of a comeback.

Some economists reckon a sustained rise in inflation is overdue. Most of the rich world is out of recession, emerging markets seem to have put the worst of their commodity bust behind them, and in a few places, like America, low unemployment has at last given way to accelerating wage growth. It is possible, some suppose, that the weak growth and sustained disinflation of the past half-decade has blinded markets and policy-makers to the potential for a sharp swing in the other direction, toward uncomfortably high inflation.

The rest of the article goes on to poo-poo the idea that inflation may be on the verge of a comeback. But we’ll see.

October 2016 in Review

3 most frightening stories

  • The U.S. electric grid is being systematically probed by hackers working for foreign governments.
  • According to James Hansen, the world needs “negative” greenhouse gas emissions right away, meaning an end to fossil fuel burning and improvements to agriculture, forestry, and soil conservation practices to absorb carbon. Part of the current problem is unexpected and unexplained increases in methane concentrations in the atmosphere.
  • The epidemics that devastated native Americans after European arrival were truly some of the most horrific events in history, and a cautionary tale for the future.

3 most hopeful stories

  • New technology can read your heartbeat by bouncing a wireless signal off you. Mark Zuckerberg has decided to end disease.
  • While he still has people’s attention, Obama has been talking about Mars and zoning. Elon Musk wants to be the one to take you and your stuff to Mars.
  • Maine is taking a look at ranked choice voting. Ironically, the referendum will require approval by a simple majority of voters. Which makes you wonder if there are multiple voting options that could be considered and, I don’t know, perhaps ranked somehow? What is the fairest system of voting on what is the fairest system of voting?

3 most interesting stories

and the Nobel Prize in Economics actually went to…

The Royal Swedish Academy of Sciences has decided to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 to

Oliver Hart
Harvard University, Cambridge, MA, USA

and

Bengt Holmström
Massachusetts Institute of Technology, Cambridge, MA, USA

“for their contributions to contract theory”

Society’s many contractual relationships include those between shareholders and top executive management, an insurance company and car owners, or a public authority and its suppliers. As such relationships typically entail conflicts of interest, contracts must be properly designed to ensure that the parties take mutually beneficial decisions. This year’s laureates have developed contract theory, a comprehensive framework for analysing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatisation of public-sector activities.

In the late 1970s, Bengt Holmström demonstrated how a principal (e.g., a company’s shareholders) should design an optimal contract for an agent (the company’s CEO), whose action is partly unobserved by the principal. Holmström’s informativeness principle stated precisely how this contract should link the agent’s pay to performance-relevant information. Using the basic principal-agent model, he showed how the optimal contract carefully weighs risks against incentives. In later work, Holmström generalised these results to more realistic settings, namely: when employees are not only rewarded with pay, but also with potential promotion; when agents expend effort on many tasks, while principals observe only some dimensions of performance; and when individual members of a team can free-ride on the efforts of others.

In the mid-1980s, Oliver Hart made fundamental contributions to a new branch of contract theory that deals with the important case of incomplete contracts. Because it is impossible for a contract to specify every eventuality, this branch of the theory spells out optimal allocations of control rights: which party to the contract should be entitled to make decisions in which circumstances? Hart’s findings on incomplete contracts have shed new light on the ownership and control of businesses and have had a vast impact on several fields of economics, as well as political science and law. His research provides us with new theoretical tools for studying questions such as which kinds of companies should merge, the proper mix of debt and equity financing, and when institutions such as schools or prisons ought to be privately or publicly owned.

The Economics Nobel Isn’t Really A Nobel

The Economics Nobel Isn’t Really A Nobel according to Maggie Koerth-Baker at FiveThirtyEight.com.

But, technically, there is no Nobel Prize in economics.2 Instead, there is the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. It was first awarded in 1969 and is named not after a person, but after the central bank of Sweden — the Sveriges Riksbank — which funds it. The Nobel Foundation doesn’t pay out the award or choose the winner (though the winner is chosen in accordance with the same principles used by the Nobel Foundation), but it does list the prize on its website along with the Nobels, tracks winners the same as Nobel laureates, and even promotes the prize alongside its own. Members of the Nobel family have spoken out against the award.

So why does it exist? Notre Dame historian Philip Mirowski has found evidence that the economics award grew out of Swedish domestic politics. According to Mirowski, in the 1960s, the Bank of Sweden was trying to free itself from government oversight and become independent. One way to do that was to frame economics as purely scientific, rather than political — in which case, government interference could only hurt the bank. Having a Nobel Prize boosted economics’ scientific street cred. And Mirowski isn’t the only academic who is skeptical of whether there should be a Nobel-associated economics prize. Friedrich von Hayek, who won the award in 1974, used his Nobel Banquet speech to critique the prize.3 “The Nobel Prize confers on an individual an authority which in economics no man ought to possess,” Hayek said. He worried that the prize would influence journalists, the public and politicians to accept certain theories as gospel — and enshrine them in law — without understanding that those ideas have a different level of uncertainty than, say, gravity or the mechanics of a human knee.

Paul Romer and the Nobel Prize

I write this the night before the 2016 Nobel prize in economics is scheduled to be awarded. By the time this posts it will have been awarded, so keep that in mind if what I say below seems outdated the second it posts.

City Observatory says Paul Romer deserves to win the Nobel Prize in economics.

In our view, the academy might want to closely consider giving the award to Paul Romer, recently appointed to be the chief economist for the World Bank, for two reasons.

First, in a series of papers published a couple of decades ago, Romer was responsible for some of the key breakthroughs in what is called “New Growth Theory,” which re-writes the mechanics of long-term economic growth in a fundamental and optimistic way. We described the key insights from of these theories a couple of months ago at City Observatory. Romer’s long been short-listed for the prize on account of this work, awaiting it seems, only sufficient quantities of gray hair to take his turn.

Second, in the past few weeks, Romer has turned the economic world on its head with a scathing critique of deep flaws in the past two decades of macroeconomic theorizing. In a paper entitled, “The Trouble with Macroeconomics,” Romer indicts the state of macroeconomics, and its growing detachment from the real world.

I happen to like Paul Romer. I saw him speak in person a few years ago and thought he was impressive. His message that human knowledge and creativity drives long-term improvements in the quality of our lives is a hopeful one in a world where we can’t just keep extracting, consuming, and dumping more and more forever.