Truck and Barter

Same Old Playbook

To say that equity markets were disappointed with the Fed today is an understatement. You can include me the camp that was looking for some sort of softer approach towards interest rates. I had been saying since nearly the beginning of the year that I don't think the Fed would push the Fed Funds rate much above 3.5%. This had been based on the rather anemic money supply growth rates. It was partially based on hope that "this time its different" but, in reality, this looks a lot like a decade ago. The Fed seems to be using the old playbook.

What we're seeing now looks similar with housing replacing the equity markets experiencing some sort of seemingly irrationality. There are some signs of inflation perculating up with oil near 60 just like we saw prices for intermediate goods back in 1994 up sharply. The Fed back then, of course, raised interest rates to counter this trend, but deeds speak louder than words. M3 is grew rather anemicly while M1 was grwoing modestly. 1995 saw these money supply numbers switch with M3 grwoing nicely while M1 wasn't and didn't from June of 1995 till Feb 1998. The Fed was removing liquidity from the system. You can see that the pattern is seemingly repeating itself today with M1 marginally growing. The Fed seems to be repeating the pattern of adding liquidity to the system only to remove it when the economy picked up.

My thought that we were nearer to the end of the rate hike cycle was premised on the fact we seem to be further along in the playbook. M1 right now is hardly growing while M3 is increasing at a pace just below 5%. These numbers are remarkedly similar to those of a decade ago. The market is weary of an inverted yield curve. As you shouldn't try and out think markets, this is justified. With few developed countries growing right now, it seems irrational to kill off the one that is.

Greenspan on China and Protectionism

Alan Greenspan's testimony to the Senate finance committee is superb. Excerpts:

Some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi (RMB) relative to the U.S. dollar would significantly increase manufacturing activity and jobs in the United States. I am aware of no credible evidence that supports such a conclusion....

[A]ny significant elevation of tariffs that substantially reduces our overall imports, by keeping out competitively priced goods, would materially lower our standard of living....

New hires in the United States currently average more than a million per week, half resulting from voluntary job change.

Wow, ~100,000 Americans will quit their jobs today (if quitting is uniform M-F). He closes:

In the decades ahead, it is in our interest and that of the global economy that China continue to progress toward becoming a more market-based, productive, and dynamic economy in which individual initiative, not government decisionmaking, is the fundamental strength behind economic activity. For our part, it is essential that we not put that outcome, or our future, at risk with a step back into protectionism.

Argentina

Argentina is, as everybody knows, for the most part a basket case. I ran across an article on Bloomberg which exemplifies why:

Consumer price rises have quickened this year after Kirchner, 55, granted all non-state workers a monthly wage increase of 100 pesos ($35) in January and allowed people to defer income tax payments that were due in December. He has raised the average salary 38 percent since taking office two years ago in a bid to bolster the country's recovery from its worst recession on record.

Of course, if the government wasn't in the habit of granting "wage increases", they probably would be a heck of a lot richer. It could be worse, you could try running an atuo company in the country:

Manfred Muell, president of DaimlerChrysler AG's local unit, said the 42 percent wage increase auto workers are demanding would make the industry unprofitable.

``It's just not reasonable,'' Muell said at a news conference on April 21 in Buenos Aires.

President Kirchner sounds like he knows how economics works:

``We will win the battle, the battle of justice, of fair profits, the battle to defend people's purchasing power,'' Kirchner said in a speech on April 6 to union leaders. ``If people have the right behavior, we will put a lid on that perverse behavior that says that when people gain in purchasing power, prices go up.''

I can't say he doesn't sound a lot like politicians in this country though. Unsurprisingly, the reason people have more money is that they printed more:

The central bank boosted May 3 the seven-day call rate -- the rate it borrows from commercial banks at -- half a percentage point to 3.75 percent, leaving it up 1.25 percentage points since Jan. 9. The bank has also cut the money supply -- as measured by the monetary base -- by 4 percent this year to 36.1 billion pesos, following a 24 percent surge in 2004.

A New Florida Theory

Michael Stastny has a post up of the latest idea from the monorail salesman, Richard Florida. The City Journal quite ably rips apart his theory of the "creative class" with incovenient facts such as actual economic performance. Undoubtedly wanting to sell more books and perhaps gain some consulting work, he is back with another application of his "work" with the comparison of creative workers across countries in the Harvard Business Review. The U.S. lags behind other countries in this which would imply that Florida thinks we could lag in performance.

Unfortunately, actual economic performance gets in the way his theory once again. If you scroll down to the bottom of the post, Michael has put together a couple of graphs that seem to put a dent into this idea. There doesn't appear to be any correlation between the percentage of creative workers in a country and the 5 and 10 year growth rate.

There does appear to be one outlier there however, Ireland. It seemingly could provide some sort of anectdotal evidence that perhaps there could be some merit, just as say the fabulous wealth of Silicon Valley seemed to support his previous work with cities. Florida even wrote an op-ed telling Pittsburg to follow the Irish example. The big problem with this is that Ireland is a model of what countries, states and cities should be doing to spur economic growth, cutting taxes. Also, Ireland's growth was largely driven by investment from U.S. technology companies(almost half by some measures). In other words, while the Irish had an educated class of people available as a workforce, they didn't generate the ideas for new enterprises that drove the growth.

A quote from the City Journal article mentioned above sums it up nicely:

Now comes Florida with the equivalent of an eat-all-you-want-and-still-lose-weight diet. Yes, you can create needed revenue-generating jobs without having to take the unpalatable measures—shrinking government and cutting taxes—that appeal to old-economy businessmen, the kind with starched shirts and lodge pins in their lapels.

The Ukrainian Economy

Many people are focusing their attention on the public resistance and uncertain revolution in Ukraine. We focus on the Ukrainian economy, which has lately been the fastest growing in Europe; after a seesaw economy in the 1990s, quasi-independence from Russia has brought a domestic investment boom and foreign investment slump. Two weeks ago, BusinessWeek had a must-read article on the entire economic affair:

But what's behind it? A combination of good luck and good macroeconomic policy. The luck is that metals, particularly steel, make up 60% of Ukraine's exports. Global prices have been high recently, thanks largely to demand from China and other Asian markets. The sound macroeconomic policy has been followed by successive governments since a financial crisis in 1998. The country has a 9.7% current account surplus, public debt is a low 24% of GDP, and inflation is in single digits. The wide-ranging privatization of the 1990s is bearing fruit: Some two-thirds of GDP is produced by the private sector, the main engine of Ukraine's growth. True, much of that is owned by a small number of tycoons. But these oligarchs -- the same term used in Russia -- are investing serious money in sectors such as agriculture, telecom, and banking. "Yes, privatization was dirty, but it has shown its effectiveness," says Olexander Paskhaver, president of the Center for Economic Development in Kiev.

Should Viktor Yushchenko manage to unseat the sitting Prime Minister through judicial decision or violence, what is at risk economically?

With Ukraine's economy booming, it's not only governments but also investors who have an interest in the poll. If Yushchenko, a strongly pro-Western politician who jump-started Ukraine's boom when he was Prime Minister from 1999 to 2001, pulls off a victory, Ukraine could see major reforms that will put the country on the international investor map like never before. But if the ruling elite rigs the election to ensure a Yanukovych win, as some foreign governments fear, Ukraine faces the risk of international isolation and serious political unrest.

The current PM and practically de-facto Presidential incumbent, Yanukovych, is actually an economically grey oligarch:

A former governor of the Donetsk region in eastern Ukraine, Yanukovych is linked to that area's powerful coal and steel barons. His government has openly favored the interests of these oligarchs, who are allied with Kuchma. In May it privatized Kryvorozhstal, Ukraine's largest steel producer, awarding the company to a business group headed by Kuchma's son-in-law, Viktor Pinchuk, even though the winning bid of $800 million was far less than a $1.5 billion offer from U.S. Steel Corp.

Still, the Yanukovych government has its share of economic achievements. It has slashed the top income-tax rate from 40% to a flat 13%, passed laws to facilitate land privatization, firmed up protection for intellectual-property rights, and pursued membership in the World Trade Organization, which is expected by 2006.

Two years ago, BW was worried that former President Kuchma's authorization to sell Iraq a sophisticated--and UN sanctions-violating--aircraft detection system would upend Ukrainian economic growth. It didn't. An article from Ria Novosti argues that, from the perspective of the Russian businessman, Yanukovych will give his own oligarchs with the best deals, while Yushchenko will break apart the old Soviet supply chains, hurting both Ukrainian and Russian oligarchs. This is why, despite the protests and media defection, Ukrainian oligarchs still support Yukanovych:

Most remain wedded to Mr Yanukovich, especially the barons of his political heartlands in the industrialised Donetsk region. But a few are beginning to wonder whether Mr Yanukovich still offers the best protection for their interests.

Many are also coming under pressure from employees who are openly supporting Mr Yushchenko - putting up posters in factories and workplaces and taking time off for demonstrations.

Much will hinge on the attitudes of the country's two wealthiest men. One is Viktor Pinchuk, Mr Kuchma's son-in-law and head of a business empire that ranges from manganese to media, including the Novy Kanal, STB and ICTV television channels.

The other is Rinat Akhmetov, the chief of a steel and coal empire based in Donetsk and Mr Yanukovich's main business backer.

To put the squeeze on these guys, Russia threatened to stop ALL foreign investment into Ukraine.

This would be comical if it weren't so damn serious.

Other Links:

CIA World Factbook - Ukraine
Institute for Economic Research and Policy Consulting - Historical Data 1991-2001
Ukrainian Business - Links to a number of interesting articles.

Swiss Boycott of American Products?

A while back, some good bloggers were discussing an apparent US consumer boycott of French products and travel to France. Of course what's good for the goose is good for the gander. But wait, it's not France taking it out on the US, but Switzerland, who sends 42% fewer tourists to the US than it did in the year 2000. But it's more than tourism:

While the total value of Swiss imports worldwide was virtually unchanged in 2003 at SFr122.4 billion, imports from the US fell by 17.3 per cent...

The [Swiss-American Chamber of Commerce] said the decline could partly be explained by the fact that Swiss consumers were turning away from US products in protest against some of the Bush administration’s policies.

Imports of wine fell by nine per cent in 2003, while the number of cars imported from the US declined by seven per cent. Both are what US officials call “emotional” consumer products.

But don't make too much of this though, because other factors--different recovery cycles, poor consumer confidence, and, OF COURSE, the exchange rate--explain the drop too:

[T]he US had recovered much faster than Europe after the global economic slowdown of 2000 and 2001.

[T]he economic impact of the war in Iraq was less pronounced in the US than it was in Europe....

The chamber's annual yearbook noted that it was “not surprising” that imports from the US had declined during 2003, as Swiss consumer confidence remained subdued.

“It has to be said that [trade] is falling back from an extremely high level. Over the past 30 years, trade has quadrupled and the business relationship between Switzerland and the US is [still] very healthy,” said Naville.

“Trade has retracted due to a weak dollar, which makes Swiss products in the US very expensive. But it's also due to weak demand in Switzerland, which has [found it difficult] to get out of recession over the last few years,” he added.

Cold Hearted Economists

Dave over at Always Low Prices points out that the jobs being lost to outsourcing and overseas manufacturers are going people in dirt poor nations. This fact is always over looked by politicians and "journalists" who take an anecdote to make these loses into a national tragedy. Most of the world is dirt poor in comparision to Americans, but politicians seemingly want to put up trade barriers and at the same time tax citizens for foriegn aid.

There is a reason the Delong's and Krugman's have been accused of being right-wingers and there seems to be many economists who actually fit that description. Economics today is what many left-wingers decry as liberal economics or, if your Australian, rational economics( does that make the opponents irrational?). This is why Delong and Krugman both support free trade while, I know from reading Brad's site, advocating some sort of state support for those negatively affected by globalization. They recognize that markets are the best choice for the allocation of resources, but seek a safety net so that the losers aren't affected too badly.

What about those economists, like myself, who aren't American liberals, surely I don't give a damn about other people? Let me ask a question, what other profession devotes as much time and resources to researching how man can better themselves? The fact that so many economists sound like right-wingers is the result of research which points them in that direction, but believe it or not, a lot them have a heart too. I sometimes joke with my friends that I'm a socialist. This doesn't have to do with actual beliefs but the simple facts that it's much easier to get laid in a country with a socialist government as an American.

There is nothing that makes me happier than when I see solid economic growth coming out places like India and China. Every person who led a miserable life and then entered the middle class makes me richer in ways beyond just short-term job growth. That's the way we should should look at the situation and not through the lense of spoiled kids on the streets of Seattle. Economists study how man betters himself even if its not the technical definition of what we do.

Quotes for Reflection

In Italy for thirty years under the Borgias, they had warfare, terror, murder, bloodshed. They produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland, they had brotherly love, five hundred years of democracy and peace, and what did they produce? The cuckoo clock.

-Orson Welles (cited in Impossibility: The Limits of Science and the Science of Limits, by John Barrow, p.31)

It is probably no coincidence that the hotbed of medieval Europe’s inchoate capitalism was Italy, with its Mediterranean exposure to Islamic culture.

-Robert Wright, Non Zero, p.158

The Fed's Credibility

Will the Fed raise rates next week? I think everyone agrees they will, the important question becomes by how much?

Expectations of a half-point hike June 30 were massively reduced last week after relatively tame US inflation numbers and hints from Fed officials, including chairman Alan Greenspan, that the rise in US borrowing costs from their current 46-year lows of 1.00 percent will not be aggressive.

The issue is one of credibility. If the Fed has finally earned its anti-inflation credibility, it can afford to be patient when raising rates, in effect it has a bit of credibility to burn. If the Fed is not believable, if the markets think that the Fed will continue to accommodate the large deficits, then they must move now and swiftly. So which is it?

Benanke, in a recent interview with The Region thinks the Fed should adopt an explicit inflation target in order to add that extra bit of credibility.

Bernanke: No, I think we have achieved a substantial degree of credibility based on the record of low inflation and that reduces the inflation bias problem already in itself. However, I think that announcing a target would strengthen our commitment to the price-stability objective and also give more emphasis to long-run considerations in policymaking. Our policy meetings are very often focused on near-term developments. Having a medium- to long-term inflation objective would force us to keep in view where we want the economy to be in the longer run.

We don't have good models for this psychological battle of managing expectations, nor do we understand it as well as we think we do.

US Unemployment May 2004

The darker the state, the higher the unemployment rate:

Data come from the BLS courtesy of the Joint Economic Committee.

UPDATE: The JEC emails to warn that its data was wrong initially. Charts have been updated to reflect new data--look much nicer now.

J.K. Galbraith on America

Dr. Galbraith does not think highly of the Bush administration. In fact, in this article an unrestrainted J.K. Galbraith concludes that our "economic problem" is mostly--not all--Bush's fault. In fact, he tells us that Bush wants economic stagnation and that "[p]ossibly, this is intentional," as a means to self-enrichment and to justify a tax reduction.

I find it helpful when writers have clear opinions about political and economic phenomena, even when I interpret those phenomena differently. However, I find it frustrating when these clear opinions are so well thought-out that the writer doesn't see a need to share with us the data that ground his beliefs.

Such is Dr. Galbraith's essay.

-----

For instance, we learn that America is not prosperous, that the national infrastructure is going to hell, that the current administration doesn't want to increase real wages of the middle class. We find out:

As things are going, quite soon, federal taxes will fall mainly on payrolls and on current consumption. Such taxes are paid mostly by the middle class, by the working class and by the poor...

Every public service will fall between the hammer of tax cuts and the anvil of deficits in state, local, and federal budgets. The streets will be dirtier, as also the air, and the water. Emergency rooms will back up even more than they have; more doctors will refuse public patients. More fire houses and swimming pools and libraries will be closed. Public universities will cost more; the public schools will lose the middle class.

How is it that many private businesses manage to raise productivity and cut costs when revenue decreases, but public businesses manage only manage to cut output?

-----

Dr. Galbraith still sees every national macroeconomy as something that must, fundamentally, be poked, prodded and cared for by politicians and technical economic experts. He doesn't seem to have a distinction between a government that sets and enforces the rules of the game, and one that changes the rules to game the outcome.

But if we ignore his dislike for current policymakers, we find that I can occassionally agree with him:

the basic reality is that the boom of the 1990s created conditions that were highly abnormal, and therefore the path of recovery is likely to be abnormal as well

I was ready to rejoice with my new friend until he insisted that the recovery would be "– abnormally weak and abnormally fragile."

I thought it would have been pertinent to mention that the recession itself was abnormally weak--the unemployment rate maxed out at 6.3% in June of 2003, and was only at or above 6% for 7 months, and is now at 1995-1996 levels--but Dr. Galbraith doesn't see the need...

After all, he had just finished telling us that low-interest rates spurred high consumption and debt during the downturn. I guess that calculating the benefits of such an environment were left as a reader exercise, while the costs required emphasis.

There are several more points I found interesting.

-----

Dr. Galbraith considers the trade deficit a large problem with no positive solution. Besides, Bush doesn't care about the trade deficit.

-----

Bush likes cheap labor and cheap oil; current economic policies just happen to mean growth until the election and stagnation afterward.

-----

The occupation of Iraq is a miserable failure.

The provision of security, infrastructure and civil administration was not adequately prepared for.

For a mind like Dr. Galbraith's, the adaptable, adjust-on-the-fly method of military occupation doesn't make sense. To him a country just can't function without detailed plans and policies.

Even worse, in Dr. Galbraith's view, the economic transition from Baathist tyranny to market-based society is tantamount to "shock therapy"; he even claims that the Iraqi economy is "unregulated", even though the CPA & central government own and operate the major source of national income--the entire oil industry from oil wells to refining to oil exports to gas stations.

-----

Did I mention that Dr. Galbraith thinks America is building an empire? (I don't disagree). First Afghanistan, now Iraq. In case you didn't know it, that's really expensive--so expensive that he thinks Europe might very well pass America as that global economic leader.

By contrast, investments made at home accumulate and yield a return for centuries into the future. Although Europe faces formidable problems of economic governance, it is not too difficult to foresee a day when this difference in current behavior will give Europe an economic advantage over the United States..

Recall that France still has a 35 hour work week, that Germany insists on protecting manufacturing, and that the proposed EU constitution doesn't so much as set basic rules to enrich and sustain, but actually issues detailed instructions on how to act.

-----

It does not concern Dr. Galbraith to examine the aggregate opportunity cost of not having invaded Iraq and/or Afghanistan. For him, the only alternative to empire is investment at home. I cannot accept this.

He doesn't integrate empire into a wider war on terror, and has no concept that unopposed terror might have imposed costs on the US that would have been much greater than those of empire.

Hence, I suggest the following non-testable formula:

Cost(Baltimore wiped off the face of the earth)
>
Cost(Invasion of Iraq and Afghanistan).

It's just a suggestion; use your own variables, and change around the signs based on personal beliefs and desires. I understand subjective opportunity costs cannot be aggregated like this. But if you insist on talking about the costs of empire, you must use the same metric to guage the costs of the absence of empire.

More India News

Earlier in the week, I posted some comments of concern that Congress would continue with economic reforms. One of the links in the post was about the former finance minister who actually did much of the reforming a decade ago. It turns out that he Gandhi is stepping aside and the former Finance Minister, Manmohan Singh, will step in. This is great news, but his lack of political skill may prevent reform from getting through when tough votes comes up and a lot of arm twisting is need. The coalition governement isn't very strong and needs the help of communists to stay in power. Some snippets from the Economist:

FOR five enthralling days, Sonia Gandhi was India’s prime-minister-in-waiting. But the honeymoon was over even before the wedding. Although accepted as the prime ministerial candidate both by the Congress party and its allies, Mrs Gandhi decided not to put herself forward. At a chaotic party meeting on Tuesday May 18th, she said “the post of prime minister has not been my aim”, and that she must follow her “inner voice”, which was telling her that she “must humbly decline this post”. Drowned out by howls of protest from her MPs, she said her responsibility was to “provide India with a secular government that is strong and stable…I am not hungry for power.”

On Tuesday evening, crowds of protesting party workers gathered outside Congress's headquarters, with a hysterical few even threatening suicide if Mrs Gandhi did not change her mind. On Wednesday, a number of senior Congress figures quit their party posts and trooped to Mrs Gandhi's home, begging her to reconsider. But she stood firm. Later that day, a meeting of Congress MPs endorsed the 71-year-old Manmohan Singh, a highly respected former finance minister and Mrs Gandhi's preferred candidate, as prime minister (with Mrs Gandhi taking on the role of party chairman). A couple of hours later, Mr Singh met the president, who asked him to form a coalition government.

And this:

Indian investors’ main worries were about the future of economic reform under Congress, and about the stability of its coalition. It was the scholarly Mr Singh, in fact, as a Congress finance minister in 1991, who initiated India’s biggest-ever package of reform and liberalisation measures. During the election campaign, Congress promised to increase India’s already soaring rate of economic growth to 10% a year. To do so, it will need to continue the reforms.

However, there are doubts about whether Congress will be free to pursue liberalisation. It will have fewer than 150 of the 545 seats in parliament. Even its “pre-poll alliance” of coalition partners will have only about 220, and a number of those will not join the government. To secure a majority in parliament Congress needs the support of the Left Front, which is dominated by the Communist Party of India (Marxist), or CPI(M). Although in West Bengal, where the CPI(M) has run the state government for the past 27 years, it has recently adopted a business-friendly pose to attract investment, the national party remains bogged down in the old dogma. Already its spokesmen have been demanding the abolition of India’s disinvestment ministry, which oversees its privatisation programme.

The markets may eventually take heart from Mr Singh’s reassuring presence and statements, and the “common minimum programme” Congress and its partners are drafting: on Wednesday, Mr Singh said economic reforms would continue, with a “human element”, and stressed the importance of healthy capital markets. Investors may also be relieved that the Communists have refused to join the government, preferring to offer “outside support”.

This may cloak the government in a paler shade of red. But it hardly seems to promise stability. Congress will remain prey to the demands of what one Indian commentator, Prabhu Chawla, has called “vulpine regional satraps, their egos larger than their parties”.

A postdoc here at Claremont interviewed the future PM for his dissertation and was impressed. His view is that reforms would conitnue because Singh would be FM(it was on Monday, before this news broke). He mentioned other things as well, but it was in a bar(last final that afternoon) and the only other thing I distinctly remember is that the Indian currency is undervalued.

Poland's Auto Industry

What happens when The Washington Post's automobile reviewer writes about Poland's integration into the EU? An exciting microeconomic drive through the country's economic development.

Although known for his off-topic auto reviews, Warren Brown makes Poland a sizzling hot topic, and keeps the reader's eyes squarely on the web page, until...:

Put another way, every car company doing business in Central and Eastern Europe increased market share last year. Automakers sold 479,000 cars and trucks in the region in 2003, a 25.6 percent increase over the number of new vehicles sold in the area in 2002, according to Global Insight's research. Polish consumers bought 55,276 new vehicles in 2003, a 16 percent increase over the number sold in 2002, according to the research.

(Emphasis added). Business has been so good in Poland that the laws of arithmetic have been broken--it is now possible for everybody to get a larger share of a pie. :)

(Side note: I've previously written about income percentiles, arguing that snapshots of income distribution give a distorted picture of low-income well-being. Now I realize, with Mr. Brown's help, the impossibly high standard of many who yearn for social justice: everybody must get an equal and ever larger share of income).

But back to the article, which outlines the course of Poland's economic development through foreign investment. It's worthwhile to note that, to start, Poles will earn far less than an average American or European salary. Some people will insist this is cruel exploitation of the poor that must be stopped. Others will insist that the only path to riches tomorrow is by exploiting the poor today:

The Delphi Krakow Technical Center employed 240 people when it opened in 1994. It now employs 2,400, the vast majority of them Polish nationals. It plans to hire more....

But car manufacturers and their suppliers see [Poland's] dismal wages and employment figures as blessings in disguise. As Barth noted, the automotive industry is a capital-intensive business. Such businesses are forever in pursuit of profits through the acquisition of talent, skills and quality production at the lowest possible price.

That makes Poland, with its large reservoir of existing and trainable technical talent, an attractive employer's market for companies like Delphi...

More jobs mean more money, and probably rising salaries. That turnabout could erode Poland's value as an employer's market but greatly increase its worth as a consumer market, Barth said.

That's right--Polish economic development is all about the Polish economy eventually pricing itself out of jobs, which will then relocate and perform their economic development function elsewhere.

Economic development is really about generating efficient and timely production facilities in diverse industries--combining non-human capital and human capital to get the best mix of price and quantity.

When Delphi no longer finds Poland as attractive as it once was, it will move some capital elsewhere. By then, other capital-investment opportunities, reflecting the higher real wages of Polish employees, will have entered Poland. This leads to a spiral of ever-higher wages. To many this seems counterintuitive, but the history of economic growth in societies respectful of markets and property requires us to take an optimistic stance towards our own pessimism.

Questions:Should Poles want job security at the wages they are currently earning? Aren't most far better off to let creative destruction wreak havoc?

India

It is with some apprehension that I comment about the Indian election; the issues are complex for somebody like myself, sitting several thousand miles away. I have over the last 3 or 4 years tried to follow developments in the country before it was cool. Despite the terrorists attacks and subsequent war, I was as optimistic as anybody could be about prospects for global economic growth, of which, India was a key component.

For the last fifteen years, liberalization has been the trend even though it has taken a few bumps across the world in Asia, South America and Russia. It is probably with this wind to the back of market economics that the Economist writes this:

An unstable coalition government, relying on the support of the Communists, is unlikely to prove radical, and may be short-lived. But there are some grounds for optimism: Congress’s manifesto commits it to a policy of sustaining and even accelerating current rates of economic growth. With luck, the coalition it is likely to lead will quickly realise that this will be near-impossible without continued reform: cutting the fiscal deficit; continuing to foster competition; and privatising more state-run enterprises. Rural India’s rebuke for the BJP should encourage the new government to spread some of India’s alleged shine to the gloomier parts of the countryside. Properly interpreted, it should not thwart reform, but spur it.

As many people have pointed out, the Congress party are the ones who started the reform effort over a decade ago that kick started the economy. The question needs to be asked if any left of centre party is committed today as it was a decade ago to liberalising their economies. I don't think the answer to that question is yes. Today, as markets in Asia are tanking, I read this little snippet posted on Drudge from Bloomberg:

India's Mumbai stock exchange halted trading for an hour after the Sensex slid 10.9 percent. The benchmark had dropped 6.1 percent Friday after the new government, led by Sonia Gandhi's Congress party, said it won't sell profitable state assets.

I take to mean she's trying to attract the communist party, who want to end the privatization program, into her government. From what I can tell, the communist's bark is worse than its bite, as this little snippet from the IHTsuggests:

Moreover, when they are not campaigning, the Indian Communists are a realistic bunch.

The only Indian state "where information-technology-enabled services are labeled essential and therefore unable to go on strike is in West Bengal, which is ruled by a Communist party," said Vivek Paul, vice chairman of Wipro, India's largest computer software company by market value, who is based in Mountain View, California.

Don't confuse me as a supporter of the BJP, I have read enough to make me not a fan the party. However, I hate communists even more. This is not to say that the economy will slow or stagnate if the reforms stop. In all likelyhood, the economy will probably continue to grow fast for several more years as the changes made a decade ago were substantial, at least that's what the growth models say. Either way, the election was a win-win situation for the U.S., either it grows fast or more immigrants come here.

Singapore

Much has been made of the low birth rates in places such as Europe and Japan, but Singapore also has the same problem. An economist offers a solution:

Prominent economist Lim Chong Yah presented this stark choice at a seminar yesterday when he suggested tackling the birth dearth by leveraging on the value Singaporeans place on education.
Advertisement

He said the Government can do this at three levels:

For the first child, provide free education from nursery school to Primary 6

For the second child, continue this to secondary school and up to A levels

For the third child, give free education all the way up to polytechnic and university level.

On the basis of merit, a student should be able to attend the school of his choice, including more expensive independent schools, and the state would pick up the bill for his education, said Professor Lim.

One of the odd pieces of data is that Singapore has a low level of educational attainment compared to its GDP. From some brief searching today, it appears that the city-state does charge some fees to parents for their children to attend school. I had chalked it up to some sort of lag effect, but it may be that a not insignificant number of kids drop out due to cost. It seems worth investigating further, I'll put it on my things to do this summer.

Another economist summed it nicely:

Said NUS economist Cheolsung Park: 'A couple will have a child if they expect the lifetime benefit of having the child, such as happiness, is greater than the lifetime cost of having the child, such as monetary, psychological and time costs

One more idea, since Singapore has some of the highest alcohol taxes anywhere, a cut may be in order.

Edit: It turns out I didn't need the whole summer at all; I have the Barro-Lee educational attainment data on my USB flashdrive(as everybody should because you never know when somebody is gonna call the American people stupid or morons). It turns out that Singapore(8.12, highest level of schoolings age 25 and over) is catching up quickly, is past Italy(7.00) and not far behind France(8.37). BTW, the Scandies, Canada, Australia, New Zealand, Swiss, S, Korea, a few others and the U.S.(12.25, the highest), lead the way. And, education isn't statistically significant as a determinate of per capita GDP, in case you didn't know.

WM & Creative Destruction

On Always Low Prices, I insist that Wal-Mart is the cutting edge of creative destruction.

World Competitiveness

In addition to not inducing and sustaining market-failure, governments should be laying down institutions to support competitive business activity, instead of just supporting specific businesses owned by relatives and cronies of the rulers.

The governments of many countries do this well; others have a long way to go.

IMD has released their 2004 World Competitiveness Rankings. I see some Swiss commentators are absurdly forecasting lower standards of living for children than current adults, and Collin May notes that the big EU nations are far down on the rankings.

The current rankings have the US first, as it has been for 5 years. I won't go into the methodology of the report, which basically results in an enormous index number. This procedure means that results could vary depending on what on thinks is most important for competition.

However, shifting the weights doesn't actually change very much. Another national competiveness assessment, independent of the IMD, has a pretty tight correlation with the IMD report over the past few years.

Also, as much as I'd love to blame the governents of poor countries for their citizens terrifying poverty, and as much guilt as they deserve, I gather that a long-term history of terrible governance is really hard to overcome...

Inducing Market-Failure

I must agree with Don Boudreaux. From my perspective the most critical economic function of a government is not its ability to correct externalities and market-failures, but its ability to induce them. The institutions that governments maintain can either sustain and enrich or feed off and combat economic activity.

As a result of geographical monopoly and historical accident, a range of governmental forms--and resulting economies--can be found. After a cursory analysis, it becomes absurdly clear that the power to induce and sustain market failure is most often found in the poorest countries.

I could be pursuaded otherwise, but I hold fast because of two charts that Don asked me to quickly assemble a few months ago--plotting Economic Freedom and Freedom to Trade vs. GNI per capita: