By Victor Davis Hanson
California Gov. Jerry Brown must rapidly close a $25 billion budgetary shortfall. But right now it seems almost a hopeless task since the state's disastrous budget is a symptom, not the cause, of California's much larger nightmare.
Take unemployment. It currently runs 12.6 percent in California, the nation's second-highest rate. Take livability. A recent Forbes magazine survey listing the most miserable 20 cities in the nation ranked four California municipalities among the index's five worst places to live.
Take education. California public schools test near rock bottom in national math and science scores. Take the business climate. A recent survey conducted among CEOs ranked California dead last for jobs and business growth.
Take taxes. California has the highest gasoline tax in the nation, and its combined sales and local/state income tax rates are among the nation's steepest. California incarcerates the highest number of prisoners in the nation. It costs nearly $50,000 per year to house each one, near the highest per-capita cost in the country.
I could go on, but you get the picture that the newly inaugurated Brown has problems well beyond even a massive budget shortfall.
Perhaps the state's problems are not of its own making, but arise from a deficit of natural riches? Hardly. California has the most fertile soil and most conducive farming climate in the country.
Tourists flock to see the beauty of Yosemite, Death Valley and a 1,000-mile coastline. San Diego and San Francisco Bay are among the most naturally endowed harbors in the world. The state is rich in gas, oil, minerals and timber. It has the largest population in the nation at 37 million residents.
OK, but maybe prior generations failed to develop such natural bounty? Again, no. At one time California educators ensured that their tripartite system of higher education was the envy of the world. The Golden Gate and Oakland Bay bridges, along with the Los Angeles freeway system and the complex network of state dams and canals, were once considered engineering marvels far ahead of their time. Visionaries made Napa Valley the world's premier wine-producing center. California's farmers found a way to produce 400 crops and half the nation's fruits, nuts and vegetables, and created the richest food region in the nation. Silicon Valley and Hollywood are still the global leaders in computer innovation and entertainment, respectively.
Perhaps California did not invest in its public workers, skimped on entitlements, and turned away newcomers? Not really. Its teachers and public servants in many comparative surveys remain the highest compensated and best pensioned in the nation. Its welfare system is still the most generous in the nation. Seventy percent of its budget continues to go for education and social services. A state that accounts for 12 percent of the nation's population generously provides for 30 percent of the national welfare load. More than a quarter of the nation's illegal aliens are welcomed into California.
So in truth, the state's problems involve a larger "California philosophy" that is relatively new in its history; one that now curbs production but not consumption, and worries more about passing laws than how to pay for them.
California uses more gasoline than any other state and has the most voracious appetite for electricity. But Californians also enact the most obstacles to producing their own sources of oil, natural gas and nuclear power. State referenda and the legislature have made it the hardest state in the nation to raise taxes and the easiest to pass costly new laws.
The state's mineral and timber industries are nearly moribund. At a time of skyrocketing food prices, more than a quarter-million acres of some of the wealthiest agricultural land in California's Central Valley lie idle due to court-driven irrigation cutoffs - costing thousands of jobs and robbing the state of millions of dollars in revenue.
Home prices stay prohibitive along the upscale coastal corridor from San Francisco to San Diego, even as millions of acres of open spaces there remain off limits for new housing construction.
Most refined Californians who regulate how the state's natural resources are used live on the coast far away from - and do not always understand - those earthier people who struggle to develop them.
California does not ask its millions of foreign immigrants to come with legal status, speak English or arrive with high school diplomas, but then is confused when its entitlement and legal costs skyrocket. Billions of dollars in remittances are sent from California to Mexico - but without the state being curious whether some of the remitters are on some sort of state-funded public assistance.
Somehow, Jerry Brown must not only change the way Californians act, but also the strange way they now seem to think - convincing the present generation to produce far more private wealth while consuming far fewer public funds. Otherwise, the revenue-strapped and reform-minded governor is little more than a modern Sisyphus - endlessly pushing his enormous rock uphill, never quite reaching the top.
Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and author, most recently, of "A War Like No Other: How the Athenians and Spartans Fought the Peloponnesian War." You can reach him by e-mailing author@victorhanson.com.
Obama's Big Lie On Taxes
By Investor's Business Daily
National Issues: A large and ongoing problem with our public discourse is the dishonesty and disinformation foisted on an unsuspecting public. That's certainly the case when it comes to taxes.
Sometimes, politicians claim things that just make you turn your head and say, "huh?" That's what happened last Sunday when President Obama, in a pre-Super Bowl interview with Fox TV's Bill O'Reilly, said the following:
"I didn't raise taxes once. I lowered taxes over the last two years. I lowered taxes for the last two years."
It was a great quote, very dramatic and emphatic. It was also quite wrong. Tax watchdog groups and think tanks have looked at the record and found just the opposite - that Obama has raised taxes numerous times, and that taxes did in fact rise during the first two years of his presidency.
Indeed, in 2009 one of the first things Obama did after entering office was to slap a 156% increase in the federal tax on tobacco - about 62 cents a pack - to pay for the children's health insurance program.
Whether you think this is a good idea or not, it is a tax.
Please recall the president's solemn promise in the 2008 campaign that families earning less than $250,000 a year wouldn't see "any form of tax increase." As Americans for Tax Reform (ATR) noted, the median income of smokers is "just over $36,000."
But the granddaddy of them all was the health care bill that the president signed into law last March.
ObamaCare, the Heritage Foundation calculates, "contains 18 separate tax increases that will cost taxpayers $503 billion between 2010 and 2019." And at least seven of those tax hikes are clear violations of the president's vow not to raise taxes on the middle class.
So the president not only raised taxes more than once, he raised them massively to help fund his unpopular takeover of health care.
In further assessing Obama's tax record, one also must look at intent. The White House and Democrats in Congress had explored the possibility of letting all the Bush tax cuts expire last year, which would have been a huge tax hike on all Americans.
During budget talks, they let it be known that "all things were on the table" - including tax hikes. But thanks to the Tea Party movement and the drubbing Democrats took in the midterm elections, all things are no longer on the table. If someone puts them there, they better start looking for another line of work.
That said, the president's claim that he's a net tax cutter is "blatantly false," according to ATR. "In fact," the group says, "Obama signed into law $7 in permanent tax hikes for every $1 in permanent cuts" during his first two years in office - a net tax hike of $618.7 billion.
Remember this the next time the media repeat their fib that this administration hasn't raised taxes. It has. And the prospect of more tax hikes to come is a big reason why the economy continues to underperform.
Reaganomics: What We Learned
Reaganomics: What We Learned
From December 1982 to June 1990, Reaganomics created over 21 million jobs. The right policies can do it again.
ARTHUR B. LAFFER
For 16 years prior to Ronald Reagan's presidency, the U.S. economy was in a tailspin—a result of bipartisan ignorance that resulted in tax increases, dollar devaluations, wage and price controls, minimum-wage hikes, misguided spending, pandering to unions, protectionist measures and other policy mistakes.
In the late 1970s and early '80s, 10-year bond yields and inflation both were in the low double digits. The "misery index"—the sum of consumer price inflation plus the unemployment rate—peaked at well over 20%. The real value of the S&P 500 stock price index had declined at an average annual rate of 6% from early 1966 to August 1982.
For anyone old enough today, memories of the Arab oil embargo and price shocks—followed by price controls and rationing and long lines at gas stations—are traumatic. The U.S. share of world output was on a steady course downward.
Then Reagan entered center stage. His first tax bill was enacted in August 1981. It included a sweeping cut in marginal income tax rates, reducing the top rate to 50% from 70% and the lowest rate to 11% from 14%. The House vote was 238 to 195, with 48 Democrats on the winning side and only one Republican with the losers. The Senate vote was 89 to 11, with 37 Democrats voting aye and only one Republican voting nay. Reaganomics had officially begun.
President Reagan was not alone in changing America's domestic economic agenda. Federal Reserve Chairman Paul Volcker, first appointed by Jimmy Carter, deserves enormous credit for bringing inflation down to 3.2% in 1983 from 13.5% in 1981 with a tight-money policy. There were other heroes of the tax-cutting movement, such as Wisconsin Republican Rep. Bill Steiger and Wyoming Republican Sen. Clifford Hansen, the two main sponsors of an important capital gains tax cut in 1978.
Ronald Reagan after signing his first tax cut, Aug. 14, 1981.
What the Reagan Revolution did was to move America toward lower, flatter tax rates, sound money, freer trade and less regulation. The key to Reaganomics was to change people's behavior with respect to working, investing and producing. To do this, personal income tax rates not only decreased significantly, but they were also indexed for inflation in 1985. The highest tax rate on "unearned" (i.e., non-wage) income dropped to 28% from 70%. The corporate tax rate also fell to 34% from 46%. And tax brackets were pushed out, so that taxpayers wouldn't cross the threshold until their incomes were far higher.
Changing tax rates changed behavior, and changed behavior affected tax revenues. Reagan understood that lowering tax rates led to static revenue losses. But he also understood that lowering tax rates also increased taxable income, whether by increasing output or by causing less use of tax shelters and less tax cheating.
Moreover, Reagan knew from personal experience in making movies that once he was in the highest tax bracket, he'd stop making movies for the rest of the year. In other words, a lower tax rate could increase revenues. And so it was with his tax cuts. The highest 1% of income earners paid more in taxes as a share of GDP in 1988 at lower tax rates than they had in 1980 at higher tax rates. To Reagan, what's been called the "Laffer Curve" (a concept that originated centuries ago and which I had been using without the name in my classes at the University of Chicago) was pure common sense.
There was also, in Reagan's first year, his response to an illegal strike by federal air traffic controllers. The president fired and replaced them with military personnel until permanent replacements could be found. Given union power in the economy, this was a dramatic act—especially considering the well-known fact that the air traffic controllers union, Patco, had backed Reagan in the 1980 presidential election.
On the regulatory front, the number of pages in the Federal Register dropped to less than 48,000 in 1986 from over 80,000 in 1980. With no increase in the minimum wage over his full eight years in office, the negative impact of this price floor on employment was lessened.
And, of course, there was the decontrol of oil markets. Price controls at gas stations were lifted in January 1981, as were well-head price controls for domestic oil producers. Domestic output increased and prices fell. President Carter's excess profits tax on oil companies was repealed in 1988.
The results of the Reagan era? From December 1982 to June 1990, Reaganomics created over 21 million jobs—more jobs than have been added since. Union membership and man-hours lost due to strikes tumbled. The stock market went through the roof. From July 1982 through August 2000, the S&P 500 stock price index grew at an average annual real rate of over 12%. The unfunded liabilities of the Social Security system declined as a share of GDP, and the "misery index" fell to under 10%.
Even Reagan's first Democratic successor, Bill Clinton, followed in his footsteps. The negotiations for what would become the North American Free Trade Agreement began in Reagan's second term, but it was President Clinton who pushed the agreement through Congress in 1993 over the objections of the unions and many in his own party.
President Clinton also signed into law the biggest capital gains tax cut in our nation's history in 1997. It effectively eliminated any capital gains tax on owner-occupied homes. Mr. Clinton reduced government spending as a share of GDP by 3.5 percentage points, more than the next four best presidents combined. Where Presidents George H.W. Bush and Bill Clinton slipped up was on personal income tax rates—allowing the highest personal income tax rate to eventually rise to 39.6% from 28%.
The true lesson to be learned from the Reagan presidency is that good economics isn't Republican or Democrat, right-wing or left-wing, liberal or conservative. It's simply good economics. President Barack Obama should take heed and not limit his vision while seeking a workable solution to America's tragically high unemployment rate.
Mr. Laffer is the chairman of Laffer Associates and co-author of "Return to Prosperity: How America Can Regain Its Economic Superpower Status" (Threshold, 2010).
Democrats Can't Filibuster ObamaCare Repeal
Democrats Can't Filibuster ObamaCare Repeal
The GOP needs 51 Senate votes, and a new president, to get it done.
KARL ROVE
Senate Majority Whip Dick Durbin likes to taunt his Republican colleagues, arguing that ObamaCare can't be repealed because 60 votes are required to end debate in the Senate on any measure.
Though Republicans will likely win control of the Senate in 2012, Mr. Durbin is right that they probably won't get to 60 senators. That would require the GOP to win back more than half the Democratic seats up next year. Rep. Jim Moran (D., Va.) recently called GOP promises of repeal "a political scam on their base. . . . It can't happen."
Not so fast. Keith Hennessey, a former White House colleague of mine, says Democrats are wrong. He argues that Republicans can repeal health-care reform with a simple Senate majority.
Director of the National Economic Council under President George W. Bush, Mr. Hennessey now teaches at Stanford Business School and is a research fellow at the Hoover Institution. Last week on his website, KeithHennessey.com, he made the case that congressional Republicans could use the reconciliation process to kill ObamaCare with 51 votes in the Senate and a majority in the House of Representatives.
The Budget Act of 1974 established the reconciliation process. The House and Senate Budget Committees can direct other committees to make changes in mandatory spending (like ObamaCare's Medicaid expansion and insurance subsidies) and the tax code (such as ObamaCare's levies on insurance policies, hospitals and drug companies) to make spending and revenue conform with the goals set by the annual budget resolution.
President Obama signing the health care bill last March.
For example, under reconciliation the Senate Budget Committee could instruct the Senate Finance Committee to reduce mandatory spending on insurance subsidies and Medicaid expansion. These two items make up more than 90% of spending in ObamaCare. All the changes from all the committees are then bundled into one measure and voted upon. Because reconciliation is protected by the rules of the budget process, it doesn't take 60 votes to bring it up and it requires only a simple majority to pass.
Will this 51-vote strategy work? One long-time GOP budget whiz, embarrassed he hadn't thought of this, told me it would. Another Republican veteran of the budget wars agreed, though she had some concerns that certain elements of ObamaCare, such as some insurance provisions, might be beyond the reach of reconciliation. For example, would reconciliation allow Republicans to kill the requirement that younger, healthier workers pay higher premiums than they rightly should to keep premiums for older workers lower?
Mr. Hennessey believes that these are "strategically unimportant" items. He says the goal should be to repeal ObamaCare's big-cost drivers, and reconciliation provides the tool to do it.
Using reconciliation would require that Republicans pick up at least four seats in 2012, when 23 senators who caucus with the Democrats are up for re-election, many in red states. Already, vulnerable Democratic senators like Jon Tester of Montana, Claire McCaskill of Missouri and Joe Manchin of West Virginia are talking about how to get rid of some of ObamaCare's most objectionable parts, like the individual mandate. They'll only get more skittish as the election approaches. Democrats cannot complain if the GOP uses reconciliation after Democrats used it to pass ObamaCare through the Senate.
Congressional Republicans are getting crucial help in this battle from allies outside Washington. Republican governors know that ObamaCare's mandatory expansion of Medicaid rolls will collapse state budgets. Texas Gov. Rick Perry has called ObamaCare "unaffordable, unsustainable and unworkable," and many have criticized the law for shifting billions of dollars onto the states. GOP governors are in charge of at least 10 key battleground states and can continue to drill home this message in states such as Ohio and Florida that are vital to Mr. Obama's re-election.
Even Democratic governors in swing states are critical of ObamaCare's Medicaid expansion. "There is no hidden pool of money" to pay for expanding Medicaid, lamented Colorado Gov. John Hickenlooper. North Carolina Gov. Bev Perdue said she opposes health-care reform "that shifts costs to the states." States are "not going to be in a position to pick up the tab" of expanding Medicaid, warned Washington Gov. Christine Gregoire.
Democrats harp on the 60-vote threshold and ignore the reconciliation option because they want Americans to accept the inevitability of ObamaCare. But its roots are clearly in shallow soil.
Of course, a 51-vote Senate strategy would also require a Republican president who would sign a reconciliation bill. All of which means that ObamaCare will be a central issue in the 2012 election. The president may not want to "re-litigate" ObamaCare, but Republicans—and a majority of Americans—do.
Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.
Paul Ryan's Republicanomics
Paul Ryan's Republicanomics
by W.W. | IOWA CITY
YESTERDAY, Ben Bernanke, the chairman of the Federal Reserve, appeared on Capitol Hill to field questions from the House Budget Committee. The committee's new Republican chairman, Paul Ryan of Wisconsin, pressed Mr Bernanke to defend the Fed's efforts to quicken recovery through it's latest round of "quantitative easing", citing "a sharp rise in a variety of key global commodity and basic material prices" as a herald of inflation. In his opening statement, Mr Ryan acknowledged that "these cost pressures have not yet been passed along to consumers"—emphasis on "yet"—before worrying aloud that Mr Bernanke and his Fed minions threaten to wreck the economy.
"Our currency should provide a reliable store of value—it should be guided by the rule of law, not the rule of men," Mr Ryan informed Mr Bernanke. "There is nothing more insidious that a country can do to its citizens than debase its currency". And who would disagree? Yet why all this hand-wringing about inflation now? Mr Bernanke sensibly pointed out that rising prices in global commodities markets reflect rising demand in emerging markets and, in some markets, constrained supply. American monetary policy? Not so much. Furthermore, inflation is low, and inflation expectations remain steady, as Mr Bernanke duly noted. Nevertheless, the breathless rhetoric of insidious currency debasement continues to spill forth even from sober, economically-literate Republicans such as Mr Ryan.
In yesterday's edition of The Daily, Jonathan Rauch draws a useful contrast between "Reagonomics", the actual economic-policy stance of the Reagan presidency, and "Republicanomics", a vulgar, acontextual cartoon of Reagonomics. Reagan met the specific challenges of the American economy in the early 1980s through tax cuts and tight money, among other things. Republicanomics transformed the policies of the Reagan administrations and the Volcker/Greenspan Fed into hardened ideology. "Reagan's embrace of a tight monetary policy in a high-inflation environment had hardened into a dogmatic insistence on tight money and anti-inflationary policies all the time," Mr Rauch writes. And thus:
At a time when most economists saw deflation and long-term, Japanese-style stagnation as a far greater danger than inflation, and when high unemployment and below-target inflation indicated that monetary policy was too tight, Republicans were hyperventilating about "currency debasement" and denouncing the Fed's efforts to expand the money supply.
I think if we add to this the reinforcing influence of an especially simplistic strain of Austrian monetary theory, we have a fairly solid account of the source of Mr Ryan's inflated worries about inflation.
Yes, yes, conservatives: there is an analogous Donkeynomics (or whatever you'd call it) that combines cold-fusion Keynesianism, occult health-care cost-curve bending, green-energy magic beanism, etc. But today is Mr Ryan's day to shine.
The chaos continues
The chaos continues
by I.A. | CAIRO
CURFEW hours are getting shorter in Cairo. As of Monday they were only between 8pm and 6am. But the night still belongs to the men who proudly defend their neighbourhood as part of neighbourhood-watch type committees, even though the looting and violence of last week has largely subsided. Banks are re-opening, but with restrictions on how much cash can be withdrawn and shorter working hours. Cairo’s traffic is being re-directed around its barricaded hub in Tahrir Square, where lots of protesters remain, slowed down by many checkpoints, but this is a city long-used to traffic jams. Most schools remain closed, but even so something close to normalcy is beginning to return. Egypt is stuck in a not-quite-revolutionary limbo, and a fog has set over its political horizon.
Some things are clear: Hosni Mubarak, Egypt's president, has now been relegated, in the public’s eye at least, to a secondary role. His new vice president, Omar Suleiman, now looks like the regime’s strongman. It was Mr Suleiman who announced that Mr Mubarak’s son, Gamal, would not be running for president. It is Mr Suleiman who is holding court with various opposition groups to prepare for the process of transition many Egyptians demand. And it is Mr Suleiman that outsiders, particularly the Obama administration, appear to be backing in the name of restoring stability to Egypt.
Beyond this, however, Egyptian politics remain as chaotic as Cairo’s central square, now a tent city that is gaining permanency with every passing day. There, thousands continue to chant that they demand the end of the regime. For them, the negotiations are largely irrelevant as long as Mr Mubarak remains in place. The youth movements that organised the protests have still not forgiven more established opposition groups for rallying to them late, and then only hesitantly.
Legal parties such as the Wafd party and Tagammu, long part of a loyal opposition to Mr Mubarak, have agreed to negotiate. Members of the National Association for Change, an umbrella group advocating for reform, have met with Mr Suleiman. But the group's leader, Mohammed ElBaradei, has refused to negotiate while Mr Mubarak remains in power, as do other parties. The Muslim Brotherhood, an Islamist group which has provided the most substantive opposition to Mr Mubarak's regime for many years, in what may be a historic first, was invited to take part in negotiations. But the Brothers remain ambivalent about how to proceed.
Egypt’s opposition may have lost the initiative, successfully driven apart by the regime’s invitation, but perhaps even more hampered by its inability to speak for both the revolutionaries in Tahrir Square and for the wider Egyptian public. Like the country itself, it finds itself torn between a desire for change and the understandable urge by a population unused to such upheaval to return to normalcy.
The government has capitalised on this national divide. It has orchestrated the relaunch of the National Democratic Party (NDP), whose headquarters burned for three days last week. A new steering committee has been put in charge, made up of supposed "reformist" personalities—although some are the same individuals who were close to Gamal Mubarak’s wing of the NDP. Ministers and senior officials have adopted a take-charge attitude on state television and are using it to dampen the calls for reform from Tahrir Square with doom-laden warnings over the country’s security. On every channel, an Egyptian flag flutters, imprinted with the words "Protect Egypt" as presenters aired allegations of conspiracies by Israel, Iran and Hamas—an unlikely trio to join forces against the land of the Nile.
Bernanke's Worst Nightmare Is This Man's Boxes
Bernanke's Worst Nightmare Is This Man's Boxes: Caroline Baum
Ben Bernanke arrived at his office a week ago and came face to face with his worst nightmare.
Staring out at the Federal Reserve chairman from page C1 of the Feb. 3 edition of the Wall Street Journal was a photo of a man and his boxes. The man was John Anton, founder and president of Anton Sports. The boxes contained his inventory of T-shirts. Because the price was right, Anton borrowed $300,000 at 2.45 percent to lay in a year’s supply -- 2,500 boxes compared with a more normal 30 -- in anticipation of higher cotton prices.
And why not? He has seen the future, and the future is higher prices. When commodity prices are rising faster than the cost of financing inventory, businesses have every incentive to stockpile, even if they don’t expect a pick-up in sales. It’s profit-maximization, pure and simple.
Is this what the Fed had in mind when it floated the idea last year of raising inflation expectations to lower real interest rates to get America spending again? I doubt it. But it’s the natural outgrowth of all its efforts.
Take QE2, for example, the Fed’s second foray into quantitative easing via the purchase of $600 billion of Treasuries from November through June. To the extent that the goal of QE2, as outlined by Bernanke, was to drive down Treasury yields and drive up the prices of other financial assets to make consumers feel wealthier, there is reason for concern.
Wealth Effect Redux?
It wasn’t long ago that double-digit annual increases in home prices made consumers feel wealthier. They borrowed and spent until that wealth evaporated.
The Fed seems to have succeeded, and maybe too well, in thwarting deflationary psychology, thanks to some help from overly easy monetary policy in some developing countries and booming commodity prices.
Which brings us back to Anton. He isn’t hoarding T-shirts because he expects the consumer price index to rise, say, 3 percent next year. He’s hoarding T-shirts because he expects cotton prices, which jumped 137 percent in the past year, to increase further.
“Everyone faces a different expected inflation depending on what he does for a living,” says Neal Soss, chief economist at Credit Suisse in New York. “That’s one of the real weaknesses of the expected inflation/real rate story.”
Mistaken Models
Don’t tell Fed policy makers. Their models determined that raising inflation expectations would lower the real interest rate, making it less attractive to hold cash and increasing the incentive for consumers to spend. Their models never envisioned a rise in nominal rates.
The yield on the 10-year Treasury note shot up to a 10- month high of 3.74 percent earlier this week from 2.4 percent in October. Most of that increase has been in the real rate, which the Fed now says reflects increased optimism about the economy.
Anton, of course, is an anecdote. Somewhere out there, just waiting for a journalist to knock on his door, is his counterpart, whose experience with prices is confined to those that are falling.
It just so happens Anton illustrates a dominant theme, which is rising global commodity prices, food riots in less developed countries where a large share of income is spent on necessities, and fears that the Fed missed the boat on QE2 (sorry).
No Such Beast
Forget the frequent references to “food inflation,” “commodity inflation” or, even worse, “cost inflation.” (Thank goodness there’s no “wage inflation” at the moment!) These are all misnomers. Yes, food prices are rising, as are commodity prices. They aren’t inflationary per se unless the Fed allows those relative price increases to translate into a generalized rise in all prices.
The best way to ensure that happens is to keep interest rates at zero, creating an incentive to borrow at a low rate to finance something that’s appreciating in price.
To date, there’s no sign of a borrowing binge. Commercial and industrial loans, which companies use to finance inventories, have inched up in the last two months after a two- year decline. And the amount of credit-card debt outstanding posted its first increase in December after 27 monthly declines. Still, bank credit, which posted back-to-back increases in July and August, is contracting again, according to Fed data.
At a hearing of the House Budget Committee yesterday, Bernanke reiterated that the Fed has the means and the motive to pare its $2.47 trillion balance sheet and raise the benchmark rate to avert an unwanted increase in inflation “at the appropriate time.”
The last time the Fed was prescient, and preemptive, was 1994, so I wouldn’t count on it. Let’s hope they start down the Road to Normal before they find out we’re all John Antons now.
Stocks Fall, Dollar Advances
Stocks Fall, Dollar Advances as Portugal's Default Risk Rises
Traders work at the Frankfurt Stock Exchange in Frankfurt. Photographer: Hannelore Foerster/Bloomberg
Stocks dropped, dragging a gauge of developing markets to its biggest loss since November, while the dollar strengthened as accelerating global inflation drives up borrowing costs. Portugal led an increase in the cost of insuring European government debt against default.
The MSCI Emerging Markets Index sank 2 percent at 10:03 a.m. in New York and the Standard & Poor’s 500 Index lost 0.6 percent as Cisco Systems Inc. and PepsiCo Inc. fell on lower- than-estimated profit forecasts. The Dollar Index added 0.8 percent. Credit-default swaps on Portugal rose 19 basis points as the country’s five-year bond yield rose 8 basis points. Rubber and cotton jumped to records.
U.S. 10-year and 30-year Treasury yields climbed to the highest levels since April this week, triggering concern that the stock-market rally is in jeopardy as bond returns become more attractive to investors and spur increases in consumer and corporate lending rates. Freddie Mac said the 30-year fixed mortgage rate rose to 5.05 percent last week, the highest since April. China lifted borrowing costs this week for the third time in four months and Korea is forecast to raise rates tomorrow.
“We’ve reached the point in which monetary policy is very relevant for asset-market performance,” said Michael Shaoul, whose $423.2 million Marketfield Fund Ltd. beat 86 percent of rivals in 2010. “We’re in a very strong trend of improving data in the U.S., where I see favorable monetary policy for at least 12 months. That’s not the case of emerging markets, where I believe you should be scaling back in countries which have clear inflationary pressures. It won’t be a problem for the global economy, but they will go through a period of adjustment.”
Yield Watch
Yields on 30-year U.S. Treasuries, which yesterday rose to the highest in 10 months, slipped two basis points to 4.75 percent before today’s auction, which completes three sales this week totaling $72 billion. Ten-year yields, which slipped from the highest since April yesterday, were up two basis points at 3.69 percent today.
The S&P 500 slid for a second day after closing at its highest level since June 2008 on Feb. 8. Cisco tumbled 11 percent as the largest provider of networking equipment’s gross margin missed analysts’ projections. PepsiCo lost 1.1 percent after saying increases in commodity prices will be a “major headwind.” Activision Blizzard Inc., the largest video-game maker, plunged 7.2 percent as its earnings forecast fell short of estimates.
Jobless Claims Drop
Inflation concerns and Cisco’s earnings report overshadowed a drop in initial jobless claims to the lowest level since July 2008. Americans filing first-time claims for unemployment insurance fell to 383,000, compared with the mediate estimate of 410,000 in a Bloomberg survey of 51 economists.
About five stocks declined for each that advanced in the Europe’s Stoxx 600. Air France-KLM Group plunged 7.8 percent after posting an unexpected loss. Credit Suisse Group AG, Switzerland’s second-largest bank, slid 6.3 after cutting its profitability target. Alcatel-Lucent SA jumped 16 percent as France’s largest telecommunications equipment maker reported profit that beat analysts’ estimates.
Credit-default swaps on Portuguese debt jumped to 449 basis points, helping push the Markit iTraxx SovX Western Europe Index of swaps on 15 governments up 1.5 basis points. Portuguese bonds pared earlier declines, with the yield on the five-year note at 6.49 percent, down from 6.93 percent earlier.
ECB Buys Debt
The European Central Bank bought Portuguese government bonds, according to three people with knowledge of the transactions. The central bank bought Portuguese debt maturing in five years, two of the people said, declining to be identified because the deals are confidential. An ECB spokesman in Frankfurt declined to comment.
The yield on Ireland’s 10-year bonds rose nine basis points to 9.09 percent, increasing for the sixth day. Default swaps on Ireland were five basis points higher, and those for Spain rose 4 basis points. Contracts on Greece increased 16.5 basis points.
The dollar appreciated against all of its 16 most-traded counterparts, strengthening 1 percent versus the euro. Sterling rose 0.5 percent against the yen and appreciated 0.6 percent per euro after the Bank of England kept its main rate at 0.5 percent today, matching the forecast of all 62 economists surveyed by Bloomberg.
The Australian dollar depreciated 1 percent versus the U.S. currency after a report showed full-time employment dropped in January. The krone fell 0.6 percent against the euro after data showed Norwegian inflation slowed more than analysts estimated in January.
Emerging Markets Slump
The MSCI Emerging Markets Index fell for a sixth day, the longest streak in three months. Benchmark gauges in Russia, South Korea, Indonesia, Taiwan and the Philippines fell at least 1.7 percent.
The gauge of 21 developing countries has lost 5.3 percent so far this year as central banks from China to Indonesia and India raised interest rates to tame consumer-price gains.
Rubber futures rose 0.4 percent to a record 516 yen a kilogram in Tokyo trading. Cotton for March delivery increased as much as 7 percent to $1.8758 a pound on ICE Futures U.S. in New York. Wheat for March delivery fell 0.8 percent to $8.7925 a bushel in Chicago trading, declining for the first time in four days. Crude oil for March delivery rose 0.6 percent to $87.22 a barrel in New York trading.
Carlos Slim Sees Colombia Rising
Carlos Slim Sees Colombia Rising as Commodity Choice
Mexican billionaire Carlos Slim stands for a photograph in New York. Photographer: Chris Goodney/Bloomberg
Feb. 10 (Bloomberg) -- Mexican billionaire Carlos Slim talks with Bloomberg's Betty Liu about his 2011 investment strategy in Latin America and his holdings in Saks Inc. and the New York Times Co. They spoke yesterday in New York. (Source: Bloomberg)
Carlos Slim, named the world’s richest man by Forbes Magazine, said he’s seeking to boost his investments in Colombia because of the country’s open policy on oil exploration, its mineral assets and growing middle class.
Slim aims to expand the drilling and oil-platform services he provides Mexico’s Petroleos Mexicanos through exploration opportunities in Colombia, he said yesterday in an interview at Bloomberg News headquarters in New York. Slim, whose holdings rose to $70 billion last year, has stakes in U.S. oil services companies Bronco Drilling Co. and Allis-Chalmers Energy Inc.
“The government is actively looking at the development of the oil industry and is promoting other investments,” he said. “We’re looking at what to do beyond the telecommunications business that we’ve been doing for 10 years in Colombia.”
Colombian foreign direct investment more than quadrupled in the past decade, to $7.2 billion in 2009 from $1.5 billion in 1999, after former President Alvaro Uribe repelled guerrilla groups that attacked oil pipelines and assassinated politicians.
OGX Petroleo & Gas Participacoes SA, the oil company controlled by Brazilian billionaire Eike Batista, said last year it may begin producing crude in Colombia in 2012. Batista is also boosting his investments in the Andean country, joining Anglo American Plc, BHP Billiton Ltd. Xstrata Plc and Drummond Co. in tapping South America’s largest coal reserves.
Surging Prices
Commodity prices are surging as emerging markets such as China and India require more resources to accommodate the needs and wishes of their growing middle classes for infrastructure and consumer goods, according to Slim. The depreciating value of the dollar is also driving those countries’ governments to build up their investments in commodities, he said.
“They don’t want to have Treasuries,” Slim said. “The dollar is weak and there’s no interest, and also with commodities they have reserves for internal consumption.”
Colombian President Juan Manuel Santos, who took office in August, is counting on rising commodity investments to fuel the Andean nation’s growth. Oil blocks auctioned last year will draw more than $1 billion over three years from companies including Royal Dutch Shell Plc, SK Energy Co. and Repsol YPF SA, according to the government.
Colombia attracted about $6.5 billion in foreign direct investment through the third quarter of 2010. Foreign direct investment in mining rose to $3 billion in 2009, the last year of annual figures available, from $1.8 billion in 2008, according to central bank figures.
Peso-Bond Slump
Still, Colombia’s fixed-rate peso bonds have slumped this year and stocks dropped amid concern the Central Bank may miss this year’s inflation target after floods choked off farmers’ supply routes, driving up food costs and sparking the biggest jump in monthly inflation since May 2008.
Colombia’s benchmark peso bonds due July 2020 touched an eight-month high of 8.2 percent on Feb. 8 and the IGBC stock index has dropped 5.6 percent this year.
Consumer prices rose 0.9 percent in January from December, pushing the annual inflation rate to 3.4 percent, the national statistics agency said in a Feb. 5 report. Banco de la Republica targets inflation between 2 percent and 4 percent this year.
As defense minister under Uribe from 2006 to 2009, Santos oversaw the rescue of 15 rebel-held hostages and an air strike into Ecuador that killed Raul Reyes, a top commander of the guerrilla group known as the FARC. Military offenses have reduced attacks on pipelines, roadways and bridges to 76 in 2009 from more than 800 in 2002, according to government figures.
Security Policies
Uribe’s security policies helped almost cut in half the number of murders and slash by 93 percent kidnappings by 2009, spurring economic gains. The Central Bank expects the economy to expand around 4.5 percent this year after growing en estimated 3.7 percent to 4.1 percent in 2010.
The son of a Lebanese immigrant who ran a dry-goods store in downtown Mexico City, Slim took advantage of periods of economic crisis in his native Mexico to buy real estate and assets such as a bottling company and a cigarette maker to amass his fortune. He acquired Telmex, as Mexico’s biggest land-line phone company is known, in a 1990 privatization sale.
America Movil SAB, the mobile-phone carrier controlled by Slim, had 29.4 million mobile-phone subscribers in its unit covering Colombia and Panama at the end of last year, up 3.8 percent from a year earlier. The unit’s sales jumped 10.6 percent to 1.9 trillion Colombian pesos ($1.01 billion) in the fourth quarter as clients used their phones more for voice and Internet access.
Wireless Company
The wireless company, Latin America’s largest, was a 2001 spinoff from Telefonos de Mexico SAB and has become Slim’s biggest investment success. His holdings of America Movil were worth about $49 billion at the end of last year.
The dollar has dropped 7.1 percent in the past year against the Mexican peso. Gold has fallen 3.9 percent this year as an equity rally, spurred by the global economic recovery, eroded demand for an alternative investment.
Slim’s publicly traded assets were up 37 percent in 2010, with the biggest gain coming from Grupo Carso SAB, a holding company that was preparing a spinoff of its mining unit. Minera Frisco SAB, which became a separate company last month, is planning new mines in 2011 that will produce 437,577 ounces of gold a year, more than double last year’s output.
New York Times
His worst-performing stock last year, publisher New York Times Co., fell 21 percent. Slim’s publicly disclosed shares in U.S. markets represented less than $500 million of his total holdings, with the rest in Mexican companies.
He acquired shares of two of those companies, Bronco Drilling and Allis-Chalmers, through his own Carso Infraestructura y Construccion SAB, the contractor to Mexico’s Pemex.
“We believe in all Latin America and that’s why we’re investing,” Slim said. “The macroeconomic variables are sound, healthy and many of the countries have raw materials that are having good prices.”
Mubarak May Stand Down
Mubarak May Stand Down Before September, Official Says
Egyptian President Hosni Mubarak. Photographer: Khaled Desouki/AFP/Getty Images
Feb. 10 (Bloomberg) -- Angus Blair, head of research at Egyptian investment bank Beltone Financial, discusses the possibility of Egyptian President Hosni Mubarak stepping down and the implications for the nation's economy and markets. Blair speaks with Margaret Brennan on Bloomberg Television's "InBusiness." (Source: Bloomberg)
Hosni Mubarak may stand down as president of Egypt before September after a wave of protests across the country demanding an end to his 30-year rule, said the head of Egypt’s ruling party.
“All options are open” once constitutional changes are enacted, Hossam Badrawi, the secretary general of the nation’s ruling National Democratic Party, told CNN in an interview. Mubarak may heed popular demands “before tomorrow,” the BBC’s Arabic service cited him as saying in a separate interview.
Mubarak’s rule may be nearing an end after hundreds of thousands of Egyptians flooded the country’s main squares and thoroughfares to demand his exit. The violence, which the United Nations says has killed more than 300 people, sparked fears about contagion in a region that holds more than 50 percent of the world’s known oil reserves.
Protests intensified after Mubarak last week rejected the opposition’s demand for an immediate departure, saying he would wait until September’s presidential election.
Reforms paving the way for Mubarak’s departure would allow a transfer of power to Vice President Omar Suleiman, said Badrawi. He said only Mubarak can take the final decision.
Wednesday, February 9, 2011
A Mexican City’s Troubles
A Mexican City’s Troubles Reshape Its Families
Telma Pedro Córdoba, with her children, Jesús and Lizette, heads a family in Ciudad Juárez. More Photos »
By DAMIEN CAVE
CIUDAD JUÁREZ, Mexico — Telma Pedro Córdoba could have left this blood- and bullet-marked city when she lost her husband to a drive-by shooting in 2009, or when an injury kept her mother from factory work, or when gunmen killed a neighbor in front of a friend’s 3-year-old son a few months ago.
Multimedia
Katie Orlinsky for The New York Times
A crime scene in a neighborhood of Ciudad Juárez, where the population has plummeted amid drug violence and a recession. More Photos »
Instead, she has stayed. Her tiny one-bedroom home, decorated with carefully done red and silver stenciling, is shared with her mother, grandmother, sister, younger brother and two children. In local slang, unlike their neighbors whose abandoned homes are now stripped of even windows, they have become a “familia anclada,” a family anchored to Ciudad Juárez.
Not long ago, the phrase hardly existed here in this city of overnight truck drivers and baby-faced factory workers from afar. But over the past several years, the forces of drug violence and recession have reshaped both the city’s character — from loose and busy to tight-knit and cautious — and its demographics.
Decades of growth have been replaced by exodus. The city has lost nearly 20 percent of its population in the past three years, or about 230,000 people, according to one academic estimate. And new government figures and interviews suggest that the men who once arrived in waves are departing in larger numbers than women.
The result is a city with more families like the Pedros: multigenerational, led by women and with several children under 14.
Demographers say the shift has accelerated in the past year not just in Chihuahua, the state where Ciudad Juárez is the biggest city. The proportion of women also grew last year in Tamaulipas, a state that is home to some of the most gruesome recent killings. There, and in Baja California, the state that includes Tijuana, the percentage of families with young children has also spiked, even as it has remained stable nationwide.
“It’s a combination of three things,” said Carlos Galindo, a demographer and adviser to Mexico’s National Population Council. “It’s harder to find a job, migration across the desert is traditionally a thing that men do, and then there’s the violence” driving many men to leave.
For Ciudad Juárez, the imbalance is not without precedent. In the 1970s and ’80s, when electronics manufacturers started the factory, or maquiladora, boom, women flooded the labor market here for low-paying jobs requiring precise handiwork, outnumbering men by five to one on some assembly lines.
Men later followed, pulling equal with women in total population and at factories. Now, though, according to government labor surveys and private sector data, women seem to be edging back into the majority and increasing their presence at maquiladoras.
It is largely a measure of perseverance, not prosperity. In interviews across this sprawling city, women described male departures, or deaths, and a life of adaptation for the families that remained.
Brenda Noriega, 31, lives in the city’s northwestern corner, on a dirt road that abuts the fence separating Ciudad Juárez from El Paso, Tex. On a recent morning, she needed both hands to count the men in her family who had returned to Durango, their home state. “Eight,” she said finally, sitting outside her small blue house with her two children, ages 12 and 13. “Eight uncles and grandfathers have gone in the past year.”
Her husband still has a job, a circumstance that explained why they stayed, she said. Indeed, for many families, work or the lack of it has been as much of a motivator for migration as violence.
The global recession has pummeled this place. From 2008 to the middle of last year, the city’s maquiladoras cut 30 percent of their work force, or about 72,000 jobs.
Some of those positions are returning. José L. Armendáriz Bailón, president of the local maquiladora association, said 20 of the largest factories were rehiring. But unemployment in the city, at 7 percent, still remains above the official national rate of about 5 percent, though either figure would be envied in the United States, and some economists contend that the Mexican average is actually higher than reported.
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We Can't Legalize Drugs
Hillary Clinton: We Can't Legalize Drugs Because 'There Is Just Too Much Money in It'
Last week, while visiting Mexico, Secretary of State Hillary Clinton was interviewed by Denise Maerker of Televisa, who asked her opinion of proposals to address black-market violence by repealing drug prohibition. Clinton's response illustrates not only the intellectual bankruptcy of the prohibitionist position but the economic ignorance of a woman who would be president (emphasis added):
Clinton evidently does not understand that there is so much money to be made by selling illegal drugs precisely because they are illegal. Prohibition not only enables traffickers to earn a "risk premium" that makes drug prices much higher than they would otherwise be; it delivers this highly lucrative business into the hands of criminals who, having no legal recourse, resolve disputes by spilling blood. The 35,000 or so prohibition-related deaths that Mexico has seen since President Felipe Calderon began a crackdown on drugs in 2006 are one consequence of the volatile situation created by the government's arbitrary dictates regarding psychoactive substances. Pace Clinton, the way to "stop" the violent thugs who profit from prohibition is not to mindlessly maintain the policy that enriches themMaerker: In Mexico, there are those who propose not keeping going with this battle and legalize drug trafficking and consumption. What is your opinion?
Clinton: I don't think that will work. I mean, I hear the same debate. I hear it in my country. It is not likely to work. There is just too much money in it, and I don't think that—you can legalize small amounts for possession, but those who are making so much money selling, they have to be stopped.
Police Investigating How A Mexican “Drug Queen” Got Botox
This Exists: Police Investigating How A Mexican “Drug Queen” Got Botox In Prison
Well, today’s certainly been a bit of a slow news day (good pick on when to make your announcement, Keith). That doesn’t mean things can’t be fun, though! On slow news days like today, you sometimes get the most incredible, weird news stories ever, the kinds that just don’t make the cut on regular days. This is one of them. Witness the bizarre story of Sandra Avila Beltran, a “drug queen” from Mexico City, who somehow managed to get Botox injections while in maximum security prison.
Really, this story leaves more questions that it answers. As CNN’s Brooke Baldwin pointed out, the chief amongst those is, “What on earth did she need Botox in prison for?” I mean, Styleite’s done plenty of stories about people going to prison because of stuff like this, but I’ve never heard of cosmetic surgery after you’re behind bars.
Anyway, enjoy the incredible weirdness of this story in the CNN report below. My favorite part is the fact that they chose to play a five second looped video of Beltran’s face in the background of the entire segment. It’s just enough to tip this fully into the surreal.
A Tale of Two Currency Areas
A Tale of Two Currency Areas
Michael Boskin
PALO ALTO – The United States and Europe are two giant free-trade areas, each wealthy but with serious short-run problems and immense long-run challenges. They are also two single-currency areas: the dollar and, for much of Europe, the euro. The challenges facing both are monumental.
But only Europe’s currency union faces uncertainty about its future; America faces no existential crisis for its currency. The two economic powers’ similarities and differences, particularly with respect to internal labor mobility, productivity, and fiscal policies, suggest why – and provide clues about whether the eurozone can weather the crises on its periphery and evolve into a stable single-currency area.
Labor mobility from poorer to richer areas provides a shock absorber against differential economic hardship. The other natural shock absorber is a depreciating currency, which increases competitiveness in the area hit hardest. That cannot happen with a common currency, and economic adjustment is doubly difficult when labor is not mobile enough to help mitigate regional contractions in income and unemployment.
The reasons for lower labor mobility in the eurozone than in America are legion. True, America’s original thirteen colonies were a loose federation, and many Americans considered themselves citizens of their state first and of the US second as late as a century after the Revolution. But one’s state was not a fully formed nation, with its own shared and deeply ingrained history, culture, ethnic identity, and religion.
Perhaps the most important cultural component of labor mobility is language. From Mississippi to Maine, and from New York to New Orleans, America’s written language is the same and the spoken language is understandable to all. Not so from Berlin to Barcelona or Rome to Rotterdam. (Or, for that matter, from northern to southern China or in multilingual India, where Hindi is spoken by only 42% of the population.) For eurozone citizens who do not speak a major language, especially English, mobility across national borders within the single-currency area is limited at best.
These are differences that cannot be easily erased. While some aspects of culture are becoming globalized, variation across borders in Europe is far greater than it is between US states. For example, until the second half of the twentieth century, today’s eurozone members regularly slaughtered each other on centuries of battlefields. By contrast, history is more commonly shared among Americans from different states, who, other than in the Civil War, have fought side by side in the nation’s external wars.
All of this means that when California slumps, residents simply leave for the mountain states; when manufacturing jobs disappear in the upper Midwest, people migrate to new jobs in Texas. That pattern is much less prevalent in Europe.
Moreover, it is a pattern that has closed the gap (now roughly 40%) between per capita income in America’s poorest and richest states, as labor and capital continually adjust by moving to areas where productivity is higher. The range of productivity and per capita income within the eurozone is considerably wider, making mobility even more important.
Finally, while fiscal systems differ among American states, the overall fiscal burden is under half that of the federal level. Almost all states’ constitutions require balanced budgets (with exceptions for emergencies). American states and municipalities do face serious medium- and long-term fiscal challenges from underfunded pension and health-care systems, but citizens living in different states have a common national budget, whereas citizens of different eurozone countries face radically different central-government fiscal positions.
Indeed, many observers argue that the eurozone’s lack of a common fiscal system is its main problem. But competition over taxes and services is beneficial, not harmful. Nevertheless, much tighter constraints, with serious and enforceable penalties, must be placed on permissible budget positions and their transparency if the euro is to survive.
And it can survive. Those who would write off the euro as a failure should consider that it is only ten years old. America, too, historically had problems as a single-currency area, from early chaos before the Constitution to the clash between agricultural and banking interests over the gold standard in the late nineteenth century. While the euro faces strong headwinds, the dollar’s early sailing wasn’t always smooth, either.
The eurozone countries must first deal with the sovereign-debt crisis, reduce their fiscal deficits, and strengthen the woefully undercapitalized banking system. But, if the eurozone is to survive and prosper beyond the current crisis, it will also need comprehensive structural reforms to boost internal labor mobility and defuse the pressures caused by economic adjustment among nations and regions. Whether citizens will support politicians who propose the labor, tax, and other reforms needed to enhance mobility, and whether such reforms will be sufficient to overcome linguistic and cultural barriers, are open questions.
Successive generations of post-war European political leaders initiated the European Union and then currency union in order to knit countries so closely together that another major war between them would become impossible. Whether monetary union was necessary to accomplish that aim is debatable. Despite the considerable advantages of a common currency (price transparency, lower transaction costs, and inflation credibility, to name a few), the difficulty of macroeconomic management of such diverse economies looms larger than ever.
The euro was always a big gamble, a grand experiment. Historical efforts at monetary union have sometimes collapsed, and sometimes they have survived multiple crises. The future of the eurozone may be cloudy, but it will not be dull.
Michael Boskin, currently Professor of Economics at Stanford University and a senior fellow at the Hoover Institution, was Chairman of President George H. W. Bush’s Council of Economic Advisers, 1989-1993.
New Rules for the Global Economy
New Rules for the Global Economy
Dani Rodrik
CAMBRIDGE – Suppose that the world’s leading policymakers were to meet again in Bretton Woods, New Hampshire, to design a new global economic order. They would naturally be preoccupied with today’s problems: the eurozone crisis, global recovery, financial regulation, international macroeconomic imbalances, and so on. But addressing these issues would require the assembled leaders to rise above them and consider the soundness of global economic arrangements overall.
1. Markets must be deeply embedded in systems of governance. The idea that markets are self-regulating received a mortal blow in the recent financial crisis and should be buried once and for all. Markets require other social institutions to support them. They rely on courts, legal frameworks, and regulators to set and enforce rules. They depend on the stabilizing functions that central banks and countercyclical fiscal policy provide. They need the political buy-in that redistributive taxation, safety nets, and social insurance help generate. And all of this is true of global markets as well.
2. For the foreseeable future, democratic governance is likely to be organized largely within national political communities. The nation state lives, if not entirely well, and remains essentially the only game in town. The quest for global governance is a fool’s errand. National governments are unlikely to cede significant control to transnational institutions, and harmonizing rules would not benefit societies with diverse needs and preferences. The European Union may be the sole exception to this axiom, though its current crisis tends to prove the point.
Too often we waste international cooperation on overly ambitious goals, ultimately producing weak results that are the lowest common denominator among major states. When international cooperation does “succeed,” it spawns rules that are either toothless or reflect the preferences of only the more powerful states. The Basle rules on capital requirements and the World Trade Organization’s rules on subsidies, intellectual property, and investment measures typify this kind of overreaching. We can enhance the efficiency and legitimacy of globalization by supporting rather than crippling democratic procedures at home.
3. Pluralist prosperity. Acknowledging that the core institutional infrastructure of the global economy must be built at the national level frees countries to develop the institutions that suit them best. The United States, Europe, and Japan have produced comparable amounts of wealth over the long term. Yet their labor markets, corporate governance, antitrust rules, social protection, and financial systems differ considerably, with a succession of these “models” – a different one each decade – anointed the great success to be emulated.
The most successful societies of the future will leave room for experimentation and allow for further evolution of institutions. A global economy that recognizes the need for and value of institutional diversity would foster rather than stifle such experimentation and evolution.
4. Countries have the right to protect their own regulations and institutions. The previous principles may seem innocuous. But they carry powerful implications that clash with the received wisdom of globalization’s advocates. One such implication is the right of individual countries to safeguard their domestic institutional choices. Recognition of institutional diversity would be meaningless if countries did not have the instruments available to shape and maintain – in a word, “protect” – their own institutions.
We should therefore accept that countries may uphold national rules – tax policies, financial regulations, labor standards, or consumer health and safety rules – and may do so by raising barriers at the border if necessary, when trade demonstrably threatens domestic practices enjoying broad popular support. If globalization’s boosters are right, the clamor for protection will fail for lack of evidence or support. If wrong, there will be a safety valve in place to ensure that contending values – the benefits of open economies versus the gains from upholding domestic regulations – both receive a proper hearing in public debates.
5. Countries have no right to impose their institutions on others. Using restrictions on cross-border trade or finance to uphold values and regulations at home must be distinguished from using them to impose these values and regulations on other countries. Globalization’s rules should not force Americans or Europeans to consume goods that are produced in ways that most citizens in those countries find unacceptable. But nor should they allow the US or the EU to use trade sanctions or other pressure to alter foreign countries’ labor-market rules, environmental policies, or financial regulations. Countries have a right to difference, not to imposed convergence.
6. International economic arrangements must establish rules for managing interaction among national institutions. Relying on nation states to provide the essential governance functions of the world economy does not mean that we should abandon international rules. The Bretton Woods regime, after all, had clear rules, though they were limited in scope and depth. A completely decentralized free-for-all would benefit no one.
What we need are traffic rules for the global economy that help vehicles of varying size, shape, and speed navigate around each other, rather than imposing an identical car or a uniform speed limit. We should strive to attain maximum globalization consistent with the maintenance of space for diversity in national institutional arrangements.
7. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies. What gives the previous principles their appeal and legitimacy is that they are based on democratic deliberation – where it really occurs, within national states. When states are not democratic, this scaffolding collapses. We can no longer presume that its institutional arrangements reflect its citizens’ preferences. So non-democracies need to play by different, less permissive rules.
These are the principles that the architects of the next global economic order must accept. Most importantly, they must comprehend the ultimate paradox that each of these principles highlights: globalization works best when it is not pushed too far.
Dani Rodrik is Professor of Political Economy at Harvard University’s John F. Kennedy School of Government and the author of One Economics, Many Recipes: Globalization, Institutions, and Economic Growth.
Did the Poor Cause the Crisis?
Did the Poor Cause the Crisis?
Simon Johnson
WASHINGTON, DC – The United States continues to be riven by heated debate about the causes of the 2007-2009 financial crisis. Is government to blame for what went wrong, and, if so, in what sense?
In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many into taking out subprime mortgages that they could not afford.
This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions? Are poor people in the US responsible for causing the most severe global crisis in more than a generation?
Not according to Daron Acemoglu of MIT (and a co-author of mine on other topics), who presented his findings at the American Finance Association’s annual meeting in early January. (The slides are on his MIT Web site.)
Acemoglu breaks down the Republican narrative into three distinct questions. First, is there evidence that US politicians respond to lower-income voters’ preferences or desires?
The evidence on this point is not as definitive as one might like, but what we have – for example, from the work of Princeton University’s Larry Bartels – suggests that over the past 50 years, virtually the entire US political elite has stopped sharing the preferences of low- or middle-income voters. The views of office holders have moved much closer to those commonly found atop the income distribution.
There are various theories regarding why this shift occurred. In our book 13 Bankers, James Kwak and I emphasized a combination of the rising role of campaign contributions, the revolving door between Wall Street and Washington, and, most of all, an ideological shift towards the view that finance is good, more finance is better, and unfettered finance is best. There is a clear corollary: the voices and interests of relatively poor people count for little in American politics.
Acemoglu’s assessment of recent research on lobbying is that parts of the private sector wanted financial rules to be relaxed – and worked hard and spent heavily to get this outcome. The impetus for a big subprime market came from within the private sector: “innovation” by giant mortgage lenders like Countrywide, Ameriquest, and many others, backed by the big investment banks. And, to be blunt, it was some of Wall Street’s biggest players, not overleveraged homeowners, who received generous government bailouts in the aftermath of the crisis.
Acemoglu next asks whether there is evidence that the income distribution in the US worsened in the late 1990’s, leading politicians to respond by loosening the reins on lending to people who were “falling behind”? Income in the US has, in fact, become much more unequal over the past 40 years, but the timing doesn’t fit this story at all.
For example, from work that Acemoglu has done with David Autor (also at MIT), we know that incomes for the top 10% moved up sharply during the 1980’s. Weekly earnings grew slowly for the bottom 50% and the bottom 10% at the time, but the lower end of the income distribution actually did relatively well in the second half of the 1990’s. So no one was struggling more than they had been in the run-up to the subprime madness, which came in the early 2000’s.
Using data from Thomas Piketty and Emmanuel Saez, Acemoglu also points out that the dynamics of the wage distribution for the top 1% of US income earners look different. As Thomas Philippon and Ariell Reshef have suggested, this group’s sharp increase in earning power appears more related to deregulation of finance (and perhaps other sectors). In other words, the big winners from “financial innovation” of all kinds over the past three decades have not been the poor (or even the middle class), but the rich – people already highly paid.
Finally, Acemoglu examines the role of federal government support for housing. To be sure, the US has long provided subsidies to owner-occupied housing – mostly through the tax deduction for mortgage interest. But nothing about this subsidy explains the timing of the boom in housing and outlandish mortgage lending.
The FCIC Republicans point the finger firmly at Fannie Mae, Freddie Mac, and other government-sponsored enterprises that supported housing loans by providing guarantees of various kinds. They are right that Fannie and Freddie were “too big to fail,” which enabled them to borrow more cheaply and take on more risk – with too little equity funding to back up their exposure.
But, while Fannie and Freddie jumped into dubious mortgages (particularly those known as Alt-A) and did some work with subprime lenders, this was relatively small stuff and late in the cycle (e.g., 2004-2005). The main impetus for the boom came from the entire machinery of “private label” securitization, which was just that: private. In fact, as Acemoglu points out, the powerful private-sector players consistently tried to marginalize Fannie and Freddie and exclude them from rapidly expanding market segments.
The FCIC Republicans are right to place the government at the center of what went wrong. But this was not a case of over-regulating and over-reaching. On the contrary, 30 years of financial deregulation, made possible by capturing the hearts and minds of regulators, and of politicians on both sides of the aisle, gave a narrow private-sector elite – mostly on Wall Street – almost all the upside of the housing boom.
The downside was shoved onto the rest of society, particularly the relatively uneducated and underpaid, who now have lost their houses, their jobs, their hopes for their children, or all of the above. These people did not cause the crisis. But they are paying for it.
Simon Johnson, a former chief economist of the IMF, is co-founder of a leading economics blog, http://BaselineScenario.com, a professor at MIT Sloan, and a senior fellow at the Peterson Institute for International Economics. His book, 13 Bankers, co-authored with James Kwak, is now available in paperback.
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