Relevant and even prescient commentary on news, politics and the economy.

Saturday browsing


40 year wish list op-ed piece in the WSJ says (hat tip Tinman) :

Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party?

Talking point presentations are to be expected, but such statements need to be rational at a minimum.

Another piece in the WSJ brought to my attention by Tinman is a narrative reminder of how interrelated we are, and one person’s ‘saving’ is another person’s loss that link to the second person needing to ‘save’ money that leads…well, you know.

Update: 17 major financials events 2008. Lots of links too.

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Furniture Industry and China

By Stormy

The once thriving U.S. furniture industry is….where?

Beijing (ANTARA News/Asia Pulse) – China sold abroad US$24.12 billion worth of furniture in the first 11 months of 2008, a growth of 21.7 per cent on the same period of 2007, the General Administration of Customs said on Wednesday.

In November alone, the foreign sales stood at US$2.52 billion, up 13.8 per cent year-on-year. Foreign-funded companies made up 51.9 per cent of China’s total furniture exports.

They sold US$12.53 billion worth, up 11.5 per cent. The United States and the European Union were the major target markets of Chinese-made furniture.

Ok… so it is still thriving…it just followed the crowd. Gotcha.

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Assume They Know What an Acronym Is

I am reliably informed (though I cannot find it on the web) that Forbes yesterday and MSNBC today are both referring to the next kleptocratic maneuverbank bailout bill as the Bank Asset Recovery Fund.

Anyone got the links?

UPDATE: Forbes link added.

UPDATE II: The consensus in comments appears to be that a Meredith Whitney report on the 29th may be the original source of the BARF acronym. Via Paul Kedrosky, FT Alphaville has an excerpt from her spot-on report of the issue with the BARF plan. The acronym is sadly missing from it, though commenter leftback chez Ritholtz claims to have been “ripped off.” (Think of it as having been mainstreamed, mate.)

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Simple Answer to a Simple Question

Dr. Black graciously asks:

Am I the only to whom it’s occurred that monetary policy through the banking channel (as opposed to, say, actually dropping money from helicopters) is only likely to be effective if banks are pretty good at allocating capital efficiently, and recent history tells us that the existing set of clowns in charge completely suck ass at this?

No. In fact, this is one of the better reasons for advocating spending (fiscal) solutions over monetary ones. The monetary ones haven’t worked, because the skillset to make them so does not currently exist sufficiently in the financial community.

Or, as someone once observed, we have thirty major banks. What we don’t have are thirty bankers to run them.

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Pick Your Pork: an Open Invitation

These tables from CBO show the actual breakout by category of both spending and tax cuts in HR.1 the House version of the Stimulus Bill as introduced (some things were stripped out for passage). I’d like to invite everyone to compile their own list of what they consider to be pork or mistimed (i.e. too late) investment and put that list in comments. On the other hand I will compile a list of investments unlikely or impossible to see being delivered via tax cuts on capital. That list will appear under the fold probably Sat. AM. Each page is a separate image, click on it to enlarge. If that is still too small bigger images are available at my website CBO Tables
(UPDATE: Reader Kolohe suggested I simply point these images over there. Well I like to keep these because the show whole pages, whereas the big ones are half pages. So instead I just put the big images below the fold)
(UPDATE 2: Some of the categories are not very transparent. For example what is the relatively small amount in Title 4 Defense ($4.8 bn) for? People who want a higher level of detail can consult the text of the bill
HR.1 Full text)

People in comments on a previous post were complaining about tone and lack of substance. Well there is plenty of substance here. Dive in!

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Off Shoring For Dummies

By Stormy

In 2003, IBM laid out its strategy for globalization. Before the 1970’s IBM rarely fired anyone. People who worked for IBM had a lifetime job. By the 1990’s, all that had changed. Trade barriers were falling; NAFTA opened a wide door for off shoring.

I have written repeatedly on this subject, but economists simply ignore what American business is doing. In one of my pieces, “A Question for the Council on Foreign Relations: Globalization at any Cost,” I quoted Tom Lynch, then IBM Director for Global Relations, as he laid out the case for off shoring. All the hoop-la that we are losing just sewing jobs is nonsense. I will let Tom speak again.

How can we operationally define the phrase “trade barrier”? Normally, we think of trade barriers as tariffs between countries or a government subsidy of goods produced, a subsidy that unfairly disadvantages a foreign firm. But a trade barrier can also be defined as: An obstacle to a company in finding cheaper labor to create products or services elsewhere. Those products—or services—will be sent back to the country the company left. The resulting trade imbalance, the resulting shift of wealth to the top of the food chain, and the resulting debt if credit is made cheap all certainly should be self-evident, even if those goods are now less expensive. In short, a trade barrier can be a barrier to off shoring.

A few posts ago, I put up some U.S. trade data regarding Advanced Technology, computers, computer parts, etc. It seems the U.S. has a growing and healthy deficit in these areas. The companies have not changed; just their locations. Advanced Technology is not sewing shirts. (Nike likes to make its expensive sneakers in purported sweatshops—and then sell them back here.)

In 2007, I wrote a post on Sam Palmisano’s remarks in Foreign Relations, “What about U.S. Investment Abroad?” Sam knew what was happening, even if most economists do not. (Sam is CEO of IBM.) Did any economist pick up Sam’s remarks? Nope. Sam obviously did not know anything about trade or globalization. Here are Sam’s remarks:

By one estimate, between 2000 and 2003 alone, foreign firms built 60,000 manufacturing plants in China. Some of these factories target the local Chinese market, but others target the global market. European chemical companies, Japanese carmakers, and U.S. industrial conglomerates are all building (or have declared their intention to build) factories in China to supply export markets around the world. Similarly, banks, insurance companies, professional-service firms, and it companies are building R & D and service centers in India to support employees, customers, and production worldwide.
[Italics mine.]

Regardless, I thought that I would post Tom Lynch’s remarks once again, even though those 2003 remarks are a bit dated.

If you turn to the chart that begins “off-shoring” then I have next: global sourcing with a question mark. What we’re talking about here is universally known as off shoring throughout business communities. There are people in IBM who are saying that off shoring is in fact a US-centric term. If you’re sitting in Bangalore India, work going to India is hardly going offshore. In any event, the external world uses the term but you may hear it called some different things as the subject evolves. I know that a lot of you as HR partners that have been supporting your customers have been involved in the 1990s with a lot of manufacturing that we moved offshore.
As we saw commoditization of a lot of our products, as we saw trade barriers come down through things like NAFTA, we moved from the US to other countries a whole lot of manufacturing and from generally high cost labor areas to lower cost labor areas. In 1990 that focus was primarily in manufacturing.

Off shoring in manufacturing moved rapidly in the 1990’s. NAFTA was one golden goose of a trade agreement. Shortly thereafter Mexico had a growing trade surplus with the U.S. Mexico was not getting richer; illegal immigration became a flood. We are not living during the time of Ricardo. Trade agreements now are often not used to allow a country to market its wares elsewhere; often, they are simply avenues for foreign corporations to set up shop.

As we saw commoditization of a lot of our products, as we saw trade barriers come down through things like NAFTA, we moved from the US to other countries a whole lot of manufacturing and from generally high cost labor areas to lower cost labor areas. In 1990 that focus was primarily in manufacturing. In looking at the current decade, the decade that has no easy name for it, like the 90s did but from now until the year 2010 and beyond; looking at an emerging trend now to move services offshore, in addition to manufacturing operations, some functions that would be included in those services would be engineering, software development, certainly chip development as well.

Well, 2010 is a bit closer than it was in 2003. And, yes, we are watching multinationals tap cheap foreign labor in software development, engineering, and chip development. This aint sewing, baby.

Services like accounting and financial services. There are companies that realize that there are lots of skills in places like India to do accounting for a fraction of the costs in theUS. Call centers; once we realize that we could have calls handled at a central location in the US and a central location in Europe. The next question is why should only be content by continent by continent, why not go further there? IT-supported services similarly. Why do you have to talk to someone in your own country? Call centers have such an interesting market – focus groups research going on and the like as to why US customers prefer in terms of accent and what they don’t like and what countries are good places to put call centers and which ones are not.

There has been a bit of a backlash with foreign call centers, but R&D and real hi-tech off shoring continues apace.

Then there is Microsoft and Hewlitt Packard. One-third of HP’s employees are off shore. HP is one of the largest IT employers in the world.

Microsoft actually had a road show that one of their senior vice presidents told their managers go ahead and pick a project and move it offshore today. I’ll tell you in a minute where you can actually access on the web that Microsoft presentation. HP, another big competitor, obviously, told the press and analysts that one of the ways it hoped to gain competitive advantage over rivals like IBM was to move stuff offshore

And, as I pointed in an earlier post, HP thinks it is among the crown jewels of American business, and, as such, should receive government support. I had to chuckle. Haven’t the trade agreements and China’s entry into the WTO been enough of a handout to HP? It’s worse than the banks.

I have to ask: Do economists ever listen to CEO shoptalk? Will they ever do a close study of some of these multinationals?

The government, I believe you’re going to find is fairly limited to what they can do and unionizing becomes an attractive option for a lot of reasons, there are indications that union organizing will become more aggressive over the coming months.

Unions have become helpless. And of course the government cannot do much. Any government that pours billions into banks while the banks declare dividends and bonuses is just laughable. Besides, there are crowds of economists all ready to join in any chorus that mindlessly promotes another free trade agreement. Cheek to cheek they chant; jowl to jowl. They know their Ricardo. They think they know how trade works. What they know is a fairy tale spun in a tower, buttressed with equations that are never predictive, not even descriptive.

Are they surprised at the latest fiasco? I think they are.

In the past, when the local witch doctor failed, the tribe sent him into the desert for a refresher course. Today, he should be forced to sit in an IBM or Microsoft or HP global strategy session.

Naw….won’t work. He will sit there, humming Ricardian tunes, not paying attention, wondering if IBM will give him tenure…or whether he can get on a talk show…. Some dummies are just dumb.

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Crowding Out and the Perils of Oversimplified Models

Tom Bozzo

tips the hat to Ken and SvN for a pointer to a nice paper from the Journal of Money, Credit and Banking called “The Deficit Gamble,” by Laurence Ball, Douglas Elmendorf (now CBO director), and N. Gregory Mankiw. Ball, Elmendorf, and Mankiw showed that the government can “with a high probability” run a deficit in the present and roll the resulting debt over indefinitely. In the states of the world where this so-called “Ponzi gamble” (*) works, the result is Pareto-improving; if the gamble fails, then at least some generations are better-off. The authors note that this does not imply that deficits are necessarily “good policy.” (**)

The details of how this works also bear a bit on the “freshwater” versus “saltwater” debate over the stimulus package and “crowding out” of private sector investment. One possibility is that there can be crowding out even in the sense that Fama describes and that may nevertheless be welfare-enhancing. Under risk aversion, a reduction in the variance of consumption can compensate for a reduction in the mean, as in substituting (safe) government debt for risky but higher-return private capital investments. But, more realistically, the portfolio choice is among private investments with a variety of risk/reward features. Ball, Elmendorf, and Mankiw show that under such circumstances, increasing holdings of safe government debt should lead to a portfolio shift towards higher-risk, higher-(mean)-return capital. This formalizes a sort-of “safety nets are good for entrepreneurs” argument. The central issue, though, is that it’s not just the quantity of capital that matters, but also its composition.

In fact, in some respects the Ball, Elmendorf, and Mankiw model may be too pessimistic as to the likelihood of the deficit-spending gamble paying off. As is fairly common in macro modeling (***), the government spending financed by the deficit is assumed to be unproductive. Of course deficit-financed stimuli can be arranged as airdrops of nondurable consumption goods. The actual stimulus package we’re fighting over, however, would direct a good chunk of money on public-sector investments (not necessarily “public goods”). So some of the “crowding out” is a substitution of public for private investment. We can fight over the relative marginal products of various public and private capital investments, but in general those will be positive. I leave knock-on portfolio effects to others, but I’ll assert without proof that the net effect shouldn’t be to increase the probability that the debt rollover would fail.


(*) The term “Ponzi” may be too loaded; the “gamble” involves a series of intergenerational transfers that are not inherently unsustainable in contrast to a “scheme” a la Madoff.

(**) Basic prudence is not revoked. Borrowing “too much” money, for instance, would affect the probability of successfully rolling over the debt.

(***) I recently flipped through the main graduate macro text of my formative years, Blanchard and Fisher’s Lectures on Macroeconomics, and you have to get pretty far along (p. 591 of my edition) to read that “in the equilibrium context some components of government spending may operate as a current input into production.” Wow, what a concept!

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comment on Ambrosini

Robert Waldmann

Following a link e-mailed by Ken Houghton I read this at “the Ambrosini critique” (thanks Ken)

I read

The need for more math is also related to the increase in the empirical relevance of theory. I’m convinced the only standing legacy of the Real Business Cycle literature, besides method, is its insistence on bringing the models to the data. In modern macro, its simply not enough to identify the existence of some effect or other. For example, real business cycles were relevant because they proved to be quantitatively important… a large chuck of business cycle fluctuations are driven by supply shocks. And RBCs have been supplanted because they didn’t explain enough of the data. The empirical relevance of real shocks couldn’t have been tested without out explicit mathematical models of the phenomenon.

This is what frustrates me about Kling, Krugman, et al’s ad-hoc theorizing. They seem contented to identify that certain macroeconomic features exist, but they don’t bother to quantify the importance of those features.

and also a comment

pushmedia1 Says:

January 29th, 2009 at 3:03 pm
To be honest, yours is an interesting request. How does one show a discipline is empirically relevant?

What sort of evidence would convince you?

(I am not the referent of the pronoun “you” in the comment).

I comment after the jump

Now Krugman does appeal to quantitative models. For example he notes the CBO predictions. Now you might not consider the CBO model to be an economic model, because I suppose it lacks micro foundations. The fact is that Krugman makes quantitavie calculations. To you they don’t count, because the theoretical argument is just that a causal effect isn’t zero, then it is estimated reduced form. Does this approach yield worse predictions than those generated by DSGE models ? I am familiar with the Lucas critique. So was Marshak who stated it long before Lucas (who made “no claim of originality” in “Econometric Policy Evaluation: A Critique and cited Marshak). However, Marshak also attempted to forecast with models which he knew were vulnerable to the Lucas critique.

He thought that was the best approach available. Since Marshak we have accumulated a good bit of data on forecasts and outcomes. Was he wrong ?

Or to put it another way, does anyone whose employment depends on getting macroeconomic predictions right use DSGE models ? If not what is the market failure ?

Pushmedia it is easy to show that a discipline is empirically relevant. The acid test is out of sample forecasting. Models can be tweaked to fit the past. A more empirically relevant model gives better out of sample forecasts.

In particular, DSGE are an empirical advance if and only if out of sample forecasts based on DSGE models are better than those based on, say, VARs, old Keynesian macro models or something else without micro foundations.

Now you will notice that the methodology described by Ambrosini is based on the ability to match summary statistics.

OK so I took a model which I am absolutely sure has nothing to do with reality and tried to see how blatantly I had to cheat to get it to match summary statistics. My sense was that it was about average plausible for DSGE (had spillovers, the labor market cleared, no exogenous technology shocks). I conclude that the approach is not fruitful.

If you are interested, I can send you the paper presenting the model and the gauss file which does the simulations. If you can convince me I fudged more than the average macro theorist, I will thank you. If you can convince me that the model and program have any scientific value at all, I will be very very grateful.

Consider astronomy. It is like macro in that it is non experimental. It is unlike macro in that astronemers can predict, for example, where planets will be in the sky. Astronomers are clearly empirically successful, they can predict things that you see in the sky better than you and I.

Can we predict what will happen to the economy better than astronomers ?

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