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

The Era of Big Government, Continued

Yes, it was on hiatus for a bit in the 1990s, but it’s back with a vengance. First, the energy bill. Now the Republicans are using the same pork belly tactics on all of their bills (DeLay to recalcitrant Republican Congressperson: “how many millions of taxpayer money would it take to get your vote?”):

As Congress rushes to conclude its 2003 session, Republican leaders are trying to garner votes for controversial legislation by loading the bills with billions of dollars in added costs that analysts said would expand the budget deficit for years to come. The year-end binge has alarmed analysts in Washington and on Wall Street, coming as it does after three years of presidential and congressional initiatives that have both substantially boosted government spending and shrunk its tax base.

“The U.S. budget is out of control,” the Wall Street investment firm Goldman Sachs & Co. warned Friday in its weekly newsletter to clients.

As the post story recounts, massive amounts of pork are flowing into bills covering Energy, Medicare, Veterans Affairs, Forest-thinning projects, funding for Iraq, and I’m sure everywhere else.

I’ll have to second Warren Rudman’s take, which is tantamount to my earlier take, “It’s your children’s money. Quick! Take it!”:

“The only thing I can tell you is evidently the word ‘tomorrow’ no longer exists in the vocabulary of otherwise responsible members of Congress,” said Warren Rudman, a former New Hampshire Republican senator and long-standing budget hawk. “They are acting as if there is no tomorrow.”


“It is puzzling, unless you take the most cynical political view of ‘I’ve got to do what I’ve got to do, and whatever bad that’s going to happen is not going to happen on my watch,’ ” he said, trying to explain lawmakers’ motivations. “If that is what’s happening, we are facing the Titanic of fiscal crises in eight to 10 years.”

There’s a lot more in the full story — all disgusting. Democrats aren’t blameless in this (witness Daschle’s selling out for ethanol subsidies), but as the party in control of the House, Senate, and White House, this spending is certified 94% Republican (96% if you count Zell Miller as a Republican).


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At Least we’re Popular in Northern Iraq…?

I thought that anti-American feelings in Iraq are confined to the Sunni triangle, as Bush and Co. tell us? Mosul is in northern Iraq, on the edge of Kurdistan… where the US is supposed to be popular.

MOSUL, Iraq – Gunmen killed two American soldiers driving through this northern Iraqi city Sunday, and then a crowd swarmed the scene, looting the soldiers’ vehicle and pummeling their bodies, witnesses said. Another soldier was killed in a roadside bombing north of Baghdad.

Bahaa Jassim, a teenager, said the soldiers’ vehicle crashed into a wall after the shooting. Several dozen passers-by then descended on the wreckage, looting the car of weapons and the soldiers’ backpacks.

After the soldiers’ bodies fell into the street, the crowd pummeled them with concrete blocks, Jassim said.

If one or two gunmen kill an American soldier, it doesn’t necessarily represent Iraqi opinion. But when a crowd of randomly selected individuals (i.e. those that were passing by at the time of the attack) decide to loot and mutilate the American soldiers, that says something very worrying about US popularity in a city that is supposed to be one of the most pro-American in Iraq.


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The FTAA is Dead

Two developments this week lead me to that conclusion. First, as this story describes, the framework agreed to in Miami this week was a shadow of the original intent, since it allows individual countries to pick and choose which parts of the FTAA they want to sign on to. So, for example, Brazil can choose to adopt the portion of the FTAA that requires it to lower tariffs while opting out of the portion of the FTAA that would require it to harmonize its intellectual property rights or government procurement policies. And the US can opt out of the portion that it doesn’t like, which would require it to reduce agricultural subsidies.

In principle, I like the idea of flexibility, but it raises the question of what value is added by the FTAA agreement. If countries opt only for the portions of the agreement that they like, with no assurances that anyone else will opt for the same portions, then couldn’t they have just done those things (such as lowering tariffs) without all of the hassle of an FTAA in the first place?

The second development was the surprise announcement by the US Trade Representative, Robert Zoellick, that the US would pursue bilateral trade deals with six individual Latin American countries (Colombia, Peru, Ecuador, Bolivia, Panama, and the Dominican Republic). Some news reports have suggested that the US is doing this to apply pressure to the other Latin American countries to hurry up and agree to the FTAA.

But I have a different reading. I think that the Bush administration has decided that it is easier to do bilateral deals (which it is), and realized that in one-on-one negotiations with weak Latin American countries, the US pretty much gets to dictate the agreement. On a practical level, a web of individual bilateral deals will make any future FTAA negotiations that much more complicated (in addition to making it more complicated to do business in Latin America), since all of those individual agreements will have to be taken into account. So I think that this move signals an unspoken abandonment of the multilateral FTAA in favor of less ambitious, easier deals. That’s why I’ll be very surprised if any substantive FTAA agreement is reached in the next few years.

Is that a bad thing? Personally, I have mixed feelings about the FTAA. While I do believe that trade generally makes both trading partners better off (see numerous posts from this week), I’m not convinced that an FTAA is the way to get there. So I’m not going to lose any sleep about this effective end of the FTAA initiative. I do wonder, however, what this says about this administration’s general level of engagement with Latin America as a region. Of course, neglecting relations with Latin America has been a consistent theme of the Bush administration since it entered office, so why should they change now?


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Borrowing and the Business Cycle

Since I’m in a data groove today, I thought I’d put up a picture showing why I worry about whether the current economic recovery is sustainable. You can read about some of the details of my concerns in this earlier post, but here’s a graph to go with it.

The point is simple: borrowing should typically fall during recessions, and rise during booms. The shaded areas in the graph represent recessions (approximately), and the two lines represent two important types of borrowing: borrowing by the US as a whole from foreign countries (that’s the current account deficit, the blue line), and the total debt service that consumers in the US have to pay as a percent of their disposable income. As you can see, in every recession in the past, the US as whole, and consumers in particular reduce their borrowing and debt burdens. And then during every economic expansion, both measures of borrowing rise. That’s how the business cycle normally works. But this time, that hasn’t happened.

If the US economy were to enter a period of strong growth now, we would expect both series to rise sharply, as they have during every previous recovery. But it seems impossible that consumer debt could boom at this point, and that the US current account deficit could grow much larger. Hence my feeling that somehow, these two measures have to fall first before they can rise again – and hence my fears that the other shoe has yet to drop on the US economy.


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Trade and Income Growth: some data

I’d like to finish up our discussion about international trade by presenting some data. There have been lots of comments in our discussion that have involved assertions regarding trade, income, and employment. I thought I’d provide a couple of graphs to help give some meat to your arguments.

The first graph shows the quantity of imports (adjusted for inflation) as the black line, rising throughout the 70s and 80s, but much more rapidly in the 1990s. The red line shows employment, which grew strongly during the 1990s (despite the rapid growth in imports). The green line shows that total compensation rose, but slowly. Between 1978 and 1995 real hourly compensation rose slowly, but from 1995 to 2002 real compensation grew quite rapidly. Total compensation, by the way, includes both wages and benefits (health insurance benefits taking up the majority of those).

The graph shows that while imports boomed, so did employment in the US. When imports stagnated during the period 2000-02, so did employment.

However, hourly compensation did indeed grow slowly during most of this period. Maybe the increased imports are to blame?

I will argue that imports are not the culprit. You may first notice that the fastest growth in real compensation since the 1970s occurred in the last half of the 1990s, when imports were growing faster than ever. If more imports caused wages to fall, that shouldn’t happen.

But the real evidence is this: higher wages are the direct result of, and are impossible without, higher productivity. Productivity drives wages. That is the conclusion of a mountain of theoretical and empirical evidence. The chart below provides one example of that.

The chart shows that real compensation almost exactly follows real productivity. Compensation grew much more slowly during the period 1973-1994, because productivity did. Compensation grew faster in the 50s, 60s, and late 1990s because productivity did. Trade is not the culprit.


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In Case You Weren’t Sure …

… what Campaign 2004 will look like, the RNC is starting it’s first ads:

With somber strings playing in the background, the commercial flashes the words “Strong and Principled Leadership” before cutting to Mr. Bush standing before members of Congress. Intended to call out the Democrats for their opposition to Mr. Bush’s military strategy of pre-emptively striking those who pose threats to the nation, the screen flashes “Some call for us to retreat, putting our national security in the hands of others,” then urges viewers to tell Congress “to support the president’s policy of pre-emptive self defense.”

I’m not sure which candidate with a prayer of winning is calling for a retreat (hint: none of them), nor whose “other hands” that refers to. Still, at this stage, the war could go either way for Bush. I’m not sure how it would play in the swing states, but a commercial using the “Bring it On” and Lincoln flight suit/”Mission Accomplished” episodes with a “make-believe is easy, we need leadership” tagline might be worth a shot.


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Hooverism in the Modern Era

Bush is getting closer and closer to the Hoover Trifecta:

1. Presiding over a net loss of jobs? Check.

2. Stock market crash? Check.

3. Global trade war leading to a Great Depression? (Instigated, or at least exacerbated by Hoover’s signing of the Smoot-Hawley Tariff Act of 1930) Based on Kash’s last two posts, on the way.

Here’s Robert Samuelson describing the Great Depression:

It is hard for those who did not live through it to grasp the full force of the worldwide depression. Between 1930 and 1939 U.S. unemployment averaged 18.2 percent. The economy’s output of goods and services (gross national product) declined 30 percent between 1929 and 1933 and recovered to the 1929 level only in 1939. Prices of almost everything (farm products, raw materials, industrial goods, stocks) fell dramatically. Farm prices, for instance, dropped 51 percent from 1929 to 1933. World trade shriveled: between 1929 and 1933 it shrank 65 percent in dollar value and 25 percent in unit volume. Most nations suffered. In 1932 Britain’s unemployment was 17.6 percent. Germany’s depression hastened the rise of Hitler and, thereby, contributed to World War II.

Now, do I really expect Bush’s anti-trade policies, or even a full-blown trade war, to spark a second Great Depression? No. We have many counter-cyclical measures now that did not exist last time. But it’s still a step — and a big one at that — in the wrong direction.


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…But Pro-Trade Forces are Mustering Against Bush

From the NYTimes:

Greenspan Warns Against ‘Creeping Protectionism’ in Trade

In an apparent criticism of the Bush administration, Alan Greenspan, the Federal Reserve’s chairman, said today that it was “imperative” that the “creeping protectionism” in the nation’s trade policy be reversed.

Mr. Greenspan “is getting right in the middle of this debate,” said Robert Hormats, vice chairman of Goldman Sachs International, “and he is not mincing words. It’s not normal Greenspan-speak. That was as close as you get to a shot across the administration’s bow.”

And from The Economist:

George Bush’s free-trade rhetoric looks increasingly hollow

A GENERATION ago, bra-burning was a symbol of the womens’ movement. This week, bras found a new political significance—as a symbol of the Bush administration’s retreat from free trade. On November 18th, the Commerce Department announced that safeguard quotas would be imposed on imports of bras, dressing gowns and knitted fabrics from China. Future import growth in these products will be limited to 7.5%.

Until this week, the White House had restricted itself to bellicose rhetoric, usually to do with the value of the Chinese currency. Now it has crossed the Rubicon. “This is only the beginning,” bragged one textile lobby group this week. More anti-Chinese safeguards will hardly induce the Chinese to open their own markets. Indeed, on November 20th China’s commerce ministry announced it would raise tariffs “on some commodities imported from the United States.”


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George Bush, Anti-Trade Protectionist…

This week, Bush has:

– suggested that he will not lift the steel tariffs that were declared illegal by the WTO

– undermined efforts for a substantive FTAA deal, by moving toward bilateral trade negotiations

– applied new tariffs to imports of textiles from China, at the risk of starting a trade war

The anti-trade protectionist forces in the US apparently have an staunch ally in this Republican president.


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Free Trade, Jobs, and Choosing

Reading the comments to Kash’s last post, and reading articles like this one in the Houston Chronicle, it’s clear that concern over lost jobs is the major reason for most anti-trade sentiment. However, free trade opponents need to understand that protecting jobs by restricting trade also costs jobs. The recent steel tariffs, under which we saved jobs in Pennsylvania and lost jobs in the auto industry in Michigan, highlight this point:

“The duties have cost steel users, such as Troy-based Delphi Corp., the world’s biggest auto parts maker, and Caterpillar, the largest earth-moving equipment maker, about $680 million, the Washington-based International Trade Commission said in September.”

“… If you keep those tariffs in place until 2005,” said Lopes, “perhaps (the steel industry) is in a better economic situation than before, but now your customers, if they’re small and medium size business, have shut down, and your bigger customers … have been forced to shift production overseas.”

“The tariffs have been especially destructive to small auto suppliers that use specialty steels only available from foreign steel makers, said Neil de Koker, who heads the Original Equipment Suppliers Association in Troy.”

“They can’t pass that price increase onto their customers because they refuse to accept it,” said de Koker. ‘If they can’t pass it on, they’re dead.”

In the face of either losing jobs in Michigan or losing jobs in Pennsylvania, how do we choose?(*) With steel tariffs, we save jobs in Pennsylvania at the expense of jobs in Michigan; along the way, all Americans get to pay more for anything made out of steel or made using machinery that’s made out of steel (in other words, just about everything). If we instead choose free trade, then we preserve jobs in Michigan at the expense of jobs in Pennsylvania. However, in the process, all American get to pay less for things made out of steel and things made using equipment made out of steel.

Viewed in this light, the choice is obvious: free trade, which creates wealth, is better than restricting free trade, which destroys wealth. (Note that by “wealth”, I mean national wealth, as in GDP, not wealth as in more money for rich people.) Jobs are going to be lost either way, but with free trade, a portion of the benefits can be allocated to job retraining, adult education, and unemployment insurance to help soften the losses in the affected industry. With restricted trade, there is less wealth to go around so there is less money, not more, available to spend on easing the burden of unemployed workers.

Finally, how are the benefits of free trade distributed? With the sole exception of workers in industries that lose jobs (and remember that jobs will be lost either way), the benefits go to people who sell, make, or buy stuff–meaning just about everyone. And, unlike most things in life, the benefits of free trade accrue in a progressive fashion. Free trade lowers the price of food, clothing, consumer electronics, and cars. Poor and middle class families spend the large majority of their income on just these goods; as family income rises, a smaller portion is spent on these goods. For example, one study estimates the savings due to expanded free trade under the proposed Free Trade Area of the Americas (FTAA) at $814 for a family of four. That estimate is from FTAA advocates and may be high but whatever the true number is, the savings are about the same regardless of where a family lies in the income distribution. In percentage terms, this makes the benefits very progressive. For a family near the poverty line (about $16,000), saving $814 is a 5% reduction in the cost of living. For a family making $100,000, the same benefit amounts to a $.08% savings. (**)

It has always struck me as odd that people who oppose free trade are generally in favor of progressive policies. On the other hand, this gives me a new theory of why the Bush administration has been surprisingly anti-trade.


(*) With the current administration, the choice is easy: which state is closer to voting for Bush in 2004? Pennsylvania! Oh, then go with steel tariffs and screw the auto industry workers. That’s opportunism, not policy.

(**) The benefits are spread fairly evenly across the population even though the wealthy spend more on food, clothes, and cars than the poor, because as you move up the luxury scale a smaller amount of the total price of the good is attributable to the costs of inputs. A Corvette and an entry model Saturn use about the same amount of steel, so each car would be a few hundred dollars cheaper without steel tariffs. In percentage terms, this is a noticeable benefit to Saturn buyers and a trivial benefit to Corvette purchasers. The same is true for high-end clothing and expensive meals.

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