Our New Economic Future

We are in a global economy today and in a huge adjustment period which is causing weakness in the US economy. The addition of developing countries along with their billions of citizens to the global capitalist marketplace has created shifts in production based on comparative advantage. They are not yet rich enough to buy American goods in bulk, but will be though that will take a decade or more.

What America "manufactures" has also changed. We now create a lot of intellectual and information goods such as movies, drugs, and processes that have no physical basis. However the international legal protections and recognition of these new goods are still being formed and so we are not receiving the full benefit of our production.

We are moving into a world where tangible products are cheap and plentiful. However, humans will always need entertainment and information. Whether the manufacturers of those products will be compensated is the question, fortunately we seem to be moving in the right direction although enforcement is still very sparsely seen. If other countries would pay for all the software, movies, etc. that they use, the United States will be in good shape and those sectors could grow, but we need to do better at getting others to enforce and pay for what we produce, otherwise the US economy will be sunk as that is our future.

A Lesson From Greece

Over 50% of Greek GDP comes from the government sector. Tax raises have already been implemented, but higher taxes won't solve the deficit and debt problem. How much more, as a % of GDP, can higher taxes realistically generate? A couple of percentage points would be record breaking, Greece's deficit stands at around -12% GDP, clearly the problem is with spending.

Why are the bond vigilantes out in force? They've done the math and it doesn't work out. The austerity measures are not enough! Greece has dug itself such a big hole that the planned bailout just is not credible. That's why there is such a massive selloff, the current situation is unsustainable and will come to a head very fast. Here is some analysis on the math:

http://ftalphaville.ft.com/blog/2010/05/05/219811/grim-greek-austerity-arithmetic/

"Greece is attempting to adjust its primary balance by a magnitude that has seldom been achieved historically in western Europe.

While the details of the planned primary balance path under the EPP have not yet been published, we estimate the ratio is likely to be projected to be about 4-6% of GDP by 2014. In turn, this implies an improvement in the primary balance/GDP ratio of 13.5pp. Such an episode of fiscal tightening, if achieved, would constitute a near-record.

Yet such fiscal tightening would be different from other episodes because in the most of the other examples listed, nominal GDP expansion had been boosted by substantial declines in short-term interest rates, while in many cases the real trade weighted exchange rate had depreciated significantly as well. In all cases shown in Figure 7, nominal GDP grew strongly, which helped the deficit itself (via stronger receipts) as well as the denominator. However, it is hard for us to envisage that Greece will be able to generate much expansion in nominal GDP in the current circumstances, given that it is within the monetary union and is also faced with the need for significant competitive adjustment against Germany, which could prove deflationary."


What should we take from Greece's problems? That when doomsday comes, it will come quickly and be very nasty. There won't be many signs of ill health until the crisis hits, and when it hits, it might be too late to do anything. For those who advocate more entitlements and endless government spending in the US, be warned. No the US cannot default, but a stagflation would be just as devastating. We have to clean our own house before we become another Greece.

The F-22 vs. F-35 Debate And Government Waste

The US has been carrying the cost of defense for both Europe and Japan, the F-35 JSF was developed in order for our allies to share in the costs of defense.

Unfortunately, the defense department is a part of the government and thus, subject to all the waste and stupidity common to government entities. The F-22/F-35 conflict highlights the problem with having multiple goals.

The F-22 is an air-superiority fighter designed to take out tough defenses. With the F-22, there is no need for the F-35 since legacy F-16 fighters would be able to fly in unopposed and above short range SAM systems.

But then our allies wouldn't be able to share in the costs! So F-35 production moves on, but the F-35 is not as good of an air superiority fighter. It can't overcome tough defenses, but it can perform multi-purpose bombing and other roles and is a replacement for the F-16. The main advantage of the F-35 is that it is cheap, or is supposed to be cheap. But with cost overruns, it might cost over $100 million each when it's all said and done, which means POOR VALUE. No surprise that our government cannot get good value for the money.

http://www.f-16.net/news_article3370.html

The F-22 was designed to break stiff enemy air defenses long into the future. F-22 systems have truly no peer in lethality. The F-22 uses extreme altitude, high speed, high quality stealth, and leading edge sensors to kill and survive on its own terms.

What the two USAF leaders don’t understand is that once the F-22 has cleared the huge threats which are enemy long range super surface to air missiles (SAMs) and enemy aircraft, common legacy aircraft can do the rest of the bombing and not get touched by the lesser threats. In other words, current legacy aircraft that are in production now, the F-15, F-16 and F-18 can drop cheap near all weather precision bombs from high altitude and not get touched by shorter range battlefield SAMs, shoulder fired SAMs, anti-aircraft artillery ( “triple A”) and trash fire. “I can touch you, but you can’t touch me”.

Based on this, the USAF has not justified a reason to acquire the F-35. The F-35 is not interchangeable with the F-22. The USAF claiming that it needs an expensive all stealth fighter force isn’t practical.

With its limited funds, the USAF can rebuild its fighter force to meet requirements of expeditionary war and home air defense. This can be done by funding the F-22 to a proper number of aircraft and buying new build F-16s which still contain a significant war fighting capability.

All these issues show why it's so hard for government to get its act together and why it so often wastes money buying stuff that is not a good value. Obama would be lauded as one of the greatest presidents ever if he could only make government get its money's worth when spending.

Bin Laden's Hip New Message: Global Warming, Same Old Goal

Perhaps realizing that his calls for jihad and terror have limited appeal, Bin Laden is now targeting a broader audience through a new message emphasizing the dangers of global warming. Unsurprisingly, his solution remains the same, destroy the United States and other Western industrial countries who are responsible for the death of millions through climate change.

Boy this guy's got some serious political game; if your message isn't finding much acceptance, just rehash it to fit the popular trend of the day and all of a sudden you sound no different than Al Gore or the other celebrated global warming preachers. Hell, maybe he won't have to live in a cave anymore, he'll stay in luxury hotels instead, fly around in a private jet, and all the while still keep true to his original goal of destroying the West. The only question is when will he get his Nobel Peace Prize and funding from the UN? Al-Queda Against Global Warming: Death to America, could be the next big NGO, well done Bin Laden!

Osama bin Laden blamed the United States and other industrialised countries for causing global warming in an extraordinary message issued yesterday.

In a departure from his usual religious rants, the Al Qaeda leader lectured on the dangers of climate change, claiming the only solution was to 'bring the wheels of the American economy' to a halt.

Rather than vows to inflict death and destruction on the U.S. and its allies, the man behind the September 11 atrocity in New York discussed the environmental future of the planet and monetary policy.

'This is a message to the whole world about those who are causing climate change, whether deliberately or not, and what we should do about that,' he declared.

He blamed Western industrialised nations for hunger, causing flooding and the destruction of fertile ground across the globe.

And he warned solutions must be 'drastic' rather than 'partial'.

Although bin Laden has briefly referred to climate change and global warming in past messages, this fresh audiotape was his first dedicated to the topic.

The speech, which included almost no religious rhetoric, has been interpreted as an attempt by the terror leader to broaden the appeal of his message beyond Islamic militants.

'Talk about climate change is not an ideological luxury but a reality,' he said in the tape released to the Al Jazeera television network, adding: 'All of the industrialised countries, especially the big ones, bear responsibility.'

Bin Laden referred to the fact that while wealthy nations had agreed to the Kyoto Protocol that binds them to emissions targets, former U.S. President George Bush later rejected such limitations in deference to big business.

continue reading story

Make Piracy A Foreign Policy Issue

Billions are lost every year due to piracy of our intellectual goods. These are the high value products that America manufactures and dominates in. Our music and movie industries are matched by none, yet piracy reduces our rightful rewards to a mere pittance. America is still the most innovative nation in the world, but what has changed is that we no longer are being rewarded fully for our innovative ideas that are being enjoyed around the world. As millions listen to our rap and pop artists, music record sales continue to drop. Software sales are stagnant even as more and more people use them. Our drug innovations are immediately stolen or forced to be sold at barely above manufacturing cost.

I'm astonished that this topic hasn't received very much attention though the effects are huge. Imagine if all the music, movies, software, drugs, etc. were paid for instead of stolen, the gains to the American economy would be huge and they would have a multiplier effect. Tower records would still be in business, employing tens of thousands of youth working their way through college. Software companies might actually hire programmers and release more software instead of declaring bankruptcy or praying for a white knight larger company to come along.

This should the the second most important foreign policy objective, taking a backseat only to terrorism. How China and others can steal our products with impunity while we beg them to extend us more credit so that we can legitimately purchase their goods is beyond me.

Haitian Culture and Poverty: A Debate On How Culture Influences A Nation's Success Or Failure

David Brooks wrote a controversial op-ed in the New York Times stating the importance of culture in a nation's success or failure.

Third, it is time to put the thorny issue of culture at the center of efforts to tackle global poverty. Why is Haiti so poor? Well, it has a history of oppression, slavery and colonialism. But so does Barbados, and Barbados is doing pretty well. Haiti has endured ruthless dictators, corruption and foreign invasions. But so has the Dominican Republic, and the D.R. is in much better shape. Haiti and the Dominican Republic share the same island and the same basic environment, yet the border between the two societies offers one of the starkest contrasts on earth — with trees and progress on one side, and deforestation and poverty and early death on the other.

As Lawrence E. Harrison explained in his book “The Central Liberal Truth,” Haiti, like most of the world’s poorest nations, suffers from a complex web of progress-resistant cultural influences. There is the influence of the voodoo religion, which spreads the message that life is capricious and planning futile. There are high levels of social mistrust. Responsibility is often not internalized. Child-rearing practices often involve neglect in the early years and harsh retribution when kids hit 9 or 10.

We’re all supposed to politely respect each other’s cultures. But some cultures are more progress-resistant than others, and a horrible tragedy was just exacerbated by one of them.

Fourth, it’s time to promote locally led paternalism. In this country, we first tried to tackle poverty by throwing money at it, just as we did abroad. Then we tried microcommunity efforts, just as we did abroad. But the programs that really work involve intrusive paternalism.

The op-ed led to the usual leftist hand-wringing and reluctance to "impose" culture on another society this time echoed by Chris Blattman.

His confidence makes me uncomfortable. To paraphrase, unkindly: These Haitians need to be more like hardworking, thrifty Americans. We’ve spent five decades learning that everything we thought would work in aid did not. Clearly it’s time to get tough. I read about some people who made this work in Harlem, so it’s obviously the answer for Haitians, whom through newspaper reading, I have deduced are also resistant to progress.

Don’t misunderstand me: Brooks could be right. In fact, I’m starting one randomized control trial to test the idea. I’m a little further from propounding it as God’s honest truth on the pages of the Times.

Sometimes the problem with big development solutions is they spring from hubris and certitude rather than caution and humility. There’s another approach to change, described in the previous post.

Finally, this topic was debated on Economist's View, a blog I frequently comment on. A college educator, Michael Gordon aka The Buggy Professor, wrote a detailed comment to which I responded after his post generated many negative responses by the leftist crowd found there. Please go here and scroll down to view the full post by The Buggy Professor as it is too long for me to quote, only half is offered below.

1) THE SUMMARY PROFESSOR CHRISTOPHER BLATTMAN OF DAVID BROOKS NY TIMES OP-ED IS UNFAIR TO BROOKS, especially since Blatttman ignores two key paragraphs that refer to a recent good book by a number of well-known developmental theorists: “What Works in Developoment: Thinking Big and Thinking Small” ed, Jessica Cohen (2008): Brookings Institute. Source, http://www.amazon.com/What-Works-Development-Thinking-Small/dp/0815702825

Specifically, with not just a reference to this impressive book, but also with an explicit quote from the most stimulating of the chapters --- the summary one by Abhijit Banerjee of MIT --- Brooks sides with the microeconomists who specialize in development theory as opposed to macroeconomic developmentalists who have been pushing one set of nostrums after another as the solution to economic backwardness, and for over 65 years now.

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2) CONSIDER, AGAINST THIS BACKGROUND, THE OMITTED TWO PARAGRAPHS IN THE BROOKS OP-ED

“In the recent anthology “What Works in Development?,” a group of economists try to sort out what we’ve learned. The picture is grim. There are no policy levers that consistently correlate to increased growth. There is nearly zero correlation between how a developing economy does one decade and how it does the next. There is no consistently proven way to reduce corruption. Even improving governing institutions doesn’t seem to produce the expected results.

“The chastened tone of these essays is captured by the economist Abhijit Banerjee: “It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control.”

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3) THAT BROOKS ACCURATELY SUMMARIZES WHAT MICROECONOMISTS IN DEVELOPMENTAL THEORY HAVE BEEN INSISTING ABOUT BIG BIG QUESTIONS AND BIG BIG ANSWERS or Nostrums that macroeconomist theorists in developmentalism have been pushing for 65 years now --- one after another, each nostrum hailed as the key to rapid and sustained economic growth for economically backward countries, none of which have worked in most of Asia, the Middle East, Africa, or large parts of Latin America --- can be underscored by quoting the end of Professor Banerjee’s chapter (my paragraphing and capital letters).

“Which brings us to our last, most radical, thought: It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control. Maybe all that happens is that something goes right for once (privatized agriculture raises incomes in rural China) and then that sparks growth somewhere else in economy, and so on.

“Perhaps, we will never learn where it will start or what will make it continue.

THE BEST WE CAN DO IN THAT WORLD IS TO HOLD THE FORT TILL THAT INITIAL SPARK ARRIVES: MAKE SURE THAT THERE IS NOT TOO MUCH HUMAN MISERY, MAINTAIN THE SOCIAL EQUILIBRIUM, TRY TO MAKE SURE THAT THERE IS ENOUGH HUMAN CAPITAL AROUND TO TAKE ADVANTAGE OF THE SPARK WHEN IT ARRIVES.

SOCIAL POLICY MAY BE THE BEST THING THAT WE CAN DO FOR GROWTH TO HAPPEN AND MICRO-EVIDENCE ON HOW TO DO IT WELL, MAY TURN OUT TO BE THE KEY TO GROWTH SUCCESS”

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4) WHAT EXACTLY HAS BROOKS THEN SAID ABOUT HAITI ‘S FAILED STATE AND ECONOMIC BACWARDNESS HAT ALMOST ANY DEVELOPMENTALIST TODAY --- including those in political science who specialize in political institutions, political conflict, civil war, corruption, crony patron-client networks, ethnic diversity etc --- Would Agree With:

(i.) Namely, it’s a dismal mess ---the poorest country and probably the worst governed in all of Latin America and the Caribbean.

And nothing by way of outside help --- foreign aid, American military intervention to help overthrow a dictatorship, and more recently limited UN intervention, 10,000 various micro-economic projects funded from abroad --- has improved the abysmal conditions in Haiti:

Its infrastructure is primitive still; its building codes are ignored; its hospital and medical services were abysmal before the recent devastating earthquake; poverty is rife; agricultural development has languished for generations; huge jerry-built shelters have been created around its two main cities, former peasants flocking by the millions there; and the huge gulf between the few rich and powerful on one side and the vast mass of Haitians on the other still looms despite all outside efforts.

Its population of slightly more than 9 million, moreover, suffers as the CIA World Factbook observes, from widespread infectious disease . . . not least owing to a lack of access to clean water, proper sewage removal systems, and basic healthy food.

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(ii.) As for its economic conditions, the best summary is found in the CIA World Factbook for 2010:

“Haiti is the poorest country in the Western Hemisphere with 80% of the population living under the poverty line and 54% in abject poverty.

“Two-thirds of all Haitians depend on the agricultural sector, mainly small-scale subsistence farming, and remain vulnerable to damage from frequent natural disasters, exacerbated by the country's widespread deforestation.

“While the economy has recovered in recent years, registering positive growth since 2005, four tropical storms in 2008 severely damaged the transportation infrastructure and agricultural sector.

---- [Buggy note: the Dominican Republic, which shakes the same island, climate, and geography with Haiti, suffered the same tropical storms, but weathered them far better --- not least to markedly superior infrastructure, fire-and-police systems, and healthcare systems. The economy quickly recovered from those storms, only to be hurt by the current global recession: As the CIA World Factbook observes,”T he Dominican Republic has enjoyed strong GDP growth since 2005 and continued to post sound gains through mid-2008 . . . “

Back to Haiti’s economy:

“US economic engagement under the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act, passed in December 2006, has boosted apparel exports and investment by providing tariff-free access to the US. HOPE II, passed in October 2008, has further improved the export environment for the apparel sector by extending preferences to 2018; the apparel sector accounts for two-thirds of Haitian exports and nearly one-tenth of GDP.

“ Remittances are the primary source of foreign exchange, equaling nearly a quarter of GDP and more than twice the earnings from exports. Haiti suffers from high inflation, a lack of investment because of insecurity and limited infrastructure, and a severe trade deficit. In 2005, Haiti paid its arrears to the World Bank, paving the way for reengagement with the Bank. Haiti is expected to receive debt forgiveness for about $525 million of its debt through the Highly-Indebted Poor Country (HIPC) initiative by mid-2009.

“The government relies on formal international economic assistance for fiscal sustainability.”

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(iii.) CONSIDER BY CONTRAST HE DOMINICAN REPUBLIC RIGHT NEXT DOOR IN GREATER DETAIL

• With a tad more population than Haiti’s 9.2 million people --- and, to repeat, located on the same island and hence sharing the same natural conditions and history of colonialism, slavery, and dictatorship for most of its history until American military intervention in the early 1960s, followed by a corrupt rigged electoral democracy that then evolved since 1996 into a solid electoral democracy --- is far richer, far better governed, has far better infrastructure, and enjoys A PER CAPITA INCOME 7 TIMES HIGHER THAN HAITI’S

• Specifically, per capita income is $8200 in the Dominican Republic. In Haiti, it is $1300.

• As for poverty, 80% of Haiti’s population was estimated in 2003 (latest figures) to live below the poverty line. Next door in the Dominican Republic is half that: 42%.

• On top of this, even as the Dominican Republic’s more diversified economy continues to export large amounts of coffee, sugar, and tobacco --- not least owing to free-trade zones with the USA and others --- its largest foreign exchange comes now from its thriving service sectors, and especially tourism . . . now the largest employer in the country.

• Unemployment shows a similar huge gap: estimated to be 14.1% in the Dominican Republic, it happens to be . . . well, the CIA World Factbook admits it can’t estimate the level because 80% of the Haitian 9 million population has no formal jobs!

o Literacy is 87% in the Dominican Republic and 52% in HaITI

Another worthwhile lesson from the buggy professor, unfortunately you can't make people learn, thus ignorance is perpetuated.

With regards to the Dominican Republic and its greater wealth, I was wondering the same thing. Why does the Dominican Republic have better infrastructure and greater political and social stability despite similar histories than Haiti? The cultural and social factor can't be dismissed, try as those here might.

Almost every nation on the planet (I can't think of an exception) has faced foreign invaders and "interference". The United States was invaded in 1812 by the most powerful nation in the world. It's navy was no match for England's, allowing the English to land forces at will. Washington D.C., the capital, was captured, the White House burned to the ground. Using a leftist perspective, this should have led to utter collapse of U.S. progress, we should have been mired in poverty and even now be roaming masses of despondent poor due to this invasion and incidence of European imperialism (that Madison foolishly welcomed war can be dismissed, the internal actions of the invaded are irrelevant in leftist analysis or viewed simply as resisting colonialism) and our failure to this day can be blamed completely on this incident in the past. But we are not a nation of roaming despondent poor, neither is China which had to endure colonialism and several opium wars along with a prolonged occupation by Japan that only ended after WWII. Warfare in Europe during the Middle Ages to 1800's was constant. Two world wars devastated the continent, yet somehow the affected countries were more or less able to recover, especially Germany after WWI which suffered heavy foreign interference along with outright occupation by France after they missed debt repayments. Yet somehow Germany was able to establish itself as a dominant power in a mere 20 years after its defeat. Foreign interference is so common that it cannot be the single factor that determines success or failure. I won't even go into the occupations of Germany and Japan post WWII. Standard leftist analysis would state that Japan is still occupied to this day as U.S. forces have bases in Okinawa against the wishes of the local populace, Japan should be even worse off than Haiti since its constitution was largely written by American imperialists.

The view that institutions and culture, each which influence the other, are the largest factors in a nation's success or failure is gaining support even amongst the left. Obama seems to understand, but as the buggy professor notes, actual policy is much more difficult to enact.

We can try to set up institutions and change culture through education, but the populace have to be willing to adopt and embrace the changes. Otherwise the effort will fail and will result in resentment along with more leftist accusations of colonialism. Yes any help we offer today, should it not succeed is immediately viewed as imperialism. Furthermore there is danger that our educational efforts, even the small scale educational programs the buggy professor recommended above, will be rendered ineffective by destructive leftist accusations of propaganda and brainwashing. An effective surefire policy method still has not yet been found that can guarantee success in light of the many difficulties, the leftist-Marxist influence amongst the worst and most destructive. So we struggle on, I suppose if it were easy, every nation would be prosperous. Good thing President Clinton's involvement shelters our help somewhat from leftist attacks. That is the real value of having a Clinton and Obama, as members of the left, they are more resistant to false leftist accusations.

Obama Offers Conservatives Hope

Does it seem disquieting to anyone that Obama seems to be "staying the course" with respect to overall foreign and domestic policy? I commend Obama for using his brain and continuing the policies that make sense and are best for America.

Look at Obama's choices on the economic front. Romer, Summers, Geithner, and Bernanke to continue in his current role. These are incredibly sensible and wise choices that have to make any liberal angry. If Republicans had to choose among Democrats, they would not be able to come up with a better slate. Volker is also well liked among Republicans and he will continue to advise Obama. This is the sort of change that will make Obama into a good president, changing the Democrats into a party that focuses on efficiency and regulations that work without imposing massive burdens.

On the foreign policy front, Clinton is a hawk within the Democratic party and Obama even more hawkish. I can't distinguish Obama's foreign policy from that of McCain, other than Obama seems willing to invade and bomb Pakistan while McCain is more dovish.

Again, it seems that the image Democrats have of Obama is different than the one I'm seeing. There hasn't been any indication that Obama would be the radical that destroys America as we know it. He seems smart enough to pursue wise policies and has done a great job in recruiting smart, experienced Cabinet members that will continue the good policies of the past.

Bush was an incompetent manager. It wasn't that all his policies were bad, especially on the foreign policy frong, it was that they were all badly executed. With a competent person behind it all, we could see great gains. We needed a change in quarterbacks, not gameplans. The gameplan remains solid as ever, but the right quarterback can make the difference between a pitiful looking team and a Superbowl winning team.

So when Krugman looks out and sees a radical change, he's imaging things again. Yes the outcome can be very different when incompetence is replaced; a football play can look ugly if executed badly, yet be a thing of beauty when executed as planned. Obama could be the perfect quarterback for our Run N' Shoot offense.