In Favor of Vodka Donuts

During the Entirely Legitimate, Real, and not Mock Whirled Trade Organization round of negotiations in Lexington, Virginia, the esteemed chair mentioned that because of current trade sanctions, there would be no “vodka donuts” available for consumption by the delegates in attendance. While this was, of course, a humorous hyperbole to the current state of affairs, it is also illustrative of some of the difficulties that nations face when trying to promote free trade and economic growth, but also desire to use non-military means of exerting pressure on other nations.

How does the United States pressure the Russian Federation to end aggressive military actions and violations of national sovereignty in Eastern Europe without backtracking on free trade and harming consumers in both Russia and the United States? Prior to recent developments from successes of the P5+1 talks with Iran, the United States had the goal of trying to pressure a regime away from pursuing acquisition of nuclear weapons through restricting access to technological goods and undercutting the economy to exert leverage for policy change. But, these policies increased global costs of some goods and also limited access to goods used to treat cancer patients in Iran.

Sanctions are seen as a clean and easy, diplomatic, and less harmful means of exerting pressure in international relations. But, how much do they undercut the commitment to free trade? How much harm do they exert on consumers and regular individuals? How many lives are ruined, potential not realized, and lives actually lost by imposing sanctions and undercutting free trade and growth? Trade in military and dual-use goods seems to be a more straightforward answer that sanctions are worth the cost. But, maybe we should have a more robust conversation about all other sanctions before we so easily support them as a catch all approach.

Position Statement for Totally Real and Legitimate WTO

This position is the culmination of national positions, as well as those of Tommy Joe wa za Banga Bednar, but are not necessarily representative of every position held by all of the nations of the African Union:

The nations of the African Union collectively represent more than $1.5 billion of the world’s economy, a center for global trade and exports, a wealth of realized and yet to be realized growth potential, and some of the world’s oldest economies. The lack of consistent and holistic free trade between the nations of the world is holding back the potential of African countries. Many nations have been mired in the lower stages of development because our partners in trade will not fully open their markets to products from our continent. Namely, agricultural products have been barred, to varying degrees, from trade out of Africa. These obstacles to trade have come in two forms. First, African agricultural products are limited in trade because they allegedly do not adhere to the same safety standards as other, domestic sources of agriculture. Second, partner nations subsidize their domestic farmers (artificially lowering the price of their domestic agricultural goods and providing an unfair advantage to domestic producers) and close specific agricultural markets (such as rice and sugar) in order to provide boons to key constituent groups. These barriers create both inefficiencies in global markets and a burden on African exports that the African Union hopes to see addressed through proposed resolutions I-III. By allowing the free flow of agricultural goods (without subsidies and Non-Tariff Barriers [NTBs]), consumers across the world will experience lower prices, nations can specialize in goods in which they have comparative advantages, specialization will allow for innovation and growth in a world that desperately needs new economic expansion, and Africa can finally be allowed to benefit from the goods it currently produces. Already, the most recent developments in WTO Agriculture negotiations have pushed forward cooperation to allow agricultural goods to flow more freely through agreements on stockpiling and lower barriers to transit at borders.

The African Union is aware that other parties to the WTO (notably the European Union [EU]) have expressed continued concern about Genetically Modified Organisms (GMOs) and their potential threat to human health and well being. At the current moment, there is not consistent, reliable evidence that GM agricultural products pose a threat to human health. Since the work of Norman Borlaug, GM crops have allowed low-quality arable land to be used, crop yields to rise exponentially, and billions of individuals to avoid famine and starvation. While organic, local crops might be ideal, in order to feed the world and promote growth, raise incomes, provide food security, and save millions of lives, we should open our markets and agricultural possibilities to the presence of GMOs.

A number of movements have started to gain traction across the African continent that oppose these WTO negotiations and oppose bilateral trade agreements outside of Africa. These individuals rightly feel that past trade agreements have only marginally benefited our nations and have instead benefited the outside nation trade partners. Many see these negotiations as the new imperialism of developed nations to extract benefits from our less developed nations, primarily to their gain. These movements have founding in truth. Past agreements and the current status quo keep African countries in the lowest stages of development and unfairly extract goods at low benefit to the African nation. Our negotiations today have the chance to change that. The proposed resolutions that open our global community to agriculture will allow for a true partnership with Africa, untold benefits to consumers, and the freeing up of public funds previously used for agriculture subsidies. Let us choose today to make a true partnership, let us choose trade liberalization in all areas, not just those that benefit developed nations and concentrated constituencies.

Background
http://en.mercopress.com/2014/12/02/wto-celebrates-major-deal-which-puts-trade-negotiations-back-on-track
http://www.foreignpolicy.com/articles/2014/08/07/africas_free_trade_hangover​

Climate Change, Revisited

During the meeting of national leaders prior to and during the Asia Pacific Economic Cooperation (APEC) summit in Beijing, President Obama and President Xi Jinping announced a deal between the United States and China to cut greenhouse gas emissions by their respective countries. Under the pledge, the United States will cut emissions by 26-28% from the 2005 levels and China (while not specifying an amount) will curb the growth of its emissions, establishing a peak in 2030.

Last month, leaders of the European Union agreed to cut emissions by 40%, compared to 1990 rates, along with boosting the use of renewable energy sources.

In all of these cases, it is easy to make public pledges and deals, but harder to follow through with commitment to the deal and actions that will substantially lessen human impact on the environment. Everyone wants to appear that they are the “good guy” who will preserve the common good (the Earth/climate/ozone), but there are numerous costs to taking action. Political will, especially in the United States, is fragmented on moving towards more renewable energy and lower emissions. Created more stringent standards make energy more expensive, require bureaucratic rules and regulations, and potentially cost jobs. There is a great disadvantage to the first mover, at least in the short run. If the U.S. moves to very strict environmental standards, the input costs of energy resources and all goods and services that have energy inputs will rise. In turn, this causes U.S. goods and services to be more expensive than those in countries that do not comply with strict standards, implement them more slowly, or have weaker standards (such as India or China). U.S. exports become more expensive and less desirable on the international market and U.S. domestic consumers import more non-compliant country goods (partially undermining the initial push to stricter standards).

Part of this issue could be solved by a uniform implementation and adherence mechanism, such as the UN Environmental Programme having the power to force (through sanctions or other coercive mechanisms) countries to adhere to uniform environmental standards. This would erode national sovereignty, though, and require the ceding of power away from the State and to an international organization, which will certainly not happen with the biggest players: China and the U.S.

So, for now, we are stuck with piecemeal agreements that may or may not be adhered to at varying degrees. There is still hope that nations will take a more long-run outlook on the issue and invest in larger and more diverse forms of renewable energy that will pay dividends in the future (as fossil fuels become scarcer and less accepted), promote energy independence that will deprive an aggressive Russian Federation of its main coercive means, and lessen harmful environmental impacts that are a negative externality for all.

Sources
http://www.bbc.com/news/world-europe-29751064
http://www.bbc.com/news/world-asia-china-30015545

A Critique on The Tragedy of the Euro

Philipp Bagus’s The Tragedy of the Euro begins as Bagus’s explanation of the European integration project in the wake of the Second World War. Bagus explains that Germany, bereft of the ability to dominate militarily, rapidly expanded industry and its economy grew dramatically. The Bundesbank of Germany became the leading financial institution of Europe and was both feared and disdained by most of Western Europe for its abhorrence of inflation and immense power. The economic growth of post war West Germany made the deutschmark the currency of choice for investment and the driver of exchange rates. Bagus argues that France, Britain, and other nations forced Germany to abandon the sovereignty of its national currency in order to accept German reunification. As the European Monetary Union (EMU)  and European Central Bank (ECB) developed, Germany’s economic strength helped incentivize investment and large government deficits in “Latin” countries. This providing of prestige, investor confidence, and bond purchases (indirectly) by the ECB acted as transfer payments from the strong Northern European countries to the less efficient Southern European countries. The situation represented a mixture of moral hazard and a tragedy of the commons, whereby the common currency was abused by less productive countries at the expense of more productive countries, laying the foundation for a sovereign debt crisis. Throughout the entire book, Bagus returns to his constant narrative that the collective European project is one that is bereft of democracy, undermines property rights, and is not as stable as the gold standard or non-fraction banking.

I take great umbrage with Bagus’s explanation of the European project, the ECB, the Euro, and the future of the Euro. Bagus is fixated on the perfection of the gold standard and adamantly against fractional banking. The gold standard is prone to unexpected inflation, high transaction costs, and a limited economy. In a similar vein, non-fractional banking has a high burden of transactions and does not allow for the potential of the economy to be actualized. Bagus also makes the bold claim that bankers, central banks, and governments are in cahoots to maximize profits through collusion and exploitation of the ordinary, working class citizen. While it might be the case that central banks buy government debt, monetization of that debt would lead to investor flight from government bonds and a vicious downward spiral.

Yes, a common currency allowed for Southern European economies, governments, and citizens to spend outside of their means and accumulate debt that caused the sovereign debt crisis. But, this was also caused by the European collective willingness to not adhere to strong standards for entrance into the Euro and the Stability and Growth Pact (SGP). Additionally, investors chose to lend the money to Greece in the form of bonds to permit this deficit spending. Furthermore, Germany’s strong, export-led growth was facilitated by a currency that was undervalued for the strength and size of the German economy. The Euro was of a lower value than the deutschmark would have been, making German exports outside of the Eurozone cheaper than they would have been otherwise. To add greater sin to the “victim” of the Euro project, German banks were heavily invested in the debt of Greece, turning a profit at the same time that Greeks could then buy more German goods (similar to the U.S.-China relationship). A simple story of Germany constantly being forced to capitulate to French and Southern European desires at the expense of its economic potential is both overstated and lacking evidence.

The Eurozone is in trouble and still reeling from crisis. Inflation rates are incredibly low and risk the spectre of deflation. Investment in the Eurozone and overall growth are incredibly low. Bagus does have one very sound and strong point: the Euro would be stronger and more sound with a stronger political union. So long as states do not have to adhere to strong budgetary policies that regulate debt and promote economic growth, the Euro will feel strains in opposite directions and risk tearing. A United States of Europe would harmonize fiscal and monetary policies, strengthen the Euro, increase investor confidence, and pave the way for a Euro that will last. Unfortunately, nationalism and eurosceptisim are present across the Eurozone. The sovereign debt crisis forced some budget and fiscal harmonization and will mend some of the fractures of the crisis and years that led up to the problems. But, a stronger political union (than the EU) is still a long way off and may require more crises before ample political impetus is in place to see it actualize.

Nice Stimulus Package

On Halloween, the Bank of Japan announced that it would increased its stimulus asset-buying program to 80 trillion yen (from previous targets of 60-70 trillion yen). Japan’s weak economy and slowing consumer prices gave rise to a great fear of deflation and continued lack of growth. The announcement was immediately met with gains for Japan-traded stocks and equities.

Across the Pacific Ocean, U.S. markets rose to record highs. As one market analyst stated,”the Bank of Japen has taken the QE baton from the Fed and equity traders couldn’t be happier.” Markets across Asia and the U.S. rebounded and strengthened in confidence from the announcement of the BoJ. Traders saw the announcement as a promise by Japan’s government to promote growth and stave off deflation and a slowing economy. The sun is now shining for traders and so they become more willing to buy, not moved by Ben Bernanke or Janet Yellen, but by Haruhiko Kuroda.

Even the Euro Zone saw positive news this week: inflation rates for October nudged up from 0.02% to 0.04%. This is a “crumb of comfort” that only represents a very small move in a very dire economic situation, but at least it is a move in the right direction.

But, all of this good news comes in the face of still-falling oil prices. The price per barrel of crude oil even dipped below $80 last Friday. As an input in many industries and for almost all major forms of shipping of goods and movement of consumers, falling oil prices will continue to drive lower overall prices and potentially price level. Is the positive sentiment of traders false hope? Are equities purchasing just a bubble of positivity that is soon to pop when the realities of slow growth and likely deflation set in?

I think the bigger picture is a more nuanced view of the web of economies. The real economy and monetary economy are driving in opposite directions. Which one will drive the other and/or have the larger impact? It may depend on animal spirits of traders to stay bullish in spite of falling prices. This may push the real economy back into “higher growth mode.” Or, the reality of the real economy may set in and cause a panic of investment pullout and a vicious spiral of no investment. Europe’s unemployment rate is stagnant. U.S. growth is low. Japan is still reeling. But maybe increased commitments by central banks  and investors can help push economies over the edge into recovery. Only the actuality of the future shall bear (no pun intended) out the answer.

Some Sources, Because I Quoted

http://www.bbc.com/news/business-29845466
http://www.bbc.com/news/business-29851532
http://www.bbc.com/news/business-29846497

Economics with Vitriol

Leading off my reading with Stiglitz’s piece from The New Republic, I was amazed by the arrogance displayed. While I usually agree with much of what Stiglitz has to say about needs to temper and reform the international financial system, the method by which he wrote his article was completely off-putting, even more so than previous pieces by Wolf. Stiglitz paints a picture of the “out of touch,” secretive, unintelligent IMF that could have been saved from its woes and stopped a region-wide financial crisis if only the IMF executives had listened to his advice. Not only is the truth of his assertion of the “correct” solution at the time of the Asian crises speculative (hindsight is 20/20), but it takes a lot of gall for even a Nobel-laureate to claim to have been able to have single-handedly stopped economic catastrophe. To further insult IMF employees (and top economists) as “third-rank students from first-rate universities” only moved his rhetoric straight into mudslinging and closed off any perception of professionalism.

While mentioning and attempting to undermine the arguments of many opponents like Stiglitz, Rogoff conducts his article, The IMF Strikes Back, with much more professionalism and fair demeanor. Even conceding some points to his opponents, Rogoff lays out a counterargument strategy that examines all points of view without regressing to mudslinging. Even though I find fault with Rogoff’s suggestion that IMF restrictions are not a harmful measure that stops governments from positive fiscal stimulus (and that governments should learn to build up rainy day funds), he makes a wonderfully valid observation that the IMF offers loans at rates much lower than any creditor and at moments when creditors are least likely to offer any capital at all.

Maybe the next rap battle videos should be between Rogoff and Stiglitz (potentially accompanied by the odd bedfellows of Sachs and Easterly).

Classic Economic Debate

In The Return of Depression Economics: and the Crisis of 2008, author Paul Krugman examines the boom and bust of Japan’s economy during the second half of the twentieth century. Krugman details how Japan’s economy rapidly expanded for decades following the second World War, launched forward by capital investment, education, and manufacturing and exports. He notes that many Americans were wary of the rise of Japan as an economic competitor (note: Mr. Roboto).

A confessed Keynesian, Krugman offers a number of possible solutions to Japan’s (and Asia’s and Latin America’s) woes that are largely based on monetary expansion operations and fiscal stimulus. He does, however, note that even some of these solutions (such as lowering the interest rate in Japan) did not work to stimulate further growth. These solutions fell short for a variety of reasons, from Japan’s liquidity trap and preferences for saving to the “carry yield” trades to Thailand when the yen was low. Krugman’s views are soundly in the camp of Keynes. In the two videos I’ve included in this post, the praised and handsomely-mustachioed Keynes proclaims that “if the flow is low, doesn’t matter the reason,” where he is talking about the money supply. Just like Krugman’s baby sitting coop example, one primary Keynesian solution is to pump money into the system. This can be done by lowering the interest rates (or leading interest rates to lower levels) in order to discourage savings and promote spending or through Open Market Operations, whereby the Federal Reserve (in the U.S.) buys Treasury bonds, putting money into the hands of investors.

But, stimulus spending did not solve the problems of Japan. Low interest rates pushed Japan into the quagmire of a liquidity trap, did not stimulate growth, and fueled carry yield trades that allowed the crisis to spread throughout Asia. In the second video, the less-praised and oft-forgotten Hayek notes that “it’s the boom that should make you feel wary.” Economic booms, especially those driven by exports, cause a rise in incomes and the value of the domestic currency. Higher incomes lead to greater imports and higher currency value makes domestic exports more expensive on the world market. These two factors lower domestic economic production, especially in export-heavy sectors. If exchange rates are allowed to float and this downturn does not spark a panic, the downturn should lower the value of the domestic currency and make domestic exports cheaper on the world market again. Unfortunately, boxing-robed Keynes notes, “the future’s uncertain, our outlooks are frail.” Investors and consumers are guided by “animal spirits,” whereby a small downturn can lead to a large investment pullout. If enough investors pull out a vicious circle is created and the panic becomes self-justifies, as Krugman notes.

Hayek note that “low interest rates” can be the true problem in an economy. Individuals must be given incentives to save, supplying loanable funds to be invested in worthy capital projects. When rates are too low, the economy will overheat (Thailand) from spending and lending. So, maybe Krugman takes more of Hayek into account than he would be willing to admit. Maybe he would write this off as mitigations that occurred because the governments made poor choices (Thailand pegging currency) or unchangeable tastes and preferences (Japanese proclivity to save). Regardless, Krugman’s illustration of these crises boils down to the modern debate on Keynesian economics.

Watch the second round and see who you think comes out on top.

China Surpasses the United States

Based on new IMF economic projections, China has now overtaken the United States as the world’s biggest economy. This revised projection moves up the point of overtaking the U.S. by at least two year (previous estimates had only been as early as 2016). The large caveat on the news is that the projections are based on “Purchasing Power Parity” (PPP), whereby GDP is adjusted based on exchange rates and the relative ability of money to buy similar goods and services in each economy.

China’s economy surpassing that of the United States continues to fuel numerous debates about the bilateral relations between the two countries. The Financial Times has even published a story on the notion of a new “G7” of developing nations (Russia, Brazil, China, India, Mexico, Indonesia, and Turkey), whose collective GDP is now larger that the current G7 (Canada, Germany, Italy, Japan, France, the United Kingdom, and the United States).

Why are so many people in the U.S. worried about this event and decrying the downfall of U.S. dominance and economic success? Yes, China and other rising nations will have larger clout at trade and political negotiations. But, China has quadruple the population of the United States. Why should it’s economy not be larger than the U.S.? The growth of the Chinese economy has lifted millions out of poverty in the past few decades. The U.S. has greater access to cheap consumer goods and can specialize more in services and high tech industry because of gains from trade with China. Growth of the Chinese economy alleviates poverty and helps U.S. citizens as well. Alarmist interpretations of data and relative size do nothing to help growth, bilateral relations, or output.

FDI Works in the Short and Long Term

FDI–when properly implemented–helps developing countries jump hurtles in economic growth and development that may not be able to be conquered by domestic means. When labor, in the short run, is fixed, and technology factor constant, the factor of production that can change output (and therefore growth and GDP) is capital. Investments in capital, whether machinery, bonds, training, or technology boost the output of the overarching production function of a nation. Capital will not solve all problems (such as systems that do not allow for information and financial flows), but it can lend a boost to economies by jump-starting growth, imparting a higher technology multiplier, and spilling over into related sectors of financial institutions and infrastructure. When FDI is performed in long-term partnerships, incentives abound for further investment and jobs, training, and incomes rise across the region or country.

While some FDI is used for extractive and manipulative purposes, legal restrictions can help to keep these practices in check. Legal best practices in the fields of corruption, pollution, workers rights, and other FDI issue areas would help to not only protect workers and the environment, but would also even the playing field so that FDI is attracted to the best returns on investment and not a race to the bottom of marginal costs.

Multinational Corporations Also Do Good Things

While there are legitimate worries about the power and influence of multinational corporations (MNCs), the story is not a clear cut narrative of investment towards economic growth or glowering conglomerates of evil that control countries, undermine democracy, and keep the poor mired in poverty.

The Firestone company has provided a recent and illustrative example of how these large entities can work across national boundaries to better the lives of people. Aside from providing jobs, income, and other resources, the Firestone plant in Harbel, Liberia has contained Ebola better than many governments have been able to. Firestone has a vested, profit-driven interest in keeping its workers healthy and productive. Therefore, this rubber plant in a village in Liberia worked to quarantine infected individuals, keep medical environments sanitized, and provide quality health services. MNCs have motivations that do sometimes run contrary to democracy and sovereignty, but profit-maximization can also drive research and services that save lives and forward technology.

Listen to the story: http://www.npr.org/blogs/goatsandsoda/2014/10/06/354054915/firestone-did-what-governments-have-not-stopped-ebola-in-its-tracks