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December 2, 2007

Economist's View - 4 new articles

You're Outta Here! (The Don't You Wish It Were True Edition)

And it's

one: Defending Goldman Sachs, by Dean Baker

two: Ben Stein Takes on Goldman and Loses, by Yves Smith

three: Ben Stein Watch: December 2, 2007, by Felix Salmon

strikes you're out... Update: Foul tip? That's nuts, the whole column was one big whiff, but, okay, strike three again...

three: What it takes, by Paul Krugman

With all the strikeouts he's had in the past, Stein ought to be pulled from the game permanently, but I have a feeling he'll be back to whiff another day.

Brad DeLong: Is the Dollar Leading Us into a Depression?

Brad DeLong's outlook for the economy in light of the falling dollar is not as optimistic as Tyler Cowen's, but he does see reason for hope. Unfortunately, that hope is based upon the typical investor misperceiving the risk of a dollar decline which makes me wonder what will happen if (when?) these investors, en masse, suddenly realize their mistake. Beep beep?:

Is the dollar leading us into a depression?, by J. Bradford DeLong, Project Syndicate: The falling US dollar has emerged as a source of profound global macro-economic distress. ... Is the world economy at risk? There are two possibilities. If global savers and investors expect the US dollar's depreciation to continue, they will flee the currency unless they are compensated appropriately for keeping their money in the US and its assets, implying that the gap between US and foreign interest rates will widen. As a result, the cost of capital in the US will soar, discouraging investment and reducing consumption spending as high interest rates depress the value of households' principal assets: their houses.

The resulting recession might fuel further pessimism and cutbacks in spending, deepening the downturn. A US in recession would no longer serve as the importer of last resort, which might send the rest of the world into recession as well. A world in which everybody expects a falling US dollar is a world in economic crisis.

By contrast, a world in which the US dollar has already fallen is one that may see economic turmoil, but not an economic crisis. If the US dollar has already fallen -- if nobody expects it to fall much more -- then there is no reason to compensate global savers and investors for holding US assets.

On the contrary, in this scenario there are opportunities: the US dollar, after all, might rise; US interest rates will be at normal levels; asset values will not be unduly depressed; and investment spending will not be affected by financial turmoil.

Of course, there may well be turbulence... But these are, or ought to be, problems that we can solve. By contrast, sky-high US interest rates produced by a general expectation of a massive ongoing US dollar decline is a macroeconomic problem without a solution.

Yet so far there are no signs that global savers and investors expect a US dollar decline. ... Thus, the world economy may dodge yet another potential catastrophe.

That may still prove to be wishful thinking. After all, the US' still-large current-account deficit guarantees that the US dollar will continue to fall. Even so, the macroeconomic logic that large current-account deficits signal that currencies are overvalued continues to escape the world's international financial investors and speculators.

On one level, this is very frustrating: We economists believe that people are smart enough to understand their situation and capable enough to pursue their own interests. Yet the typical investor in US dollar-denominated assets -- whether a rich private individual, a pension fund, or a central bank -- has not taken the steps to protect themselves against the very likely US dollar decline in our future.

In this case, what is bad for economists is good for the world economy: We may be facing a mere episode of financial distress in the US rather than sky-high long-term interest rates and a depression. The fact that economists can't explain it is no reason not to be thankful.

Are Some Development Experts "Full of Fertilizer"?

This is very Rodrikian. It's also Sachsian:

Ending Famine, Simply by Ignoring the Experts, by Celia W. Dugger, NY Times: Malawi hovered for years at the brink of famine. After a disastrous corn harvest in 2005, almost five million of its 13 million people needed emergency food aid.

But this year..., It is selling more corn to the World Food Program of the United Nations than any other country in southern Africa and is exporting hundreds of thousands of tons of corn to Zimbabwe. In Malawi itself, the prevalence of acute child hunger has fallen sharply. ...

Farmers explain Malawi's extraordinary turnaround ... with one word: fertilizer.

Over the past 20 years, the World Bank and some rich nations Malawi depends on for aid have periodically pressed this small, landlocked country to adhere to free market policies and cut back or eliminate fertilizer subsidies, even as the United States and Europe extensively subsidized their own farmers. But after the 2005 harvest, the worst in a decade, Bingu wa Mutharika, Malawi's newly elected president, decided to follow what the West practiced, not what it preached.

Stung by the humiliation of pleading for charity, he led the way to reinstating and deepening fertilizer subsidies despite a skeptical reception from the United States and Britain. Malawi's soil, like that across sub-Saharan Africa, is gravely depleted, and many, if not most, of its farmers are too poor to afford fertilizer at market prices. ...

Patrick Kabambe, the senior civil servant in the Agriculture Ministry, said the president told his advisers, "Our people are poor because they lack the resources to use the soil and the water we have."

The country's successful use of subsidies is contributing to a broader reappraisal of the crucial role of agriculture in alleviating poverty in Africa and the pivotal importance of public investments in the basics of a farm economy: fertilizer, improved seed, farmer education, credit and agricultural research. ...

Malawi's leaders have long favored fertilizer subsidies, but they reluctantly acceded to donor prescriptions, often shaped by foreign-aid fashions in Washington, that featured a faith in private markets and an antipathy to government intervention.

In the 1980s and again in the 1990s, the World Bank pushed Malawi to eliminate fertilizer subsidies entirely. Its theory both times was that Malawi's farmers should shift to growing cash crops for export and use the foreign exchange earnings to import food...

In a withering evaluation of the World Bank's record on African agriculture, the bank's own internal watchdog concluded in October not only that the removal of subsidies had led to exorbitant fertilizer prices in African countries, but that the bank itself had often failed to recognize that improving Africa's declining soil quality was essential to lifting food production.

"The donors took away the role of the government and the disasters mounted," said Jeffrey Sachs, a Columbia University economist...

Here in Malawi, deep fertilizer subsidies and lesser ones for seed, abetted by good rains, helped farmers produce record-breaking corn harvests in 2006 and 2007, according to government crop estimates. ...

"The rest of the world is fed because of the use of good seed and inorganic fertilizer, full stop," said Stephen Carr, who has lived in Malawi since 1989, when he retired as the World Bank's principal agriculturalist in sub-Saharan Africa. "This technology has not been used in most of Africa. The only way you can help farmers gain access to it is to give it away free or subsidize it heavily."

"The government has taken the bull by the horns and done what farmers wanted," he said. Some economists have questioned whether Malawi's 2007 bumper harvest should be credited to good rains or subsidies, but an independent evaluation, financed by the United States and Britain, found that the subsidy program accounted for a large share of this year's increase in corn production.

The harvest also helped the poor by lowering food prices and increasing wages for farm workers. Researchers at Imperial College London and Michigan State University concluded in their preliminary report that a well-run subsidy program in a sensibly managed economy "has the potential to drive growth forward out of the poverty trap in which many Malawians and the Malawian economy are currently caught." ...

links for 2007-12-02

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