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August 23, 2009

Economist's View - 5 new articles

"Fictional Sovereignties"

More side of the road blogging (still traveling):

Fictional Sovereignties, by Robert Skidelsky, Commentary, Project Syndicate: ...The world's population is about six billion. Suppose it was divided into independent political units of two million people each. That would mean 3,000 micro-states, each refusing to accept any sovereignty superior to its own. Of course, this would be a recipe for global anarchy.

Yet the trend over the past century has been toward a continuous increase in the number of small states, mainly owing to nationalist revolts against multinational empires: the latest bout of state creation followed the disintegration of the USSR.

Even long-established states like the United Kingdom now have strong separatist movements. In its political life, the world has been regressing to a form of tribalism, even as its economic life has become increasingly globalized.

The equation of state with nation is the arch-heresy of our time. A "nation" is, at root, an ethno-linguistic ― occasionally religious ― entity, and because it is through language and liturgy that culture is transmitted, each nation will have its own distinctive cultural history, available for use and misuse, invention and discovery.

The state, however, is a political construction, designed to keep the peace in an economically viable territory. There are simply too many "nations," actual or potential, to form the basis of a world system of states, not least because so many of them, having been jumbled up for centuries, cannot now be disentangled.

Micro-states can never be made small enough to satisfy their advocates' exalted standards of cultural integrity. So the unraveling of multinational states is a false path.

The way forward lies in democratic forms of federalism, which can preserve sufficient central authority for the purposes of statehood, while respecting local and regional cultures.

Today's upsurge of micro-nationalism is not just a consequence of the revolt against empires: it is also a revolt against globalization.

There is widespread resistance to the idea that the chief function of modern states is to slot their peoples into a global market dominated by the imperatives of efficiency and cheapness, heedless of the damage to non-economic activities.

This feeling is strengthened when the global economy turns out to be a global casino. National assertion is a way of combating impersonal forces and remote authorities.

Globalization promises too much in terms of welfare gains, particularly to developing countries, to be abandoned.

But the lesson from the current crisis is that we will have to develop styles of global economic governance to manage, regulate, and mitigate the creative, but often disruptive forces unleashed by the global market.

In the absence of an actual world government, this can be done only through cooperation among states. The fewer "sovereigns" there are, the easier it will be to secure the necessary cooperation.

The Bretton Woods Agreement of 1944, which laid the institutional foundation for the postwar World War II economy, was made possible because the United States and Britain called the shots.

When objections were raised to Cuba being put on the drafting committee, Harry Dexter White, the American representative, remarked that Cuba's function was to provide cigars.

Such a cavalier attitude to the demands of lesser powers to be heard is no longer possible. But all this means is that the facades will have to be more subtle and the fictions more elaborate.

Provided we do not deceive ourselves about where real power lies, let presidents and parliaments be three a penny if that is what makes people feel good about themselves.

I agree that we shouldn't deceive ourselves about where the real power lies, but we also need to recognize that as other economies around the world develop, the distribution of power will shift, something that global institutions must begin to incorporate into their governance structures (the power shift is already happening, even more so after the war in Iraq and the financial crisis undermined the authority of the U.S.).


"Don't Let the Stimulus Lose Its Spark"

Robert Frank makes two points. First, state and local governments facing budget problems due to the recession need more help from the federal government. Second, those who object to federal help for states, or to government spending to stimulate the economy more generally, "have not offered persuasive arguments":

Don't Let the Stimulus Lose Its Spark, by Robert Frank, Commentary, NY Times: Encouraging economic news has been reanimating the critics of President Obama's stimulus program. But heeding their admonition to end the program would be a grave mistake. We need more stimulus now, not less.

Even if the economy is improving, it is still very weak. Another quarter-million jobs were lost last month... Now we face an ominous new threat to recovery from sharp cuts in state and local government spending. ... These cuts were mandated by laws meant to stop politicians from spending beyond their means. While such measures may be beneficial on balance, sharply reduced government spending is exactly what the economy doesn't need right now.

Through its legal authority to run deficits to stabilize the economy, the federal government can keep recovery on track by transferring revenue to states and cities. Of course, opponents of the original economic stimulus program have no desire to see it extended this way. Yet they haven't made a persuasive case. The flaws in their arguments don't rise to the absurd heights seen in recent town hall meetings on health care reform. But it is a difference in degree, not kind. ...

In a recent column in Forbes magazine, the economist Lee Ohanian of the University of California, Los Angeles, a stimulus opponent, explained why he believes that increased government spending wouldn't help... The problem, he says, is that "the higher taxes on incomes or expenditures that ultimately accompany higher spending depress economic activity." ...

His argument, and that of stimulus opponents generally,... boils down to this striking contention: As the government spends borrowed funds, consumers will start to realize that the resulting debt spells higher taxes in the future, which will lead them to curtail their current spending. Those cuts will offset increased government spending, leaving no net stimulus.

Although there may be people who would actually spend less now to hedge against uncertain future tax bills, it's unlikely that you know any of them. As behavioral economists have been saying for decades, that's just not the way most people act. Hardly any consumers even know how ... the national debt ... will affect future taxes.

More important, there are good reasons for believing that stimulus spending will make people's future tax payments lower, not higher. Yes, government borrowing adds to the national debt. But if the stimulus also hastens the downturn's end, it will accelerate the growth of future incomes and tax revenue. In that case, the net effect would be to reduce future taxes, compared with what they would have been without the stimulus. ...

The recent state and local spending cuts are a major setback to the stimulus program, which many economists have argued was much too small to begin with. A small minority disagrees but has not offered persuasive arguments.

The downturn threatens every goal we care about. Doing everything possible to limit state and local spending cuts will help end it faster.

Helping states is a good idea, and more help is needed. But that's not enough by itself to bring aggregate demand up to the necessary level, other types of spending are also needed (think of it this way - saving every state and local job that would be cut without federal aid is not enough to solve the employment problem).

However, a state that knows the federal government will step in and help if it gets into trouble may be unwilling to take steps to smooth the state's business cycle such as creating a rainy day fund (i.e., build the fund during boom times bringing output closer to its long-run trend, and spend the fund during the bad times also bringing output closer to its long-run trend). Because of this, if the federal government stands ready to backfill state budgets during recessions, we may want to require that states meet certain restrictions (such as having a rainy day fund of a particular size) before they can receive help.

Allowing state government to contract during a recession makes things worse, and I believe this recession will teach us that the federal government needs to provide much more help than it did this time around. But if the federal government does explicitly take on the responsibility to prevent state governments from contracting when the economy turns downward, then the obligations of local, state, and federal governments need to be clarified. We also need to make sure, as much as possible, that the states cannot game the system to their advantage.

Update: Brad DeLong adds, in reference to Lee Ohania's argument:

This is, as I say every day, simply wrong as a matter of very basic economic theory. Increased nominal government spending financed by future taxes is crowded out by a reduction in nominal private consumption spending if and ony if what the government spends money on is a perfect substitute for what private consumers spend money on. That just is not the case.


"Five Myths about Health Care around the World"

An attempt to "dispel a few myths about health care abroad":

5 Myths About Health Care Around the World, by By T.R. Reid, Commentary, Washington Post: ...I've traveled the world ... to see how other developed democracies provide health care. Instead of dismissing these models as "socialist," we could adapt their solutions to fix our problems. To do that, we first have to dispel a few myths about health care abroad:

1. It's all socialized medicine out there. Not so. ... In some ways, health care is less "socialized" overseas than in the United States. Almost all Americans sign up for government insurance (Medicare) at age 65. In Germany, Switzerland and the Netherlands, seniors stick with private insurance plans for life. Meanwhile, the U.S. Department of Veterans Affairs is one of the planet's purest examples of government-run health care....

2. Overseas, care is rationed through limited choices or long lines. Generally, no. Germans can sign up for any of the nation's 200 private health insurance plans -- a broader choice than any American has. ... The Swiss, too, can choose any insurance plan in the country.

In France and Japan, you ... can go to any doctor, any hospital, any traditional healer. There are no U.S.-style limits such as "in-network" lists of doctors or "pre-authorization" for surgery. You pick any doctor, you get treatment -- and insurance has to pay. ...

As for those notorious waiting lists, some countries are indeed plagued by them. Canada makes patients wait weeks or months for nonemergency care, as a way to keep costs down. But ... many nations -- Germany, Britain, Austria -- outperform the United States on measures such as waiting times for appointments and for elective surgeries. In Japan, waiting times are so short that most patients don't bother to make an appointment. ...

3. Foreign health-care systems are inefficient, bloated bureaucracies. Much less so than here. ...

4. Cost controls stifle innovation. False. The United States is home to groundbreaking medical research, but so are other countries... Any American who's had a hip or knee replacement is standing on French innovation. ... Many of the wonder drugs promoted endlessly on American television, including Viagra, come from British, Swiss or Japanese labs. Overseas, strict cost controls actually drive innovation. ...

5. Health insurance has to be cruel. Not really. American health insurance companies routinely reject applicants with a "preexisting condition"... They employ armies of adjusters to deny claims. If a customer ... faces big medical bills, the insurer's "rescission department" digs through the records looking for grounds to cancel the policy... Foreign health insurance companies, in contrast, must accept all applicants, and they can't cancel as long as you pay your premiums. ...

In many ways, foreign health-care models are not really "foreign" to America, because our ... system uses elements of all of them. For Native Americans or veterans, we're Britain: The government provides health care, funding it through general taxes, and patients get no bills. For people who get insurance through their jobs, we're Germany: Premiums are split between workers and employers, and private insurance plans pay private doctors and hospitals. For people over 65, we're Canada: Everyone pays premiums for an insurance plan run by the government, and the public plan pays private doctors and hospitals according to a set fee schedule. And for the tens of millions without insurance coverage, we're Burundi or Burma: In the world's poor nations, sick people pay out of pocket for medical care...

This fragmentation is another reason that we spend more than anybody else and still leave millions without coverage. All the other developed countries have settled on one model for health-care delivery and finance; we've blended them all into a costly, confusing bureaucratic mess.

Which, in turn, punctures the most persistent myth of all: that America has "the finest health care" in the world. We don't. In terms of results, almost all advanced countries have better national health statistics than the United States... In terms of finance, we force 700,000 Americans into bankruptcy each year because of medical bills. In France, the number of medical bankruptcies is zero. Britain: zero. Japan: zero. Germany: zero.

Given our remarkable medical assets -- the best-educated doctors and nurses, the most advanced hospitals, world-class research -- the United States ... should be the best in the world. To get there, though, we have to be willing to learn some lessons about health-care ... from the other industrialized democracies.

There are, of course, groups that have a strong interest in perpetuating these myths as part of their attempt to block health care reform.


"Why Sleep?"

Is sleep our power saving mode?:

Why sleep?, EurekAlert: ...Humans ... spend roughly one-third of their lives asleep, but sleep researchers still don't know why. ... Theories range from brain "maintenance" — including memory consolidation and pruning — to reversing damage from oxidative stress suffered while awake, to promoting longevity. ...

Now, a new analysis by Jerome Siegel, UCLA professor of psychiatry ... has concluded that sleep's primary function is to increase animals' efficiency and minimize their risk by regulating the duration and timing of their behavior. The research appears in the current online edition of the journal Nature Reviews Neuroscience.

"Sleep has normally been viewed as something negative for survival because sleeping animals may be vulnerable to predation and they can't perform the behaviors that ensure survival," Siegel said. These behaviors include eating, procreating, caring for family members, monitoring the environment for danger and scouting for prey.

"So it's been thought that sleep must serve some as-yet unidentified physiological or neural function that can't be accomplished when animals are awake," he said.

Siegel's lab conducted a new survey of the sleep times of a broad range of animals, examining everything from the platypus and the walrus to the echidna, a small, burrowing, egg-laying mammal covered in spines. The researchers concluded that sleep itself is highly adaptive, much like the inactive states seen in a wide range of species, starting with plants and simple microorganisms; these species have dormant states — as opposed to sleep — even though in many cases they do not have nervous systems. That challenges the idea that sleep is for the brain, said Siegel.

"We see sleep as lying on a continuum that ranges from these dormant states like torpor and hibernation, on to periods of continuous activity without any sleep, such as during migration, where birds can fly for days on end without stopping," he said.

Hibernation is one example of an activity that regulates behavior for survival. A small animal, Siegel noted, can't migrate to a warmer climate in winter. So it hibernates, effectively cutting its energy consumption and thus its need for food, remaining secure from predators by burrowing underground.

Sleep duration, then, is determined in each species by the time requirements of eating, the cost-benefit relations between activity and risk, migration needs, care of young, and other factors. However, unlike hibernation and torpor, Siegel said, sleep is rapidly reversible — that is, animals can wake up quickly, a unique mammalian adaptation that allows for a relatively quick response to sensory signals.

Humans fit into this analysis as well. What is most remarkable about sleep, according to Siegel, is not the unresponsiveness or vulnerability it creates but rather that ability to reduce body and brain metabolism while still allowing that high level of responsiveness to the environment.

"The often cited example is that of a parent arousing at a baby's whimper but sleeping through a thunderstorm," he said. "That dramatizes the ability of the sleeping human brain to continuously process sensory signals and trigger complete awakening to significant stimuli within a few hundred milliseconds."

In humans, the brain constitutes, on average, just 2 percent of total body weight but consumes 20 percent of the energy used during quiet waking, so these savings have considerable adaptive significance. Besides conserving energy, sleep invokes survival benefits for humans too — "for example," said Siegel, "a reduced risk of injury, reduced resource consumption and, from an evolutionary standpoint, reduced risk of detection by predators."

"This Darwinian perspective can explain age-related changes in human sleep patterns as well," he said. "We sleep more deeply when we are young, because we have a high metabolic rate that is greatly reduced during sleep, but also because there are people to protect us. Our sleep patterns change when we are older, though, because that metabolic rate reduces and we are now the ones doing the alerting and protecting from dangers."


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