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October 16, 2009

Economist's View - 4 new articles

"Myth of Rising Protectionism"

Dani Rodrik says that fears that the economic crisis would protectionist measures have largely gone unrealized, and that "much of the credit must go the social programs that conservatives and market fundamentalists would like to see scrapped":

Myth of Rising Protectionism, by Dani Rodrik, Commentary, Project Syndicate: There was a dog that didn't bark during the financial crisis: protectionism. Despite much hue and cry about it, governments have in fact imposed remarkably few trade barriers on imports. Indeed, the world economy remains as open as it was before the crisis struck.
Protectionism normally thrives in times of economic peril. Confronted by economic decline and rising unemployment, governments are much more likely to pay attention to domestic pressure groups than to upholding their international obligations.
As John Maynard Keynes recognized, trade restrictions can protect or generate employment during economic recessions. But what may be desirable under extreme conditions for a single country can be highly detrimental to the world economy.
When everyone raises trade barriers, the volume of trade collapses. No one wins. That is why the disastrous free-for-all in trade policy during the 1930s greatly aggravated the Great Depression.
Many complain that something similar, if less grand in scope, is taking place today. An outfit called the Global Trade Alert (GTA) has been at the forefront, raising alarm bells..." ... with China as the most common target. ...
The reality is that the international trade regime has passed its greatest test since the Great Depression with flying colors. Trade economists who complain about minor instances of protectionism sound like a child whining about a damaged toy in the wake of an earthquake that killed thousands.
Three things explain this remarkable resilience: ideas, politics, and institutions.
Economists have been extraordinarily successful in conveying their message to policymakers ― even if ordinary people still regard imports with considerable suspicion. Nothing reflects this better than how "protection" and "protectionists" have become terms of derision.
After all, governments are generally expected to provide protection to its citizens. But if you say that you favor protection from imports, you are painted into a corner with Reed Smoot and Willis C. Hawley, authors of the infamous 1930 U.S. tariff bill.
But economists' ideas would not have gone very far without significant changes in the underlying configuration of political interests in favor of open trade. For every worker and firm affected adversely by import competition, there is one or more worker and firm expecting to reap the benefits of access to markets abroad. The latter have become increasingly vocal and powerful, often represented by large multinational corporations. ...
But the relative docility of rank-and-file workers on trade issues must ultimately be attributed to something else altogether: the safety nets erected by the welfare state. Modern industrial societies now have a wide array of social protections ― unemployment compensation, adjustment assistance, and other labor-market tools, as well as health insurance and family support ― that mitigate demand for cruder forms of protection.
The welfare state is the flip side of the open economy. If the world has not fallen off the protectionist precipice during the crisis, as it did during the 1930s, much of the credit must go the social programs that conservatives and market fundamentalists would like to see scrapped.
The battle against trade protection has been won ― so far. But, before we relax, let's remember that we still have not addressed the central challenge the world economy will face as the crisis eases: the inevitable clash between China's need to produce an ever-growing quantity of manufactured goods and America's need to maintain a smaller current-account deficit.

Unfortunately, there is little to suggest that policymakers are yet ready to confront this genuine threat.

I don't think we should draw the conclusion that because social insurance helped to avoid destructive protectionism, the amount of social protection we provide is adequate. In many areas, e.g. adjustment insurance and health care, it isn't.

Paul Krugman: A Hatchet Job So Bad It's Good

The health insurance industry's recent "hatchet job" attacking health care reform may have actually done health care reform a favor:

A Hatchet Job So Bad It's Good, by Paul Krugman, Commentary, NY Times: In the past, the insurance industry's power has been a major barrier to health-care reform. Most notably, the industry paid for the infamous "Harry and Louise" ads that helped kill the Clinton plan. But times have changed.
Last weekend, the lobbying organization America's Health Insurance Plans, or AHIP, released a report attacking the reform plan just passed by the Senate Finance Committee. Some news organizations gave the report prominent, uncritical coverage. But health-care experts quickly, and correctly, dismissed it as a hatchet job. And the end result of AHIP's blunder may be a better bill than we would otherwise have had.
For 2009, it turns out, is not 1993. Once again, Republicans have tried to kill reform with smears and scare stories. But all they seem to have killed with their cries of "socialism" and warnings about "death panels" is their own credibility. Some form of health-care reform is highly likely to pass.
So it's a different game than it was 16 years ago. And it's a game that the insurance industry apparently doesn't know how to play.
The motivation for the AHIP report seems to have been the decision by the Finance Committee to weaken the penalties for individuals who don't sign up for insurance, even as it retains regulations requiring that insurers offer the same policies to everyone, regardless of medical history. The industry worries that some people will game the system, remaining uninsured as long as they're healthy, then signing up when they get sick.
This is, believe it or not, a valid concern. Many health-care economists believe that a strong individual mandate, requiring that almost everyone sign up, will be needed to make health reform work. And the Finance Committee probably did weaken the mandate too much.
But AHIP, apparently unable to help itself, didn't stop there. Instead, the report threw every anti-reform argument the authors could think of at the wall, hoping that something would stick. ...
Which brings us to the ways in which AHIP may have done health reform a favor.
As I said, the individual mandate probably should be stronger than it is in the Finance Committee's bill. But there's a reason the mandate was weakened: fear that too many people would balk at the cost of insurance, even with the subsidies provided to lower-income individuals and families. So why not address that cost?
Aside from making the subsidies larger, which they should be, there are at least two changes to the legislation that would help limit costs. First, health exchanges — special, regulated markets in which individuals and small businesses can buy insurance — can be made stronger, in effect giving small buyers a better bargaining position. Second, the public option — missing from the Finance Committee's bill — can be brought back in, giving private insurers some real competition.
The insurance industry won't like these changes, but that matters less than it did a week ago.
There's also another point, which House Speaker Nancy Pelosi has stressed. Part of the opposition to a strong individual mandate comes from the sense that Americans will be forced to buy policies from a greedy insurance industry. Giving people, literally, another option — the right to buy into a public plan instead — would defuse that opposition.
Even with stronger exchanges and a public option, health reform would probably increase, not reduce, insurance industry profits. But the insurers wanted it all. The good news is that by overreaching, they may have ensured that they won't get it.

"Public Trust has Economic Consequences"

Howard Davies says we need to rebuild trust in financial markets:

Public trust has economic consequences, by Howard Davies, Commentary, Project Syndicate: Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis. That is hardly surprising, as previously revered firms revealed that they did not fully understand the very instruments they dealt in or the risks they assumed. ... But ... if this loss of trust persists, it could be costly for us all.
As Ralph Waldo Emerson remarked, "Our distrust is very expensive." The Nobel laureate Kenneth Arrow made the point in economic terms almost 40 years ago: "It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence."
Indeed, much economic research has demonstrated a powerful relationship between the level of trust in a community and its aggregate economic performance. Without mutual trust, economic activity is severely constrained. ...
So if it is true that trust in financial institutions – and in the governments that oversee them – has been damaged by the crisis, we should care a lot, and we should be devising responses which seek to rebuild that trust. ...
In the United States,... a ... systematic, independent survey promoted by economists at the University of Chicago Booth School of Business ... did show a sharp fall in trust in late 2008 and early 2009, following the collapse of Lehman Brothers.
That fall in confidence affected banks, the stock market, and the government and its regulators. Furthermore, the survey showed that ... if your trust in the market and in the way it is regulated fell sharply, you were less likely to deposit money in banks or invest in stocks.
So falling trust had real economic consequences. Fortunately, the latest survey, published in July this year, shows that trust in banks and bankers has begun to recover, and quite sharply. This has been positive for the stock market.
There is also a little more confidence in the government's response and in financial regulation than there was at the end of last year. The latter point, which no doubt reflects the Obama administration's attempts to reform the dysfunctional system it inherited, is particularly important, as the sharpest declines in investment intentions were among those who had lost confidence in the government's ability to regulate.
It would seem that rebuilding confidence in the Federal Reserve and the Securities and Exchange Commission is economically more important than rebuilding trust in Citibank or AIG. Continuing disputes in Congress about the precise details of reform could, therefore, have an economic cost if a perception that the system will not be overhauled gains ground. ...
Researchers at the European University Institute in Florence and UCLA recently demonstrated that there is a relationship between trust and individuals' income. ...
The data show, intriguingly, that ... if you diverge markedly from society's average level of trust, you are likely to lose out, either because you are so distrustful of others that you miss out on opportunities for investment and mutually beneficial exchange, or because you are so trusting that you leave yourself open to being cheated and abused. ...
Maybe we should trust each other more – but not too much.

Deviating from society's average level of trust is costly only of the average level of trust is correct. Prior to the financial crisis, the level of trust was too high and more distrust than average would have been helpful in avoiding losses. Also, because the level of trust was too high, restoring trust to the blind faith level it was at before the crisis would be unwise. There wasn't enough fear and mistrust in financial markets as the bubble was inflating, and more skepticism and doubt than is appropriate. We need to rebuild trust, but even with an optimal regulatory response, we shouldn't go back to the same level of trust in complex financial products, ratings agencies, etc. that we had before.

links for 2009-10-15

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