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December 12, 2009

Latest Posts from Economist's View

Latest Posts from Economist's View


Why it May Take Almost Seven Years for Unemployment to Reach Five Percent

Posted: 12 Dec 2009 12:24 AM PST

How long will it take the unemployment rate to go back down to five percent?  My answer is here.

links for 2009-12-11

Posted: 11 Dec 2009 11:02 PM PST

House Passes Bill on Financial Regulation

Posted: 11 Dec 2009 02:16 PM PST

The House passed legislation today on regulation of the financial industry:

House Passes Far-Reaching Bill Tightening Financial Rules, by Carl Hulse, NY Times: The House on Friday approved a Democratic plan to significantly tighten federal regulation of Wall Street and the financial sector...
The bill's principal provisions establish a process for dismantling large, failing financial institutions; set up a council to identify and regulate firms that are so big, interconnected or risky that they need heightened supervision to keep them from bringing down the whole financial system; create a new consumer financial-protection agency to squelch unfair and abusive practices; and for the first time, regulate over-the-counter derivatives markets. The bill also contains provisions on executive pay, investor protection, credit ratings, hedge funds and insurance.

However, the bill still has to pass the Senate:

Despite the House action, final legislation is not imminent. The Senate is still developing its own measure for debate early next year and any Senate bill is likely to have substantial differences from the House measure, necessitating further negotiations. ...

And the legislation still has to get by an important constituency for politicians:

In preliminary votes ahead of the measure's approval, lawmakers scaled back the bill's ambitions slightly in ways that may increase its chances of overcoming objections from powerful financial interests. ...

I'll keep my hopes up, but given lawmakers attention to "powerful financial interests," something that will certainly (and disconcertingly) influence the Senate bill as well, I'll wait to see what emerges from the Senate before concluding that this is the road to any type of fundamental regulatory change.

Rodrik: Making Room for China

Posted: 11 Dec 2009 09:21 AM PST

Dani Rodrik says that if China wants to pursue industrial policy, as he believes it should, its membership in the WTO leaves it little choice but to keep its currency undervalued:

Making Room for China, by Dani Rodrik, Commentary, Project Syndicate: China's undervalued currency and huge trade surplus pose great risks to the world economy. They threaten a major protectionist backlash in the United States and Europe; and they undermine the recovery in developing and emerging markets. Left unchecked, they will generate growing acrimony between China and other countries. But the solution is not nearly as simple as some pundits make it out to be.
Listen to what comes out of Washington and Brussels, or read the financial press, and you would think you were witnessing a straightforward morality play. It is in China's own interests, these officials and commentators say, to let the renminbi appreciate. ...
This story casts China's policymakers in the role of evil and misguided currency manipulators, who, inexplicably, choose to harm not only the rest of the world, but their own society as well. In fact, an appreciating renminbi would likely deal a serious blow to China's growth, which essentially relies on a simple, time-tested recipe: encourage industrialization. Currency undervaluation is currently the Chinese government's main instrument for subsidizing manufacturing and other tradable sectors...
Before it joined the World Trade Organization in 2001, China had a wider range of policy instruments for achieving this end. It could promote its industries through high tariffs, explicit subsidies, domestic content requirements on foreign firms, investment incentives, and many other forms of industrial policy. But WTO membership has made it difficult, if not impossible, to resort to these traditional forms of industrial support. ... Currency undervaluation has become a substitute. ...
The trouble with currency undervaluation is that, unlike conventional industrial policy, it spills over into the trade balance. ... Indeed, China's current-account imbalance ... began its inexorable rise in 2001 – precisely when the country joined the WTO.
Given that WTO rules tie China's hands on industrial policy, how much of a growth penalty would the Chinese economy suffer if the renminbi were to appreciate? My estimates, crude as they are, suggest a steep trade-off. An appreciation of 25% – roughly the extent by which the renminbi currently is undervalued – would reduce China's growth by somewhat more than two percentage points. This is a significant effect... [I]t would be a tragedy if the most potent poverty-reduction engine the world has ever known were to experience a notable slowdown. ...
So we are left, it seems, with two equally unappetizing options. China can maintain its currency practices, but at the risk of large global macroeconomic imbalances and a major political backlash in the US and elsewhere. Or it can let its currency appreciate, at the risk of inducing a growth slowdown and political and social unrest at home. It is not clear that advocates of this option have fully comprehended its potentially severe adverse consequences.
There is, of course, a third path, but it would require re-writing the WTO's rules. If China were allowed a free hand with industrial policies, it could promote manufactures directly while allowing the renminbi to appreciate. This way the increased demand for its industrial output would come from domestic rather than foreign consumers. It is not a pretty solution, but it is the only one. ...

One of the arguments for maintaining an undervalued currency given above is that "it would be a tragedy if the most potent poverty-reduction engine the world has ever known were to experience a notable slowdown." I don't find the poverty reduction argument very compelling. I am all for reducing poverty, but if China's policy reduces poverty within its borders at the expense of other developing countries with poverty problems that are just as bad or worse, how does that justify maintaining an undervalued currency? As Rodrik notes, China's currency policy serves to "undermine the recovery in developing and emerging markets." And it also takes jobs from those countries during normal times. Are China's poor somehow more deserving than the poor in other countries?

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