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June 25, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View


Paul Krugman: The Renminbi Runaround

Posted: 25 Jun 2010 12:42 AM PDT

Paul Krugman says "China needs to stop giving us the runaround and deliver real change" in its currency policy:

The Renminbi Runaround, by Paul Krugman, Commentary, NY Times: Last weekend China announced a change in its currency policy, a move clearly intended to head off pressure from the United States and other countries at this weekend's G-20 summit meeting. Unfortunately, the new policy doesn't address the real issue, which is that China has been promoting its exports at the rest of the world's expense.
In fact, far from representing a step in the right direction, the Chinese announcement was an exercise in bad faith... In short, they're playing games.
To understand what's going on, we need to get back to the basics of the situation. China's exchange-rate policy is neither complicated nor unprecedented, except for its sheer scale. It's a classic example of a government keeping the foreign-currency value of its money artificially low by ... buying foreign currency. ...
There have been all sorts of calculations purporting to show that the renminbi isn't really undervalued, or at least not by much. But if the renminbi isn't deeply undervalued, why has China had to buy around $1 billion a day of foreign currency to keep it from rising?
The effect of this currency undervaluation is twofold: it makes Chinese goods artificially cheap to foreigners, while making foreign goods artificially expensive to the Chinese. That is, it's as if China were simultaneously subsidizing its exports and placing a protective tariff on its imports.
This policy is very damaging at a time when much of the world economy remains deeply depressed. In normal times, you could argue that Chinese purchases of U.S. bonds, while distorting trade, were at least supplying us with cheap credit... But right now we're awash in cheap credit; what's lacking is sufficient demand for goods and services to generate the jobs we need. And China, by running an artificial trade surplus, is aggravating that problem.
This does not, by the way, mean that China gains from its currency policy. The undervalued renminbi is good for politically influential export companies. But these companies hoard cash rather than passing on the benefits to their workers, hence the recent wave of strikes. Meanwhile, the weak renminbi creates inflationary pressures and diverts a huge fraction of China's national income into the purchase of foreign assets with a very low rate of return.
So where does last week's policy announcement fit into all this? Well, China has allowed the renminbi to rise — but barely. As of Thursday, the currency was only about half a percent higher than its typical level before the announcement. ... Chinese officials are still making statements denying that a rise in their currency will do anything to reduce trade imbalances, and ... suggest a rise of only about 2 percent ... by the end of this year. This is basically a joke.
What the Chinese have done, they claim, is to increase the "flexibility" of their exchange rate: it's moving around more from day to day than it did in the past, sometimes up, sometimes down.
Of course, Chinese policy makers know perfectly well that although U.S. officials have indeed called for more currency flexibility, that was just a diplomatic euphemism for what America, and the world,... has the right to demand...: a much stronger renminbi. Having the currency bob up or down slightly makes no difference to the fundamentals.
So what comes next? China's government is clearly trying to string the rest of us along, putting off action until something — it's hard to say what — comes up.
That's not acceptable. China needs to stop giving us the runaround and deliver real change. And if it refuses, it's time to talk about trade sanctions.

"Will This Well End Well?"

Posted: 25 Jun 2010 12:15 AM PDT

The definition of "onshore" changes when you are a regulator captured by the industry you are supposed to monitor:

Will this well end well?, by Eric Rauchway: There oughta be an axiom of regulation, that if you're changing the rules in such a way that will make you sound grossly culpable when something goes wrong, you shouldn't do it.

The future of BP's offshore oil operations in the Gulf of Mexico has been thrown into doubt by the recent drilling disaster and court wrangling over a moratorium.

But about three miles off the coast of Alaska, BP is moving ahead with a controversial and potentially record-setting project to drill two miles under the sea and then six to eight miles horizontally to reach what is believed to be a 100-million-barrel reservoir of oil under federal waters.

All other new projects in the Arctic have been halted by the Obama administration's moratorium on offshore drilling, including more traditional projects like Shell Oil's plans to drill three wells in the Chukchi Sea and two in the Beaufort.

But BP's project, called Liberty, has been exempted as regulators have granted it status as an "onshore" project even though it is about three miles off the coast in the Beaufort Sea. The reason: it sits on an artificial island — a 31-acre pile of gravel in about 22 feet of water — built by BP.

Then the article quotes some scientists saying this doesn't sound like such a hot idea. So wait, why is it okay? "BP has defended the project in its proposal, saying it is safe and environmentally friendly." Well, okay then.

I hope very much I have no future interest in returning to this link.

More from the article linked above:

Rather than conducting their own independent analysis, federal regulators, in a break from usual practice, allowed BP in 2007 to write its own environmental review for the project as well as its own consultation documents relating to the Endangered Species Act... The environmental assessment was taken away from the agency's unit that typically handles such reviews, and put in the hands of a different division that was more pro-drilling, said ... scientists, who discussed the process because they remained opposed to how it was handled. "The whole process for approving Liberty was bizarre," one of the federal scientists said.

links for 2010-06-24

Posted: 24 Jun 2010 11:05 PM PDT

Dean Baker: Pay Retirees to Leave the Country

Posted: 24 Jun 2010 04:32 PM PDT

I thought the plan was to have death panels decide which of our seniors to send away on icebergs, but Dean Baker says to help with the budget, we should pay retirees to leave the country:

The Jobs and Unemployment Compensation Bill is Unlikely to Pass

Posted: 24 Jun 2010 02:34 PM PDT

When the initial stimulus package was put into place, we threw out a life rope that was too short to save everyone. Some people were able to get to it, and they were helped, but others were left treading water or, worse, sinking. So do we circle back and throw out more rope in order to save the people left out the first time around? Ezra Klein brings the bad, but not unexpected news [Update: scratch the word unlikely in the title, the bill failed.]:

The Senate unemployment bill founders: Before talking about what's happened to the Senate jobs bill, it's worth first talking about what's in the Senate jobs bill.
The biggest and most important item is the extension of unemployment insurance. ...Then there's the extension of the federal government's program to help states pay for Medicaid costs. During recessions, more people need Medicaid, which increases the program's cost, but state revenues drop, which reduces their ability to pay for the program. ...
The bill also has a raft of tax cuts and investments, including billions for the Small Business Administration to offer more loans to small businesses, bonds to fund infrastructure development, money to encourage private-sector R&D. and more. A full list of the bill's provisions, and its subsequent modifications, can be found here.
Those modification documents are important, because Democrats have made a lot of changes to the bill in response to Republican opposition. The total cost went from $200 billion to about $110 billion. The bill went from being deficit-funded -- which is what you want for stimulus -- to largely paid for, with only the $30 billion or so in unemployment benefits adding to the deficit. The $25 addition to unemployment checks was eliminated, and states now have to pay more for Medicaid, adding to their budget woes. The bill, in other words, has been made smaller and weaker. And that's despite 9.7 percent unemployment.

And still, it looks like Democrats might lose the vote today. And when I say "lose the vote," I don't mean that a majority of the Senate will vote against it. I mean that 58 senators, rather than 60, will support the legislation. All Republicans, and possibly Ben Nelson, appear to remain opposed. And why not? The less that Democrats appear to be doing on jobs -- and the fewer jobs that Democrats actually create -- the better Republicans will do in November. ...

Looks like the "you're on your ownership society" is on its way.

The Instinct for Austerity is Working Against Us

Posted: 24 Jun 2010 10:23 AM PDT

A couple of days ago, Room for Debate at the NY Times asked about the need for further stimulus, and part of my response said the following (It hasn't run yet since they decided to cover McChrystal first):

But the most important change that is needed is in the attitude of the public and politicians toward using deficit spending to stabilize the economy. Even though it's the correct response, deficit spending goes against our instincts. When times are tough, our natural response is to cut back on consumption. We may dip into savings or borrow money to prevent too large a fall in consumption, but our overall consumption falls. To see government not only failing to reduce its spending as its income (tax revenue) falls, but actually increasing spending by a large magnitude, cutting taxes, and financing it by taking on debt, and then saying even more is needed runs counter to those instincts. And starting with a budget that is already in the red doesn't help at all.

I see Paul Krugman is making a similar point. Here's Brad DeLong:

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It's Paul Krugman's World: We Just Live in It, by Brad DeLong: Paul Krugman:

Against The Super-Asinine, The Gods Themselves Contend in Vain: Brad DeLong wonders how the proponents of tight budgets and tight money are prevailing in the midst of mass unemployment, low interest rates, and incipient deflation. It's actually not all that surprising. Horrifying, but not surprising. The case for expansionary policies in the face of a slump is intellectually difficult; Keynes described the writing of the General Theory as a painful process of discovery, and so it is. The natural instinct of almost everyone is to think that tough times require tough measures, and that if the economy is suffering, the government should tighten its own belt. It would take a clear consensus from economists to overcome that natural bias. And that consensus has, of course, been lacking — largely because a significant proportion of the economics profession has spent the last three decades systematically destroying the hard-won knowledge of macroeconomics. It's truly a new Dark Age, in which famous professors are reinventing errors refuted 70 years ago, and calling them insights.

On top of that, anti-stimulus appeals to a fundamental meanness of spirit that is always present in the political world. The super-asinine we shall always have with us.

May I say that I expected something like this? It's part of the reason I was so anxious to see Obama go for the maximum stimulus possible: it seemed obvious that he would have only one shot...

Not obvious to me--not at the time.

I do say that if, as appears to be the case, Paul Krugman is always right, it would be really, really, really, really helpful if he were more optimistic...

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