:: The Boys Weekend Journal ::

Article: Barry is on the Money

There is a story on BBC marking the descent of the dollar and pound against the Euro. Apparently investors don't realize the true impact of the upcoming $700b tax cut. It's a little known fact that the US debt clock only has 15 digits, so once it hits $10t it rolls back to zero. We're well on our way!

Update: there is now another article documenting the rise of the Euro.

:: Joe 9:30 PM [+] ::
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Discussion: Circling the Drain

There is another story on /. regarding the impending demise of the IT industry in America. I find this endlessly fascinating. Stories like this used to pop up once a year, but now they're hitting almost once a month. There was a distinct current of denial in it for a while. There were a lot of chest-thumping "only inferior coders need to worry about this, not uber-mensch like me" posts in the early days. Now a sort of resignation is taking over. It doesn't matter if you're good when a company can get 8 decent coders somewhere else for the price of you. This reality is only recently starting to cut through the arrogance and bravado of the American IT community. This was not supposed to happen to highly skilled white-collar workers. We're suffering the same fate as car manufacturers in the 70's and 80's and we can see it coming. Some people are trying to jump ship and find a new line of work entirely, some are trying finding niches that will survive the exodus of jobs, many others are just hanging on for dear life. It's quite a thing to see..

:: Joe 10:57 AM [+] ::
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::Oxfam Attacks Subsidies::

At the WTO meeting in Mexico, Oxfam is leading a coalition of 21 countries against farm subsidies. During the summer the US and EU held their own bilateral talks to decide how to address the issue of subsidies in preparation for this meeting. It doesn't seem like they're in a rush to make major changes, but at least they're coming to understand that this is the critical next step in reaching any further free trade agreements. It creates an awkward political situation for Republicans, who are generally the strongest proponents of free trade, but who also count on support from agricultural states for almost all of their national political power. It will be interesting to see how that unfolds. It's very encouraging to me to see that the developing nations have been able to come together and rally behind this issue. Hopefully it will pave the way for other alliances in dealing with trade issues.

:: Joe 1:29 PM [+] ::
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::Fair Trade Labelling::

There's a nice story on CSM today regarding fair trade product labelling. Extra points for quoting a UW student.

:: Joe 3:02 PM [+] ::
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::A Tangled Web::

Asia Times has a very interesting story discussing the Bush administration's moves attempting to get China to revalue the yuan. They are critical of this policy for number of reasons. (FYI, it looks like China is rejecting this pressure in any case...)

First is that we have been running a huge trade deficit with China for some time (which is, of course, the administration's reasoning for this move). During this time China has been piling up US currency, but they have little motivation to buy anything from the US (or anyone else) with it. What can they get from the US that they can't produce cheaper themselves? So in an effort to do something productive with this money they've mostly been buying US government securities (ie financing the US federal budget deficit). If the US reduces this trade deficit at the same time that our budget deficit soars to record levels it will become difficult to find takers for securities to finance our debt. This will result in the US raising interest rates in order to make the securities more attractive, countering Alan Greenspan's intensive efforts to stimulate the US economy with low interest.

They also mention that a majority of the products imported from China are actually produced by American companies (something highlighted in the Oxfam report as well). To some extent this makes the trade deficit illusory (or at least makes it appear much worse than it is). Forcing these companies out of China will make their products more expensive and less attractive on the world market and could end up hurting American business.

Additionally it will have the effect of making products more expensive to Americans (whether the products continue to come from China, or are manufactured elsewhere, including the US), stifling US consumer spending or driving up consumer debt, which is already at dangerous levels.

Finally, the article does not discuss this, but I wonder how much of that manufacturing would return to the US even if China becomes less attractive? Wouldn't Indonesia, the Philippines, and India still be more attractive places to move these manufacturing centers to? I think there would have to be a more intensive effort to devalue the dollar to actually bring manufacturing back home. There is also a CSM article today discussing this general topic.

In all it becomes a very difficult situation to project. However, one thing is clear in all this: our massive budget deficit and national debt clearly constrain our ability to control our own economy with regards to international trade. These are penalties beyond simply mortgaging our future prosperity and indebting future generations. The debt locks our monetary and fiscal policies together, forcing us to make a choice between them. We can keep interest rates low to try and spark growth, but it means maintaining a strong dollar which hurts trade. Or we can devalue the dollar to reduce our trade deficit, but it will cost us higher interest rates to finance our debt. We can't have both.

:: Joe 1:06 PM [+] ::
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::Our free trade hypocrisy::

With all the promotion of free trade by the Bush administration, I am continually amazed by how protectionist it is. The EU, supported by the recent WTO ruling against American steel tariffs, is threatening sanctions of its own on politically sensitive American products unless those tariffs are repealed. The Bush administration is taking time to think things over, as if the WTO ruling were ambiguous. Ironically, the steel tariffs, while perhaps saving a few steel worker jobs, have hurt American consumers of steel with higher prices.

As if that weren't enough, the administration has announced that it will impose quotas on the imports of certain Chinese textiles and clothing. This is technically legal under the WTO agreement with China (I can't find the specific text, but I believe that the US can impose product specific quotas on hyper-increasing imports for 12 years - aren't we sneaky?) . Strangely, these quotas are likely to do little for the virtually nonexistent textile manufacturing industry in the US. Will someone tell me what this administration means by free trade?

:: Ryan 10:12 PM [+] ::
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::Best Globalization Discussion EVER::

Click here, then select the 1/7/04 Brookings Discussion on US Trade Policy. Awesome panel, awesome discussion, fascinating points raised. Senator Schumer rocked the house, and he and Roberts diagnosed and presented the issue in a very concise and powerful manner.

:: Joe 10:09 PM [+] ::
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::An End to Comparative Advantage::

This column is a follow up to the Brookings Institute debate I posted previously, or rather that debate was a follow up to this article. Written by Democratic Senator from New York, Charles Schumer and Reagan administration asst. sec. of the Treasury, Paul Craig Roberts, the article presents a challenge to the idea that comparative advantage is driving global trade, and as a consequence a challenge to the entire Ricardoan theory of the benefits of free trade. I have been tremendously impressed with Schumer, both in the article and in the discussion. He provides a perfect example of a national political figure driving forward a critical public debate on a serious and mature level. Unfortunately I'm not sure his efforts have drawn much attention.

One place where Schumer's column has drawn notice is the Von Mises Institute, which has written a rebuttal. Now, I'm not an economics professor, as the author George Reisman is, but it looks like a fairly weak rebuttal to me. The response is that sure US wages will drop rapidly, but the shift of work to places with cheaper labor will drive value, and the cost of goods will fall faster than income, making Americans wealthier in terms of "riches". Comparative advantage? Bah, who needs it. Additionally he makes a rather specious argument that all of the capital being spent overseas to outsource ends up being reinvested in the US which will necessarily mean that US wages will not fall. I think there are a number of significant counters to this view.

First, is that his last point on wages is fairly silly. What goods and services will this money be purchasing to bring it back to the US? By his own argument, pretty much all of the work that will be left here will be services provided to Americans, which obviously doesn't hold much value to customers overseas. The other option, which is actually what mostly happens now, is that it returns to invest in the US, typically in government bonds. It is a huge leap to assume that this patter will continue as the US economy bleeds productive capacity and the dollar drops like a rock.

So wages will drop. The next item to consider is that not everything will be outsourced. The vast bulk of health care work necessarily must be done locally. These costs wouldn't fall, and in fact are currently spiralling upwards. Many other services would also not benefit from outsourcing (plumbers, auto mechanics, lawyers, etc). While workers who saw their wages drop precipitously may or may not see even more precipitous drops in the costs of some of their expenses (has the price of Nikes dropped since they moved to sweatshop labor?), they would likely find the cost of these static expenses to be crippling. I'm sure Reisman would posit some major shifts in the distribution of the labor force would magically resolve this problem, but that leads me to my next point.

Reisman suffers from the perenial sickness of economists, the inability to see past pretty numbers in a spreadsheet to the human implications beneath them. He could use a good strong shot of Keynsian reality. Massive movements of jobs out of the country and massive movement of workers from their current profession into some sort of fallback position doesn't happen by the turning of a dial on a switchboard. Even relatively small structural changes can send shockwaves of instability through an economic system. And what he suggests is by no means a small structural change. This massive churn of displaced workers comes with a tremendous human cost as our country has a severely inadequate support network for handling and retraining these out of work laborers. Additionally the dire damage to economic sectors being moved overseas cannot help put place serious drag on areas of the economy not directly affected. The economy is a tightly woven network of interdepencies underlaid from top to bottom by mass psychology. Uncertainty and turmoil breed weakness. The formulas say things will work out ok in the end, and eventually they probably would. But in the meantime there will be a lot of pain and suffering, and that is precisely what Schumer is rightly worried about.

:: Joe 11:58 PM [+] ::
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