Friday, December 28, 2007

Deconstructing Krugman

It seems that few economists can raise the ire of other economists the way Paul Krugman can. In his latest column on trade, Krugman begins to discuss the increasing downward pressure being exerted on US wages by increased trade with developing nations.

As Krugman lays out the basic framework of his argument, he takes pains to state (twice) that he is not a protectionist. He does state in his final thought, however, that we should be wary of knee-jerk acceptance of trade and that we should listen to those who question trade.

This final thought has lead to two interpretations by Dani Rodrik and Greg Mankiw.

For his part, Mankiw seems intrigued by Krugman's thoughts(although would like to see the data backing them up) but wonders if we should take trade-questioners seriously if they are really just closeted protectionists.

Rodrik jumps on Mankiw's statement and asserts that people who question trade should not all by labeled as protectionists.

In fairness, I don't think that is what Mankiw was saying, that everyone who questions trade is necessarily a "protectionist" (which seems to be a bad word in economist circles.) What Mankiw (I think) was asking was if we know someone is a protectionist, should we listen to their views on trade? (presumably because their views will be highly skewed against trade).

My answer to Mankiw is yes, we should list to different (intelligent) views on trade, even if they are posited by a protectionist. Trade is crucially important to the economic growth of humanity and needs to be discussed, examined and deconstructed from many different angles. The purpose of this IMO is not to try to find a way to stop trade, but to continually try to find ways to make it better.

And to Rodrik I would agree that applying blanket terms to describe people's views is not helpful, but that is not what Mankiw was doing in this instance.

Good review of what caused the subprime mess...

... also check out the final thought on the piece about the possible "cleansing" effects of a recession.

Economics Blog : Are Manufacturers' Inflation Worries Growing?

Remember what I said earlier on inflation?

Right now manufacturers are eating the increases in raw materials, but that may not last much longer.

My concern on inflation is simple, the US imports a lot of stuff, including commodities and raw material. A falling US dollar means all that stuff if going to cost more; a USD from a year ago bought more imports than it does now.

Up until now, manufacturers have absorbed these costs so as to not lose marketshare, but eventually these manufacturers (as profit-maximizing entities) will have to pass along those higher costs to the consumer, and viola: inflation.

Consumer confidence up...sorta

A quick compendium of economists' take on consumer confidence is about as clear as mud.

Confidence is up...sorta.

Spending is up...sorta.

More subprime woes in the works...kinda.

Basically, it is going to be hard to judge the economy by what people say, rather you're going to have to do it by what people do. People may say they have confidence in the economy, but if they're not going to buy houses and not going to go shopping, then clearly their confidence is slipping.

And oh, BTW, businesses don't seem it be in a great rush to spend either.

Housing: The slow band-aid method

Housing prices are "sticky", meaning that they don't just bounce up and down the way stock prices do. Rather, the housing market corrects itself in a manner that is analogous to slowly and painfully peeling off a band-aid. News reported here in the WSJ suggests however that the traditional slow peel of a housing correction this time may be more like the quick and efficient band-aid rip method. (still painful, but at least the pain comes and goes in a shorter period of time)

Rather than housing prices slowly dropping to eventually reach the bottom in a few years time (some estimates I heard where that we would still be fishing around the bottom as far into the future as 2012) it looks like the decline may be more rapid, possibly bottoming out sometime in 2009.

The obvious follow-on thought is that with a quicker drop, we could begin a quicker recovery. Housing prices going up sooner would relieve pressure on consumers who are currently feeling crushed under the weight of low savings and low housing prices. A rise in 2009 could help bring the economy back from any slowdown (or recession) we are likely to experience in 2008.

Sunday, December 23, 2007

How to Avoid Recession? Let the Fed Work - New York Times

I agree with Mankiw here that the economy should be handled with a very light touch from a policy level, especially considering how unpredictable markets currently are and how potentially fragile the entire financial system may be. (Still almost 200 basis points between LIBOR and 3 month Treasuries).

I would actually go further than Mankiw and suggest that even the Fed should stay out of the way and not mess further with interest rates.

Here are my concerns:

1) Inflation: I understand the need to boost the availability of capital, but cuts in interest rates will have a continued eroding effect on the dollar and as we import so much stuff, the price of that stuff is bound to go up. Interest rates drop, the dollar drops and inflation shoots up, that is my fear.

2) I heart savings: There has been a continued downward trend in US savings. I dunno, this can't be healthy. I'm not begging for a recession, but a bit of financial pinch may encourage consumers to save more, which may shore up the dollar and may even help restore some consumer confidence (especially for those consumers who right now are shaken by a drop in their home values and have no money in the bank.)

How to Avoid Recession? Let the Fed Work - New York Times

Thursday, December 20, 2007

MBIA says it has $30.6 bln exposure to CDOs - Yahoo! News

Daily stories like this is why there is an existential crisis in financial markets, as illustrated by the LIBOR/Treasuries spread.

This story is but one small example of many more to come....

MBIA says it has $30.6 bln exposure to CDOs - Yahoo! News

DIY financial crisis monitoring

Great quick article on a short-hand way to track the growing financial crisis, track the difference between LIBOR and Treasuries. LIBOR is the rate one bank loans to another and in theory should carry only slightly more risk (higher interest rate) than US Treasuries. Sure, Treasuries have the backing of the US government, so that should be pretty secure. But LIBOR has the backing of our entire financial system, which should be pretty secure as well.... but it seems it isn't.

Based on my readings, the difference between LIBOR and Treasuries will continue until the market feels that all the bad news from the financial industry has been articulated, but that could take a long time...

Gauging the credit crunch: A do-it-yourself guide

Monday, December 10, 2007

Dani Rodrik's weblog: Real wisdom on trade

Yet another article to get to when I'm done with school. I've build a larger reading list post-school than I ever had during school!

I think Dani Rodrik gets unfairly labeled as anti-trade or anti-globalization. I admit, I haven't read a ton of his work, but what I have read makes me think he's more of a skeptic, wanting to point out the problems and inefficiencies in global trade.

To my mind, this doesn't make him anti-trade, but an important voice in asking the question how to make trade better.

As I read more of his material, we'll see if my opinion remains the same.

Dani Rodrik's weblog: Real wisdom on trade

Saturday, December 08, 2007

Market Power: Mobile Phones Empower the Base of the Pyramid (by NextBillion Writers Rob Katz and Ana Escalante) | - Development Through Enterprise

Lot of talk about the role mobile phones play in promoting development around the world, so is there space for OLPC? Is the future of development a mobile device and something as clunky as a laptop (no matter how well designed) will remain a relic of western IT usage?

By pushing PCs on developing countries, are we really just force-feeding them a technology they really don't want/need?

Market Power: Mobile Phones Empower the Base of the Pyramid (by NextBillion Writers Rob Katz and Ana Escalante) | - Development Through Enterprise

Monday, November 26, 2007

For profit vs. non-profit

The battle between OLPC and the Classmate PC is a fascinating proxy for the debate of business vs. charity to aid in development.

Monday, November 19, 2007

Sovereign Wealth World: Financial Page: The New Yorker

As always, James Surowiecki finds exactly the right words to sum up a current trend (in this case, the rise of sovereign funds.)

But it’s a problem of our own making. The reason that sovereign wealth funds are so flush with cash is all the dollars we spend on oil and Asian consumer goods. If we want to consume far beyond our means, then, one way or another we’re going to end up selling off assets to pay for it.

Sovereign Wealth World: Financial Page: The New Yorker

For Geert

it is not my favorite Catherine Wheel song, but it is the one I've grooving to as I complete G7II

Friday, November 16, 2007

AMD sells 8.1 pct stake to Mideast firm - Yahoo! News

Up until now, sovereign funds have been investing mainly in PE-types of investments...ports, real estate, huge infrastructure and so on.

But pretty soon, all those countries holding mountains of US dollars will begin to look for other assets in which to invest.

Enter the tech sector.

Looks like AMD is getting ahead of the curve. But what will be more interesting is when sovereign funds get into the local VC game.

AMD sells 8.1 pct stake to Mideast firm - Yahoo! News

Monday, August 06, 2007

First going on second...

Rodrik explains the general point of disagreement between economists. If I ever grow up to be an economist, I think my first instinct is to be what he calls a "first-best" economist... but I have to admit, I am finding "second-best" arguments increasingly compelling.

Dani Rodrik's weblog: Why do economists disagree?

Thursday, June 21, 2007

Bill Gates's Charitable Vistas

A critique by by economist Robert Barro on the role Bill Gates's philanthropic activities have had on the world, verses his activities as the founder of Microsoft.

While I think Barro is a little harsh here, he makes an interesting point that creating a product that increases productivity is far more beneficial to the world that simply giving away millions (billions?) to charitable causes. The argument goes that creating such a product (Windows), increases the ability for people to generate their own economic value. It is hard to argue with this point and in general terms, I would agree with it.

Of course, Gates isn’t just throwing around money and the focus of his foundation is (in part) funding research for cures that may not be economically attractive to some pharmaceutical companies (building software can be profitable, finding a drug that only poor people really need is not).

Sunday, June 10, 2007

Why Africa needs a Marshall plan

An excellent opinion from Glenn Hubbard and William Duggan of Columbia Business School. As I start my new gig with the global BD team, this sort of thing very much inspires my thinking. Is there a role for big business in helping the development of small business and of economic activity in general in poorer parts of the world?

I'm not talking about charity or "CSR" here, I mean opportunities that hold economic upside for all involved; opportunities that make strong business sense for all participants. / Home UK / UK - Why Africa needs a Marshall plan

Friday, May 18, 2007

Facebook | Oh Canada...

This pretty much confirms what I've suspected all along, for some strange reason, Facebook is really popular in Canada, particularly my home town Toronto.

Over the course of a few weeks, I got a bunch of invitation to join Facebook from friends up in the Great White North. It took me quite by surprise because I've never really looked into Facebook here in SV, and there aren't many people I know around here who are into it.

Facebook | Oh Canada...

Thoughts on the Pigou Club

Greg Mankiw references two articles that support the “Pigou Club” thinking, which is basically a carbon tax should be levied to encourage “green” behavior and account for the true costs of carbon in the atmosphere.

I agree with this position and am encouraged that economists of Mankiw’s background and expertise support such a plan of action.

I won’t summarize the two articles, but I will highlight a couple of concerns that I have. Nothing I mention here means that I necessarily disagree with any of the points raised in the articles, just that these are things I thought of while I read them.

From Jeffery Sachs quoted in Scientific American:

The key to solving the climate change crisis is technology.

Broadly speaking, I agree with this point. But I do get nervous when someone says there is a single magic bullet solution to any large problem. I’m not sure that is what Sachs means, but to my mind technology and societal behavior change are equally important. True, new technologies could inspire societal behavioral change, I just think we need to be more up-front about that or talk about how to marry the two concepts.

For example, car-pooling is a behavior change, hybrids are a technology innovation; put the two together-- car-pooling in a hybrid—and now you’re really talking!

Sachs also mentioned low or zero emissions through clean coal. I’m far from smart enough to debate him but, is that for real? I should do more research.

The next article was from Fortune. One point made here on ethanol was:

The net effect is close to nil; if you doubt that assessment, check out this recent study by the Canadian government, which found that a 10 percent blend of corn-based ethanol would reduce emissions by about 1 percent.

Again, I’m sure this is true and I have been a little skeptical of the recent craze around ethanol. But to that point, we all know that with any new technology it starts out expensive and inefficient, but as it gains adoption, price goes down and efficiency goes up. So it is consistent to say that ethanol may not be very efficient now, but it is reasonable to assume that as it gains widespread use, its ability to offset emissions will increase.

Greg Mankiw's Blog: Readings for the Pigou Club

Tuesday, May 15, 2007

Footnotes to trade

Economist Dani Rodrik takes two separate looks at other issues that get attached to trade agreements. One is a look at labor and environmental issues (which he seems in favor of) and the other is IP and patent protection (of which, he seems a little more suspicious)

Dani Rodrik's weblog: Trade and environmental agreements in trade deals

Dani Rodrik's weblog: More on market-access rent-seekers

Sunday, May 06, 2007

Watching Blade Runner...

instead of studying.

Conversation between Roy Batty (a Nexus replicant, which is an artificial life form) to Chew, the genetic engineer who designed his eyes.

Chew: "You Nexus, huh? I design your eyes"

Roy Batty: "Chew... If only you could see what I've seen with your eyes."

Batty's line one of the greatest in cinema history. (And its engraved on my iPod)

Wednesday, January 31, 2007

The many faces of globalization

NY Times has an interesting profile of Dani Rodrik, a Turkish born economist who pushes alternative theories on globalization.

I gotta be honest, I haven't read any of Rodrik's work but he does seem intriguing based on this profile.

In fact, I'm not sure what he's saying is all that different from a lot of other economists, that ultimately global trade is good for populations as a whole. But where he seems to take the discussion one step farther is admitting that while global trade is good on the whole, it is not good for everyone and he highlights that there are individuals (if not entire industries) who suffer as a result of it.

Rodrik seems to posit that rather than going after trade as a single minded goal, go after it with a two pronged approach; with the second prong being a thoughtful series of policies on how to assist those who are inevitably harmed by trade.

Seems like a pretty sound strategy to me. Again, I haven’t read anything else by Rodrik so I’m just going off of what’s on the profile. However, I think I am more pro-trade than he is. If I read Rodrik correctly (based on this profile), he is much more cautious about free trade and would probably advocate keeping certain barriers up (or even returning some barriers) while certain industries improve and can become globally competitive.

I see the logic here, but I’m not sure I could support it. Wouldn’t increased global competition encourage slow industries to improve? I guess he would counter that a certain amount of protection would help these industries grow and strengthen, but unfettered competition would wipe them out before they’ve had a chance to establish themselves.

I dunno, I still can’t really buy it. But I applaud that he is able to thoughtfully point out the challenges of globalization and even when doing so, does not dismiss globalization outright.

As usual, there is a lively debate on Mankiw’s blog about this story.