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Monday, March 31, 2003

Military Average Fuel Economy

Now we know where a lot of the $75 billion cost of the war goes:

The fuel cost numbers are startling. A gallon of modified jet fuel, which is used in tanks as well as aircraft, costs only 84 cents when bought wholesale from multinational oil companies such as Shell and ExxonMobil.

By the time the cost of transporting the fuel to the battlefield is added, that sum can rise to hundreds of dollars per gallon.

The US army says that for the campaign in Afghanistan, where there are no reliable or significant sources of fuel, the army depends on fuel flown in by helicopter from ships in the Indian Ocean. The cost per gallon: about $600.

The US army estimates it costs about $150 per gallon for fuel used in Iraq. The fuel comes from 23 US military dumps scattered across the Middle East, a number that was doubled in preparation for the current conflict.

This translates into a total fuel cost of about $60,000 per Abrams tank - assuming a distance travelled of 400km from southern Iraq to Baghdad and an average fuel consumption by the Abrams of one mile per gallon.

That last quote is almost certainly an underestimate--the M1A1 tank uses something like 5 gallons to the mile, driving the fuel cost up considerably. The article goes on to detail how the army is looking into alternative fuels and means of power, but the army will be dependent upon refuelling for years yet, and, a we've discovered in the past couple of weeks, logistics are crucial. After all, Lawrence Freedman, a professor of war studies at King's College London, writes today that:

The drama of war lies in combat but the source of victory lies in logistics.

Good luck, Mr. Mankiw

In an article titled "Advice to a fledgling economic adviser", Jeffrey Frankel cautions the incoming chair of the Bush Council of Economic Advisers, N, Gregory Mankiw, about what to do when the president inevitably does something that he disagrees with:

the press seldom asks persistent or sophisticated questions. So one can usually formulate a careful sentence that appears to be consistent with the White House line and yet is not literally false, and get away with it. His immediate predecessor, Glenn Hubbard, signed on to the White House statement "interest rates don't move in lockstep with budget deficits". He, like Mr Mankiw, has a textbook with the standard model linking interest rates to budget deficit.

But because the sentence is true as written, Mr Hubbard has nothing to fear from his colleagues when he returns to university life. The press did not ask the follow-ups: "While budget deficits are not the only factor that determine interest rates, doesn't a budget deficit cause interest rates to be higher than they otherwise would be? And regardless whether that increase is small, doesn't the deficit crowd out investment?" In the current national mood this president is getting an easier ride than his predecessors, so this is probably Mr Mankiw's best bet.

That's all? To rely upon obsfucation and the fecklessness of Beltway reporters? I think Rubin-worship is going a bit too far. Also, Frankel is writing in the FT, not on personal stationery; what about an adviser's role to the public? Writing about treasury secretaries, Stephen Kirchner (scroll down) notes:

[I]t’s always bemusing when the financial press argues in favour of less transparency from officials. The media pilloried O’Neill for his supposed lack of sophistication on exchange rate policy, when all he was trying to do was inject some reality into discussion of the dollar. As the old saying goes, politicians only get into trouble when they tell the truth. Unfortunately, the media are often complicit in this process.

It's a strange day when op-ed writers want public officials to be unclear (to put it mildly) to the general public.


Another item for Brad DeLong to bang his head on a wall about:

Those concerned that the US administration pays insufficient attention to the rest of the world will not be reassured by moves afoot at the US Treasury.

For years the Treasury has had a 24-hour operator service which can put callers in touch with its top officials at times of crisis. Given that financial upsets can erupt at any time, this has proved invaluable at times of high stress in global finance.

But Observer hears that the Treasury, to the consternation of some of its own officials, plans to cut this back to a 7am-10.30pm service. Outside those hours, if you don't have John Snow's cellphone number, you will just have to wait.

This is not too bad if like, say, the oft crisis-hit region of Latin America, your market trading hours coincide with Treasury opening time. But Asian countries should resolve to have crises late at night or very early in the morning if they want US input.

Tabula Rasa

James Suroweicki writes about Iraq's odious debts.

The Well-Rounded Class

In the New Yorker, Louis Menand looks at the current debate about U.S. college admissions:

[A]dmissions offices have always given preference to various types of candidates whose grades and standardized-test scores may be below average. They have done so because they have other institutional needs besides putting scholars in the classrooms. They have football teams to field, orchestras and marching bands to staff, student organizations to be led, alumni to be kept in a giving mood, and feeder schools to be kept in a feeding mood. They have a gender balance to preserve. They can’t have ten times as many poets as physicists, or thirty students from Exeter and none from the local high school.

Later on, he adds:

Most people feel that a heterogeneous class is better than a homogeneous one, and the fact that this makes it harder to get in does not mean that the process is unjust. It’s just a supply-side system: excess demand gives the colleges the advantage in deciding what they want their student demographics to look like. And the truth is that anything that reduces the power of the S.A.T. is a good thing. It is absurd to believe that a test taken when a person is sixteen can predict how well that person will be performing when she is twenty-two.

This is an instumentalist view of affirmative action--the University of Michigan case prompted Menand's article. Universities are imperfect markets because we want them to be--no one wants "worthy" students to be deprived of an education, so other criteria are used aid admissions decisons. In essence, Menand, who desribes the lack of transparency--and the consequent unpredicability--of Ivy League admissions, is defending not so much affimative action as a university's right to be arbitrary in it's selection process if it helps meet "instiutional needs".

I'm not sure about the legal basis for this--can institutions legally be arbitrary? A huge part of regulation is designed to reduce uncertainty and arbitrariness in the process, if not the outcome, of decisionmaking. Consider the issue raised by Jack Baklin's post back in January about baselines in colour blindness:

[L]aws like the 1964 Civil Rights Act that guarantee blacks equal opportunity clearly are designed to help them, so doesn’t that make them race conscious? Well, if your baseline is a world in which everyone has the right to refuse service to anyone they don’t like, and the right to hire and fire anyone they don’t like, yes, it does. The law is altering common law rules of contract and property for the explicit purpose of benefitting black people.

Anti-discrimination law does not prohibit prejudice--merely the ability to act based on that prejudice. Can that same law overlook positive discrimination? In a few months, perhaps, we'll find out.

Sunday, March 30, 2003

From a Different Perspective . . .

David Warsh points out how the current war could be about oil after all:

Perhaps the Gulf Wars are best understood as being antitrust policy for oil — industrial reorganization by force in the aftermath of successful monetary stabilization.

While discussing political instability in the Middle East, and how the Bush administration sees oil as adding to that instability, Warsh refers to Amity Shlaes, who last week in the Financial Times (subscribers only) rebutted Bush and Powell on the ownership of Iraqi oil:

[B]elonging to the people tends to translate into belonging to the government. And the assumption that government-controlled oil can benefit the Iraqis is tricky. Indeed, one can argue that state ownership of oil has cursed Iraq. And that, come reconstruction time, the single most important thing that the US and Britain can do to facilitate stability is to privatise Iraq's reserves - even if that means cutting deserving Kurdish leaders out of the bounty. And even if it means being accused of creating a "Texas on the Tigris".

Many commenters, Lynne Keisling first and foremost, have taken pains to point out how the war cannot be about oil. Warsh does not disprove those economic arguments--there is still limited real value in plundering Iraqi oil. The publicly-owned Iraqi oil endowment finances Saddam's exploits, and to that extent the protestors are right--this war is about oil.

Saturday, March 29, 2003

Who's Being Patronising?

The New Statesman has a leader this week titled "How we patronise the Iraqi people". The last paragraph starts with this sentence:

Politicians and modish commentators in western countries are poor judges of what third world people want, which is mostly peace, security, food and water.

Isn't the New Statesman a "modish commentator"? The magazine is correct insomuch that most people in the world want "peace, security, food and water", but don't people want more than the bare necessities? In accusing the hawks of being patronising, the NS here is itself being patronising. The leader goes on:

Yes, they will want to keep out of torture chambers, but in countries ruled by tyrants, large sections of the population become skilled at keeping out of trouble; it is harder to dodge a cruise missile. In Iraq and elsewhere, all we can safely assume is that public opinion would like us not to sell military or police equipment to unelected rulers and their henchmen, not to make deals with dictators even when it suits us to do so, and not to impose sanctions that lead to disease and starvation among millions of children. If British and American (and, for that matter, French and Russian) governments were to follow these rules consistently, people could do more to overthrow their own rulers, where they deem it necessary, without violent outside intervention. (emphasis added)

What makes the NS a good judge of what people in the third world want? Here they are committing an error most evident in the anti-globalisation movement--it is projecting what it wants onto those who it puports to care about. I don't know if the Iraqi people want the liberation that they are being given, but neither do they. Opinion is also not monolithic--some may be for it, others against. Is the resistance that US and British forces are facing a mass campaign? So far most reports indicate not.

Something also needs to be said about the wish for the west to "follow . . . rules consistently". Independent central banks may be one thing, but is an independent foreign policy? No nation does this--few people, let alone states, leave a blatant opportunity to make a profit alone, and the temptation to cheat on any rules-based regime is simply too great. The call here is effectively for a depoliticisation of foreign policy--communiqués can be issued, regrets expressed, but in the end the NS would just have the west shrug its shoulders. The desire for this is reminiscent of the Kellogg-Briand Pact of 1928, where the "High Contracting Parties solemly declare in the names of their respective peoples that they condemn recourse to war for the solution of international controversies, and renounce it, as an instrument of national policy in their relations with one another." The Italian invasion of Abyssnia in 1935 put paid to this ideal.

I am not going so far as to decry international law or the United Nations, as some commentators have done. I just draw attention to the fact that inernational law is more of a mutual-benefit process than a strict constraint on the actions of nation-states--if it were meant to be the latter, then a proper independent policy enforcement mechanism would exist. So far there is only one--the WTO's dispute-resolution mechanism--and it is only a qualified success. The NS would do well to consider why that is.

Friday, March 28, 2003


Though he does not use the phrase, Jim Henley makes a revealed preference argument regarding the war in Iraq:

All of which leads to the one thing I think I've figured out about the war so far. You can't trust what anyone tells you, but watching how they fight will tell you what they're thinking.


Size and Credibility

A new economics blog, Law, Politics and the Economy, opines on the legitimacy of the United Nations:

It would seem to me that the need for reform is clear. Make the voting more like the IMF and the Security Council will gain credibility overnight.

People talk a lot about reforming the Security Council, but any such reform has to go through the UN General Assembly, and developing countries, whcih make up most of the numbers, would never vote for such disenfrancisement. They--and non-veto-wielding developed countries--already seethe at the Permanent Five, but when they thak their two-year stints on the Security Council their votes do carry real weight, as the pressures put on Angola, Guinea, Cameroon, Mexico, Chile and Pakistan made clear. No one like the status quo, but there is a profound institutional dyaminc that makes it better than most proposed alternatives.

Developing countries, in addition, don't like the voting systems of the Bretton Woods Institutions--their structures are another post-Second World War settlement, which the vast majority of countries fell into afterwards. The General Assemby may be powerless, but its existence maintains the pretense of the soverign equality of states--a notion dear to the hearts of all independent, self-governing territories. The IMF's voting system nakedly recognises established economic power, and while that may occasionall deliver outcomes developinc counties like (like the recent IMF loan to Argentina, a bad idea pushed through by G-7 pressure) these institutions are not seen by may people as being representative--the system is one reason why some claim that globalisation does not work for the poor.

Any proposal for reforming the United Nations system of voting has to take these and other pressures into account. There are arguements that both France and Britain should not be Security Council members as their power has waned in the postwar era; both countries, as well as Russia, know that Veto power gives them a legitimce thay would not otherwise have. Admit Japan (a country that constitutionally cannot go to offensive war) and you have to admit Germany. Admitting India, which has a good claim on the sheer size of its population, would antagonise Pakistan, whose only claim is its possession of nuclear weapons. The African countries would also want an input, and would you pick large but barely stable Nigeria over South Africa? Which Middle Eastern non-democracy gets the nod? In the Americas choosing Brazil would upset Argentina and possibly Mexico.

Reform of the Security Council, and of United Nations voting in general, has been discussed for decades, and the issues involved have proved so difficult that they have never been formally put forward. Operation Iraqi Freedom has changed may things in geopolitics, but it is doubtful that it could force institutional change on the East River.

Thursday, March 27, 2003

Talk Isn't Cheap

A couple of weeks ago, Stephen Kirchner pointed to the an FT article about the volatility caused by comments made by US Treasury Secretary John Snow:

The strong dollar has long been more of a rhetorical gesture than a policy goal. The phrase was adopted by Robert Rubin, Treasury secretary between 1995 and 1999, to allay concerns that the US would seek to devalue the dollar as a way of boosting exports.

The strength of the dollar was crucial in keeping the US economy on track during the boom of the late 1990s, helping to suppress inflation and interest rates at a time of rampant growth in domestic demand. Strong dollar rhetoric also helped to attract the foreign capital needed to fund the ballooning US current account deficit.

One result of this history is that the market has become addicted to sporadic assurances that the administration continues to favour a strong dollar. Having ploughed huge sums into US asset markets in recent years, fund managers are extremely sensitive to indications that the value of their investments will be eroded further by the weakness of the dollar. Many have been rushing to hedge their US investments anyway. European fund managers who failed to hedge their exposure to the dollar over the past year would have seen an investment in the S&P 500 fall by 43 per cent, compared to a 28 per cent fall in local currency terms.

15 months ago, Michael Lewis wrote about Snow's immediate predecssor, Paul O'Neill, in the New York Times Magazine:

[T]he larger category of O'Neill's indiscretions are the many things he has said that are true, and that most people know to be true, but that treasury secretaries are not supposed to say. Included here [is] his observation that despite decades of treasury secretaries suggesting otherwise, the United States government does not pursue a ''strong dollar policy'' and that in any case the Treasury has no ability to affect the level of the dollar.

Going on, Lewis notes:

To the financial-establishment mind, O'Neill's approach to Treasury Department big-shot-dom is a travesty. It violates the central tenet of Washington financial life: never use the English language to convey meaning. The idea is that the economy benefits when important financial policy makers preserve their mystique and that they do this only when they avoid saying what's on their minds. The assumption underpinning this behavior is that the financial markets need to feel as if there is someone somewhere who knows something that they don't and who can, in a pinch, fix things. Greenspan has made a living by saying nothing in the most complicated possible ways and letting other people infer his genius. O'Neill's immediate predecessors, Robert Rubin and Lawrence Summers, took a slightly more direct approach but still stopped well short of saying anything worth discussing. And in any case, Rubin, who created the model Summers followed, was genuinely so diffident that his opinions were never likely to get him into trouble.

For better or worse, O'Neill instinctively takes the opposite view: that people are more likely to prosper if you develop positive opinions on subjects and tell them what you think in plain English. ''I thought there would be a bigger market here than there is for clarity of expression,'' O'Neill says. He remains incredulous about the outrage over some of his comments. Take his remark about the strong dollar. It was simple fact: the value of the dollar is determined in the long run not by some Treasury policy but by America's growth rate relative to that of other nations. ''But nobody wrote that,'' he says. ''Not one person. All they wrote was 'controversy!'''

Lewis also gets to the heart of the matter:

The odd thing about being treasury secretary is that while people may pay attention to what you say, you can't actually do very much. ''When you're treasury secretary,'' says Bo Cutter, who, in addition to serving in Jimmy Carter's O.M.B., worked under Rubin in Clinton's White House, ''you get to talk about the world economy, but you can't actually do anything about the world economy. By definition, you get invited to the meetings, but you don't by definition get to control them.'' The sort of power even the most exalted treasury secretary has is only the power to persuade. He has, at best, the power to manipulate public perception of big events and to infect the mind of the president with his ideas.

The most powerful "finance minister" (treasury secretaries have little direct fiscal power) in the world is Britain's Gordon Brown, who has 1) domestic power and 2) the gravitas to affect international financal frameworks, as he has done in reforming the IMF and establishing the G-20. The US treasury secretary, on the other hand, while influential, works mainly in the world of expectations, where credibility is key. What remains?

A lot of people at the moment are worried about the movment of the US dollar. Jane Galt points to a Robert Shapiro article in Slate about the dollar's possible collapse because of the war:

Given a bulging current-account deficit, slow growth, and a prospect of years of huge budget deficits, a bad war might just trigger a real currency crisis. In 1997 and 1998, Thailand, Malaysia, Indonesia, and South Korea found out how fragile prosperity can be when it depends on foreign capital that can be yanked when a currency weakens. We're in a stronger position because our underlying economy is so much sounder and because foreign investors have so few other, plausible places to park their money.

But a currency crisis could still hit us like a hurricane. Suppose two or three of the top 10 things that could go wrong for us in the war do go wrong and the liberation of Baghdad begins to look like the siege of Stalingrad. That kills hopes for a quick victory-bounce in the U.S. economy, and foreign investors accelerate their shift from U.S. to European securities. As the dollar sinks along with our stock market, more foreign investors rush to sell, and the declining dollar turns into a run and finally a rout.

There are two ways to end a currency crisis like that: Hike interest rates far and fast to draw back capital, stalling economic growth as a consequence; or get the world's major central banks to intervene in the currency markets by buying dollars. In the current diplomatic deepfreeze, I wouldn't count on the European Central Bank. Instead, we would have to rely on Japan, China, and other Asian countries to bail the dollar out. These are all high-saving nations with large foreign-exchange reserves, and, more important, export-based economies that would be hit nearly as hard as we would by a cheap dollar. But that's not a favor that an American president with his sights on North Korea might want to ask for.

Are things that bad? Current economic sluggishness has people worrying about cyclical deflation, and the American fiscal imbalance leads to worries about long-run inflation. Where do expectations come in to this? Edward Hugh has a possible answer:

The job, right now, of the American president is to convince the markets and the American consumer that there is going to be inflation: this remember is to escape from the zero bound trap. But not inflation right now, since everyone believes that the Fed being the serious entity it is, this would soon be brought back under control. No, what they have to do is convince everyone that there is going to be serious long-term inflation. If I am right, in doing this they hope to avoid short-term deflation (remember we have serious papers knocking around out there with titles like "On the Responsibility of Being Irresponsible"). So what better way to convince everyone that this is going to happen than sell the image of your 'polyvalent loony', the president whose only interest is to keep his rich friends happy, and use it to ram home the point - inflation is on the way. And it seems to be working: Certainly an economist as prestigious as Paul Krugman is convinced there is going to be serious inflation in ten years time, and to put his money where his mouth is he has taken out a fixed rate mortgage. And if Paul Krugman is convinced, then so too are a lot of readers of the NYT, etc etc. What I would like to believe, since I have always respected Krugman as an economic thinker, is that he is as recursively aware of his own part in the theatre as Bush possibly is. Of course, once everyone is suitably convinced, and deflation is avoided (this, of course, on the conventional view of the deflation problem which I personally don't accept!!) then we might find them saying, aha, caught you, only kidding.

At the risk of oversimplying, the Bush Administration may be planning, pace Barro and Gordon, to cheat its way to economic stability. Now, expectations clearly matter, but can people be fooled like this? Under rational expectations (a strong assumption, I admit, but work with me here) without binding rules (like an independent central bank) or a solid reputation for sound policy, economic actors should expect such cheating, and act to neutralise the policy. In spite of wonderful papers on the subject, no government in the world except New Zealand's has an unambiguously clear fiscal policy framework, and Brad DeLong's continuing exercise of "banging his head against a wall", to name but one, sould lead one to conclude that, as far as a fair number of people of concerned, the administration's economic policy is far from credible.

Information moves markets, that is certain, and statements from senior officials are a part of this. The FT and Lewis quotes above don't make it sound so clear, though. What is apparent is that some people, at least in the financial markets, want to be fooled. Take Paul Krugman, for one, comparing Paul O'Neill to Robert Rubin:

[O]verseeing world financial markets is nothing at all like running a large, very old-economy, command- and-control corporation (or, for that matter, working the details of the federal budget). Mr. Rubin excelled at the deft strategic intervention — persuading investors, when the situation was on a knife edge, not to pull their money out and turn a temporary loss of confidence into a self-fulfilling prophecy of collapse.

Yes, Rubin handled the Mexican and LTCM crises well, but the notion that someone "oversees" world financial markets is close to being spurious. Lots of people and institutions look for trouble, but oversight also requires crisis prevention, not merely deft last-minute handling. When is comes to some global markets there is little real effective oversight; hedge funds, for example, are unregulated. Nevertheless people, even on Wall Street, like to maintain the fiction that there is someone to watch over them. Expectations matter, therefore, but they are only rational in part.

Credibility counts for a lot, especially given the limited policy instruments at a government's disposal. This matters more the larger the economy is; Argentina, for example, tried for too long and lost all of its credibility with a bang. This is why speculators, much reviled by some government leaders, are a good thing--they are able to spot imbalances and show that a ruse is in fact a ruse. The British learnt this the hard way on Black Wednesday.

How credible is Bush? Well, we don't know. Why? In spite of the headbanging and other complaints, the Bush Administration has not really done all that much besides the 2001 tax cut. While that is very important, it is still only a sample size of one, and does not leave much to form any notion of revealed preference. Much of the rhetoric against Bush's proposed dividend would lead you to think that it's already happened. Perhaps that is because of Bush's determination--people expect it to happen. Clinton lacked credibility for much of his domestic policy, especially after the failure of health care reform in 1994. Aside from the tax cut and the Education Bill, Bush is AWOL on domestic policy--including the economy. To jump to another area, Robert Zoellick would be a lot more credible in trade negotiations if people thought the president really cared about what he was up to. That possible source of recovery for the world economy is now stalled, and off the radar until the war is over.

My advice is to wait and see. Bush has not, say, had to fight to get an economic proposal though Congress, and that will be the true test of his credibility. Until then, all that remains are words, which oddly enough seem to give people a lot of comfort.

Wednesday, March 26, 2003

Meanwhile, on the Other Side of the Planet . . .

QSI pays a visit to Chile and Argentina, and describes his impression of the two places. What's interesting is not the economic situation, which is well documented, but his perspective on the outlook of the different populations. Describing Argentinians, he says:

A sense of despairing, fatalistic hopelessness lurks in the background here, but there is also a worrying sense of entitlement, the sense that Argentina deserves better. It would certainly deserve better, but it won't get there without doing something to get it. Magic solutions are not going to fall out of the sky. Coming to terms with former glory is a hard thing to do, and current-day Argentina still hasn't entirely vanquished the ghosts of its own past.

You get the impression there that Argentinians are waiting for deliverance from their troubles. Contrast that with this:

Chile is far less conspicuous, but has plodded along calmly without pretension to build a surprisingly solid economy. The price level in Chile is far more appropriate to an economy that's still not quite fully developed, certainly compared to prices in Argentina.

To digress slightly, the World Bank In 1998 publised a report called Assessing Aid. This is a much ignored report, partly by the Bank itself, which still acts, well, like a bank, whose major institutional dynamic is to lend money. The report's overview summarises its conclusion:

Developing countries are to a large extent masters of their own fate. Domestic economic management matters more than foreign financial aid. Economies that lag are held back more by policy gaps and institutions gaps than by a financing gap. Aid as money has a large impact only once countries have made substantial progress with reform of policies and institutions. Poor countries with good policies should get more aid than ones with mediocre policies—but in fact they get less.

Thsi is the principal message of William Easterly's book The Elusive Quest for Growth, and both volumes confirm something that I have thought for a long time: that countries are responsible for their own fates. Sadly, the lessons of Assessing Aid still go unheeded in Argentina's case--in January major creditors pressed the IMF into allowing Argentina to "defer" (default, effectively) on $6.8 billion of outstanding debt to it, inspite of Buenos Aires's failure to meet IMF conditions. Having staved off complete disaster, Argentinians and their government limp on, waiting for an election to bring deliverance. If it were only so simple.

Thursday, March 20, 2003

Rails of Fancy

In a leader last July about airport expanson in the UK, the Guardian wrote:

Getting people to re-examine how they travel is vital for sustainable development. The case for replacing internal flights with high-speed rail links should be embraced by ministers.

Now another leader in the same paper on Wednesday says:

[T]he size of the bill is simply prohibitive. The north-south price tag is more than 3.5% of the country's output - three times the annual transport budget. Even the 70 miles of Channel Tunnel rail link will cost more than £5bn. We may face such ludicrous sums because the bean counters cannot add up, or because the costs of 220mph trains in Britain, where train travel was invented, are simply too high. Evidence suggests it is the latter.

Now, I like trains as much as anyone, but I am afraid I must concur.

Wednesday, March 19, 2003

Policy of Industry

In today's Guardian, Larry Elliott worries about the fate of British industry:

[T]oday, the hollowing out of British industry continues almost without comment. We are, it seems, living in a post-industrial world where manufacturing has shrivelled in size and importance. The new Britain is based on knowledge-based services and the hi-tech end of manufacturing.

Elliott quotes Cambridge economics professor Bob Rowthorn, who says that "Too much manufacturing capacity has been shed, and the failure to develop a more dynamic manufacturing sector may eventually turn out to have serious consequences for the balance of payments and the overall prosperity of the country".The questions I ask are how much is too much capacity and what is the likelihood of Rowthorn's scenario?

This to me seems to be an example of anchoring--people becoming attached to what they know. The disappearance of manufacturing is assumed to be a problem, when it could merely be a response to changing economic conditions. Similar arguments have been made if several countries for "food security", while the expansion of trade and changing preferences may make the idea of domestic food self-sufficiency superfluous.

The issue of the decline of manufacturing is less about economics than about a particular perspective on economic change; what matters is the degree to which you're willing to accomodate yourself to such change. Elliott would rather not make the transition:

[Industry] wants help in the Budget to stimulate investment; it wants lower interest rates, it wants a cheaper pound to make it worthwhile doing business. It wants an industrial strategy and it wants it now.

Unless Her Majesty's Government is prepared to make some policy reversals (in particular the end of an independent Bank of England) this agenda is a non-starter. Britain has a proud industrial history, but it looks likely to continue to become mostly that--a history.

The Second Gulf War

So, we go to war this week. About time. Not that I am pro war or anti--I'm actually quite ambivalent about the whole thing. I just wish it would get over and done with as soon as possible. That may a callous attitude when lives are at stake, but the war talk has been going on for more than a year, and it was clear months ago where this was going. To have it all over would be a relief, at the very least so that people can all stop arguing about it.

Yes, Bush has been single-minded about this, but that does not make him stupid, as a lot of people are prone to think. I do find it regrettable that he alienated several of his allies in push to war, and he's done a terrible job of winning over public opinion outside of the United States. Does this, of itself, make war a bad thing? Not necessarily, but in the long run I don't know.

An (American) classmate of mine said today that Americans are of two minds when it comes to the world. They either become isolationist and retreat from it, ignoring all that does not affect them, or they're gung-ho, going in all the way. Neither is great, but those are the extremes the world is sometimes faced with. Whicj one do you choose?

Will the project for liberal democracy in Iraq, and the Middle East in general, work? I don't know. It's a very, very long-term project, and I am not sure that America is ready for the responsibility. Now that they're going in, they need to prepare for what it entails. Good luck to them. I hope it works, and that Iraqis, at least, get the freedoms we in the West enjoy, and learn the responsibilites that go with them.

The "New World Order" that existed after the fall of the Berlin Wall in 1989 ebded on September 11, 2001. This is the first war to define what replaces it. Let it be quick, and let it work, for all our sakes.

Saturday, March 15, 2003

Economic Sociology

After this Atlanticblog post on journal editing (editors apparently suffer much abuse, even though they are often the kesy to a successful academic career) read this Vaguely Right post, and the paper it links to, on the attituides of those who have done PhDs in economics in the top US grad schools.

I'm not doing a PhD, nor do I actually want to be an academic economist. (Economic history, on the other hand, is a possibility.) None of what I've just read is encouraging me to think otherwise.

Wednesday, March 12, 2003


Very, very busy offline lately. Posts have been, and will continue to be, light and intermittent for a while.My apologies.

Sunday, March 02, 2003

Boring Choices

Commenting on what he describes as the "boring" subject of Australian fiscal policy, John Quiggin writes:

[I]n the Australian system it is the Commonwealth that collects all the taxes and the States that provide all the services that matter. This 'vertical fiscal imbalance' means that Commonwealth governments have an inbuilt bias towards cutting taxes. The States have an inbuilt bias towards spending money, but since the Commonwealth has the fiscal whip hand, it's Commonwealth biases that matter. This is one structural reason why both taxes and public spending are too low in Australia, compared to what the public would prefer, what economic analysis would imply is desirable and what other developed countries actually do."

The first reason (what the public would prefer) may be valid; after all, I am not an expert on Australian politics. The latter two "structural reasons", however, are both questionable.

What does economic analysis objectively say about the optimum size of taxation and government spending? Granted, a larger role in the economy gives the state greater freedom to influence it through fiscal policy, procurement and the like. It is, however, a legitimate politcal choice that a government choose not to influence the economy that way. In this sense the size of the state remains a politcal decision, not an economic one. States can even choose to give up discretionary fiscal policy; a Business Council of Australia paper four years ago proposed a mechanism for an independent fiscal policy. This may or may not be a good idea, but it's still a choice.

The last point, regarding what happends in other developed countries, is also suspect. One does not have to do what other countries do--the whole debate about war in Iraq makes this clear. Making this point makes it seem that homogenisation of spending levels is good in itself, not because it brings wider benefits. The differential in spending between Ausralia and the rest of the OECD is again a political choice.

Choices about the level of taxes and public spending are fundamentally about what the public would and would not want, and about what political parties would argue for or against. Economists can aid this process, but, ultimately (and sometimes to thir dismay--ask a public choice theorist) the decisions are not up to them. In making these arguments Quiggin decribes more about his preferred choices than what is generally "desireable".

I have already confessed my ignorance regarding Australia, but one could speculate that the taxation and spending were deliberately split up in Australia's constitution to achieve the present-day low-taxation result. Perhaps even Quiggin's first argument can be countered through revealed preference--Australians say they want higher taxation and spending, but keep voting for governments that deliver the opposite. Are any of these arguments right? I don't know.

Sneering at Science

Commenting on a post by John Quiggin, Kevin Drum says this about political attituides to science:

More and more, over the past decade, it strikes me that partisans on both the left and the right have increased their skepticism toward scientific results that clash with their ideology. This is easy to do with the social sciences, of course, since results are almost always statistical in nature and generally deal with wildly complex subjects. This makes them easy to dismiss simply by throwing mud at them and claiming that (a) the methodology was wrong, (b) the investigators were biased, (c) the statistics are suspect, and (d) common sense tells you the results are all wet anyway.

The general attitude here is that anything too complex for the common man to understand can be ignored. What do pointy headed intellectuals know, anyway?

This is an attitude to be avoided. In every field there are fringe elements, and it's undeniable that occasionally they turn out to be right. But it doesn't happen very often, and whether the results support your own beliefs or not, the mainstream of science is far more likely to be right than wrong. Ignore it at your peril.

Very true. This does not mean that all that academics say must be taken seriously, or that they have a monopoly on the truth; the knowledge, however, that science brings to policy should not be dismissed in pursuit of simple ideological purity.

A Cotillion for Eggheads?

I'm not a PhD Student (I'm doing half of an MSc in Economics at the moment) but this essay on graduate school is food for thought. (via Newmark's Door.)


Last week it was sickness; this week it was utter exaustion. I also had (and still have) a lot of macro reading to do. Sorry.