Month: May 2007

Does Foreign Ownership of U.S. Debt make us Vulnerable?

I would like to thank the hosts of Marginal Revolution for giving me the opportunity to answer questions about my book “The Price of Liberty: Paying for America’s Wars” and for allowing me to enter into a dialogue with your contributors on the issues I have raised in the book.

If you have not had the opportunity to see it, I also encourage you to read an Outlook piece I did for the Washington Post on May 6. It contains some of the views contained in my book. The Post has been kind enough to allow us to circulate this piece.

In view of the many very interesting postings on Marginal Revolution about international financial matters, I thought it would be useful to focus on one particular aspect of US strategic vulnerability — the growing risk that in the event of a major catastrophe in the US — from a major new act of terrorism, another massive hurricane, or a pandemic — the foreign capital that we have become used to receiving from the rest of the world, to the tune of $700 to 800 billion annually on a net basis at relatively low cost, will not be available in abundant amounts.

Alexander Hamilton called the debt the nation had accumulated during the Revolution the “price of liberty” and insisted that it be faithfully repaid, especially to foreign lenders, whose financial support was critical to the success of the Revolution. He recognized that were there to be another war foreign funds would also be critical to American success — so financial strength, which he took to mean sound finances and robust international creditworthiness, was important to future military strength.

The same is true today. If another major terrorist attack were to take place the budget deficit will increase dramatically as revenues drop due to economic weakness  and the government has to bear the cost of recovery and retaliation. Foreigners would then be reluctant to buy American financial assets or will demand a higher risk premium — i.e. higher interest rates — to do so. In either case there would be a major financial disruption harming an already weakened economy. It is worth noting the contrast between today and 9/11; in 2001 the US had had four years of surpluses as opposed to four years of deficits, and then we were only half as dependent on foreign capital as we are today. Both differences increase our vulnerability — and bigger imbalances in the next decade will add to that vulnerability.

This is a concern I have. I would be interested in whether others share it. Do you believe that heavy and growing dependence of foreign capital constitutes a strategic vulnerability in the event of a catastrophic attack. And if so what should be do to reduce this vulnerability?

I look forward to a dialogue on this and related subjects during my blog tour this week and thank you for your willingness to provide your thoughts.

Bob Hormats, Author,
“The Price of Liberty: Paying for America’s Wars” (Times Books)

How to improve your attitude about money

Do you have any credit cards?

I don’t have a debit card because my accountants worry too much about the amount of money I would withdraw, but I do have a Royal Bank of Scotland Mastercard. I’ve had only one credit card for the past 10 years, mainly to keep track of my spending.

I got my fingers really burnt once with an Amex black card. I was about 24, and for some reason I stopped taking taxis and just used helicopters whenever I could. I paid for such things using the Amex, but I didn’t realise that you had to pay off the balance every month. I was incurring huge amounts of interest – I had bills of about £47,000 for a couple of months.

It wasn’t my fault, though. I was told I could use the card to buy anything, from a window to an elephant, so I did. I wasn’t in very good shape at that age. I got into a lot of debt and eventually ended up in rehab aged about 27…

Are you a saver or a spender?

Spender definitely – I’m Spenderella. I’ll buy almost anything. I love art, especially contemporary art. I recently bought a Federico Herrera, which cost about £10,000. I also bought a baby grand piano about a year or so ago, which I play for a couple of hours every day. It cost just over £10,000. It was a nightmare getting it into the house – we eventually found a 100ft crane to do it. I remember people saying they could see a Steinway in the air.

To run my house also costs a bomb. I have about seven people working for me today – decorators, gardeners and cleaners – and about 15 staff in total. When I was in the Fame Academy house earlier this year, I spent a good £35,000 redecorating and repairing my own home…

Do you invest in shares?

I have lots but I don’t have a clue about them. My accountants and Kleinwort Benson, my investment bank, deal with my money but I’m not sure who does what. I think most of my investments are in safe funds though. I can’t say exactly how much I’ve invested but it’s probably a few million.

Do you have a pension or other retirement plan?

I’ve got no idea, but I don’t worry about it really – I’m told it’s all been mapped out.

Do you believe pensions are a good thing?

I hate the word pension. It just annoys me because my philosophy is to live fast and die young…

What aspect of our taxation system would you change?

I don’t like paying 40%. I’d get rid of that. I’d also get rid of parking and congestion charges – in fact, I’d get rid of Ken Livingstone altogether. I’d put him in a lovely health farm somewhere…

What is your financial priority?

To maintain my lifestyle and my health. I want an easy life so my lifestyle expenditure is huge. It includes a concierge service which keeps my life going smoothly. I also have someone come in to reorganise my wardrobe every two months – that costs £600.

I want things to run well and without any stress – a typical capricorn. I deeply believe in a certain order in the universe. I have a moon map and my dad bought me a telescope for my last birthday.

Do you have a money weakness?

Clothes, handbags and shoes. I have hundreds of them. My favourite handbag is a new limited edition Union Jack Chanel handbag, which cost £16,000. The other designer I’m fond of is Azzedine Alaia, who is good for elegant simple clothes. I always buy a few pieces of the collection when they come out. Six pieces could easily cost about £15,000. The clothes last a lifetime, though.

Now here is the clincher:

What is the most important lesson you have learnt about money?

Losing my money was perhaps the best thing that happened to me. It taught me to respect it. Just as Santa Claus isn’t real, I always thought money grew on trees – it doesn’t.

Guest Blogger: Bob Hormats

We are very pleased to have Bob Hormats guest blogging at MR this week.  Bob is currently vice chairman of Goldman Sachs (International).  Bob has extensive experience in finance and politics having served in the State
Department as assistant secretary of state for economic and business
affairs, ambassador and deputy U.S. trade representative, and senior deputy assistant secretary for economic and
business affairs, among other positions.

Bob’s latest book is The Price of Liberty: Paying for America’s Wars, a superb history of wartime fiscal policy and a warning that entitlement programs and war spending are pushing America towards fiscal catastrophe

Welcome Bob!

Would immortals be libertarian?

Arnold Kling posed the question.  Let’s go further and say these people reprogram themselves to behave like true immortals, rather than sticking with their inherited and earlier evolved biological intuitions. 

If we assume monotonicity (and why shouldn’t we?), we can draw inferences from societies with short life expectancies.  They are extremely superstitious, willing to entertain tyranny, and hardly libertarian.  Try teaching Henry Hazlitt in the Congo.  More generally, pending death makes us think of honor, patriotism, and in-group solidarity

If longer lives move us away from such feelings, yes some immortals would be quite libertarian.  That is one direction a tolerant and secular morality can take, but that is hardly the end of the story.  Many more immortals would become non-theistic, rational constructivist, cosmopolitan Benthamite modern liberals, much like Matt Yglesias or Brad DeLong.  I believe the elasticity of ideological adjustment is greater in this direction.  Those views, and the libertarians, would grow in popularity at the expense of the middle, but I doubt if the libertarians would become a majority or even a plurality.

In other words, a society of immortals would become more like…uh…the blogosphere.

Most of all, I would expect more libertarian attitudes toward social issues.  Immortals are going to want to try everything, and why not? 

Another factor is the declining scarcity of time.  I recall, as a kid, seeing a made-for-TV movie about immortals.  None of them had plans or homes.  They all lived under a bridge, with the bums, and behaved wantonly.  They wanted to behave without social constraint, and that meant shedding their reputations and in essence going on the lam.  They figured there was always more time to shape up, slip back into a reputation, and run a major corporation.  But how did they vote?

Is Hayek less important today?

Nicolai Foss writes:

I have the feeling that the thought of Friedrich von Hayek is receiving less and less attention…among economists and other social scientists Hayek is increasingly attaining the status of a classical writer in the sense of Schumpeter – namely somebody who is cited and invoked, but mainly for ceremonial/ritualistic reasons and more often in footnotes than in the main text. In contrast, little use is made of his work for purposes of actual theory development.

The "Hayek Industry" continues, but it feels less focal to the profession.  It is also less fashionable for outsiders to respond to Hayek, as did Lucas and Stiglitz.  I attribute this to two factors.  First the shift toward empirical work makes Hayek less relevant to many mainstream debates.  Hayek’s work had implications for the work of Kenneth Arrow, but not for how abortion legalization affects the crime rate.  Furthermore central planning and business cycles — two of Hayek’s main areas — are no longer such hot topics.  Second is the blogosphere.  Many of Hayek’s insights are deep and relatively philosophical; it is hard to put them into a snappy blog post.  For better or worse, it is easier for a market-oriented blogger to follow Becker, Alchian, or even Mises than Hayek.  I also believe that the blogosphere will, in the long run, favor the thought of Tullock over Buchanan, for similar reasons.

By the way, here is Nicolai on economists’ autographs.

German Postwar Artists

The Sunday NY Times has a big article on Sigmar Polke, who is being featured at the upcoming Venice Biennale art show. His new work is intriguing and uses exotic materials.


However, I’ve always thought that Polke comes out second best when compared (as he often is) to Gerhard Richter, who is, to my mind, the greatest living painter.

Anselm Keifer and Joseph Beuys are the quintessential artists who reflect the aftereffects of the war on modern Germany. Keifer’s work is so elegiac and decayed and somber and sad, while Bueys (to me) is about the frailty and ridiculousness of the human body.

One thing I really miss about living in the DC area is getting to see works like this Kiefer (here’s another) and these Richters (#1, #2) for FREE.


Will we one day see a Council of Economic Advisors able to veto legislation for being uneconomic?  It seems unlikely but do not underestimate the influence of my friend Bryan Caplan whose The Myth of the Rational Voter flirts with putting limits on the vote-franchise and yet still manages to get a favorable review in the New York Times Magazine!

Nor is that all.  An even more powerful demonstration of the spread of Caplanianism can be found here.

Spread the word – buy The Myth of the Rational Voter and go forth and multiply.

Gone With the Wind: The Perfect Book?

It is too perfect.  It is light, compact, has decent-sized print, and presumably, even if the story is not great, it would hold my attention on a long plane trip.

That is why I have never read it.  I am saving it up for the worst plane trip of my life.  As long as I have never read this book, I feel protected against the prospect of that plane trip.

I’ve brought the book on this trip, but I’m not sure I’ll crack the first page.  Its liquidity premium is simply too high.

Magnus Carlsen


In the prestigious Linares chess tournament Carlsen met the following top-rated players: Veselin Topalov, Viswanathan Anand, Peter Svidler, Alexander Morozevich, Levon Aronian, Peter Leko, and Vassily Ivanchuk (replacing Teimour Radjabov). With the significantly lowest ELO rating, he achieved a 2nd place (on tiebreaks) with 7.5 points after 4 wins, 7 draws and 3 losses, and an ELO performance of 2778.

Magnus, born in Norway November 30, 1990, may be the greatest chess prodigy of all time.  He is arguably ahead of the pace of either Fischer or Kasparov.

This can’t be right, or location theory upended

The flight from Oslo airport to Bergen airport costs less than the cab ride from Oslo airport to downtown Oslo.  Blame the taxi cartel if you wish (is there one in Norway?), but relative to food and other prices that cab ride seemed like a bargain.  Fifty minutes in the cab cost only three or so kung pao chickens with water.  Imagine how location theory should look when it is cheapest to travel far and costliest to make small moves.  I am reminded of Venice, where getting your shopping cart up through the steps to cross a canal or two is sometimes harder than taking a train or boat out of the place altogether.

Are irrational voters stubborn voters?

Bryan Caplan writes:

Venezuelan policy was bad in the past for the same reason it’s really bad now: In Venezuela, bad policy is good politics because it’s popular.

We all know that Bryan blames bad policy on irrational voters,  I sometimes worry he is too quickly identifying irrationality with stubbornness.  An irrational voter might be very easy manipulated by a politician, just as many Venezuelan voters have had their incipient populism mobilized by the rhetoric of Chavez.  Were so many Cubans communist before Castro?  Of course to the extent irrationality and its content are endogenous, we must move away from a simple "blame the voters" story.

In the past Bryan has blogged that many voters are too stupid or too irrational to respond even to propaganda.  But political rhetoric sometimes works on some of the people and perhaps that is enough.  (Technical point: I doubt if the Caplan-postulated irrationality is evenly distributed along a Downsian spectrum in such a way to support quasi-dictatorial rule by the median voter.)  Irrationality is likely to make the political spectrum sufficiently complex and multi-dimensional as to have some easily manipulated levers.  In that case electoral competition is not aiming at a simple mid-point of dominant public opinion.  Social choice theory then tells us that even a small amount of preference manipulation or agenda-setting can have a huge effect on final outcomes.

Under one plausible view (not Bryan’s as far as I know), politicians have good fundraising and coalition-organizing reasons to persuade voters to accept an essentially one-dimensional political scale.  Mankind’s biological tendencies toward prejudicial alliances, combined with the forces of spontaneous order, support the same.  Political irrationality results, much as Caplan suggests, but the apparently-in-charge voters are as much a shadow play as a unique cause or fulcrum. 

Tristan Tzara!

Addendum: Here is the critical Christopher Hayes review of Bryan’s book.

Libertarian paternalism

There is a new Econoblog, Mario Rizzo vs. Richard Thaler.  Here is Mario in closing:

Richard wants to use the word "libertarian" to differentiate his
paternalism from the traditional variants.  Yet he uses the word in a
fuzzy way.  He wants to define libertarian along a continuous variable
— the cost of exercising the exit option.  However, libertarianism, as
every libertarian understands it, uses a bright-line test — who
imposes the cost?

The phrase "libertarian paternalism" is misleading.  It isn’t libertarian, but I don’t mean this point in the usual "rage against governmental coercion" sort of way.  A more consistent Thaler would simply emphasize that both paternalism and coercion are often ill-defined concepts or perhaps matters of degree.  Thaler wants to shock us by rejecting non-paternalism but when pressed he denies the underlying distinctions behind his big claim in the first place.  In other words, the whole debate should be focused on specific proposals, there is less to the philosophy than meets the eye. 

Fun with Central Bankers

1. Alan Greenspan certainly has been heard from a lot since his "retirement". Apparently current club members don’t like it as Bank of England Governor Mervyn King put a brutal slam on Greenie last week (as the article details though, Alan is laughing all the way to the bank). I approve of anything that makes central banking more like professional wrestling.

2. Guillermo Ortiz (or the Alan Greenspan of Mexico) is closing in on 9 years as Head of Mexico’s central bank. He inherited an inflation rate of 19%, which was steadily reduced.  It is around 4% today and much less volatile than in the past. Good job, Guillermo!

3. Central Banking, Japanese style.  With the country beset and bedeviled by deflation and stagnant growth, the BOJ stuck with a virtually zero interest rate for almost 6 years before getting frisky and raising rates to .25% last July. By all accounts it was so much fun they wanted to do it again the next month but were heavily pressured by the Government to hold off. This winter they raised rates again to .5%. Now, prices and wages have started falling again in Japan, but the BOJ boys can at least hold their heads up high at the next club meeting.

4. In the US the FOMC now has an unprecedented level of academic economic expertise. Start with Chairman Bernanke, who is ranked 107 in this list of top 1000 economists by publications from 1990-2000, then add longtime MR friend Randall Kroszner (ranked 363) and Fredrick Mishkin (ranked 93). In addition, St. Louis Fed President William Poole is a voting member this year. Poole is among the top ranked economists by publications from 1969 – 2000, as is alternate member Charles Plosser, ex-editor of the Journal of Monetary Economics and President of the Philadelphia Fed (Plosser is also ranked very high on citations from 1975 – 2000). Whether this is a good or bad thing remains to be seen!

5. Finally, for those hoping that new president Sarkozy will lead real reform in France, it turns out that he has met the enemy and it is the ECB!! This doesn’t seem good to me, though after taking a lot of hits Sarkozy has apparently backed down at bit.

Tyler v. Alex: Guide to the Perplexed

Lately I’ve noticed that people are confusing posts from Tyler with posts from me.  Here is a simple guide for the perplexed:

  • References to a cymbalist/Dadaist/expressionist that you have never heard of.  Tyler.
  • References to Dog/Rush/Hayek (Salma).  Alex
  • A simple question with ten answers.  Tyler.
  • A complex question with one answer.  Alex.
  • You have no idea what the post means.  Tyler.
  • You know exactly what the post means and it makes you mad as hell.  Alex.