The trade deficit and the dollar
America has had persisting trade deficits, so some economists think the dollar is due for a big plunge. The magazine The Economist cites some commentators as suggesting a 40 percent decline against the Euro. Read the commentary of Brad DeLong, who resists making such a prediction himself. See Brad’s longer and more detailed discussion, where he raises the possibility that capital inflow into the U.S. will slow down and the dollar will plummet. He tells us that the whole process has gone on far longer than he would have expected, but again he stops short of offering his own prediction. He wonders when foreign investors will start worrying about the risk of a huge dollar depreciation.
I am more optimistic than the doomsayers (N.B.: I do not read Brad as belonging to this group, though perhaps he is flirting with the idea of joining), in part because I think that strong growth and productivity, which currently appear to be in the cards, can avoid or postpone a “day of reckoning” of this kind. America is simply a good place to invest, and will remain so for the foreseeable future. The dollar did decline by over 50 percent in the 1980s, against major currencies, but at that time high dollar values were more obviously a speculative bubble in the first place.
The cost of TV advertisements
What does advertising time cost for various TV shows? Read Daniel Davies who offers the relevant link. For the data at hand, Friends sells ad time at the highest rate. The Simpsons is more expensive than Monday Night Football.
Monkey see, monkey do?
Monkeys appear to have an innate sense of when they are being treated unfairly, read here. Capuchin monkeys will refuse beneficial exchanges, if they see another monkey getting a better deal. Sound familiar? Similar results are found in the literature on experimental economics for humans, as Robert Frank notes at the link.
Here is one summary from The Washington Times, the only paper I can find in today’s Virginia power blackout, they don’t yet have the link on-line:
When both monkeys were given a cucumber slice after handing over the token, they completed the trade 95 percent of the time.
But when one was given the tastier grape for the same amount of work, the rate of cooperation from the other monkey fell to 60 percent…The refusal to make the exchange increased as the experiment continued…The scientists concluded that capuchins apparently measure rewards in relative terms…the tropical forest-dwelling capuchins were chosen for the experiment because they often share food.
One commentator on the study, a Charles Janson of SUNY, suggests that the behavior of the monkeys might have been learned in captivity (again, cited in The Washington Times).
Storming the MarginalRevolution
We at MarginalRevolution are committed to providing regular fresh content on a daily basis. That being said, we live in Northern Virginia, a big storm is coming, and Governor Mark Warner says we might lose electrical power for a while. I don’t expect blogging problems, but on the off-chance that you don’t hear from us for a short while, keep faith, we will be back as soon as conditions permit.
How state government works
“Average salary of a state legislator last year : $30,300
Average amount spent lobbying one : $130,000″
From Harper’s Index.
Advice for budding bloggers
Here is more on how blogs succeed, or fail, from Daniel Drezner. Focus on your audience, he says, rather than obsessing on getting links from the popular mega-blogs, such as Instapundit. Don’t neglect the link from Electric Venom, she says the world of blogging is a bit like high school, it has its bullies, people who go through friends like laundry, and so on. Her conclusion: don’t do it if you don’t enjoy it. John Scalzi tells us that the future belongs to the amateur blogger (N.B.: he is paid), and that the mega-bloggers have to focus on boring topics, such as Howard Dean.
General Wesley Clark and progressive taxation
Was America founded on a principle of progressive taxation? General Wesley Clark told us “yes.” My friend and co-blogger Eugene Volokh relates some political and economic history and offers a qualified “no.”
Are cell phones killing off ghost stories?
Could ghost sightings be declining with the advent of cell phones? Will haunted houses lose their luster? The link is from the ever-excellent www.cronaca.com.
I can think of at least two explanations for this possible phenomenon. First, perhaps people with cell phones feel safer and hallucinate less. Second, perhaps it is harder to lie/self-delude right on the spot than afterwards, imagine telling your friend there is a ghost right next to you now. What if your friend asks to speak to it or hear it groaning? I also would like more data, how about alien abduction stories, noting that spaceships are presumably “dead zones.” My calling plan does not mention them…
Frankenfoods and the environment
Can genetically-modified foods help us clean up the environment? Jonathan Rauch says yes. We will need fewer herbicides, less irrigation, and we will have less need to farm on environmentally sensitive lands. By limitating habitat destruction we will support biodiversity.
Molecular biologist Don Doering goes further:
[He] envisions transgenic crops designed specifically to solve environmental problems: crops that might fertilize the soil, crops that could clean water, crops tailored to remedy the ecological problems of specific places. “Suddenly you might find yourself with a virtually chemical-free agriculture, where your cropland itself is filtering the water, it’s protecting the watershed, it’s providing habitat,” Doering told me. “There is still so little investment in what I call design-for-environment.”
Rauch goes out on a limb:
I hereby hazard a prediction. In ten years or less, most American environmentalists (European ones are more dogmatic) will regard genetic modification as one of their most powerful tools. In only the past ten years or so, after all, environmentalists have reversed field and embraced market mechanisms–tradable emissions permits and the like–as useful in the fight against pollution. The environmental logic of biotechnology is, if anything, even more compelling. The potential upside of genetic modification is simply too large to ignore–and therefore environmentalists will not ignore it. Biotechnology will transform agriculture, and in doing so will transform American environmentalism.
The Economics of Child Labor
No, not paper routes or roadside car washes, this is about the tough stuff, like Moroccan children in carpet factories. 186 million children, between the ages of 5 and 14, perform illegal child labor. 111 million of these jobs involve hazardous work. Kaushik Basu offers his analysis and observations in the latest issue of Scientific American.
Obviously wealth is the best cure for hazardous and oppressive child labor. By the latter part of the 19th century, child labor was declining in the richer nations.
Basu notes that many anti-child labor campaigns backfire. A 1990s boycott of Nepalese carpets, made with child labor, led many of those children to become reemployed as prostitutes. Boycotts are ineffective when the available alternatives are worse. Anti-child labor regulations can backfire for another reason as well. Many children work simply to help their families achieve a threshold level of income, such as subsistence. The lower the wage that the children earn (think of the regulations as lowering the net returns from child labor), the more they will need to work to reach that threshold.
We learn also that history matters. Adults who worked as children are more likely to send their children out to work, even after adjusting for income.
Basu is skeptical of many interventions but he does not recommend laissez-faire. He argues that there are “multiple equilibria,” and that government can move an economy, in the right stage of development, from one equilibrium to another. The more children that work, the lower the overall level of wages, and the lower the stigma from sending one’s child out to work. Basu argues you can “tip” an economy into considerably less child labor. If you can cut out a big chunk of child labor, wages rise, making child labor for many other families less necessary. The stigma attached to child labor rises as well, and fewer people will send their children out to work. Once an economy is moving away from child labor, the process can happen quite rapidly.
Sue me, sue you blues
Now it is my turn to be outraged. Co-blogger Alex was upset yesterday by a class action lawsuit against his tiremaker, $19 million for the lawyers, nothing for the relevant set of plaintiffs (who weren’t even injured, should that make you feel better or worse about the whole thing? Worse, I say.)
Today I received a notice of a class action suit concerning Western Union, and of a proposed settlement. I frequently send money to my Mexican painter friends, usually using Western Union.
Why the class action suit?
…the Defendants [made] misrepresentations about or otherwise failing to disclose to customers the fact that they received a more favorable exchange rate for converting U.S. dollars to foreign currency and foreign currency to U.S. dollars than they provided to their customers.
Imagine that, a middleman buying and selling at different prices! It feels like something out of Atlas Shrugged.
The stigma of bankruptcy
According to one estimate, between 15 and 17 percent of all households in the United States could benefit financially from filing bankruptcy. Only about one-tenth of them do so. I learned this from The Two-Income Trap (reviewed by me immediately below). The book draws on the research of Michelle J. White, here is her on-line summary of her work. This also suggests that current bankruptcy law is unsustainable in the long run, here is one of many calls for reform.
Why does the middle class feel so poor?
I’ve just read The Two-Income Trap: Why Middle Class Mothers & Fathers are Going Broke, by Elizabeth Warren and Amelia Warren Tyagi. This book has received a good deal of popular press.
Having children is a big part of the financial burden, Americans have been spending less on appliances, food, and clothing. Housing prices are the real killer, especially if the family has children. Good schools and safety are becoming increasingly hard to buy. In real terms, families with children paid 79 percent more for housing, comparing 1983 to 1998.
Having just overpaid for a house, to put my stepdaughter into a good school district, I can sympathize with this argument. But I don’t understand the core logic as a more general claim. The authors claim that this financial predicament is affecting very large numbers of middle class Americans. At the same time we are told that good schools are increasingly hard to come by. Which is it? If there are a small number of homes with good schools, not too many people can be overpaying. If there are a large number of such homes, good schools cannot be that scarce, and the bidding war should not be so fierce.
I nonetheless recommend the book to stimulate your thoughts. It also argues for anti-usury laws, claiming that debt-ridden families will make rash decisions and overborrow at excess rates. You might recall Adam Smith made a similar claim over two centuries ago.
Iraq and the Marshall Plan
According to some estimates, we will spend $20 billion on Iraqi infrastructure over the next year, half of Iraqi gdp (don’t take Iraqi gdp statistics too seriously!). Andrew Sullivan has been asking how our assistance to Iraq compares to the Marshall Plan of postwar Europe. Here are some answers, drawn from a 1985 piece I wrote “The Marshall Plan: Myths and Realities,” click here for an on-line summary, the piece appeared in Doug Bandow’s U.S. Aid to the Developing World.
The Marshall Plan did not ever exceed 5 percent of the gross national product of the recipient nations. In the case of Germany, note that we were taking more out of Germany, in the forms of reparations and occupation cost reimbursements (11 to 15 percent of West German gnp), than we were ever putting in. Then throughout the mid-1950s, Bonn repaid half of the aid it had received. Note that German economic recovery followed from liberalization and reforms, which predated Marshall Plan aid.
In 1949-50, our Marshall Plan aid to France was roughly equivalent to French military expenditures abroad in Indochina and North Africa.
Of the European nations, arguably Belgium recovered from World War II most rapidly, and this happened before Marshall Plan aid kicked in.
At the end of World War II, the Austrian economy was one of the most desperate in Europe. Austria received high per capita aid sums, but the economy stagnated. Austria later recovered, when it improved its monetary and fiscal policies. Marshall Plan supporter Franz Nemschak wrote: “The radical cuts in foreign aid in the last year of the Marshall Plan and the stabilization tendencies in the world economy forced Austria to make a basic change in economic policy.” Greece received high per capita aid as well, but had a poor recovery.
The lesson for Iraq?: Simply spending money won’t get us there. See these Rand Corporation figures, showing that per capita aid does not correlate obviously with the eventual success of a reconstruction. The key question is whether the Iraqis can build healthy institutions. Walking away is not the answer, but don’t feel good just because you see more money being spent.
Addendum: I have scanned the whole essay and put it on-line.
The costliest hurricanes
Andrew of 1992 was by far the costliest hurricane in U.S. history, estimated at $26.5 billion in damages, here is a list of the top ten. If you want an older list of the top thirty, adjusted to 1996 dollars, click here.