Category: Current Affairs

Why do Asian central banks buy so many dollars?

Why exactly are the Japanese and Chinese foreign banks buying so many U.S. dollar-denominated securities? And if such purchases are so important in keeping our economy afloat, ought we not try to figure out whether they are likely to stop?

Foreign central banks are on a spending spree. As recently as 2001, central banks bought just $10.7 billion in Treasury securities on a net basis. But their net purchases have risen dramatically: to $43.1 billion in 2002 and $128.5 billion in 2003.

With each passing quarter, foreigners have become more significant consumers of U.S. government debt. In 2002, non-Americans accounted for about half of net purchases of Treasury securities. But in the first quarter of 2004 they accounted for 150 percent! That is–the rest of the world bought a net $679.8 billion in Treasury securities while U.S. brokers and dealers sold a net $202.7 billion.

I can think of a few theories:

1. They think dollars are a good investment. Well, at one level this must be true tautologically. But why do those two central banks have such a special attachment to this investment vehicle?

2. They think they will receive geopolitical favors in return. I view this as a relatively optimistic scenario. It suggests, among other things, that the game can continue for a long time. Mutual gains from trade have a strong attraction. It also would mean that American “imperialism” has a lower economic cost than is usually believed. It leads countries to want to buy our Treasury securities as a favor to us. On the darker side, it means that our fiscal irresponsibility has a higher cost than is usually believed. It forces us to play numerous games on the international stage.

3. China and Japan want to keep the value of the yuan and yen low, as part of a mercantilist export-promotion strategy. I take this to be the standard wisdom. I”m certainly not dismissing it, but I do have a few questions. Aren’t there easier ways to subsidize exports? Why are exporters the dominant interest group here? Isn’t a country wealthier when its currency is stronger in real terms?

4. They are building up an endowment, for the same mix of self-evident and obscure reasons that universities do. It is a symbol of status, stability, and commitment to the long haul. It helps them be taken seriously as countries.

5. They have a stake in American prosperity. They’re willing to hold an inferior portfolio if it keeps the U.S. — obviously a major market — fat, healthy and addicted to imports.

6. They are incredibly risk-averse. What safer investment could you find?

7. They are just plain, flat-out stupid. I call this the uh-oh scenario. They won’t stay stupid forever.

I suspect there is truth in all seven hypotheses.

This Slate article offers some useful background and the above quotation. And here is some (numerically overstated) good news:

The day may come when the Chinese government stops being the lender of last resort to America, but if it does stop, there are a billion or so Chinese citizens ready to take up the cause. Given the legal right to do so, they would yank deposits out of the Chinese banking system and invest in U.S. securities.

Addendum: If I look at my own portfolio, I am doing much the same thing. I believe that most assets are overpriced and I don’t know where else to put my money.

Shorter patent lives mean shorter lives

People talk about the high price of pharmaceuticals as if high prices lasted forever. In fact, within a year of the expiration of a pharmaceutical’s patents, prices will typically fall by more than 50 percent as generic producers enter the market. Patents nominally last for 20 years but the effective patent life is much lower because patents are typically granted years before a product has cleared FDA review. The effective patent life of the average new pharmaceutical in the 1990s averaged just 12 years (see here for some references). Competition from competing but non-infringing pharmaceuticals makes the de facto patent life even shorter.

Thus, my response to the seniors and others clamoring for lower pharmaceutical prices is to be more patient. Does this sound harsh? Consider this, the people who are demanding price controls are not simply asking for lower drug prices they are asking for lower prices on the newest drugs. Lower prices for drugs introduced 15 years ago are already here. Remember, those drugs were recently considered the very best modern medicine has to offer, so it’s not like I am expecting those who can’t afford the newer medicines to go back to using leeches.

Price controls or other such plans such as reimportation may bring cheaper pharmaceuticals for a short period but we will then have a much smaller supply of new drugs forever. Only the shortsighted would buy that prescription.

Should we worry about Mexican remittances?

Our trade deficit has reached a record high, and Mexicans are sending billions of dollars home to their poorer relatives. Is this a problem?

Most importantly, poverty in Mexico declines. Many recipients earn no more than a dollar or two a day. As for America, sending the funds does not damage the U.S. economy. For purposes of comparison, let’s say that Mexicans came to this country, worked to earn money, and then burned the dollar bills. Would this “trade deficit” hurt us? No. Wiring funds to Mexico has similar effects. If the dollars don’t come back, it is as if they have been burned. We have earned seigniorage by trading paper for goods. If the dollars do come back, someone is investing in the U.S. or buying exports.

The level of remittances does mean that we should be less worried about the trade deficit. Think of the remittance as redistributing wealth within Mexico, but without costing the United States real resources.

To some extent our trade deficit may reflect an inadequately low rate of saving. But wiring money abroad is not the central cause of low savings. First, migrant workers often contribute to our capital stock. Second, sending the money to Mexico is probably a substitute for spending it (most senders of remittances are themselves relatively poor, and thus have lower savings rates). So when these people “burn” their money by sending it abroad, they are lowering the real quantity of American resources devoted to consumption. Let’s not confuse sending money with sending real resources.

Read Econopundit for a more negative spin. Randall Parker inclines negatively on remittances as well. I often agree with Randall, but on this issue I am ready to send away…

The Poles praise Ronald Reagan

The passing of Ronald Reagan was a major event in Poland. It was prominent in the newspapers and in conversation. Lech Walesa recently wrote:

I often wondered why Ronald Reagan did this, taking the risks he did, in supporting us at Solidarity, as well as dissident movements in other countries behind the Iron Curtain, while pushing a defense buildup that pushed the Soviet economy over the brink. Let’s remember that it was a time of recession in the U.S. and a time when the American public was more interested in their own domestic affairs. It took a leader with a vision to convince them that there are greater things worth fighting for. Did he seek any profit in such a policy? Though our freedom movements were in line with the foreign policy of the United States, I doubt it.

Noble sentiments, and I agree. Note that Reagan was far more popular in Poland than here in the United States. Read some horrific criticisms of Reagan.

The irony is that Lech Walesa, author of these words, remains far more popular in the United States than in his native Poland. Taxi drivers told us that the Poles “hated” Walesa, even though we regard him as a hero for world freedom.

Walesa ran for office, and was elected President of Poland in 1990 with 74 percent of the vote. He lost narrowly when he ran again in 1995 (Reagan at least beat Mondale!). When Walesa ran for President in 2000, he received less than one percent of the vote. (Reagan, in contrast, if he could run again today, would win in a landslide.)

Walesa spoke too plainly, promised too much, and maintained unpopular prohibitions against abortion. But when the sad day comes that Walesa passes away, we Americans will stand ready with our unstinting praise.

Thanks to co-blogger Alex for the pointer.

Rebellion against newspaper registration?

If you read blogs, you sometimes get frustrated when the links lead you to newspaper registration. Even if you don’t have to subscribe or pay money, you are asked to provide personal information, such as age, gender, zip code, and perhaps even hobbies. Newspapers have moved increasingly to registration over the last year, read more here.

Not surprisingly, consumers are striking back. Many write in false names, ages, and email addresses. allows readers to bypass registration procedures for most of the major paper sites. In essence they have already registered for you. Just insert the web address you want and you arrive there immediately.

I’m not endorsing this practice, and I haven’t a clue about its legal status. The economics are easier to predict. To the extent that people can bypass registration, newspapers will cut back on their free web offerings. So, whether you like it or not, you are contributing to a public good when you register dutifully.

We bloggers stand on the other side of this equation. I subscribe to USA Today, and link to it frequently, in part because of its on-line archive. It requires no registration and the archives remain available, free of charge. Unfortunately I am not the marginal consumer in this market.

I’ve wondered why hackers don’t reproduce the major newspaper sites, such as New York Times, or The Wall Street Journal, and offer them to the public free of charge. Why can’t you use Kazaa to read these papers, whether or not you have paid for a subscription?

Has Bush cut back government bureaucracy?

The following table lists how many of the major agencies or departments had their budgets cut in a given Presidential term:

President and Term, Number of Budget Cuts [see the last link in this post for further explanation of the data. I’ve done minor editing and added the boldface]

Johnson, 4 out 15
Nixon, 3 out 15
Carter, 5 out 15
Reagan 1, 8 out 15
Reagan 2, 10 out 15
Bush, George H., 2 out 15
Clinton 1, 9 out 15
Clinton 2, 0 out 15
Bush, George W., 0 out 15

Obviously Reagan II made real efforts in this direction. George W. comes in tied for last with Clinton II. This is a highly imperfect proxy, but when you are 0 for 15 it is hard to blame measurement error alone.

Here is one unnoticed achievement of Ronald Reagan:

President Reagan is the only president to have cut the budget of the Department of Housing and Urban Development in one of his terms (a total of 40.1 percent during his second term).

Here is the full and sad story on Bush’s fiscal policy for the agencies and departments. Here are the underlying data.


Zimbabwe continues its short march into barbarism. Here’s is a quote from land minister John Nkomo – sadly reminiscient of early twentieth century history.

Ultimately, all land shall be resettled as state property. It will now be the state which will enable the utilization of the land for national prosperity.

Of course, he was quoted in the government controlled newspaper. And get this, it’s not good enough that the government take the land:

Mr. Nkomo urged farmers to volunteer their land to the state rather than wait for an order, saying, “The state should not be made to waste time and money on acquisitions.”

The people of Zimbabwe are starving because of land “redistribution” could a better example of Robert Lucas’s dictum be found?

Immigration and 9/11

One of the few bright notes since 9/11 is that there has been no backlash against immigrants. Consider, for example, that there were 25 percent more immigrants to the United States in 2002 than in 2000 (see Table 1). Nor has there been an immigration backlash against Muslims – there were 19 percent more immigrants, for example, from Iran in 2002 than 2000 (see Table 2). Even more surprising, despite heightened examination, 20 percent fewer aliens were expelled from the United States in 2002 than in 2000 (see Table 43).

Polish memories

1. Hearing Poles say they love America, but America does not love them.

2. Hearing a Krakow taxi driver praise Ronald Reagan.

3. Staying in a “Jewish hotel” that can’t get kosher food right and hires Poles to stage Klezmer music for German tourists.

4. Seeing the Basilica in Krakow, arguably the most beautiful church in Europe. Which is saying something. Here are some images, but they don’t come close to the real thing.

5. Visiting Auschwitz and Birkenau. Words fail, but everyone should make this trip if they can.

Ronald Reagan the Libertarian

Here’s a wonderful quote from Reagan in 1975 from Reason magazine.

If you analyze it I believe the very heart and soul of conservatism is libertarianism. I think conservatism is really a misnomer just as liberalism is a misnomer for the liberals–if we were back in the days of the Revolution, so-called conservatives today would be the Liberals and the liberals would be the Tories. The basis of conservatism is a desire for less government interference or less centralized authority or more individual freedom and this is a pretty general description also of what libertarianism is.

Now, I can’t say that I will agree with all the things that the present group who call themselves Libertarians in the sense of a party say, because I think that like in any political movement there are shades, and there are libertarians who are almost over at the point of wanting no government at all or anarchy. I believe there are legitimate government functions. There is a legitimate need in an orderly society for some government to maintain freedom or we will have tyranny by individuals. The strongest man on the block will run the neighborhood. We have government to insure that we don’t each one of us have to carry a club to defend ourselves. But again, I stand on my statement that I think that libertarianism and conservatism are travelling the same path.

I found the above quote from a nice roundup on Reagan by Pejmanesque. See also my earlier commentary (below) Mourning in America and Fabio’s Reagan’s Message to the World.

Academic Freedom

Earlier Tyler posted the story of Daniel Sumner, the agricultural economist at the University of California at Davis who has been accused of “treason” for analyzing US cotton subsidies for Brazil in a WTO case. One of the most troubling aspects of the case is that instead of backing him to the hilt, Sumner’s dean bowed to King Cotton and questioned his judgment.

Michael Ward a professor of economics at the University of Texas at Arlington (and a regular MR reader, I might add) has authored a Petition in Support of Academic Freedom stating in part:

To the extent that it is within their expertise and terms of employment:

1. It is appropriate for scholars to engage in public policy debates regardless of the comments’ effects on US producers or consumers.
2. It is appropriate for scholars to consult with interested parties in policy-making or judicial matters even when the adversary is the US government or US interests.

You can express your support here.

Haitian fact of the day

In Haiti’s slums, round swirls of dough can be found baking in the sun. They look almost appetizing until you learn the ingredients: butter, salt, water and dirt…

And the dirt biscuits of Haiti – called “argile,” meaning clay, or “terre,” meaning earth – are not exactly a final cri de coeur against starvation.

Like the mice in Malawi, they are a staple of the very poor, somewhere between a snack and a desperation measure. Making them has been a regular business for years. The clay is trucked in plastic sacks from Hinche, on the central plateau. Blended with margarine or butter, they are flavored with salt, pepper and bouillon cubes and spooned out by the thousands on cotton sheets in sunny courtyards that are kept swept as “bakeries.” They cost about a penny apiece.

“They’re not food, really,” said David Gonzalez, a reporter at The Times who has visited Haiti many times. “People with hunger pangs eat them just to fill up their stomachs.”

Here is the full story (NYT); it is sad to even use the “food and drink” category for this entry. Here is a previous installment of “Haitian Fact of the Day.”

Update: I wrote this post a few days ago, before the horrific flood. Flooding is such a severe problem in Haiti because of deforestation, brought on by poorly defined property rights to trees and forest.

Update on my whereabouts

Today Paris is lovely; I would sooner say I am enjoying the French than arguing with them. My airport terminal was intact, my jet lag minimal, and my goat cheese salad excellent. I continue to flirt with the idea that the French, of all Europeans, are most like the Americans. Both, for instance, have a missionary impulse toward other cultures. And both are obsessed with quality, albeit in differing directions. The saddest thing for me here is that in the 1970s, they replaced Les Halles, the old food market where much of French cuisine evolved, with a soulless shopping mall. I will never get over that loss. On the other hand, it is remarkable how many shops you can find that will sell you a bar of dark chocolate for $5 or more; I never feel I am overpaying.