Category: Current Affairs

10th anniversary for NAFTA

The first of January will mark ten years of NAFTA. There is little doubt it has helped the United States and Canada, but how about Mexico?

Foreign investment in Mexico has increased dramatically. It now stands at $12 billion a year, more than India receives. Exports have grown by a factor of three, up to $161 billion. Mexico’s per capita income has risen 24%, to $4000 a year. All these trends were underway before NAFTA, but NAFTA continued and cemented them. It also is believed that the $40 billion Clinton bailout never would have happened without NAFTA. Finally Mexico has made significant steps toward democratic rule and now holds elections with relative freedom of political entry.

Why then so many complaints from Mexico? First and most importantly, many Mexican exporters have been devastated by competition from the Chinese, who pay much lower wages. To be sure, this is a real problem, but for Mexico to be the high-wage competitor itself says something about how far the country has come.

Second, many Mexican farmers are upset at competition from American pork and corn. Most of these farmers are not mechanized in any way. They push a plow through their fields with a burro or ox. It is hard to imagine how preserving these sectors could benefit Mexico’s future development. I am all for easing the relevant adjustment costs, but trying to keep these jobs would be no different than banning the car to protect the proverbial horse and buggy. The only difference is that many of these farmers don’t even use techniques from the horse and buggy age.

Keep in mind that free trade in food will be a windfall for Mexico’s urban poor. Furthermore many indigenous farmers grow food for their own consumption, not for sale to outside markets. Cheap American imports can’t make them worse off, since they can always continue their current time allocation if they wish. More likely, they will start buying more cheap foodstuffs and look for a different line of work.

NAFTA was far from a perfect treaty, but let us offer three cheers in its favor. It may well go down as the most lasting legacy from the Clinton administration.

A recent World Bank report confirms this positive view: “without NAFTA Mexican exports would have been around 25 percent lower than the actual numbers, foreign direct investment would have been around 40 percent less and the country’s per capita income in 2002 would have been up to 5 percent lower.” Here is a summary of the report.

By the way, did you know the Mexicans are the world’s biggest drinkers of Coca-Cola in per capita terms, exceeding even Americans?

The earlier figures in the post, as well as the Coca-Cola information, come from Business Week.

How much do Freddie and Fannie Mae save homeowners?

Freddie Mac and Fannie Mae receive numerous state privileges, including tax-exempt status for their securities. Many investors believe that the U.S. government would guarantee the debts of the agencies, should a crisis arise. Not surprisingly, there has been recent talk of making the agencies operate on a level playing field.

The agencies, in response, argue that they have lowered the cost of homeownership significantly. But by how much?

Wayne Passmore of the Board of Governors did a study, here is one summary. Here is the bottom line:

The report says that because of their government-sponsored status, Fannie Mae and Freddie Mac were able to borrow at lower interest rates than private sector firms by an average of about 40 basis points from 1998 through the end of this year. However, most of this benefit is passed on to stockholders not to homeowners, the report says. The effect of these two enterprises buying and repackaging mortgages has reduced interest rates by only about seven basis points.

“The GSEs’ implicit subsidy does not appear to have substantially increased homeownership or homebuilding because the estimated effect of the GSEs on mortgage rates is small,” Passmore reports.

Furthermore it is estimated that the legal subsidies account for as much as 81 percent of the value of the traded companies. Not surprisingly, the agecies have been critical of the study.

My take: A common sense understanding of tax incidence favors Passmore’s conclusions. Humongous is the right word to use in describing American capital markets. If you let one entity borrow at lower rates, there are two primary options. First, that entity makes profit without lowering overall rates much. Second, and less likely, that entity becomes big enough to lower mortgage rates by some amount. But to the extent the entity becomes large, there is a significant tax or guarantee cost associated with its size. In other words, the government would be pushing down real interest rates by subsidizing capital accumulation, which cannot generally be done at low cost.

What wise men know

Frankincense, $4 per oz.
Myrrh, $5.60 per oz.
Gold, $411.20 per oz.
Value of celebrating the holidays with friends and family: priceless.

Tyler and I independently chose images for today and we both chose paintings by the northern Italian painter (c.1500), Andrea Mantegna!

Here is my pick, Adoration of the Magi, followed by Tyler’s pick the Adoration of the Shepherds (click to expand either image).



Calendar facts

1. The U.S. calendar industry accounts for $1.2 billion a year.

2. The average American buys 2.5 calendars.

3. Dog calendars are especially popular. Bush and Britney Spears calendars have not been selling well.

4. The 2004 Nuns Having Fun calendar is now sold out.

5. Women prefer larger calendars than do men.

6. 70 percent of all calendar business is done in December, talk about seasonal business cycles.

7. Many calendar prices are cut in half on December 26.

8. Many calendars cost no more than a dollar by the end of January.

9. Less than one-third of Americans plan their workday in writing. One CEO of a time management firm reports: “Most people walk into work and don’t have a plan.”

From USA Today. If you are wondering, I bought my 2004 calendar in October and it portrays Hokusai prints.

The Millennium Challenge Account

The Bush administration is proposing to increase our foreign aid budget by 50 percent over the next five years. A new bureaucracy, the Millennium Challenge Corporation, would be created. Here is a summary from

In response to U.S. government development-assistance directive drift and to the Republican perception that aid has been hijacked by touchy-feely liberals, in March 2002 the Bush administration proposed the creation of the Millennium Challenge Account, which would be distributed via the Millennium Challenge Corp. In contrast to USAID, which administers funds to developing countries of pretty much every stripe and inclination, MCA moneys would be allocated only to those nations judged to be most committed to promoting economic freedom, governing fairly, and investing in education and health–based on scores in 16 quantitative areas (such as government effectiveness, primary education completion rate, inflation, etc.) using data collected by the World Bank, the International Monetary Fund, and other third parties. In order to qualify for MCA funds, a country must score above the median of all candidate nations in half the individual criteria in each of the three broad categories, and above the median in a corruption indicator–unless, of course, it is given a bye by the administration.

Under the current foreign aid regime, the U.S. government, often through USAID, crafts developmental priorities and projects, usually in conjunction with local governments, and oversees their implementation through mostly American contracting organizations. One of the key innovations of the MCA will be to give recipient governments a larger role in designing development programs and make them accountable for achieving results.

I remain to be convinced that this is a good idea. The countries that are truly reforming need foreign aid the least. The plan works best if you think that politicians want to push more reforms, but lack the cash to pay off special interests. The plan also works if you think that we can bribe politicians to reform. The plan works worst if you think that foreign aid leads to corruption and inferior policy. In that case we are penalizing the success stories and pushing them in the wrong direction. Of course, the very push for reforming foreign aid implies there is some truth to the latter possibility.

The real motive might be to bypass multilateral institutions and use foreign aid to reward potential allies in our foreign policy struggles. It is then Machiavellian to market this as an aid program.

If we wish to reform foreign aid, have we considered the cost-effectiveness of the alternative strategy of simply dropping dollar bills from a helicopter? No, this is not a purely facetious suggestion. After all, the Bush people tell us that we can spend our money more effectively than the government can for us. Given the lower quality of government in poor countries, we might expect private spending to be a better option there as well.

If we are going to have criteria for aid allocation, perhaps we should try to predict future growth potential, rather than looking at past reforms. Societies that are starting new investments in health care, education, and intermediate social institutions might be the promising recipients of aid dollars. If you know of any good studies on what predicts future (not current) growth, in the Granger-causal sense, please let me know.

The Slate article also notes the following:

…annual U.S. private foreign aid–via foundations, private voluntary organizations, corporate charity, religious organizations, and, most important, remittances sent home by emigrants and their descendants in the United States–amounted to roughly $35 billion in 2000, or more than three and a half times the aid handed out by the U.S. government. Private aid, like private enterprise, tends to be more focused on the bottom line of success–so the chances are better that (unlike, all too often, development funding from governments) a delivery mechanism or program that isn’t getting the job done will be replaced, pronto.

Here is a link to the relevant research on private foreign aid.

Liability and flu vaccine

Liability law appears to be a critical factor behind the vaccine shortage:

As legal liabilities have chased many vaccine-makers out of the market, there are fewer manufacturers. This means less overall ability to produce additional doses, and less investment on new, faster ways to make vaccines.

In the US about 185m people risk serious flu-related illness each year.

At one time the US had 20 flu vaccine manufacturers. Today there are just four: Aventis, GlaxoSmithKline, Merck and Wyeth.

After the second world war the science of cell cultures led a boom in vaccine production. But gradually profit margins thinned on vaccines, as the government became a big buyer of them. Increasing legal liability drove many makers out of the vaccine business.

Today smaller biotech companies have entered the game. But they lack the capacity and the distribution to solve near-term shortages, experts say.

“One of the problems with vaccines is you put them in healthy people,” says Louis Galambos, history professor at Johns Hopkins University and an expert on vaccine manufacturing. “Now we’re in a situation where we have too few producers.”

Congress passed a law in 1986 to limit liability on vaccines for children. There are no such liability limits for adults, however.

Pharmaceuticals companies are inhibited by the particular structure of the US vaccine market, experts say. The US government is a large buyer of vaccines, leaving relatively poor profit margins on vaccines.

Here is the full story from The Financial Times.

What are the best Christmas gifts?

Experiences, not possessions. Concerts and travel are remembered for longer than clothes and jewelry. The result is robust to different ages and groups, but tends to be strongest for high-income individuals. Here is the full story, here is another summary. Here is the original paper. The home page of Van Boven, one of the researchers, offers many interesting papers on human psychology.

The economics of capturing Saddam

Eugene Volokh draws our attention to the following article about Iraq. Here is a snippet from the abstract:

The capture of Saddam Hussein…demonstrates that poor intelligence is not inherent in U.S. guerrilla war-fighting; the United States overcame it by identifying the central weaknesses of its opponents. In this case, the central weakness was money — and this was not only a financial weakness, but also a cultural one.

Here is some more of the substance:

The guerrillas did have one major vulnerability: money. The Baathist regime long ago lost its ideological — and idealistic — foundations. It was an institution of self-interest in which the leadership systematically enriched itself. It was a culture of money and power, and that culture permeated the entire structure of the Iraqi military, including the guerrilla forces that continued to operate after the conventional force was defeated. Indeed, the guerrillas substituted money for recruitment. In many cases, they would pay people outside their ranks to carry out attacks on U.S. troops as a supplement to attacks by the main guerrilla force.

The culture of money made the guerrillas vulnerable in two ways. First, they relied on support from an infrastructure fueled by money. Whatever their ideology, they purchased cooperation with money and intimidation. Second, much of the money the guerrillas had was currency taken from Iraqi banks prior to the fall of Baghdad. A great deal of it was in U.S. dollars, which continued to have value, but most of it was in the currency of the old regime. One of the earliest actions of the U.S. occupation forces was to replace that currency. Over time, therefore, the resources available to the guerrillas contracted.

The United States brought its financial resources into play, purchasing information. As U.S. money surged into the system and guerrilla money began to recede, the flow of information to the United States increased dramatically. Obviously, much of the information was useless or false, and it took U.S. intelligence several months to tune the system sufficiently that operatives could evaluate and act upon the intelligence. Over time, the very corruption of the Baathist system was turned against it.

Mistaken predictions about this war have not been in short supply. But let’s hope they are right.

The commissar vanishes, Beatles style

[Yoko] Ono’s weirdest piece of video trickery comes on the recently released DVD “Lennon Legend: The Very Best of John Lennon.” On one film, for the classic song “#9 Dream,” Ono has edited herself into the original video. There you will find her mouthing the backup vocals that were sung on the original hit recording by Lennon’s girlfriend at that time, May Pang.

In addition:

Ono has dropped [Paul McCartney’s] name from the songwriting credit on “Give Peace a Chance.” The song was written by Lennon only, but at the time the songwriting duo was still putting their two names on everything.

Here is the full story. McCartney, on his side, removed Lennon’s songs “Maggie Mae” and “Dig It” from the re-release of the Beatles’s Let It Be album. He never thought much of these songs, so he added another Lennon composition, “Don’t Let Me Down,” in their place. He also has sought to have many of the Beatles songs switched from the universal “Lennon-McCartney” tag to “McCartney-Lennon.”

Adam Smith suggested that people become more insecure about reputation, the more reputation they have. The theme of vanity as an addiction dates back to the early Christian writers, such as Boethius. But my query is simpler: don’t these people have anything better to do? Oh yes, if the title of the post interests you see here.

The best argument for spam I have yet heard

Historian and travel writer Jan Morris was interviewed about America in the British Times, December 13. She offered the following remark:

There is grossly too much of almost everything. There is too much money, too much food, too much choice, too much power, too much capitalism, too much spam on the e-mail. Wal-Mart, the ultimate American retailer, employs three million people: on one single day during my visit it opened 39 new stores, and its annual sales last year were bigger than the GNP of Switzerland. Eighty-three TV channels were available in my hotel room last night. Last Sunday’s edition of the Chicago Tribune contained, by my bemused count, 51 editorial and advertising sections. The president of Harvard occupies a house valued at $11.5 million. The supermarket Shaw’s, in Boston, offered last week, 432 different cheeses.

I had at least three reactions. First, you would think that such a famous historian would stay in a hotel with digital cable. Then she would have more than 83 channels, perhaps as many as five hundred. Second, I just had been thinking about writing a blog post complaining about American trade restrictions on French non-pasteurized cheese, the best kind of cheese I might add. Morris may have seen 432 different cheeses but we could do much much better in this area. Let’s have free trade in cheese and real diversity. How many Americans eat cheese wrapped in paper rather than plastic? Finally, spam must have something good to offer if it can be lumped in with all these rosy developments. Morris refers to the current United States as “sclerotic” and “bloated,” can she be serious?

Is file-sharing dead?

The recent RIAA lawsuits have severely blunted the practice of file-sharing. The music industry has gone after the on-line users who share copyright-protected songs. The movie industry may someday follow suit. Although the number of people prosecuted has been small, the negative publicity has caused many people to shy away from Kazaa, Grokster, and other services.

I don’t know of any good estimates of how much file-sharing has gone down in recent times. All parties to the disputes have incentives to fudge the numbers. But based on conversations and anecdotal observations, combined with written sources, I find it plausible that file-sharing has declined by at least a third.

The days of file-sharing, however, are far from over. First, a judge just ruled that the RIAA cannot petition Verizon for the names of potential file-sharers. reported as follows:

…in a strongly worded ruling, the appeals court sided with Verizon, saying a 1998 copyright law does not give copyright holders the ability to subpoena customer names from Internet providers without filing a formal lawsuit.

This ruling should come as no surprise. After all, why should the RIAA have a special right to petition Verizon for the names of potential copyright infringers? I hold some copyrights too. I and many others could petition Verizon for the information concerning various account holders. Without any legal standard of proof privacy is meaningless. More significantly, Verizon would end up swamped under the requests. Imagine various hackers and cyberpunks flooding Verizon with identity requests just to make the reporting system unworkable.

Even if this ruling is reversed, or John Doe suits prove effective in generating the names, file-sharing is likely to return in force. Anonymous networks are becoming more popular rapidly. Read the analysis of Clay Shirky. Right now users are not sure whether these networks are useful or trustworthy. But that information will spread rapidly. Within a year, we will know whether the Palestinian file-sharing network is indeed reliable. If that source of files turns out to be crooked, something else will arise to take its place.

Consider the whole problem in terms of consumer option value. File-sharers have not given up on the idea. They are waiting to see when and how they can start sharing files again. When the proper time comes, they will return in full force.

Addendum: Here is a Washington Post article on the decision. Hit and Run links to the full decision.