Category: Current Affairs

Why the EU won’t become a federal government

I was struck by Larry’s Siedentop’s words from today’s Financial Times (subscription required):

…the new member states will be very assertive once the formalities of enlargement are over. We can expect an unapologetic defence of national interests, a suspicion of encroachments from Brussels and an intense dislike of what might be called lurking double standards in the EU…It will be a pluralist vision rather than a unitary one, a preference for something more like a confederation than a federation. For behind the quasi-federalist form projected for Europe that is promoted, at least intermittently, by France, such countries detect a wish to give the EU some of the attributes of a unitary state. Their contribution could decisively shift the balance of the debate away from that particular vision.

The beast isn’t starving

I caught a lot of flak from conservatives when I wrote in an op-ed that the so-called Bush tax-cuts were a fraud. If spending isn’t cut then in the long run taxes can’t be cut either. Since spending has gone up under Bush, all he has done, I argued, is to raise our future taxes (at precisely the wrong time too given the coming fiscal problems created by demography) . Conservatives complained that I missed the strategic beauty of the Bush plan. A tax cut, they said, will keep spending down, it will “starve the beast.” Well Bush is now asking for another $87 billion to fight the war in Iraq, employment is down everywhere but in the federal government where it is higher than under Clinton, and Bush is already touting how his administration is responsible for the largest increase in Medicare in its 38 year history. Apparently, on the Bush diet you can eat all you want and still lose weight.

Globalization and poverty: a debate

The Cato Institute offers an on-line debate on globalization and poverty, here is the last installment. Johan Norberg, author of In Defense of Global Capitalism, takes on Robert Kuttner, of The American Prospect. I am closer to Norberg’s market orientation, but Kuttner gets the better of this exchange. Norberg needs to concede a clear role for government in development, in producing public goods and basic infrastructure, and emphasize that most developing countries today don’t have strong enough markets or anything close to it. That debate he could win.

Should we be surprised that the Cancun WTO talks failed? and other major news sources use the word “collapse.” The rich countries won’t give up their agricultural subsidies, some of the poor countries won’t open up their investment and procurement rules.

A recent IMF Working Paper, “The WTO Promotes Trade: Strongly but Unevenly,” by Arvind Subramaniam and Shang-Jin Wei (not on-line) provides an account of the longer history. In the early days of WTO (GATT), developed nations used the institution to reduce their average tariff barriers from 27 to 4.5 percent. Since that time the institution grew and deteriorated in quality: “our result is a more damning indictment of the WTO than even that in Rose [the link is from me, of course, not the authors of the paper]…He found that membership in the WTO had no significant effect on trade. We find that membership has a significantly negative effect on trade…”

It is the developing countries that drive the negative result. The authors emphasize that the result is not statistically robust, but in any case this is hardly a ringing endorsement of WTO.

Addendum: The paper is now on-line.

Sweden rejects the Euro

The margin is decisive, so far it looks like 56 percent against, 42 percent for, read here for one early account of the voting.

It is a tough call, but I think the Swedes did the right thing. Mostly the Swedes feared that the fiscal discipline of the EU will curtail their welfare state, but I don’t think this should have been the main issue. The Netherlands, another small country, has created a generous welfare state (albeit with some spending cuts), prosperity, and relative fiscal responsibility, all under the rubric of the EU. In the long run it is hard to see the EU curtailing Swedish spending more than international capital markets and other competitive pressures would. And it remains to be seen how binding the EU fiscal requirements will prove, after France is violating them.

What is really the advantage if Sweden had adopted the EU? Price competition would have become more intense, as buyers would have an easier time comparing prices across countries with only a single currency unit (admittedly this violates various economic theories, which suggest people “see through” the monetary unit, but it nonetheless seems to be true, noting that in the short run prices get bumped up before later falling). That counts as a real gain, but on the other side the Swedes would have given up the ability to control their own monetary policy.

The Swedes have a history of pursuing a monetary policy independently of Western Europe. The Swedish depression of the 1930s was milder than for the rest of Europe, in part because Sweden broke with gold, devalued, and avoided a disastrous deflation, for one treatment read here.

Supposedly the Swedes don’t now have the “proverbial seat at the table,” but as more countries adopt the Euro, how much is this worth anyway? They decided to keep a whole table of their own, albeit a much smaller one. Does anyone really know how the European Central Bank will operate over time, as more members join, or if a crisis hits? Some critics charge that foreign investors will now stay away from Sweden, due to exchange rate volatility, that would be one factor on the side of Euro adoption.

Perhaps it will prove most important that the Swedish government supported the change, and voters didn’t cooperate. Swedes usually have great trust in their government, more than we are accustomed to seeing in the United States. This may signal a break between Swedish elites, who often have closer ties to Europe, and many Swedish voters. The consequences of today’s vote will likely include more than just macroeconomic policy.

Liberalization of capital markets

How much does liberalizing capital markets spur economic growth in developing countries? It depends on what kind of country you look at, according to a recent paper by Kenneth Rogoff, formerly chief economist at the IMF, also Professor at Princeton.

He suggests that financial integration should be “approached cautiously.” Many of the benefits kick in only after countries have achieved a particular level of financial integration. Improvements in integration, starting from low levels of integration and development, often have increased the volatility of consumption. Trade integration is associated with faster increases in health and infant mortality, but financial openness is not.

Rogoff sees four problems with financial integration for poorer countries: investors engage in herd behavior, investors engage in speculative attacks on unsound currencies, the risk of contagion, and governments may use financial globalization to overborrow. Financial integration can, in principle, bring great benefits but it is not always used responsibly.

We should take these results seriously. Rogoff is a highly respected economist and he has no starting bias against market globalization. Read his open letter to Joseph Stiglitz, which offers a good statement of his overall perspective on global markets.

Did you know that Rogoff had an earlier career as a chess grandmaster? Read the story he once wrote for Seventeen magazine on this time in his life.

Why do ticket sellers allow scalping?

It is a common economic puzzle why the prices for various events, such as Super Bowls and rock concerts, do not always clear the market. Why sell tickets cheaply, thereby allowing scalpers to buy them up and later resell them at higher prices, reaping the surplus for themselves?

Canadian Ticketmaster wondered the same, and now they are doing something about it. For many concerts they will auction off some tickets at market-clearing prices. Most groups, however, will auction off only a few of the best tickets, rather than all tickets.

One concert promoter had reservations about the scheme: “From a fan’s point of view, I don’t think this would be fair,” he said. “Obviously, everyone should have equal access to tickets, especially if you’re a fan that lines up overnight. It should be fair and equitable.” Comments of this kind show that either he or I, or perhaps both of us, do not understand this market very well.

Thanks for Eric Crampton for pointing the link out to me. And speaking of musical concerts, it is sad to report that Johnny Cash has died.

The poor love globalization

Read this piece from, on how much the poor love globalization.

Here is one money quote:

When asked if cultural imports are “good” for their respective countries, young people in particular seemed to respond favorably in the developing world. Eight-five percent of Russians, 65% of Bangladeshis, 89% of Guatemalans, 94% of Chinese, and even 60% of Egyptians aged 18-29 answered affirmatively.

Here is another:

Even when respondents in the developing world saw conditions in their own countries “getting worse,” a sizeable majority refused to blame globalization for their problems. In fact, of all the countries where a majority of respondents said conditions in their respective country were deteriorating, none showed a majority of respondents putting globalization at fault. The highest percentage blaming globalization came in Indonesia, at 44%. Most others were in the teens.

Furthermore the global poor like multinational corporations, by overwhelming margins, and don’t like anti-globalization protesters.

How many heat deaths?

“Portugal scrapped its initial estimate of 1,300 deaths and lowered it to just four,” from today’s Germany claims 40 heat-related deaths this summer.

The British claim 907 extra deaths across the span of a very hot week. Here are the Italians: “The Health Ministry said on Thursday 34,071 people over the age of 65 died between July 16 and August 15, compared with 29,896 in 2002 — a 14 percent increase.” French estimates range between 10,000 and 15,000 deaths.

How much of this was avoidable and how much was random movement in the numbers? In net terms, how many people actually died prematurely?

Consider the stability of mortality statistics. I checked the UK Office of National Statistics tables, for England and Wales, and was surprised how much death rates bounce around (at the link you need to go through some work to create the file in readable form, follow the instructions).

Take deaths over the time period 1985-2001. Rounding off the figures to the thousands, the median change in death numbers, from one year to the next, is 9,000 (the totals run from 530,000 to 590,000 deaths per year). The biggest change we see across a year is about 25,000. We shouldn’t expect those changes to be distributed perfectly evenly across the months. But if we divide by 12 “naively,” it would be very common for death tallies, on a monthly basis, to change by 700 to 800 people, when comparing one year’s August to the previous year’s August.

Now let us go back to the British figure. If the number of deaths jumps in a single week by 907, compared to an average change, this is out of the ordinary but not unthinkable. On the other hand, random noise plays a very small relative role when the monthly death rate jumps from 10,000 to 15,000.

These people all would have died anyway, the next question is when. Twelve months from now, will the yearly death rate stand above its average or will we now see fewer deaths for a while? To what extent did the heat redistribute deaths from September and October to August? (Eli Lehrer raises the further interesting question of whether some of these people died through a psychological effect, given that the media were reporting that a “heat death time” was upon us.)

Note that the richer and more technologically advanced a society, the fewer heat wave deaths we should expect, read here and here. For one thing, richer people are more likely to buy air conditioners. Everyone points the finger at negligent children, or the French hospital systems or August vacations. We can also blame the sluggish economic growth rates of the Continent. Social welfare states can be quite inhumane, once we examine secondary consequences.

The bottom line: something very bad did happen in France and Italy.
Something less bad happened in Britain. But we still have not gotten to the bottom of how bad or why.

Surprise! Fox News is Fair and Balanced!

Accusations of media bias are common but are typically based upon nothing more than subjective standards and anecdote. A brilliant new paper by Tim Groseclose (GSB Stanford, currently visiting GMU) and Jeff Milyo (U. Chicago, Harris School) pioneers a more promising approach. Since 1947, the interest group Americans for Democratic Action (ADA) has tracked how Senators and Represenatives vote on key issues and they have used these votes to rank politicians according to their liberalism. In the 2002 session, for example Ted Kennedy received an ADA score of 100 and Phil Gramm a score of 0. Political scientists are familiar with ADA scores and have come to rely on them as a measure of ideology.

Groseclose and Milyo have found a way to compute ADA scores for media outlets as if they were politicians. What they did was to examine the Congressional Record for every instance in which a politician cited a think tank. They then did the same thing for newspapers, network news shows and other media outlets. By matching newspapers with politicians who had similar citation records they can impute an ADA score for the media outlet. Joe Lieberman, for example, has an ADA score of 66.3. Suppose that in his speeches he cites the Brookings Institution twice as much as the Heritage Institute. If the New York Times has a similar citation style then the New York Times is assigned an ADA score of 66.3. (The method is slightly more complicated than this but this gives the right idea.) Note that Groseclose and Milyo do not have to determine whether the Brookings Institution is more liberal than the Heritage Institute all they need to know is that the Times has a similar citation style to Lieberman.

Ok, what were the results? It turns out that all of the major media outlets, with the exception of Fox News: Special Report are considerably more liberal than the median member of the House over the 1993-1999 period. Moreover, although Fox News: Special Report was to the right of the median house member it was closer to the median member than were most of the other media outlets. (Interestingly, all of the liberal media outlets were less liberal than the average Democrat and Fox News is less conservative than the average Republican – thus there is a sense in which all media outlets are less biased than is the typical politician.) Here are the ADA scores of various media outlets along with some comparable politicians.

Joe Lieberman (D-Ct.) 66.3
New York Times 64.6
CBS Evening News 64.5
USA Today 62.6
NBC Nightly News 62.5
Los Angeles Times 58.4
Ernst Hollings (D-SC) 56.1
ABC World News Tonight 54.8
Drudge Report 44.1
Arlen Spector (R-PA) 44.0
House Median 39.0
Senate Median 36.9
Olympia Snowe (R-Me) 36.0
Charlie Stenholm (D-Tex) 29.3
Fox News Special Report 26.4

Bhagwati criticizes the WTO

Read this on how the WTO is becoming a forum to regulate the behavior of the poorer nations, rather than bring free trade. Eminent trade economist Jagdish Bhagwati of Columbia University calls WTO a “sham,” and a “legal…straitjacket of do’s and don’ts…”

Here is a money quote:

“The developing countries are scared out of their wits now,” Bhagwati says, “because they don’t understand what they’re being forced to sign. The agreements are going way outside the trade issues and involve a helluva lot of things like your access to oil, your access to intellectual property and capital controls…. When I looked through the investment agreements, it was worse than reading my insurance policy for the fine print. I couldn’t make anything out of it, and I’m a reasonably informed person, a pretty smart economist as they go.”