Category: Current Affairs

Read Milton Friedman on Howard Dean, George Bush, the tax cuts, divided government, the Great Depression, and other topics. My biggest surprise: he appears to be more sympathetic to the Euro than before, though he still needs to be convinced it will work.

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.

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.

Cnn.com 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.

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.

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.