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Saturday, April 26, 2003

So Now It's Going To Be the G8

Well not quite yet. But moves are afoot to bring China on-board. What isn't clear is whether or not this is simply political game-playing on France's part, or whether the move will go further. China certainly has more right to be there than either Russia or Italy.

France asked Chinese leader Hu Jintao on Friday to join the seven most industrialized economies and Russia at a summit in France in June, in a move to widen cooperation on world affairs. French Prime Minister Jean-Pierre Raffarin, during a visit to Beijing, announced the invitation to the June 1-3 summit in the spa town of Evian, saying it came from President Jacques Chirac.

He also said China and France shared similar views on the central role of the United Nations in the post-war reconstruction of Iraq."We believe that it is necessary, that it's useful, to say the least, to discuss North-South relations with the full participation, with the participation of Africa, China and other countries," he said through an English-language translator."France and its partners have decided that the Evian meeting would be one discussing development, therefore we have expressed a wish that China be present given the theme of our discussions," he told a news conference.

The so-called Group of Seven leading economic powers -- the United States, France, Germany, Britain, Japan, Italy and Canada -- only recently decided to widen their gatherings to include Russia. Diplomats have said Russia was originally included for political rather than economic reasons and the grouping, which acts as a forum on world affairs, should remain small.

Raffarin was in China just days after a World Health Organisation travel advisory was issued for Beijing, where the number of SARS cases has been rising dramatically.He expressed solidarity with the Chinese in the face of the disease and said after meetings with senior Chinese leaders, including Premier Wen Jiabao, that the two countries had a common stand regarding Iraq. "We share positions on the role of the United Nations, particularly in matters of reconstruction as well as assisting the Iraqi people," Raffarin said.

Asked his reaction to Secretary of State Colin Powell's one word answer -- "yes" -- this week to the question of whether France would suffer consequences for its opposition to the war in Iraq, Raffarin said allies should respect one another."We believe that mutual respect is the basis of the notion of allies. When you have an ally, you respect him, and when you are allies you may have diverging positions," he said.
Source: Reuters

Just When You Thought it Was All Over.........

Well I never did think SARS was going to be easy, but we still have no idea of the real extent of the problem in China. Toronto is causing a lot of fuss, but I think the ground rules are different. Meanwhile, one day after I stuck my neck out and held out for Chinese growth this year all the data are going the other way. That's what makes being an economist an interesting business, you get the chance to swim against the tide. So I think I'm hanging-on in there, if only to prove to everybody for once that I am not a pessimist. This isn't pure guesswork, its a reasoned assessment of the strength of the growth wave in China and the contra-indications we have seen up to now. All the models in the world are useless in a situation like this. What you have to do is exercise judgement, I sure hope mine turns out to be good.

Shanghai, the Chinese commercial centre that has remained largely insulated from Sars, is expected to report a substantial increase in suspected cases within days, as the virus continues to spread through China. The verdict on Sars in Shanghai, delivered on Friuday by a six-strong World Health Organisation delegation, coincided with a further downgrading of China's growth prospects because of the virus.It came as the disease spread further in the Asia-Pacific region, with the Philippines confirming its first cases. "We already have four documented Sars cases in the country. Three of them came from abroad, while one is of local transmission," Manuel Dayrit, health secretary, said in Manila.Philippine President Gloria Macapagal-Arroyo warned that the government would prosecute people who violated quarantine orders, evaded health checks or falsified medical reports.

Hong Kong was meanwhile investigating a Sars outbreak in a crowded public housing estate that some fear could become a repeat of that at Amoy Gardens, in which more than 300 people were infected in one high-rise tower block. Authorities say there have been six cases from four households in Hing Tung House, a packed apartment complex in Kowloon.In Shanghai, which has reported only two confirmed and 18 possible cases of Sars, the numbers have been so low in comparison to other cities that many suspect a cover-up.However, the WHO officials said the expected increase in cases was the result of a new, broader classification for suspected Sars sufferers, and not deliberate under-reporting by officials.Beijing authorities on Friday raised the official death toll by three to 103 and the number of infections by 103 to 877 - statistics that underlined the city's status as the new focus of an outbreak that has infected more than 4,400 worldwide.

While doctors say the risk to individuals remains small, fear of Sars has gripped the Chinese capital, sending many workers fleeing to their home towns, prompting companies to order impromptu holidays, and emptying hotels, shopping centres and restaurants.Beijing authorities have ordered at least 4,000 people who have had close contact with Sars victims to quarantine themselves at home.WHO officials declined to quantify how many new suspected cases would be reported in Shanghai but it may be as high as 100, a fivefold increase.

J P Morgan further reduced its forecast for annual economic growth in China to 7.4 per cent, down from a revised 8 per cent only two weeks ago, because of lost consumption and lower inventories.Fred Hu, managing director for Goldman Sachs in Hong Kong, said if Sars persisted for longer than the next two quarters, and damaged the key manufacturing sector, it could reduce 2003 GDP growth to 6 per cent. Growth hit 9.9 per cent year-on-year in the first quarter.
Source: Financial Times

SARS: More Asian Growth Revisions

The growth expectations for Asia ex-China continue to drop:

The deadly Sars virus, currently sweeping the Asia Pacific region, appears poised to wreak havoc on domestic economies and has already sent equity markets into a sharp downward spiral. The OECD warned this week that the overall economic fallout for the worst affected Asian countries could be significant."The economic impact of this epidemic depends largely on how promptly and effectively the virus can be brought under control," the OECD said, adding that preventative measures were proving particularly disruptive to travel and business.

The World Bank, meanwhile, downgraded its economic growth forecast for East Asia to 5 per cent from 5.5 per cent in its latest forecast, blaming Sars, the Iraq war and other external shocks.Analysts have been careful to keep a sense of proportion over impact of the virus on East Asian economies. Bill Belchere at JP Morgan expects Sars to have a sharp temporary economic impact, rather than provide a sustained hit to the region's growth prospects. That said, Rob Subbaraman at Lehman Brothers noted that heavy damage had already been done.

The impact of Sars has clearly intensified since the outbreak was announced in Hong Kong on March 10. While global equity markets have been boosted by the swift conclusion to the Iraq war, Asian markets have significantly under-performed the US market as each day brought fresh revelations about the spread of the virus. The FTSE Asia-Pacific index, excluding Japan, has lost by 5.8 per cent relative to the S&P Composite since early March. Hong Kong, the hardest hit of the markets, closed at a third consecutive 4½ year low on Friday, dragged down by HSBC Holdings which fell on worries about the prospect of a rise in bankruptcies as the Sars virus batters the local economy. The decline is reflected in a 15.8 per cent fall in the FTSE Hong Kong index relative to the S&P Composite since early March. Chinese equity markets tried to ignore the Sars outbreak until mid-April but then went rapidly went into reverse. Since April 15, the Shanghai B index has lost 10 per cent of its value and has under-performed the S&P composite by 9.3 per cent. Economists have been busy revising down their forecasts for China amid concern over the potential fallout if foreign companies review their operations in the country. Foreign operations are estimated to contribute about half of the nation's exports and almost a third of its economic activity.

The fears were fanned this week by reports that Japan's biggest carmaker, Toyota was recalling its staff from Beijing during the outbreak. Toyota denied the reports. However, other foreign companies including General Electric and Honda are said to be making it easier for expatriate staff to go home or are recalling staff from China. The FTSE Singapore index is down by 9.9 per cent relative to the S&P Composite. Earlier this week, deputy prime minister Lee Hsien Loong said the virus could be catastrophic for the city state as the government introduced tough new powers to jail or fine people who defied strict new quarantine regulations.Taiwan suffered its biggest one day fall for eight months on Thursday as concern about the impact of Sars hit the market. The benchmark weighted index has lost 12.3 per cent relative to the S&P Composite.

Outside Asia, Canada has been incandescent at a World Health Organisation warning against travel to Toronto. However, the WHO is standing by its warning in the face of 16 reported deaths from the virus in the Toronto area. The market, which traditionally moves in step with Wall Street, has significantly underperformed with the FTSE Canada index falling 5.5 per cent relative to the S&P Composite since early March. Travel, tourism and retail stocks have so far borne the brunt of the selling.IATA, the global airline industry body, said this week the Sars crisis, and a resulting plunge in air travel to and from East Asia were devastating for airlines in the area. It maintained its prediction that the already deeply-troubled industry would loose about $10bn this year after cumulative losses of $30bn in 2001 and 2002, which is largely blamed on global economic problems and fears of terrorism. Asian airlines have underperformed the FTSE World index by 23.5 per cent since early March.
Source: Financial Times

For Once Some Good News

For once a federal judge seems to have made a good, forward looking and coherent decision:

Two years after an appeals court hammered the final nail in Napster's coffin, a new federal ruling will allow two remaining file-trading platforms to continue operating. Delivering a significant victory for peer-to-peer networks, a federal judge ruled Friday that two popular file-trading services should not be held liable for copyright infringement committed by their users.

In his decision, Judge Stephen Wilson of U.S. District Court in Los Angeles found that the service operators, Grokster and Streamcast Networks, do not have direct control over the files swapped on their networks. Without evidence of their active and substantial contribution to the infringement, he wrote, the file-trading services cannot be held liable.

"Grokster and Streamcast are not significantly different from companies that sell home video recorders or copy machines, both of which can be and are used to infringe copyrights," Wilson wrote in the summary judgment. The case stems from lawsuits filed against three of the largest peer-to-peer networks by a group of more than 20 Hollywood studios, led by Metro-Goldwyn-Mayer Studios, and major music labels, led by Arista Records. The music producers and film studios originally filed separate suits, which later were consolidated into a single action. Notably, neither side contested the facts of the case, with both Grokster and Streamcast, which operates the file-trading site Morpheus, acknowledging that some users did in fact use their services to illegally trade copyright works. The central question was whether the file-trading services should be held liable for contributing to copyright infringement for providing a forum that allowed the illegal activities to occur. Michael Page, the attorney representing Grokster, said the ruling validated one of his main arguments, which was that a new technology with many useful and legal purposes should not be blocked out of fear it could be used the wrong way.
Source: Wired News

Friday, April 25, 2003

More on the Irresponsibility of Being Responsible

Maynard has again come to the rescue by giving me some (as is usual with him) intelligent feedback on my preposterous suggestion that maybe a superficial reading of the US deficit situation was missing something. Firstly Maynard's response:

When I first saw your comment in Brad's weblog I was confused, and
thinking about it since then has not cleared things up.

Here's my problem. Assuming you are correct, and that this is all an act, I still don't see you expect this to play out. The federal debt increases, sure, and long term interest rates increase (supply and demand and all that); and then what? Long term interest rates in and of themselves will not cause inflation. So what's next? The fed floods money into the system via OMC actions, reducing the fed discount rate, maybe even changes the reserve requirements. Why do these require an irresponsibly large federal debt to work effectively?

I think I understand the large scale idea. A future deeply indebted federal government clearly benefits from unexpected inflation that reduces its debt load. What I don't understand is (a) how the federal government gets from wanting this inflation to actually making it happen and (b) won't this be a fiscal disaster for the federal government after some brief cheering? Won't investors, screwed out of their funds once, demand an interest rate for future fed offerings that not just covers the inflation rate but also compensates them for their past losses and for future uncertainty? That seems pretty much what happened when we went through this last time in the early 80's. And won't the federal government be forced pretty close to a desperate situation by such an increased interest rate burden.

Now certain things need to be said at the outset. In the first place I am thinking very much about this situation in the light of the Japanese experience, and in particular in the light of what many influential American economists have had to say about how to address the problem of deflation were it ever to reach the shores of the US. The key texts to keep in mind in this regard are probably Ben Bernanke's speech Making Sure 'it' Doesn't Happen Here and a highly influential paper by Lars Svennson A Foolproof Way of Escaping From a Liquidity Trap . Various articles by Paul Krugman on the liquidity trap issue (links to which can be found on my Deflation Page are also relevant). The problem that may be thought to be facing the US is not being stuck in a liquidity trap, but to avoid entering one. Three strategies are recommended: monetary easing, purchasing securities by the Federal Reserve, and purchasing of non dollar denominated assets to devalue the currency. All of this is being proposed with the objective of creating inflation, or to be more exact of creating the expectations of inflation. Various ideas have been floated as to how to manage this process without provoking on the one hand excessive inflation, and on the other without market participants internalising the idea that the central bank is only engaging in a limited operation which will not be sustained. In other words how do you avoid market participants 'front running' the central bank?

Now the major criticism of this line of argument from inside Japan turns precisely on this question: how do you convince everyone that a solid institution is suddenly becoming irresponsible, and is going to remain irresponsible for long enough. If the Japanese don't adopt inflation targeting, it isn't because they don't understand (or haven't thought about) the argument. It's because they're understandably scared that all they might do is create another asset bubble and another crash. How do you know when to stop?

Well non of this seems to pre-occupy unduly our inflation targeters. And what they can't succeed in getting the Japanese to try out, they may well be willing to experiment with in the US. Paul Krugman and Brad Delong are undoubtedy right to point out the problem of above trend productivity growth coupled with below trend growth in demand: the logic is continual price disinflation, followed eventually by price deflation. According to reasonable estimates this could be only a year or so away (Krugman's back of the envelope guess). Also bear in mind that the negative upward oil price shock could be followed at some stage by a downward one in a slack global economy with Iraq needing (for whatever reason!!!) to sell oil quickly. This would be the push that tips everybody over, and then you can have it: zero interest rate bound, and liquidity trap. This is not inevitable but it is one distinct possibility.

I am convinced that Stephen Roach is right, the Fed is taking this possibility very seriously. Now despite central bank independence the US Treasury do talk to each other. Greenspan's opinion is valued (and via Greenspan Bernanke's) and Greg Mankiw is not stupid. In fact I think the first clue that something might have been on the cards was Mankiw's appointment (and the ignominious sacking of yes-man Glenn Hubbard, which must in my book count as one sign of intelligent life in the White House). The second clue has been dollar policy since O'Neill's departure. There is now no real attempt to suggest that the US is maintaining a strong dollar policy. A significant devaluation has already taken place, and it is entirely possible that another is in the pipeline. But the US economy is not sufficiently open for this to have a critical impact (although on another occassion I would want to say something about the fact that it's level of openness is highly significant in other contexts). The pass through rate on prices is small, and in addition many of the Asian economies (which in some ways are the ones that matter) are tied to the dollar and so relative prices are unaffected. Indeed if SARS becomes important in China, this will mean even more internal deflation there, and in other Asian economies. So in the end the dollar 'correction' may have more to do with that other US deficit: the current account one.

So we come back to domestic policy. How do you convince market participants that the US is serious about inflation. One solution, which is proposed in the paper I cited, would be to weaken the level of perceived independence of the central bank, and have it constrained to print money for a serious fiscal deficit. Now what better Mick and Montmerency double act here than Alan Greenspan and George W Bush. After all everyone's completely convinced that the White House is determined to cynically manipulate everyone in sight. (Look, although I hate to do this, I think it has to be said: in some ways Paul Krugman could have fallen into the trap (I'm sure a non-liquidity one) of perpetuating the image of Bush that would make this a feasible strategy. Bush, the crazy president who is going through unashamed self-interest to ruin his country by running huge inflation-provoking deficits. Or maybe Paul Krugman is actually a true patriot, who is putting country before private reputation, and given credence to the Bush 'madman' view to help legitimate the trap-proof fool).

Now for the questions. Why the fiscal deficit, not massive quantitive easing. Because looking at Japan, even though no one is ready yet to admit this publicly, I think we can see that this alone doesn't work. It doesn't work for a variety of reasons, and if you want to know what I think about them all you'll have to follow developments on my Japan Page as I try work through all the issues involved. The principal problem however is that monetary policy is inherently more limited than it has been fashionable to imagine of late. In particular, you can carry out all the quantitative easing you want, but if the bank managers aren't willing to lend, because they don't believe the expansion is coming, you can find yourself stuck. Let's just call this for the time being the "credibility trap".

Now 'won't this be a fiscal disaster for the Fed after some brief cheering'? Obviously this is the risk. But remember the plan 'B' probably is: after steering nicely clear of the deflation iceberg (and this is, of course, the part of the theory I can't really swallow) they get to say, whoops, sorry folks, we made a (deliberate) mistake, looks like the critics were right all the time. The part I'm not spelling out is that all this would, naturally, involve abandoning those cherished 'tax cuts' that only lock in as the decade advances, but this may be considered the lesser evil (or maybe they believe all the late 90's Greenspan optimism that above trend sustained growth is possible, in which case all the numbers change). Look, I never said I agreed with this (although it has a lot more possibility of working in the US than it ever would in Japan or Europe), what I'm trying to do is explain some puzzling behaviour in a way which is different from the 'simplistic' theories. I like simple theories (a la Occam and Einstein), not simplistic ones (which doesn't mean the simplistic theories are never right, but we should always probe reality a little more, just in case they aren't). I don't know that this is actually what is going through peoples heads, just that it is quite consistent with a close inspection of the pertinent theories, and some of the known facts. Is it surprising that they are not explaining this: well obviously no. For this game-play to work it is important that the other players aren't aware of it. What I do think is that before arriving at strong conclusions we should at least consider all the arguments: I am simply presenting one story, a story which might account for what would otherwise appear to be some highly irrational behaviour. Are they up to it? I haven't a clue.

Rogoff vs Stiglitz

The sharp-eyed will have noticed my continuing regard for Rogoff's watch at the IMF (despite the occasional 'inflation targeting? footfault), and my absolute lack of respect for Stiglitz. People who were surprised by the virulence of the book should have noted earlier danger signals. Ormerod, in Butterfly Economics (the funniest book I have read since Spike Milligan's 'Adolph Hitler, My Part in His Downfall) has him giving the Marshall Lectures at Cambridge in 1996. As Ormerod has it: "He opened in superb fashion. 'Real business cycle theory' he began, picking up the first sheet of his notes and casting it to the ground, 'that's about all that needs to be said about that'." Well, don't say you weren't warned (none of which is to endorse RBC). Ormerod is infact quite good at sizing people up. Robert Mundell, for eg. Apparently he is begins all his UK TV appearances by saying that the euro must be coming since he has asked the taxi driver who told him that it was, of course, inevitable. He also mistook the female interviewer for the make-up lady: now how's that for a strong grasp on reality. (If you've noticed by now that I often don't have too much respect for nobels in economics, wait until I get started on the literature ones. Actually what I don't like is back slapping. Especially for doing bad science. But then I don't rate the Oscars either). Meantime all this was basically a lead in to Damien Smith who is running over the same sort of ground:

My question is, what did Stiglitz do as the World Bank's chief economist besides this? Stiglitz to some extent was naive, thinking that the sheer force of is ideas and personality could change things in Washington DC. Contrast this with what Rogoff has been doing. True, Rogoff first engaged in some triumphalism, such as the open letter and an article in Foreign Policy titled "The IMF Strikes Back", none of which was going to endear him to the Fund's critics, if that was his intention.Rogoff has though, to a large extent, learnt some humility. Take the March 17 research report on the "Effects of Financial Globalization on Developing Countries", which Rogoff co-authored. The dramatic conclusion:

The empirical evidence has not established a definitive proof that financial integration has enhanced growth for developing countries. Furthermore, it may be associated with higher consumption volatility. Therefore, there may be value for developing countries to experiment with different paces and strategies in pursuing financial integration. Empirical evidence does suggest that improving governance, in addition to sound macroeconomic frameworks and the development of domestic financial markets, should be an important element of such strategies

This was overblown, especially by some of the IMF's critics. The IMF still favours financial liberalisation, though it now recognises the problems involved, as well as a need for flexibility both in the process and pacing of such liberlisation. All the same, Ross Gittins of the Sydney Morning Herald is right when he writes that "while the IMF's many critics are rubbing it in, they shouldn't forget that such a burst of intellectual honesty takes a lot of guts."

The Fund has also been moving in other directions to change. Anne Krueger's proposal for a Soverign Debt Restructruing Mechanism, while panned at the recent Fund-Bank spring meetings, represents a huge effort to change current debt work-out practices. The IMF's signature publication, the biannual World Economic Outlook, overseen by Rogoff, is taken more and more seriously in the financial centres that matter. (There were times that IMF pronoucements on the US economy were binned straight away; no longer.) Recently, the Fund's staff was against a G-7 led push for a rollover of Argentina's debt.

The Fund therefore, under present management, is trying to evolve. It cannot be all things to all people, but it is seemingly willing to acknowledge its mistakes, while making efforts to do thing better. These efforts may not be the right ones, no matter how well-intentioned; collective-action clauses in bond contracts, for instance, are perhaps a better, and more politically feasible, solution for emerging-market debt problems than the SDRM. For all the oppostion that the Fund gets though, no matter what it does, these efforts must be acknowledged. Other than a couple of good research reports (Assessing Aid is one), I ask, what exactly is Stiglitz's legacy at the World Bank?
Source: Indiawest

A Grim Message For Europe

That's the economists view of the latest OECD Survey. They also endorse the 'should've cut sooner and harder' view of the ECB.

As the OECD points out, the gap between America and Europe is widening, with the euro area as a whole registering significantly poorer performance in the past few years. There is no prospect of an early reversal, at least in part because European economies have left themselves with very little room for maneouvre—and because what scope they do have remains largely unused.

It does not help that the European Central Bank (ECB) has been slow to reduce interest rates. The OECD reckons that there is scope to cut rates by another half of a percentage point: the IMF also said further cuts should be considered. In Europe, monetary policy is the main instrument of economic stimulus because the much-derided stability and growth pact has left no scope for fiscal relaxation. The budget-deficit limits set by the pact were intended to underpin monetary union, but they have already been breached. For the euro area as a whole, the budget deficit should have fallen to 0.3% by last year, and be set to disappear altogether in 2003. Instead, the deficit across the zone reached 2.3% in 2002, and is not now expected to return to balance until 2006 or thereabouts. France and Germany are finding it particularly difficult to meet the pact’s targets.

The OECD does not share the view of those who argue that the stability pact is pointless because it is damaging short-term recovery. Instead, it points out that the medium-term outlook makes curbing fiscal deficits necessary—not just to preserve the pact’s credibility “but because of the age-related spending pressures that are about to intensify over the next few years”. Without new measures, the OECD reckons the three biggest euro-area economies—Germany, France and Italy—will make little headway in bringing down their deficits. The report makes little attempt to disguise the OECD’s view that governments have mainly themselves to blame, for squandering the surpluses in the boom years.

It’s a grim message for Europe, especially when contrasted with the somewhat better short-term outlook for America, where the OECD expects a modest but steady recovery this year, accelerating in 2004. However, even that might turn out be optimistic in the light of the Federal Reserve’s latest survey of economic conditions across America, widely known as the “beige book”, published on April 23rd. This shows a “lacklustre” economy, with several parts of America growing even more slowly than earlier in the year.
Source: The Economist

SARS and China

Sars is primarily a human and a health problem, That notwithstanding natural born economists cannot help reaching out for the used envelopes in the bottom drawer, and trying to make out some rough numbers. Andy Xie reckons that the consequences in China could be mild but significant - 0.2% to 0.4% - but that the knock-on balance sheet impact could be more important. I'm not willing to risk my shirt on this, but my feeling is that unless things go down the worst case road (which isn't of course excluded - once the thing became endemic it would be all hell to erradicate) the impact could be less than even Andy is imagining. Firstly all that money that isn't spent on tourism will most probably simply be redirected into other sectors (the situation in Asia ex-China is another matter, as all the periphery countries lose their newly rich Chinese visitors: remember even if only 5% of the population are doing relatively well out of the growth spurt, that's still a hell of a lot of people). But secondly in terms of global business structure SARS is just one more reason to move away from face-to-face: bad news for the airlines, but good news for communication technology. As they say: some die, others are born. And if Roach and others (hmm, hmm) are right, and the negative feedback impact of slow growth in the US is accelerated growth in China, then this should give plenty of investment and extrenal demand stimulus. Plus, if Andy is right on the balance sheet front (but not too right) the main impact will be yet more internal deflation in China, more investment and more exports. So come on, I'm sticking my neck out, ex-worst-case-scenario-impact economic growth in China should maintain its momentum this year. Incidentally, one of the factors which is making SARS a health nightmare over there are the 150 million plus migrant workers occupied in the new economic zones, a terrible demographic for controlling epidemics, but a fantastic one for economic growth. Finally, not the final paragraph about crony-capitalism, and remember Japan.

In my view, the short-term economic pain will be acute. Cancellation of the weeklong May Day break could decrease this year’s GDP growth rate by 0.2-0.4%. The disruption to normal economic life could incur even more economic costs. On April 2, we reduced our forecast for China’s 2003 GDP growth rate to 6.5%. This is sufficient to cover the economic losses associated with SARS for one quarter of the year. There are three scenarios for how this crisis could unfold in the coming months. First, the virus loses its virulence going into the summer months, as do many other contagious respiratory diseases. Second, the virus remains as it is but the public campaign reduces the infection rate and brings the epidemic under control within two months. Third, the virus mutates and hits in several waves as did Spanish flu and Hong Kong flu. The first two scenarios are consistent with our current GDP growth forecast. Most of the economic impact would be concentrated in the second quarter and probably be equivalent to giving up one quarter of growth. Normalization should take place in July.The third scenario would imply a significantly lower growth rate than we are currently forecasting. It is virtually impossible to make such a forecast. The only relevant message is that it would imply much more downside than is currently in the market.

As China’s economy enters a period of rapid slowdown, it is impossible to predict the downside associated with its balance sheet risk. Large amounts of non-performing loans in state banks and the low profitability of state-owned enterprises are widely known risks embedded in China’s balance sheet. However, they may not represent the most important risk in this cycle.

An opaque private sector represents the gravest risk to China’s economy in the short term, in my view. A large number of private companies have flourished in the past few years by manipulating financial accounts to obtain bank loans. Some have even controlled local banks and used them as their own piggybanks. A large number of private companies have negative cash flow but present positive profits through accounting tricks. If the cycle turns down hard, they may face bankruptcies, which would magnify the economic cycle.This risk is especially pronounced in the property sector. Commercial building space under construction rose to 928 million square meters last year from 772 million sq. m. the year before. The industry didn’t have much equity to begin with and used mostly bank loans to fund its growth. Poor capitalization has been partly hidden by creative accounting. Further, purchases by Taiwan and Hong Kong residents are quite important to this sector’s health. The SARS crisis would reduce such demand. The balance sheet problem within this sector could be exposed in a downcycle. The sector contributed 23% of overall economic growth last year. If it experiences a hard landing, the impact on the economy would be large.

Further, the rise of China’s private sector, especially in the non-export sector, is modeled after Southeast Asian crony capitalism. Many, if not most, private companies that sell into domestic demand do not make returns above their cost of capital. They plug their cash flow problems with more loans. This has given them incentive to control local banks to ensure their cash source doesn’t dry up. This new risk represents an immediate challenge to China’s economic stability.
Source: Morgan Stanley Global Economic Forum

OECD Joins the Call for Sharp ECB Rate Cut

I'm afraid I'm not a special OECD fan, and in the comparison with Rogoffs IMF facelift there is 'ni color' as we say here in Spain. Nor am I willing to cite advice from Jeam-Phillipe Cotis since, frankly my dear, he may not have a clue. (Obviously there are exceptions to prove every rule, and Bessanini, Scarpetta, Scherer et al do a fine job). Also note the 'unexpectedly protracted' comment about the downturn: it depends on who you read doesn't it ? (Maybe the OECD people need to get into collaborative filtering). However it is interesting to note the growing consensus that something should be done to try to stop the big ship from sinking. Those in the little boats need to mind the backwash!

The eurozone needs a significant cut in interest rates "the sooner the better" to stimulate economic recovery, the Organisation for Economic Cooperation and Development said on Thursday. The Paris-based group of the world's 30 richest nations warned of slowing eurozone growth and said there was a clear case for a cut of 0.5 percentage points off the current interest rate of 2.5 per cent. The European Central Bank meets in two weeks.In its twice-yearly economic outlook published on Thursday, the OECD cut sharply its forecasts for eurozone growth this year while raising its expectations for the US in 2004.

The OECD indicated US interest rates were "well-adapted" to the economic situation but appeared worried about inflationary pressure in Britain, where it said short-term interest rates would need to rise next year. . World economic recovery would be "progressive if unspectacular" having been "unexpectedly protracted" and marked by failing confidence, the OECD said.
Source: Financial Times

Japan: Yet Another 20 Year Low?

Yes I'm afraid so. The only point of interest seems to be when will it stretch to become a 21 year one. But seriously folks, amidst all the talk that the Japan bubble burst at the end of the 80's it's easy to forget that during the last two years - effectively since Koizumi came to office to put things straight - the Nikkei is down 45%. If there is such a thing as a wealth effect, then this is indeed another enormous deflation in asset values, and still it continues.... It is extremely difficult in the face of this to understand how some commentators (like Morgan Stanley's Robert Alan Feldman, or, in his way, Richard Katz) can continue to be so upbeat on the 'reform' possibilities: by the way I'm in the proces of reading Katz's Japanese Phoenix he makes some interesting points and I'l try and blog something next week.

Tokyo shares fell below their recent 20-year low on Friday as investors reacted with dismay to Sony?s failure to reach its full year profit target. Sony shares were untraded as sell orders piled up at Y3,220, 13 per cent below the stock?s Thursday closing price and at the Tokyo exchange?s limit for a single day fall. The Nikkei average was down almost 2.2 per cent at 7,685.28 by midday, with the Topix index off 1.6 per cent at 781.92. Sony announced on Thursday that it made a loss of Y111.1bn in the three months to March, and fell well short of its profit target for the full year. Some analysts expressed disappointment that the media and electronics giant had not revised its forecast down as it became clear sales at its electronics division were falling away. The gloom surrounding the technology bellwether sent all technology exporters lower. NEC was down 2.3 per cent at Y346 after the company on Thursday it stayed in the red for a second consecutive year, but narrowed its net loss to Y24.5bn and forecast a profit of Y30bn for the coming year. Toshiba, which is set to announce full year results after the market close on Friday, tumbled 4.3 per cent to Y309. Matsushita, the electronics maker behind the Panasonic brand, also dropped 4.3 per cent, to Y885, ahead of reporting on Monday.The motor industry was not immune to the darkening sentiment, with Mitsubishi Motor falling 5 per cent to Y245 even though the company on Thursday reported record net profit of Y38bn thanks to successful restructuring. Honda was down 5.2 per cent to Y3,650 ahead of its earnings report due after the market close.
Source: Financial Times

Thursday, April 24, 2003

A Commitment to Higher Inflation

I'm not getting any feedback on my Bush the actor pretending to deficit spend irresponsibly argument (hint, hint!). Today there are two US professional economists areguing the case for an open comittment to inflation. Of course they're using a fairly orthodox inflation targeting argument of the kind I don't really swallow (not in its simplistic monetarist for anyway) but still, if you take this argument seriously, wouldn't they be doing what they are doing over at the US Treasury? Or what is it I'm missing?

The Federal Reserve has won its long war against inflation. And, with victory, go the spoils - evident in President George W. Bush's decision to reappoint Alan Greenspan for another term as chairman. But to ensure an enduring legacy, Mr Greenspan now needs to solve a different problem: inflation is too low, rather than too high. How so? The economy needs a buffer of inflation above price stability to ensure that monetary policy has room to work effectively in the event of shocks to aggregate demand. The inflation rate should be high enough to allow the economy to take a shock without falling into deflation.

During its anti-inflation campaign, the Fed opportunistically accepted recessions when they inevitably occurred because they generate disinflationary dividends. Then, in subsequent recoveries, the Fed would pre-emptively increase rates before there was any sign of a rise in inflation.Opportunism and pre-emption made sense when the Fed's goal was to push inflation lower. The mistake of tightening too much or easing too little had the benefit of clipping inflation. Cycle by cycle, the war against inflation was fought, with each recession drawing us closer to victory.

The logic no longer holds, however, now the promised land of price stability has been reached. There would be nothing opportunistic about going lower on inflation. To the contrary, doing so would be a deflationary mistake. Similarly, pre-emptive tightening makes no sense if there is no buffer between the actual inflation rate and price stability, as at present. Without a buffer, the Fed should welcome a modest rise in inflation.Such an outcome would provide the economy with greater room to absorb the inevitable adverse shocks. The deflationary costs would be very high in the present post-bubble world, given the heavy debt burdens of businesses and households. And the Fed has only 1.25 percentage points of interest rate ammunition left, even less if it wants to avoid putting the money market mutual fund industry out of business.

So what should Mr Greenspan and Fed colleagues do? First, they should junk the doctrines of opportunistic disinflation and pre-emptive tightening. Such a declaration would pull down expectations of short-term rates and foster lower longer-term rates.Second, the Fed should commit to keeping its federal funds rate at or below the current 1¼ per cent until core inflation climbs back to, say, 2 per cent or higher on a year-on-year basis. The current reading of about 1½ per cent (on Mr Greenspan's preferred measure, the core PCE deflator) is right in the middle of the 1-2 per cent range that Ben Bernanke, Fed governor, recently suggested as the working definition of price stability.

A commitment to a higher inflation rate would be better than a commitment to eschew tightening for a specific period, as some have suggested.Under the former, if the economy strengthened or if inflation rose, expectations about when the Fed would be released from its commitment would move closer and investors would bring forward their expected date of tightening. Bond yields would rise even before the inflation target was reached, helping to slow the economy and keep inflation from rising. Conversely, if the economy slowed or inflation fell, investors would anticipate a much longer period of low short-term rates. This would pull down bond yields, helping to stimulate the economy. The bond market vigilantes would be enlisted as a posse to help the Fed stimulate or restrain the economy.

In contrast, a time commitment could backfire. If the economy were much stronger than expected and inflation climbed, Fed officials would be stuck with a Hobson's choice - honour the commitment and allow inflation to climb higher than desired or renege on it and lose years of hard-won credibility.A strategy tied to an objective of modestly higher inflation does not require an accurate forecast. The Fed just has to be willing to live with inflation as high as the target. But what about the danger of an economy with a head of steam overshooting the inflation target? After all, given the slow effect of monetary policy, it would take time for the Fed to slow the economy. This is a risk. But we have little doubt that the market would start to raise longer-term interest rates, tightening long before the Fed. Meanwhile, the Fed would restore a buffer of inflation against a deflationary shock.

Such a strategy would require Mr Greenspan to give up some of his cherished flexibility. But flexibility is not always a good thing. It leads to uncertainty, not least over the Fed's vigilance in avoiding deflation. Such uncertainly contributes to higher risk premiums for both corporate equities and bonds. By reducing worries about deflation, the Fed could restore more normal risk premiums, promoting a greater appetite for risk among investors in post-bubble corporate America.Expectations are what drive markets. By shaping expectations - and anchoring inflation expectations in positive territory with a buffer against deflation - the Fed could get the more exuberant economic recovery it desires, with less risk of deflation.
Source: Financial Times

On Democracy and Lunatic Passions

Today Maynard is asking an interesting demographic question:

there is another aspect to the demographics of India and China that I've not seen you mention---the overhang of boys vs girls. I have a pet theory that as these boys grow up and can't find girlfriends we are going to see much more militarily aggressive stances from these countries. The boys will be eager to go into war on the theory that this will prove them to be men and make them more desirable to the babes and (heck, whisper it, remove some of their competition). China has the potential to keep this under control, meaning they simply have a pool of disgruntled young men vandalizing and perhaps being locked up in prison. But India, a democracy with all the lunatic passions that go along with that; and with Pakistan always there. I think this is simply one more good reason why we'll see another fight break out; only a reason not often mentioned.

I don't know if Maynard was aware of it but Richard Wrangham made a very similar type of point in his Edge interview (see below). On India more generally, my guess is that the US will try to use India as a buffer in the face of a growing perceived (or real) problem with China. I mean its the only thing that's b Iig enough. Every one things about Pakistan/India, normally when everyone is thinking something they're wrong. Remember India has had a war and long standing dispute with China.

China is coming up so fast that it's amazing even me. One of the points about things getting faster faster is that this has a strange effect on our concept of the future. I can still remember that in the seventees we used to talk about the eightees as if they were just around the corner. Now 2010 seems on the one hand quite near, and on the other very, very far away. If we follow a Kurweil type calculus we could see (to say something) 2 centuries of change (measured in past time) between now and 2010. What I'm trying to say is that we have no idea what the relative economic strengths and weaknesses of the US and China will be come 2010 (Europe I imagine will be completely out of the game and obsessed with its own problems), but the threat of military confrontation for hegemony must exist.

I would say this is the one which preoccupies me most. The one which gets me wakeing-up in the middle of the night in a cold sweat: just how will Washington respond the day Beijing announces 'tommorrow we're off to Taiwan'? Why, for example, were the Beijing politicians so keen to get chip manufacturing moved to the mainland, and why were they so 'anti' in Washington. And whatever happened to that 'spy plane downed' issue. It's funny, this took place about the time Stephen Roach was on one of his annual visits to Beijing. He even got to meet the then Premier. It was also about the time he really got going spelling out bubblenomics and the double dip. The Premier thanked him profusely and Steve was very flattered. One week later the plane was brought down. Now it couldn't be that they were grateful to him for explaining that the US was weakening economically, and that it might be a good time to push a bit, now could it? As usual people are thinking about the wrong story. (I'm not referring to Stephen Roach here, but to our general collective obsessions).

We tend to think of the problems that have given rise to Al Qaeda, for example, as being concerned primarily with economic and political conflict, and obviously those are hugely important. Nevertheless, in order to understand why it is that particular countries and particular people within those countries find Osama bin Laden's wild schemes attractive, we have to think in terms of rather deeper differences among groups and sexes.

Think of it this way: Why is it that Western civilization is threatening to the people who support the Al Qaeda philosophy? And not just the Al Qaeda fighters themselves, but more importantly the great masses who are buying the Al Qaeda t-shirts in the Middle East? It's true that U.S. hegemony over oil and support for Israel in the Palestine conflict are general economic inequities that are going to contribute to people's resentment, but there are reasons why those men in particular resent Westernization.
Men in the Middle East come from a society in which there is polygany — one man having many wives — and even though polygany can never be very wide-spread within a society because there aren't enough women, it has the enormous effect that women marry upwards. Polyganous marriages are always concentrated in the upper socio-economic strata. This means that in the lower socio-economic strata you have a lot of men with very few women, and they use the typical systems for getting wives that are used in polyganous societies, which include gaining control over women. In a polyganous society, women want to marry into the polyganous society because that's where all the wealth and the opportunities are to get good food and survival opportunities for your kids. Consequently, they allow themselves to be frustrated, to be veiled and put in the burkha, to be given rules that mean they can only stay inside the house and have to blacken their windows. They allow themselves to be totally controlled by men.

So in this society you've got a lot of lower-class men, who have very few reproductive opportunities, who want to control women, and then you introduce them to this westernization that says, "Women, we will educate you, we will free you from the burkha, we will give you opportunities to be mobile, to travel, to flirt, to make your own romantic alliances." That is a very strong threat to the men who are already up against it and whose reproductive future depends on making alliances with other men who are in complete control of their own daughters. So westernization undermines reproductive strategies of men who are already desperate.

This means that in order to develop long-term strategies for reducing the degree of resentment that globalization and westernization are inducing in those countries, we should think about what we can do to reduce polygany. The countries where Al Qaeda gets the most support are the most polyganous countries: the Afghanistans, the Pakistans, the Saudi Arabias, and so on. But if you take a country like Turkey, which banned polygany in the 1920s, you see very little support. Single men are dangerous when they face a difficult reproductive future, and when they are presented with a series of economic changes that further reduce their economic futures by liberating women from their own control, then those men become peculiarly open to those wild schemes that Osama bin Laden presents. And those sorts of dangers are liable simply to continue for as long as the reproductive inequities continue in the Middle East.

Wednesday, April 23, 2003

On the Inconveniences of Meddling

Sunday I wrote: "When you meddle you destabilise, and when you destabilise you don't know (and can't in principle predict) the consequences...". Minute Man has sent me some critical feedback. His point and my reply:

Well, that assumes that the situation was stable prior to meddling. Eastern Europe was a demographic disaster area long before 1989. for that matter, Western Europe is a demographic disaster - if your tables included France, Spain, Italy, and Germany, I don't think they would stand out as significantly better than the Eastern bloc.

Anyway, Iraq (if it is like the rest of the mid-east) is much younger and, one hopes, more energetic.

Of course Eastern Europe wasn't stable before, and of course things needed changing. My point is the whole homeostatic theory is bunk. You can't massively intervene (which is not leaving things to market forces) and then assume everything will find a nice equilibrium.The eastern transition process has produced a nightmare, and no-one is even reflecting on it. Russia has been left in the hands of gangsters with the only known exports being oil and prostitutes. So, like Fox TV, we move on to the next spectacle. I don't think this is going to work.In fact you are wrong, the eastern demography is significantly worse. You may remember that I am pretty critical of the anti-immigration mentality of most west European states, and I think the growth and stability pact is pretty much a non runner because of the debt situation produced by the demographics.

The point is I'm afraid, we need theory to understand this, wishful thinking just won't work. The EU countries (without the enlargement) the US and Japan are all more or less in a line, which is now being followed by eg the Asian tigers, then behind this are coming (roughly speaking) Brazil, Mexico, India... Special cases are Eastern Europe and China. This is probably because of the early entry of women into the labour market and then economic implosion (in the Eastern Europe case) and social engineering population manipulation (in the Chinese one).

The more I study this topic, the more I realise that the classical economists understood more than our neo-classical contemporaries. The economic consequences are going to be enormous. In particular, if there is a 'demographic transition', (for example from 3-4 children per female to below 1.5, remember once you strip out immigration all 'developed' societies are now below 1.5, and, more frighteningly, it seems that as growth slows down, and societies get older and relatively poorer, this number may deteriorate rather than improve) it seems the more rapidly you make it the worse the resulting situation. This is why the case of Spain and Italy in the EU is so important, or S Korea in Asia. This may tell us what we can expect to see in Mexico, Brazil, India etc 20 to 30 years from now.

On Iraq, I entirely agree, it is much younger. Whether it is more energetic after years and years of one-party rule remains to be seen. On the demographic front, obviously it would make sense for the EU to incorporate not only Turkey, but also Iraq and Iran (this would also help do something about our oil shortage!!). I think the problems in Iraq are primarily political, but this is beyond my competence, and anyway there are already plenty of commentaries on this to suit every opinion. My point is more fundamental. If we reject the complex adaptive system 'ermergence' hands-off (or if you prefer hidden-hand) approach and go in for massive interventions, we shouldn't be surprised if we get the results we don't expect. This, after all, is the principle argument against state manipulated economies: whether in France, Russia, or Iraq.

Ken Rogoff on Inflation Targeting

The Chief Economist at the IMF becomes an inflation targetting evangelist in today's FT. Normally I give an unequivocal welcome to the breath of fresh air Rogoff has brought to IMF economics, but here I can't help feeling he is way off target. He seems to miss the deflation problem entirely and treat the interaction of political and economic objectives as if this was a simple 'technical' question. As everyone knows the US treasury is hell bent on provoking inflation provoking deficits, Bernanke down at the Fed cannot really disagree. What would be 'moderate' inflation? 4%, 5%? So at least noone can complain is that the US authorities are not making their inflation targeting (useful 'double entendre' here) clear. What many less people seem to recognise is that this may be a sophistocated game of poker, where the interaction between the central banker and the politician may be central.In fact 'destructive ambiguity' may be what the game is all about. Or are we to assume that the public at large are a bunch of simpletons?

Even those of us who are not inflation-targeting fanatics are starting to wonder why the G3 central banks (Bank of Japan, the European Central Bank and yes, even the US Federal Reserve) seem so reluctant to speak more openly and concretely about their long-term inflation objectives. What harm would there be in giving broad guidelines for, say, average consumer price inflation over the next five to 10 years? One can think of some concerns but do they really outweigh the potential benefits? Yes, each of these large central banks faces special challenges, but the broad general issues are really the same.

The principal argument in favour of more transparent and specific official long-term inflation objectives is to make it easier for markets to interpret central bank policy. With long-term inflation expectations more firmly anchored, long-term interest rates might jump around a bit less, and businesses and investors might find it easier to draw up long-term contracts.

Admittedly, monetary policy in both the US and the eurozone has vastly improved over the last two decades, and long-term inflation expectations are correspondingly more stable. But could a bit more transparency hurt? Besides, there are other potential benefits to anchoring expectations. For the BoJ, the failure to communicate a clear strategy on inflation over the past five years has helped confound all efforts to escape the country's deflation sand-trap. Surely annual yields on 10-year yen bonds would not be below 1 per cent if people envisaged a clear end to the country's long bout with falling prices. True, there is relatively little danger of seeing broad-based embedded deflation take root in the US or the eurozone, but it is clearly an outside risk. If the Fed, in particular, had in place a framework for anchoring long-term inflation expectations, there might be less need to worry about having to use unorthodox anti-deflation weapons such as purchasing long-term securities.

And then there is the perennial problem of the changing of the guard. This is a much discussed concern in the US, but in some ways no less of an issue for the euro area and Japan. Would not some clarity over long-term inflation objectives help to calm markets?

There is another delicate matter: while much of the world currently enjoys an outstanding group of central bankers, what if some future appointees were less competent and perhaps less committed to controlling inflation? Wouldn't having a long-term inflation guideline help mitigate the problem, at least marginally?

The interesting question is why reject this small non-addictive dose of inflation-targeting? The most compelling argument, perhaps, is the "slippery slope" defence: if one of these central banks were to issue broad guidelines for five- to 10-year average inflation, it would only be a short hop, skip and a jump to far more narrowly construed inflation targeting, say along the lines of the Bank of England. Worse things could happen, although it is important for the largest central banks to retain considerable flexibility and discretion. In today's complex global environment, difficult-to-imagine uncertainties form the exception that proves the rule.

Another concern is the inflation guideline itself. What if a central bank chooses the wrong one? This counter-argument seems pretty feeble. Central banks have implicit guidelines anyway, and if they do seem misguided, then all the more reason to hear the central banks' thinking. What kind of targets make sense: 2, 3, zero per cent? These are technical questions, but suffice it to say that in currency unions that are less well integrated, both in terms of fiscal policy and labour mobility, a higher inflation objective is needed to reduce the odds of localised deflation. And positive and negative deviations from the guidelines ought to be treated symmetrically.

What about the fact that there is a variety of indices of inflation, and none is quite right for everything? True, but as long as the central bank is clear on its aims, markets ought be able to adjust accordingly. In any event, in the universe of macroeconomic concepts, inflation is something we measure relatively precisely, compared, say, to output or unemployment.

What I propose is a small step. I do not regard transparency of long-term inflation objectives as being more important than maintaining central bank independence, or than having conservative central bankers with strong anti-inflation credibility. Indeed, looking over the next 40 years, one has to be concerned about burgeoning fiscal deficits and ballooning old-age transfers in the biggest economies. Monetary institutions must remain strong or the irresistible force of fiscal profligacy will once again overwhelm all inflation resistance. A greater measure of inflation transparency can only help. It is time to end policies of destructive ambiguity.
Source: Financial Times

China Overtakes UK to Become World No5 Trading Nation

No real surprises here, although it's nice to watch the milestones as we go rolling past.

The outlook for world trade this year is clouded by uncertainty, and growth is unlikely to be any stronger than last year's modest recovery, the World Trade Organisation said on Wednesday. Merchandise trade volumes grew 2.5 per cent last year, after falling 1 per cent in 2001, thanks to robust import demand in North America, China, other Asian developing countries and the transition economies of central and eastern Europe.The value of China’s merchandise exports and imports increased by more than 20 per cent last year, when the country overtook Britain to become the world’s fifth largest trading nation. The value of India’s exports also grew at double-digit rates.Import volumes shrank slightly in western Europe and rose weakly in Japan, reflecting slow economic growth. They fell sharply in Latin America because of economic crises that severely reduced inflows of foreign direct investment into the region.

A third of last year’s growth in world trade was accounted for by a 3 per cent rise in the volume of US merchandise imports, fuelled by strong consumer demand. However, the expansion tailed off in the final quarter, reflecting weak capital investment.Despite the depreciation of the US dollar, North America’s merchandise exports fell almost 4 per cent. The WTO blamed the drop on lower demand abroad, particularly in western Europe and Japan, and on an apparent loss of US export competitiveness. Overall, merchandise trade volumes in developing Asia grew 12.5 per cent. However, Japan’s merchandise imports rose only 1.6 per cent, and its exports 8 per cent. Although the value of western Europe’s exports rose 5.5 per cent and imports by 3.5 per cent in US dollar terms, the WTO said the apparent growth was entirely due to the dollar’s depreciation. In volume terms, exports rose 0.6 per cent and imports fell 0.5 per cent.
Source: Financial Times

SARS on and on it Goes

Apart from the fact that the rapid upward revisions of the numbers in China mean that the epidemiological studies correspond to an increasinly undertain reality, and that this means that drawing conclusions becomes increasingly difficult, there is some good news and some bad news. The good news is that the Beijing Genomics Institute and the Institute of Microbiology and Epidemiology of the Academy of Military Medical Sciences have now done some gene sequencing and they've posted to the internet, in yet another example of how the technology is transforming research and creating a whole new idea of scientific 'community'. The bad news is that the virus may well be mutating:

The latest gene sequences of the SARS virus were obtained by scientist at the Beijing Genomics Institute and the Institute of Microbiology and Epidemiology of the Academy of Military Medical Sciences. They have now released five sequences on the internet. A short report on four of the coronavirus samples was also published. The samples came from nose and throat swabs, as well as lung, liver and lymph node tissue removed during autopsies. Three samples were from Beijing patients, with the fourth from a patient from Guangdong, the province where SARS originated.Four other code sequences have been released by scientists in Canada, the US, Hong Kong and Singapore. All differ by up to 15 "letters" in the 30,000 that comprise the virus. The Chinese scientists note the differences and write that "the virus is expected to mutate very fast and easily". Such slight differences could also be explained by errors in the sequencing process.However, most of the variations seen so far seem to affect one gene in particular, while 12 more genes show no changes between non-Chinese sequences. This suggests the variants may genuine mutations.Scientists will now be working to determine whether different strains produce different symptoms in patients and are spread in different ways. In Hong Kong, the group of patients from the now infamous Amoy Gardens tower block were much more likely to suffer diarrhoea and the virus's spread there has been linked to the sewer system. Scientists at Hong Kong University are now sequencing key regions of the virus.

China's increased openness has given a cautious welcome by the World Health Organization. "We're now much closer to what we always thought was the reality in Beijing," says Peter Cordingley, spokesman at the WHO's Western Pacific headquarters in Manila. "But as for the rest of the country, we have dark misgivings." New data reveals that SARS now ranges from the densely populated Sichuan province in the southwest to Liaoning in the northeast. "We're very worried about the less accessible provinces, where there is poor health care and poor resources," Cordingley says.

But another WHO official says China is still not revealing some key data. "Without the date of onset for patients, you can't say what the trend of the disease is," Jeff McFarland, a WHO virologist, told AFP. "This is the data that we need to have to fully understand the epidemic." "To be able to contain SARS, we have to know what is happening in China," says microbiologist John MacKenzie at the University of Queensland, Australia, and a SARS investigator for WHO. "Until the Chinese authorities come totally and utterly clean, they will maintain a sink that will carry on affecting us globally," he told New Scientist. MacKenzie adds that problems with the flow of information between authorities and the WHO have also been a problem in Hong Kong, particularly in relation to the spread of SARS in the Amoy Gardens housing block. "Details of work on transmission, on what animals, if any, might be involved is still to come out," he says.
Source: New Scientist

Tuesday, April 22, 2003

On the Comparative Advantage of Being Young

Joerg has written to me raising some interesting points, among them:

"You also have a page with graphs done by Ray Kurzweil which show how fast things get faster, i.e., the degree of acceleration inherent in technological progress. This points to accelerating growth and thus an offsetting effect in terms of overall future growth. In my view, combining an increase in the retirement age with pro-immigration policy and an innovation-friendly incentive structure should do the trick. However, obviously there is no way to ever remove the growth advantage a "younger" society has during the brief period that it stays younger. Why should there? But maybe your thesis is more pessimistic and refers to increasing resistance against technological change in "older" societies?"

The page in question is ( here ).

I think Joerg has understood me, it's not just how fast things get faster, but how much faster they are getting faster. Kurzweil calls it the law of accelerating returns. My gut feeling is that we are talking about an underlying power law type process here: cooking, agricultural revolution, industrial revolution, informationalism....then what? The first point I would make is such change, linked as it is to fundamental uncertainty and absence of visibility (sound familiar??), is by its very nature destabalising, at least for a society which is nicely adapted to a far slower rate of change. Of course I think that economy and society are complex adaptive systems so we will learn eventually, but there is going to be a transition period.

And this transition period occurs when, guess what, our societies are ageing rapidly. Of course whether there is a connection between these two things, or put differently what is ergodic and what is non-ergodic (incidentally I am grateful to Cosma Shalizi for pointing out in his blog that chaotic sytems are generally ergodic, though 'subject to positive destabilising feedback' : ( here )

So this is the first point. We are, in principle, going to have trouble handling all this change, and I think we are already seeing signs of that. Now on the more mundane economic level whether tthis process of technological change produces growth as we conventionally measure is a hard question, as is, as Joerg notes, quatifying what is happening. You mention the comparative advantage of a young society for the 'brief period' it remains younger. May I remind you that in the case of the UK this brief period lasted from the end of the 18th to the end of the 20th century, during which time enormous transformations in relative rankings in the global economy occured. In particular India and China got stuck on the starting block. But now much of this seems to be unwinding, and I think it is worth trying to investigate some of the consequences. Especially since some of the previously young societies haven't yet been convinced of the comparative advantage of younger societies and may be in some sort of denial. Also the brief period may well be much briefer for some newly developing economies, and this tends to suggest a much more roller coaster type ride as we move forward (again I suggest China is going to be a very clear example of this: something like having a Tsunami passing through your front garden).

Getting really mundane, we need some ageing metrics both in age and relative value terms. Theoretically it is possible to have declining labour forces and rising economic values produced. It is also possible to have the contrary case. It depends, and we don't even have tractable models yet. Again it is possible to have rising gross product values and rising per capita incomes, or one without the other. Ditto, it depends and we have no adequate models. One of the key theoretical problems here is what exactly productivity is, and what exactly that nebulous component TFP is. Falling prices are not necessarily bad, this is clear. It all depends on the rate of expansion of the whole economy and the relative elasticities of the different product sectors. You could argue that the rapid productivity advance in the US and the recalcitrant growth rate was an example of bad sector-lead disinflationary pressure, but I am not convinced we have the picture clear enough on this one yet to assert even that.

Sock it to 'em Marty

Harvard professor and president of the US National Bureau of Economic Research Marty Feldstein has a timely piece on the pitfalls of the euro in today's Financial Times. While I may not go along with him in everything he says - I'm not sure he has the endebtedness minefield that lies behind the growth and stability pact too clear for example - he has at least been saying this from the begining. I wonder how many more will jump on the bandwagon this year as the problems become more and more apparent. My guess, for what it's worth, is that Britain won't join, ever. Sweden, I don't know, it may be a close call, and it depends how things pan out as the year goes on. The enlargement countries, if they've got any sense they won't since they would lose their competitive edge inside the Union, also by the time their turn to decide comes the difficulties involved will probably be pretty plain to see.

As Gordon Brown, the chancellor of the exchequer, considers whether adopting the euro would be in Britain's interest, he should look carefully at the experience of Germany. Membership in the monetary union has weakened the German economy and is preventing it from escaping its current slump. Although Germany also suffers from a variety of structural problems, it is the euro that raised its unemployment rate over the past year to 10.6 per cent. The German example shows that Britain's decision about adopting the euro is not a question of whether the time to do so is now right. Adopting the euro is a permanent commitment with permanent consequences. My judgment is that it would not be in Britain's long-term economic interest to accept the constraints of the single currency.

Here are the facts. Germany's gross domestic product rose only 0.5 per cent last year, the lowest of all the leading European countries, and ended the year in decline. Germany also has the lowest inflation rate, just 1.2 per cent. Because the single currency means that all eurozone countries have the same nominal interest rate, Germany's real interest rate is the highest in the eurozone. This is a very dangerous situation in which the high real interest rate weakens the economy and causes inflation to fall further. As the inflation rate falls, the real interest rate rises, creating the potential for a dangerous downward economic spiral.

If the German economy were not constrained by the single currency, natural market forces would cause interest rates to decline, thereby boosting all kinds of interest-sensitive spending. Weak demand in Germany would also cause the D-mark to decline relative to its trading partners, boosting exports and helping producers to compete with imports from the rest of the world. Instead, German manufacturing has been weakened by the sharp rise of the euro over the past year. In addition to these automatic market responses, an independent Bundesbank would probably have responded to the weak economy and declining inflation by temporarily lowering short-term interest rates. This is now impossible. The European Central Bank must make monetary policy for Europe as a whole, an area in which inflation is now above the 2 per cent target ceiling. The Stability and Growth Pact also prevents Germany from using a temporary fiscal stimulus to increase growth and bring down unemployment. Although persistent deficits are harmful in the long term, a temporary rise in the fiscal deficit could in principle provide the stimulus needed to rekindle growth. But the eurozone countries have had to constrain themselves from running deficits because of the potential danger to the common currency.

As an American who has long been sceptical about the economic effects of the euro, I am often asked why a single currency should be good for a large continental economy such as the US and yet not for Europe. The answer is that the US economy has three basic features that make it possible to have a single currency without the harmful effects that now arise in Europe. First, American employees move within the country when demand is relatively weak in a particular region, facilitated by a common language and a culture that regards moving across the country as perfectly normal. Germans are not leaving Germany in large numbers for areas of Europe with faster growth or lower unemployment. Second, wages are much more flexible in the US than in Europe, reducing the decline in regional employment that occurs when demand falls. And third, the US has a federal fiscal system that directly offsets about 40 per cent of the relative decline in any state's gross domestic product by a lower outflow of taxes to Washington and a higher inflow of transfer payments. European fiscal systems are still largely national.

Germany did not decide to embark on the single currency after a careful evaluation of its economic costs and benefits. Helmut Kohl led Germany into the single currency in order to create a stronger political union in continental Europe, a political union that would have common economic, social, defence and foreign policies. The euro would be a symbol of that solidarity and a mechanism for centralising economic power.
Source: Financial Times

Monday, April 21, 2003

Who's in Charge at the Iraqui Oil Ministry?

I suppose in times like this you just have to keep your sense of humour.

Ringed by US tanks and guarded by US soldiers with a very exclusive admission list, Iraq's oil ministry on Sunday appeared secluded from the disorder that reigns in the rest of Baghdad. One question nevertheless provoked a great deal of confusion: who is in charge of the world's second largest petroleum reserves?The former minister is barred from entering, as are his deputies. A man in a green suit, standing outside the barbed wire, introduced himself as Fellah al-Khawaja and said he represented the Co-ordinating Committee for the Oil Ministry, which few of the employees had heard of.

But when asked who was giving the orders at the ministry, most employees pointed to a portly man standing in the lobby, who declined to give his name: "I was a DG (director general) in the old administration, and no one has told me I'm not a DG anymore," he said......The director general said he was confused by the lack of any formal notices, and had a only a vague idea of the committee, backed by the Iraqi National Congress, the formerly exiled opposition group. "I don't honestly know who they are, who chose them, how they are being motivated. I know I am in contact with no one and no one is in contact with me." However, he lamented the whole US approach to dealing with post-war Iraq. "We have a lot of experience with coups d'etat and this one is the worst," he said. "Any colonel in the Iraqi army will tell you that when he does a coup he goes to the broadcasting station with five announcements. "The first one is long live this, down with that. The second one is your new government is this and that. The third is the list of the people to go on retirement. The fourth one, every other official is to report back to work tomorrow morning. The fifth is the curfew." This is usually done within one hour, he added. "Now we are waiting more than a week and still we hear nothing from them."
Source: Financial Times

Committed to Being Irresponsible

Brad Delong has posted the latest information on the US Deficit ( here ) but I'm afraid the smart money says we're all missing something here. Reading the comments there lead me to recommend the following paper by none other than Gauti B. Eggertsson, and appropriately enough entitled "Committing to being Irresponsible"


This paper explores the peculiar credibility problem that a zero bound on the short-term nominal interest rate, the liquidity trap, poses to monetary and fiscal policy. We present a rational expectations model in which the zero bound on short-term nominal interest rates is binding due to deflationary shocks. When the zero bound is binding the Central Bank best achieves its objectives by generating inflation expectations to lower the real rate of interest and stimulate aggregate demand. A discretionary Central Bank that is independent from fiscal policy, however, cannot credibly commit to inflation. The result is a liquidity trap that is characterized by excessive deflation and a negative output gap. This deflation bias is the opposite of the inflation bias analyzed by Barro/Gordon (1983) and Kydland/Prescott(1977). Turning to fiscal policy, our model implies that if the Central Bank is independent then Ricardian equivalence holds and deficit spending, i.e. tax cuts and debt accumulation, has no effect. Our proposed solution involves reducing the independence of the Central Bank. If fiscal and monetary policies are coordinated, Ricardian Equivalence fails, and the government can credibly commit to future inflation by deficit spending. As a result it lowers the real rate of return, curbs deflation and increases output. Finally we address what coordination of fiscal and monetary policy might entail in practice. We review the applicability of our model to the current situation in Japan. We then discuss the extent to which the successful policies pursued in Japan during the Great Depression can be rationalized by our model.

Now remember not everybody working in the White House is completely stupid, there is a real deflation threat, and if they said they were going to create a temporary scare and then announce 'sorry folks only kidding', no-one would believe them, now would they? So if you want to commit to being irresponsible then you have to be credible, and what better actor to convince the world the US government is totally irresponsible than George W. (I never have been able to understand why he didn't get the Oscar for Elmer Gantry).

I have been trying to flag this since Mankiw was appointed. I don't believe the looming inflation story for a minute (my whole ageing population analysis goes out of the window for one. Of course I wouldn't mind being proved wrong since a bit of nice steady inflation would be a lot preferable - there I am a Keynesian at heart - the trouble is I'm not convinced). If I had been Paul Krugman I wouldn't have take a fixed rate mortgage. (Unless, that is, he's also an insider working-up the act. Of course I'm joking but it's a wonder Mickey Kaus and company haven't got round to thinking this one up, probably they're not paranoid enough yet). However once you start along this road you could read Greenspan and Volcker as joining in the act.

Or again, you could read all those internet Iraqui oil/euro conspiracy theories as just Karl Rove inspired spin to keep the Europeans happy with a rising euro while the US Treasury quietly lets the dollar fall.The trouble is, once you start to read economic policy like a game, you just don't know where to stop, now do you?

The government ran up a deficit of $252.6 billion in the first six months of the 2003 budget year, nearly twice the total for the same period a year earlier. The latest figures, released Friday by the Treasury Department, highlighted the government's deteriorating fiscal situation. Record deficits are forecast this year and next. The total deficit so far this fiscal year, from October through March, was higher than the Congressional Budget Office's forecast for a deficit of $248 billion. The shortfall was $131.9 billion in the 2002 first fiscal half. Revenue slipped 6.1% to $825.2 billion from the year-earlier period, reflecting lower tax revenue from the listless economy. Individual income-tax payments dropped 6.8% to $372.1 billion. Corporate tax payments plunged 43% to $44.6 billion, reflecting in part the impact of business tax cuts enacted last year and weaker profits, the CBO said. Federal spending climbed 6.6% to $1.08 trillion from a year earlier. The biggest spending categories were Social Security, at $249.3 billion; programs of the Health and Human Services Department, including Medicare and Medicaid, $246.5 billion; military, $180.9 billion; and interest on the public debt, $160.6 billion. For the entire 2002 budget year, which ended Sept. 30, the government ran up a deficit of $157.8 billion, ending four consecutive years of surpluses...
Source: Associated Press

Five Steps From Heaven

Unlike Eddie Cochrane, Stephen Roach can count five steps between where we are now and where we all want to be. I, of course, would add a sixth: that the ageing of the US population doesn't represent a drag on growth at home, while ageing in Europe and Japan doesn't place the appearance of rival growth engines beyond the bounds of reasonable doubt.

The dream merchants are hard at work peddling the tale of another economic revival. The magic of postwar relief is widely billed as the catalyst. A veil of uncertainty will be lifted — so goes the argument — prompting businesses and consumers, alike, to unleash the animal spirits of pent-up demand. Just as America led the charge to Baghdad, the US economy is now presumed to lead the way to global recovery. Prewar malaise will give way to postwar healing, and presto — world financial markets will unwind many of the trades that have been in place for the past six months. Just like that. To me, this is a leap of faith of Herculean proportions. While I certainly concede it is possible to get from Point A to Point B, I am hard-pressed to believe that the path will be seamless or expeditious. As I see it, there are five myths to the recovery call of 2003, each of which draws the postwar healing scenario into serious question:

First and foremost, is the myth of another US-led recovery in a lopsided global economy..........The notion of a capex-led recovery in the United States is a second myth of the global healing scenario..........A third myth of recovery is that America has fixed its saving problem, thereby removing one of the key impediments to sustained economic revival....................A fourth myth of recovery is to pretend that the deflationary scare is over..............A fifth myth of recovery is the notion that postwar healing in the US is about to spark an economic revival elsewhere in the world. Unfortunately, the world is still headed the other way.
Source: Morgan Stanley Global Economic Forum

Nonetheless I'm afraid I still go for the Cochrane original:

The formual for Heaven's very simple
Just follow the rules and you will see
And as I travel on
And things do go wrong
Just follow steps one,two and three

Step one - you find a girl to love
Step two - she falls in love with you
Step three- you kiss and hold her tightly
Well that sure seems like heaven to me
Just follow steps one,two and three

The Price of Transition

Normally I try to steer well clear of politics (with a capital P) and stick to the things I know something about, but a piece in Business Week has got me going about a topic which I think is important: the transition in Eastern Europe. Far be it from me to offer any strong opinion about the future of Iraq. The internal situation seems to be extremely complicated, and the external one even more so. What concerns me is that in many of the arguments relating to Iraq, the precedent of the Eastern transition is held up as a model. Well that is the last thing it should be. In my book all these countries are still essentially in a state of schock - traumatic shock most likely - as a result of the impact of the 'transition process'. The evidence for this: look at the population numbers (I have yet to really write up my thoughts on the 'transition countries' but some indication can be found ( here )).

In the demography debate the list of former Eastern bloc countries looks more like a parade of 'usual suspects'. Belarus currently 10m, 2050 projected 7.5m, Bulgaria currently 8m, 2050 projected 5.25m, Czech Republic currently 10.2m, 2050 projected 8.5m, Estonia currently 1.3m, 2050 projected 0.65m, Hungary currently 10m, 2050 projected 7.5m, Poland currently 38.6m, 2050 projected 33m, Romania currently 22m, 2050 projected 18m, Russian Federation currently 145m, 2050 projected 101m, Ukraine currently 49m, 2050 projected 31.7m. In addition to the dramatic population decline we can also expect a radical aging process: Belarus currently under 15 18.7% over 60 19.3%, 2050 projected under 15 14.2% over 60 37.6%, Bulgaria currently under 15 15.8%, over 60 21.7%, 2050 projected under 15 13.9%, over 60 38.1%, Czech Republic currently under 15 16.4% over 60 18.3%, 2050 projected under 15 13.4%, over 60 39.5%, Estonia currently under 15 18.0%, over 60 21.2%, 2050 projected under 15 14.6%, over 60 41.4%, Hungary currently under 15 17.0% , over 60 19.7%, 2050 projected under 15 14.1%, over 60 36.0%, Poland currently under 15 19.2%, over 60 16.6%, 2050 projected under 15 14.5% , over 60 36.2%, Romania currently under 15 18.2%, over 60 18.9%, 2050 projected under 15 14.7%, over 60 34.9%, Russian Federation currently under 15 18.0%, over 60 18.5%, 2050 projected under 15 14.5%, over 60 36.0%, Ukraine currently under 15 17.8%, over 60 20.6%, 2050 projected under 15 13.7%, over 60 37.7%.

Now a number of points need to be made. Firstly no-one (yes: no-one) knows what the consequences of this 'other' transition will be, or even if at some point this dramatic population implosion will reverse itself. One thing is however sure, the reality will be a difficult one. These countries are approaching this traumatic change in poverty, and with retiring cohorts with very little in the way of accumulated wealth. Given their relative poverty, and the important immigration needs of their more affluent western European neighbours, it seems unlikely that they will attract significant immigration: the contrary is in fact more likely (and in fact as my own personal experience with Bulgarian immigrants here in Spain confirms), that the able bodied under 50 leave to work in the west, sending money home to help elderly relatives. This 'individual' solution will, in fact, only make the collective problem worse.

Secondly, I am not trying to hold anyone in particular responsible for this 'outcome'. The reasons for this unique situation have yet to be adequately analysed, and its consequences appreciated, but one thing is sure: no-one should be claiming this catastrophy as a victory for liberation. When you meddle you destabilise, and when you destabilise you don't know (and can't in principle predict) the consequences. Nor am I saying that there is any direct comparison with Iraq here (although looking round the world from Russia to Venzuela to Nigeria to Saudi Arabia having petroleum seems to be more of a curse than a blessing - in fact I think Adam Smith already understood why this would be - and it remains to be seen whether Iraq can be the exception that proves the rule. Suffice it to say that I have my doubts, and that thinking about the difference between Texas and California may help to see why it is reasonable to entertain such doubts). No what I am saying is that the eastern 'experiment' has produced results which are far more problematic than is widely recognised, and even though the road to disaster may well be paved with the best of intentions (the euro??), playing with other peoples lives to test ideological principles can only make bad things worse. Now why do I find it difficult to convince myself that this lesson has been learnt in the White House?

From Basra to Baghdad to Kirkuk, U.S. and British forces are still mopping up combat operations and restoring order. But retired Lieutenant General Jay Garner, director of the awkwardly named Office of Reconstruction & Humanitarian Assistance (ORHA), is eager to get going on rebuilding Iraq. Still forced for security reasons to cool his heels with his staff of 350 in Kuwait City, Garner is itching to move to Baghdad to oversee his "Iraqi jump-start program." The plan is to restart oil production, award key telecom contracts, and provide small-business loans within three months.

Garner & Co.'s effort will mark the start of another monumental experiment in economic transition -- one that could prove every bit as complex as efforts to transform Eastern European and Soviet economies in the 1990s. Like many of those former communist governments, Iraq has operated under an inefficient command-and-control system for decades. Its economy has also been ravaged by three wars, including the current one, since 1980, and more than a decade of international sanctions. Although Iraq's oil reserves of 112 billion barrels offer tantalizing prospects, the industry sorely needs investment.

And while little is known about the rest of the economy -- few nations have been isolated for so long -- there's no doubt it's a wreck. More than 600 state-owned companies have been run into the ground, Garner aides estimate. Planners will have to sift through the ashes of the Finance Ministry, destroyed in Baghdad, for clues as to how the government finances were run. "The restructuring of this economy to meet national needs is going to take, at minimum, a half a decade," predicts Anthony H. Cordesman, a prominent expert on Iraq at the Center for Strategic & International Studies in Washington. "I would have hoped that we learned from the Russian experience that a command economy that has been warped for 30 years is not going to be 'jump-started."'
Source: Business Week

Sunday, April 20, 2003

At Last It's Official: the Internet Dropout Exists

The latest Pew Centre survey on the use and non-use of the internet( here ) has some interesting details. 42% of the US population are currently off-line, but within that group there are some interesting differences: 24% are described as truly disconnected (never-tried and not-interested), 20% (the net-evaders) have a 'small world' one-remove connection via a friend or family member (the technologically challenged?), while 17% (up from 13% April 2000) are identified as 'dropouts' (people who are one-time-but-no-longer users, among the many reasons seems to be 'computer loss', in one case the dog - or was it the girlfriend - may have eaten the computer). Among the many things which have altered but received little comment with the regime switch in the US has been the level of interest and awareness about the 'digital divide' problem. Aggregate user/non-user distinctions still,in my mind, tell us relatively little about what is happening on the user front. Last year's Pew 'Broadband' survey was revealing, among other things for the details about broadband connections and internet posting. A staggering 45% of those with broadband connections seem to 'hang' something or other in the internet: music, photos, blogs, video clips, poetry whatever. So if we do a medium-term projection, maybe the biggest fissure is going to arise between those with and those without broadband. Those with broadband could well pose a threat to many established media interests in terms of the breakdown of the afficionado/professional divide.

The next group I would identify would be the occasional users. I am not at all convinced that if someone one day invented a small, limited search and e-mail device, that this wouldn't be a big hit with all those who are either sick to death of computers at work, or fed up with all the PC management problems. Then comes the group who have either tried-and-left or never-entered. Either way they seem to be definitively out, and this clearly will have important social consequences. Some of the problem may be cyclical, in terms of the fact that now may not be the easiest moment for many Americans to replace a lost or broken computer. At the same time my guess is that in telecom terms there are less fixed-lines out there, and connecting a PC or laptop across a mobile still isn't the easiest thing. On the other hand another part of all this is surely structural: the technology is constantly changing, and lashing out large amounts of hard-earned cash for a marginally-used product may not seem to make economic sense. Also the interesting group of people between 30 and 49 (once the first flushes of youthful enthusiasm have passed) who pull the plug should preoccupy us. After all, the initial novely of it must be wearing off, and while many commentators were quick to point out that - as with electricity - once we got used to it we'd soon stop talking about it, there's a lot of difference between living in a house without electricity and one that doesn't have internet. Long term of course everything's going to be wired to everything else (and maybe everybody to everybody), but as Keynes famously said long-term we're either all dead, or all enjoying a form of silicon-based eternal life which may or may not (depending on where you are with spiritual machines) be classified as human. It's the future that I can nearly see that worries me, and in all this I can't help thinking about Cavalli Sforza and his visit to the African rain forest to study Pygmees. The Pygmees little-by-little do move to the edges of the diminishing forest, and do watch curiously as the neigbouring farming communities work the land. But they do not become farmers. They remain stuck in time, and dependent on the agricultural population for the occasional bit of day-labour thrown their way. Now has anyone else tried to explain to someone who has never used internet what it is all about: then think Kurzweil and think singularity, and ask yourself: what the hell is going to happen?

Seventeen percent of those who do not use the Internet are Net Dropouts. This is a modest increase in the number of dropouts we measured in the April 2000 survey when we found that 13% of non-users reported they had left the online population. Net Dropouts tend to be young Americans, many of whom have had recent trouble with Internet access or their computer. A disproportionate number are parents, and they are likely to cite burdens on their time as a reason they do not want to go online. Additionally, a surprisingly large group of them are employed. Like other non-users of the Internet, Net Dropouts are overrepresented among minorities. They are also overrepresented among those with lower household income, which suggests that the burden of paying for Internet access and maintaining a computer is likely a factor in their decision to drop their Internet connection. Net Dropouts are also markedly more likely to be urban residents than suburban or rural.

Net Dropouts cite a variety of voluntary and involuntary reasons for their departure from the Internet population. The biggest reason Net Dropouts cited for abandoning their use of the Internet is that they no longer had a computer. This was a problem that tended to be cited by younger adults, those in rural areas, those in households with modest incomes, and men. Indeed, one respondent told us that his “girlfriend stole my computer.” Another related access issue is loss of Internet connectivity. People who stopped going online because of Internet access issues explained that they lost access because they moved, changed or lost jobs, or could not get to the place where they usually accessed the Internet. Some also said the cost of an online connection became too expensive. More frequently than other groups, 18–29 year olds, high school graduates, and women tend to break off from the Internet because of Internet access problems.

A general dislike of the Internet was another oft-cited reason for dropping out. These Dropouts found the Web unhelpful and uninteresting. This reason was given most often by minorities who dropped out, older Americans, those in high-income households and with high levels of education, and men. Problems with online content and design issues were less important to Net Dropouts than problems of access and preference. Those who expressed concerns with Internet content or design tended to be suburban residents, male, white, and between the ages of 30 and 49. While many Net Dropouts reported that loss of a computer and/or Internet access was a main factor in going offline, some 79% of Net Dropouts knew of a convenient public place, like a library, where they could to access the Internet. Eighty-three percent said that it was “very” or “somewhat” easy to get to places in their communities with public Internet access.

Most Net Dropouts do use computers and know other people who are online. They are twice as likely to use computers as other non-users; some 57% say that they use a computer on at least an occasional basis. Nine-tenths of Net Dropouts have close friends or family who use the Internet, and 86% say that at least some people that they know go online. In comparison, 69% of non-users say that some or most of the people they know go online. Net Dropouts may no longer be physically connected to the Internet but they remain socially connected to it. Generally, Net Dropouts view the online world in a more positive light than other non-users and that, most likely, is a product of their familiarity with it. Sixty-three percent of Net Dropouts think that they are probably or definitely likely to start using the Internet or email again someday. Other non-users are more likely to suggest they will never go online. Nonetheless, Net Dropouts seem to have a more negative outlook on society compared to Internet users. Nearly half of Net Dropouts are dissatisfied with the way things are going in this country today, and over 60% say that you can’t be too careful in dealing with people. Over half of Net Dropouts believe that most people would take advantage of others given the opportunity. Twice as many Net Dropouts as Internet users say that they have hardly any people they could turn to for support when they need help. Generally, all non-users, including Net Dropouts, feel like they have less control over their lives. While Net Dropouts describe the Internet in a variety of ways, they see it more as a tool for specific needs, rather than a resource with broad applicability to their lives.
Source: Pew Internet and American Life Project