Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Friday, September 19, 2003

Click on Cancel to Install

Now this is something. If I read this right Mr or Mrs average computer user gets a mail at home saying there is a security alert. The alert purports to come from microsoft, who, as they have just been reading, have been having problems. So they panic and open the mail, then, half-way through, they have their doubts, so when asked about installing the update, they click no, and the worm is still installed. The other details about the experts believing "that the family of worms is being used to create open relays for spamming" and that the worm is also preparing "systems for copies of itself to be shared via the Kazaa peer-to-peer network" are equally preocuppying. The virus is mutating in response to the bacteria. Scary.

A new mass-mailing worm has gained moderate traction this week by preying on users' heightened fears about Windows security. The Swen worm, also known as Gibe-F, sometimes travels as an attachment to an HTML e-mail purporting to be a patch alert from Microsoft. It can also arrive impersonating an e-mail delivery failure notice. If installed, the worm will try to shut off antivirus and other security software. It also tries to spread itself through network file shares and by e-mailing copies of itself. The worm, which does not contain a destructive payload, seems to be hitting Europe hardest. U.K.-based e-mail filtering outsourcer MessageLabs Inc. had intercepted 35,450 copies of it as of midmorning EDT today, meaning it has topped the company's threat list for the day so far. Helsinki, Finland-based antivirus vendor F-Secure Corp., meanwhile, elevated Swen to a level 1 threat, the company's highest threat designation. Swen has hit at an interesting time. Last week, Microsoft Corp. announced two new vulnerabilities in how RPC-DCOM is implemented in Windows. Either could be used to create a worm similar to Blaster, which struck in August.

Moreover, experts are watching for the emergence of another variant of the Sobig worm. Sobig-F spread widely last month, choking e-mail systems until its pre-programmed expiration date of Sept. 10. Experts believe that family of worms is being used to create open relays for spamming. Some experts are calling Swen a variant of the Gibe worm, but most consider it a new worm. Swen is likely written by that worm's author -- it has features similar to those of Gibe variants, according to F-Secure. The worm is more of a threat to home users and small offices because it travels as an executable file. Most enterprises strip executables at the gateway. Also, the bogus alert e-mail should set off warning lights to recipients because Microsoft does not send fixes via e-mail. Instead it refers people to its download page. If the worm is installed, a window pops up that reads "This will install Microsoft Security Update" and asks the user to click "yes" or "no." If "yes" is clicked, then a bogus installation dialog comes up. The worm will install if either button is clicked. Swen disables registry tools so users can't run the Regedit utility and import REG files data, alerts said. The worm also prepares systems for copies of itself to be shared via the Kazaa peer-to-peer network. When it copies itself, it uses such names as "XXX Pictures," "XboX Emulator" and "Download Accelerator." The worm also searches the hard drives of infected systems for e-mail addresses that it can send copies of itself to with its own SMTP engine. It looks for addresses in .html, .asp, .eml, .dbx, .wab and .mbx files. It also searches for e-mail addresses from newsgroups. Swen also tries to spread via IRC networks. The worm tries to send a copy of itself as "WinZip installer.zip" to every user joining a channel where an infected user is present. The author of the worm seems to want to keep tabs on his creation. When it first runs, the worm sends an HTTP Get request to a server that displays counter information.
Source: Search Security.com

Friday Night is Roach night.

Yes its Friday again, and the weekend comes round very quickly, doesn't it? Today Stephen Roach takes issue with the financial markets: now who else would dare. Personally I can't help agreeing with him. The facts are, more or less, on the table. Certain conclusions seem to follow. But the markets seem incapable of drawing these conclusions. We are living on spin, and when we run out of spin, it would be surprising if we weren't going to see a 'correction'.

The mood in Dubai is cautiously upbeat as the semi-annual IMF-World Bank meetings now get under way. The direct impacts of the war in Iraq and SARS have faded. In response, the global economy seems to be slowly shifting gears to the upside. The official forecast of the IMF staff underscores the tentative nature of this shift. The mounting imbalances of a US-centric world are at the top of their worry list. Needless to say, that’s a theme I certainly have some sympathy with. World financial markets couldn’t care less............

Which takes us to the critical question of the moment: What do financial markets see that the IMF and its like-minded sympathizers -- yours truly, included -- are missing? The main insight, in my view, is the presumption that global imbalances really don’t matter at all. They are judged as the inevitable, benign, and even desirable outgrowth of yet another burst from the world’s only real growth engine. For what it’s worth, I continue to take issue with that key point (see my 2 September 2003 essay in Investment Perspectives, “Do Imbalances Matter?”). Imbalances, in my view, are tantamount to instability and fundamental disequilibrium. I would be the first to concede that such a state of disequilibrium is not life threatening in and of itself. But it does leave the economy, or economies, under question far more vulnerable to shocks than might otherwise be the case. To the extent such shocks are the rule, not the exception, I continue to be enamored with the case for an economic relapse in early 2004. Reading between the lines of the IMF’s latest assessment of global risks, I suspect such an outcome wouldn’t come as much of a surprise to them either.
Source: Morgan Stanley Global Economic Forum.

The Risks of Not Outsourcing

This piece tells us I think why the US would be ill advised to get involved in a trade war with China. Maybe such an eventuality would be good for the textile business back home. But for the companies in the technology sector, lack of Chinese outsourcing would only make them less, not more competitive with respect to their principal rivals.

Samsung Electronics, the world's top memory chip maker, said on Friday it would move most of its personal computer manufacturing operations in South Korea to China by 2005. This move is intended to increase its competitiveness against global rivals, such as Hewlett-Packard and Dell.

The transfer is the latest in a series of similar moves by Korean companies eager to exploit China's low labour costs and avoid industrial unrest at home, a trend that has heightened fears the country's manufacturing base is being hollowed out at a time when it is trying to recover from recession. "This is a global trend. If we produce and sell our products abroad, that will save our costs," a Samsung spokesman said. The PC business accounts for about 16 per cent of sales at Samsung's digital media division, which in turn contributes about a fifth of the group's total sales. Around 60 per cent of Samsung's home appliances and more than two thirds of its digital media products including PC monitors are already produced abroad. Under the transfer plan, Samsung's PC factory in Suzhou, China, which began operations in April, will become the group's main PC manufacturing base by 2005 with an annual production capacity of 1m units. Currently, 75 per cent of Samsung's PCs are sold domestically and the remainder abroad.
Source: Financial Times

It's Not the Economy, Stupid

Again I know it's being indulgent, but I can't resist it. Fons Tuinstra in Shanghai, with an advance posting of his WTO ChinaBiz column, being his very own ironic self. I agree, ridicule is effective. (incidentally, one argument no-one seems to be making, does occur to me. When Argentina pegged to the dollar, no-one complained, at least no-one on Wall Street. It may have been a good or a bad decision - I think it was a bad decision - but no-one cried 'foul'. Why was it thought a good thing for Argentina to peg: to create an infrastructure with financial stability. And why do some think it is convenient that China continue, for the time being, with the peg.........

Shanghai – China seems to be a convenient subject during the campaigns for American presidential elections, and at least two days afterwards. Especially in the upcoming campaign, since there are so many real issues politicians want to avoid – Iraq, taxation - China has become an issue very early in the struggle.

Unfortunately this time a real non-issue has the honor of becoming the epicenter of public attention in the US: the question whether China treats the world unfairly by pegging its renminbi to the US dollar. Even a Wall Street Journal commentator – not really a medium for China fellow travelers – sighted yesterday that since it is politics, arguments do not make a difference anymore. China has already sent US Treasury Secretary John Snow home, polite but empty-handed. Snow will have another go at this weekend’s G7 meeting, but that will not make much of a difference.
It is comparable to the Japan discussion the US in the 1980s when US manufacturers campaigned against Japanese cars. Now half of the Americans drive a Japanese car.

The US manufacturers, followed by lawmakers and the US administration accuse China of stealing American jobs in an unfair way. Other countries like Mexico and Italy lose many more jobs to China, but they have been less vocal on this issue. On the contrary, it is remarkable how many experts, countries and institutions agree with China when it says it first has to make its banking system healthy before it can give the renminbi in the hands of the free market.
Almost everybody agrees with China. The European Bank. The IMF. Nobel-prize winner Stiglitz. The Japanese Prime Minister. Mister Forbes. Almost nobody with a basic knowledge of economics thinks it is a good idea for China to float its currency, it might even hurt the world economy.

It is obvious that only a good alternative subject is going to take the heat off China. What advice can we give the American politicians? I think first they should turn away from the economy. It is very hard to blame anybody else for the fact you are unable to compete on a global market. Better forget about the economy as an issue unless you would really have a very smart idea to save it.

Just pick a little country with loads of nasty anti-American habits, and bomb the hell out of them – verbally please, not like in Iraq. If you promise not to send your marines, I can give you some really good arguments why you should take on Holland, my home country. We despise the US policy toward Iraq. We let homosexuals marry! You need more arguments? We condone soft drugs and legalized prostitution (although we liked it more when it was still illegal). We attract loads of American tourists who do not spend their money doing things that are banned at home. We facilitate abortion. We support safe sex. Economy is anyway such a boring subject is you have no really smart solutions. How can you keep up momentum for the next 14 months, especially if you still need a lot of favors from China? Go for the small countries and juicy subjects: that is much more convenient.
Source: The China Trade

Where's the S in the SGP?

Back to my comments yesterday on spin, the stability pact and confidence in our processes and our institutions. I am getting the distict feeling that one or two of the smaller states in the euro zone are begining to feel rather uncomfortable after Suday's vote in Sweden. Case in point, the Netherlands:

While many governments in Euroland are having difficultly finding the right balance between growth and stability when it comes to implementing the Stability and Growth Pact (SGP), the Netherlands have clearly chosen stability. The Dutch government announced drastic austerity measures in its 2004 budget, to keep the deficit from breaching the 3% of GDP Maastricht limit. Without these measures, the sharp deterioration in the economy would push the budget deficit up to 3.8% of GDP, according to government estimates. Unlike the big Euroland countries, such as Germany and France, which are facing similar budget deficits, the Netherlands are thus taking serious steps to abide by the limits set out in the Growth and Stability Pact. To leave some room for unexpected revenue shortfalls or expenditure overruns, the Dutch government has set itself a deficit limit of 2.5% of GDP. The efforts of the Dutch government are even more striking, given that the Dutch economy is significantly underperforming its euro area peers............

The measures announced by the Dutch government are in stark contrast to the fiscal policy measures planned by Germany and France, which will likely see their budget deficits breaching the Maastricht limit by similar amounts next year. The Dutch effort underlines the contrast between the big EMU countries, which are letting their fiscal policy slip in the face of the Stability Pact rules, and the efforts by the smaller countries to keep their finances in check. The Dutch Finance Minister, Gerrit Zalm, is a fervent supporter of the rules outlined in the Stability Pact. He recently underlined his resolve, by saying that his Ministry is looking into the possibility of bringing a case in front of the European Court of Justice, if Germany, France, or Italy were to breach the rules of the Stability Pact. After his threat to sue the EU Commission for not taking appropriate action under the Stability and Growth Pact last week, the 2004 budget presented today underlines that Mr Zalm takes the issue of fiscal consolidation very seriously.
Source: Morgan Stanley Global Economic Forum

The Next Billion Users

Emergic's Rajesh Jain has a series of articles entitled Tech Talk: the next billion. Really I recommend the whole series, here is the first installment:

I read this on Kevin Werbach’s weblog: “According to a Reuters report, there will be half a billion mobile phone handsets sold next year. That includes 100 million camera phones and 30 million smartphones. Stop and think about those numbers for a bit.” The line which made me think from the report was this: “The total number of mobile phone users will approach 1.4 billion individuals worldwide in 2004.”

That indeed made me stop and think. I began to wonder: what would it take for us to get to those many PC users. The corresponding figures for the PC industry are about 150 million new PCs being sold each year and about 500 million users. What would it take for us to get to the next billion PC users? This is what this series is about. The underlying assumption I am making is that the computer is a productivity enhancer, and it should be available for every worker in every enterprise of the world, and also every family. The computer has been the most important invention of the past quarter century, and yet its benefits have not percolated beyond the top of the pyramid.

First question: who are these billion users? Where are they going to come from? To answer this, first consider where the current users come from. Today’s computer users are mainly comprised of: almost all individuals, large companies and SMEs (small and medium enterprises) in the developed markets, along with a small fraction of the same in the world’s emerging markets (think Asia, Latin America, Eastern Europe, Africa). The bulk of the individuals and employees in the emerging markets are without computers at this point of time. These are the next market.

By my estimate, there are about 30-40 million SMEs in the emerging markets, employing more than half a billion people who need access to information and communications. Few among this segment have adopted information technology at the core of their business. In addition, among the individuals, there are about 4 billion people in the world’s emerging markets, consisting of about 600-700 million families. Again, only about 10-20% of this segment has probably need penetrated with computers. Here too, there are about half a billion families which need a computer. How can we get a computer to each family that does not have a computer?

So, that is our challenge: getting 30-40 million SMEs to buy an average of 10-15 computers and 500 million families to buy a single computer. Both of these segments are in the world’s emerging markets. Given that this is the Internet age, it also need to be networked. In other words, our vision is: “a connected computer for every employee and every family.” For the computer industry to get to these billion users, it will need to re-think many things, including the affordability (cost) of computers, the technology architecture, the way applications are developed and distributed.

Big Trouble Over Little China

With US elections looming next year, the volume in the war of words over the 'china trade' is definitely going up. Let's hope that's all it is, a war of words. I, of course, do not mean to imply that all China's trade practices are 'fair', nor would I suggest that such a thing could be said whilst keeping a straight face of the US record. What is more significant is the evident deterioration in the atmosphere. As I noted yesterday in connection with another topic , shouting normally is not the best way to make progress on an agenda. If this continues it is less, rather than more likely that the Renminbi will float any time soon. And following so close on the heals of Cancun, it has to raise a question mark over the continuing future of the globalisation process. No bad thing, some might say, but this would not be my view.

Chinese trade officials and experts reacted yesterday with a mixture of defiance and foreboding to several criticisms of Beijing by Donald Evans, US commerce secretary, that signalled a sharp increase in trade tensions across the Pacific.

Sun Huaibin, director of the China National Textile Industry Council, a powerful government-linked body, dismissed Mr Evans's complaint that China was pursuing "unfair" trade policies in some areas. "The US is always bragging about being a free-market economy," Mr Sun said in an interview. "Our competitive edge [in textiles] is the result of 10 years of reform and restructuring. The US textile industry should learn from our experience rather than seeking the help of their government."

The textiles sector is particularly sensitive in a bilateral trade relationship that has become a key issue for the next US presidential election. Mr Evans said the US administration was creating an "unfair trade practices team" to combat illegal product-dumping, intellectual property theft and other abuses by trading partners - mainly China - that contributed to a loss in US jobs.

US business groups also stepped up pressure yesterday, saying that China's compliance with its obligations under the World Trade Organisation had been "uneven and incomplete" and warning there could be "political consequences" if US companies did not see tangible new opportunities.

The toughly worded report from the US Chamber of Commerce, the largest business federation in the country, says China's entry into the WTO has raised the expectations of US companies, who want to see sales in China grow markedly.

"Without tangible improvements, there will be political consequences as well as a possible souring of business views about the market," it says.

The complaints that US companies are not winning sufficient business in China echo many of the charges made against Japan two decades ago when that country was running record trade surpluses with the US. But while the US in the 1980s negotiated a series of agreements to limit Japan's exports to the US, such mechanisms are no longer allowed under WTO rules.

China's trade surplus overtook that of Japan for the first time last year to total $103bn (€92bn, £65bn), raising widespread concern in the US that China is keeping its currency pegged at an artificially competitive rate. US calls for a revaluation have been rejected by China, although Beijing is considering moving to a more flexible exchange rate.

US Chamber officials said yesterday that they did not want concerns over China's WTO compliance to become an excuse for protecting the US market. They sought to distance themselves from the campaign launched by some US manufacturers and sympathetic members of Congress to press China into revaluing its currency.

"We do support engagement," said Joe Damond, a lobbyist for the pharmaceutical industry and member of the Chamber's China task force. "What we want to see is that engagement turn into concrete results for our companies."

China Watching and China Bashing

I'm trying to put together some thoughts on why I don't agree with the 'China is Going to Crash' school of thought. So reading around I came across this interview with the Ford Foundation Representative in China, Andrew Watson in China Development Brief (thanks to T-Salon for the link). The points Andrew makes sum up many of my feelings. China is a complex society, and China is changing. In the same way you can't take GWB and his 'republican guard' as the last word on the US today, it would be a mistake to say China is run by the CCP, period. The devil, as always, is in the detail.

...........in any society each individual performs a variety of social functions regardless of where their work assignment is and some of the most creative researchers and thinkers who've had the greatest impact on, shall we say, economic reform and development, have been in government institutions and quite often their role there enables them to have quite a big impact.

There's clearly a growing diversity of perspectives in China on the whole range of social issues and that reflects the increasing diversity and complexity of Chinese society. Even in areas which were not broadly worked on in society at large — say, international relations — there's a growing difference of perspectives on what is China's strategic interest, what kind of policy China should have towards particular current issues, and this is reflected in the growth of different kinds of institutions that now work on international affairs and foreign policy. In the 1970s that was essentially the preserve of the Ministry of Foreign Affairs but now you have — I don't know if you'd call them NGOS, but consultancy groups or independent groups working on international relations issues and producing research reports for provincial governments or companies related to issues that are going to impact on those particular groups. In economic affairs there's a lot of that as well, you have groups like Unirule and Horizon who are no longer part of a formal government structure and can act like independent consulting think-tank groups, and some of those have quite reasonable research capacity.

Many of the emerging types of social organisations are not yet institutionally mature enough or well established enough to be able to run solid research programmes in the area in which they work.................I tend to be relatively optimistic about the prospect for growth and change here. I'm not one of the 'China crashes tomorrow' school. I think there are clearly very significant issues to be sorted out. I'd like to see first of all a reduction in disparities in income, particularly between town and countryside and different regions; secondly, a greater provision of public goods and public welfare more broadly across China - urban areas still get a lion's share of these things and it seems to me increasingly important for the Chinese state to provide educational and health and other opportunities for rural citizens, and I think that's a really important challenge facing the society.............

To date, the reform and growth process in China has been basically driven from above. It's changes in government policy and experiments and innovation from within the system that has opened up the space for reform and change. The whole thing started off with rural reforms. Essentially the leadership took the decision that there could be contracting of land to the household, that the household could then use its labour appropriately, that there could be markets for goods that were not part of the Plan. And in fact those three changes opened up space in which peasant farmers and households were able to move their resources in all kinds of different directions, which helped change the structure of the economy, opened out all kinds of new types of rural activities, transformed the structure of agricultural production and so on. So policy change from above has a very important impact on what happens.

Dieting on the Fly

This is very good dieting news. And a very strange result:

Scientists know that very strict low-calorie diets can prolong life. But now they report that it does not matter when you start that diet — at least if you are a fruit fly. The life-prolonging effect kicks in immediately, continues as long as the diet, and is lost as soon as the dieting stops. "We were very surprised, completely taken aback," said Dr. Linda Partridge, a professor at University College London, whose laboratory made the discovery.

For now, no one has a clue about what the crucial changes are in a fly's body when it goes on or off a diet. "It's been assumed that the reason things live longer when they diet is that there is a slowing down of age-related damage," Dr. Partridge said. But, she added, it now appears that cannot be true. "The system has no memory."

In a detailed demographic analysis of life and death among 7,492 fruit flies, published today in Science magazine, Dr. Partridge and her colleagues discovered that the protective effect of dieting snaps into place within 48 hours, whether the diet starts early in life or late. Flies that dieted for the first time in middle age were the same as flies that had been dieting their whole lives. But the effect can be lost just as quickly. Flies that dieted their entire lives and then switched, as adults, to eating their fill were the same two days later as flies that had never dieted. Dr. Huber Warner, who directs the biology of aging program at the National Institute on Aging, said that it was as if dieting flies "put on a suit of armor."
Source: New York Times

Thursday, September 18, 2003

How Not to Reform the Stability Pact

It has been a busy day in the mailbox today, and Joerg has been back a second time, with a critique of this morning's throw away comment about Franco-German plans for a European investment project:

Ah, and then you wrote this: "It wouldn't have anything to do with off-balance sheet liabilities, would it?" Yet you would have me believe that you are not a card-carrying anything! That investment programme is a clear-cut deficit-spending proposal - certainly motivated by a perception that Euroland is in recession and therefore in need of initiatives like FDR´s TVA and similar projects. I don´t quite see how you can spin this into a truth-in-numbers affair - except, of course, if you insist on the EU having no business to increase deficit spending at the height of a recession (or to exist at all, since presumably the smaller members would be better off without the bigger ones - but why should I think that Laos profits from China, whereas Bulgaria is strangled by the EU-core?)

No first let's look at what the FT actually says:

.......as France and Germany spoke of the need for EU funds worth billions of euros to be invested in 10 industrial projects to boost growth across Europe and counter criticism of their flouting of the stability pact. Paris and Berlin called for the projects to be largely funded by the EU, either through co-financing loans from the Luxembourg-based European Investment Bank or from existing EU programmes. The two governments have come under fire for their failure to restrain their budget deficits. Both are set to breach the stability pact, the fiscal rules that underpin the euro, for the third year running in 2004.

The 10 projects, unveiled by Mr Chirac and Gerhard Schröder, German chancellor, will cover information technology and telecommunications, research and development, transport infrastructure and sustainable development. The proposal will benefit sectors ranging from telecoms to engineering and chemicals businesses, and goes far beyond an earlier initiative by Italy to promote investment in public infrastructure. Telecommunication and IT-related projects will include the creation of national broadband networks, the digitalisation of terrestrial television and radio broadcasting, and the development of a network linking research institutions in Europe. Additional funding will be requested for three transport projects: TGV Est, a high-speed link between Frankfurt and Paris via Strasbourg; Galileo, the European GPS satellite; and electronic toll-road systems

Now my objection here is not to these projects per se, nor to the counter cyclical use of deficit financing. My problem is that there is a distinct suspicion that this proposal is to get round the growth and stability pact by the back door. It is the mention of the Luxembourg-based European Investment Bank that caused my eyebrows to raise, and my hands to type the 'off balance sheet liabilities' quip. If this is what is being suggested, then this is the kind of euro politics that the Swedes just rejected. It is 'spin' in another guise. What Europe now needs is a full and open discussion of the stability pact, ie a political process, and not the use of an administrative loophole to avoid this process. Is this what bringing Europe nearer its citizens means? Maybe the pact does need to be reformed, but the EU's citizens also need to be kept informed of the risks involved. We can't woffle-on about the dangers of 'fiscal trainwreck' US style and simply ignore the problems in the EU and Japan. At the same time we could bear in mind: it's always easy to dream up ways to spend money, it's much more difficult to dream up ways to spend it usefully. Here in Catalonia I would certainly prefer more hospitals and old-people's homes to more kilometres of high-speed train. I am not even convinced we are going to need them.

On the Convenience of Making fine Distinctions

Ok, Ok, it was red rag to the bull stuff, and (no offence implied or intended) Joerg has responded to the bait. Why, he is asking, should we make the distinction between accusations of spin, and accusations of lying?

As a politician or journalist, I would not have accused the Bush admin of lying instead of hyping. But as a private citizen, I probably did.

a) Private citizens often do accuse each other of "lying" instead of "hyping". They cannot possibly avoid doing so.

b) Any exercise in "hyping" begs the question why it is being undertaken. Motives are only considered to be real if they form a consistent pattern - if they remain stable over time. You will automatically be criticized for nepotism if your judgment of merit starts to show signs of being clouded by partiality. Blix is just being nice when he says Bush
believed in his claims. Bush must also believe that what he said about Iraq is true about North Korea. A policy that is designed for a world which doesn´t exist - one in which the U.S. can continue boasting the strongest military forever - is the equivalent of what dramatist Henrik Ibsen called a "Lebenslüge", an existential lie. People are right to be
afraid of falling into such traps. So they use every available mnemonic to scare themselves away from them - which includes subsuming spin and hype under the category of lying. Only persons acting in the public sphere can be expected to spare the time needed to make the fine distinction you are calling for here.

That "Lebenslüge"-thing is what is so puzzling. What the Clintons did to themselves, Bush does to the nation. His opponents simply cannot believe the nation to deserve a leader so obviously lacking moral stature. That leads them to start accusing him of leading a minority government. They moralize because it is so hard to ridicule........In the case of Bush, ridicule would run roughly along the following line: "What could be more dangerous to the lives of our citizens than an administration that is running scared about being threatened by a country that doesn´t have WMD - while another one openly announces that it wants them and gets away with it?"

O.k., now I may look to you like an accomplished spin doctor. But I certainly didn´t demonstrate ignorance or dishonesty.

I think inadvertently we have the point here. Joerg distinguishes between the private and the public. In the private sphere we may - or may not, depending on our temperament - give vent to our spleen. In the heat of argument with our nearest and dearest we may say things we have cause to later regret (here the do you hate me? thing comes to mind - one of the major problems of the public sphere discourse in the US is that it unecessarily brings all the strong emotions of inter-personal rage into the public arena: viz the 'why do you hate America so much' stuff). The whole point about the public sphere is that it needs to try and rise above this, there needs to be what the German philosopher Habermas would call a 'speech community'. This speech community implies that you do not question the authenticity of the other's communication every second minute. That those who many of my readers may consider to be worthy of the epithet 'liar' resort to this kind of strategy, I do not doubt. It is rather like the professional foul in football, a simple tactic to disrupt the opponent's rhythmn. In the political context it distracts attention from the content to the form of the message, a distraction which can only benefit the side which has the weaker argument. That is why I think it incumbent on those who consider their arguments to be superior to those of GWB (and I have nothing, please note, against irony and ridicule, in fact they are among my favoured 'gentle' techniques), I think it incumbent on them to avoid this 'hot' zone like the plague. Basically political life should not be reduced to the level of a domestic argument, and those who place themselves in the public sphere should be expected to be able to spare the time to make the distinction. Why, in the final analysis, do we approach the other with an open hand? To show, of course, that we are not advancing armed. Why do we try to sit the parties to a dispute round a table, and why do we accuse people of spin and not of lying? Bottom line: I am sure Hans Blix is currently putting the US administration under more pressure than certain other people who are perhaps attracting more publicity of late.

The Big Wheel Keeps on Turning

The latest issue of the IMF's World Economic Outlook is now available . There is nothing really surprising - partly at least because the substance of the document was leaked last month. The difficulty is we are playing a waiting game. Bets have been placed but the wheel hasn't stopped turning yet. In general, simply because basic business cycle theory suggests we should be due for a recovery, expectations are that next year will see more growth than this one. You put the numbers in the models and they duly come out as expected. Certainly the US gives the impresssion of going up the ramp, but as I suggested yesterday, the doubts remain. Today, everyone utters a sigh of relief as new signings fall to 399,000. The US labour market cannot be read off the number changes from one week to another, in fact in general data cannot be interpreted and re-interpreted on a weekly basis, there is too much room for spike and random, or one-off items. We really can't take decisions on whether the labour market is improving based on the impact of things like the electricity blackout, or on retail sales based on a bout of hot - or cold - weather. If we are reduced to doing this, it is because we want to believe. I'm afraid there is no shortcut to the truth here, we simply have to be patient and wait as the weeks and months pass.

As stressed at the time of the last World Economic Outlook, the recent weakness of the world economy has not just been due to the war. The equity boom in the late 1990s was the largest in modern history: the unwinding of its effects is uncharted territory, and it is perhaps not surprising that most observers, including the World Economic Outlook, have found it difficult to gauge the aftermath. While the direct impact of equity market losses on household consumption growth should now have peaked, household balance sheets in some countries, notably the United States, remain stretched and housing markets—boosted in part by the aggressive easing of monetary policy in the last three years—are unlikely to provide the same support to the recovery going forward as they did in the past............

Given the very substantial macroeconomic and other stimuli now in train, a stronger economic upturn is clearly possible. That said, the pace and extent of the pickup in investment may be constrained by relatively high excess capacity along with continued corporate caution in the wake of recent accounting scandals; corporate and household balance sheets, while improving, remain stretched; and the substantial support to consumption provided by the housing sector is unlikely to be sustained, while labor market conditions remain relatively soft.

More broadly, the record current account deficit—now matched by an equally large general government deficit is still an important vulnerability. Despite its depreciation over the last year, the dollar still appears overvalued from a medium-term perspective, and the risk that its adjustment may become disorderly— or that it might overshoot—cannot be ruled out. Against this background, U.S. policymakers have faced a difficult task balancing the need to provide short-term support to the economy while minimizing the risk of exacerbating long-run problems, a task made no easier by the weakness of demand in the rest of the world. Monetary policy has been highly accommodative, and the Federal Reserve has appropriately indicated that this can be maintained for a considerable period; the adoption of a medium-term inflation target could help to anchor inflationary expectations and reduce the risk of an adverse shock leading to unwanted downward pressure on inflation. With low interest rates contributing to a continued boom in house prices, which—after adjustment for inflation—are about 30 percent above their previous peak, concerns have been raised that the current stimulus has been achieved at the risk of a future housing bust, which could have a serious impact on consumption and growth.

Such concerns need, however, to be balanced against the certainty of greater current economic weakness in the absence of monetary easing and the risks that it would pose for the United States—and the global economy—at the current conjuncture. And with policy interest rates not expected to be raised until the recovery is on a firm footing, the impact of eventual housing price adjustment would likely be offset by strength elsewhere in the economy. Even so, the elevated level of housing prices is a potential risk, particularly if long-term interest rates were to continue to rise strongly.

On the fiscal side, the general government deficit (covering both the federal government and the states) is projected at over 6 percent of GDP in 2003, compared with a surplus of over 1 percent in 2000—the largest swing in the fiscal position over three years in at least three decades. While this has provided short-term support to the recovery, it has come at the cost of a substantial deterioration in the medium term fiscal position—in practice, with the U.S. Administration’s expenditure and revenue projections appearing relatively optimistic and a further supplementary budget expected to cover expenditures related to Iraq, the outlook may well prove worse. If sustained, higher deficits would offset the longer-term benefits from tax cuts—already reduced by complex and untransparent phasing and sunset arrangements—and make an orderly adjustment of the current account deficit more difficult. In addition, with public debt no longer projected to decline in coming years, no fiscal cushion will be built up in advance of the coming pressures from the retirement of the baby boomers. This would be of less concern if early action to reduce future costs of aging populations were envisaged, but that does not presently appear to be the case (recent proposals in fact increase Medicare spending). Consequently, implementation of a credible medium-term framework to restore broad budgetary balance (excluding Social Security) over the cycle is now even more pressing, along with measures to put the Social Security and Medicare systems on a sound financial footing.

The continued robust growth of labor productivity remains a key strength of the outlook. While this partly reflects the effects of recent labor retrenchment, productivity growth should remain solid in coming years—although not as fast as in the late 1990s—buoyed by continued advances in information technology and the gradual spread of IT-related productivity gains to other sectors of the economy. This, in turn, has been underpinned by the flexibility and investment-friendliness of the U.S. economy, strengths that should continue to be built on in the future, including by continuing to strengthen corporate governance and accounting standards. That said, as noted above, a number of downside risks remain, and based on historical experience even an orderly current account adjustment would likely be accompanied by weaker growth of both GDP and—even more—domestic demand. While such risks are clearly reduced by strong productivity growth, looking forward it seems unlikely that the United States can or should provide the degree of support to the global economy over the medium term that it has in the past.

Just one detail. I shall miss Rogoff when he goes. I think the last few numbers of the WEO have been a distinct improvement. I say this even though my main thesis, that ageing populations across the OECD world form an important backdrop to the 'weak recovery', doesn't even get a look in. On the US economy he says everything that needs to be said - though I would have investigated the productivity/output gap factor a little more - without needing to raise his voice even once. I think if you have technical expertise this may be the best way to use it.

Putting a Beware of the Dog Notice Doesn't Mean You Have One

You know these days the airwaves are full of claims and counter claims that this one or that one is a liar. I don't repeat these claims and don't want to. I don't doubt that there are liars amongst us. But I don't think such claims and counter claims are either useful, or constructive. Others may wish to differ, as is their right. Opinions are not facts. They are thus neither true or false. Theories likewise: they are either confirmed or refuted. Where there is no agreement as to the salient facts, no discussion is possible. One day we may reach that unfortunate state, but until we do, I think we should attempt to rescue what remains of our political process from the degenerative tendencies which are all too evident. I happen to think this is something which is worth the effort. To critise the opinions of others, this is the daily bread of political life. To turn debate into a street brawl, this is something else. Those with some pretension to scientific expertise have a special responsibility here. I may be wrong or I may be right about the economic impact of the demographic transition, but I would never like to feel that your opinion about what I had to say on the topic was conditional on what I think, or don't think, of GWB.

Now here's one expert who manages to get across what he wants to say without calling anyone a liar, and long may he do this. His target is spin, and spin is neither a fact nor an opinion, it is a process, a process of opinion manipluation whose use is more appropriate to the profession where it originated - and even there it's use may often be questionable - than it is to the decision making process in a mature democracy:

Hans Blix, the former UN chief weapons inspector, today accused the British and American governments of spinning intelligence ahead of the Iraq war.
Making reference to the UK's September dossier, over which two intelligence officials have told the Hutton inquiry they expressed concerns, Mr Blix said that information about Saddam Hussein's alleged weapons of mass destruction was "over-interpreted", with "spin" being allowed to infect the presentation of Iraq's military capabilities.

"The UK paper, the document in September last year, with the famous words about 45 minutes, when you read the text exactly, I get the impression it wants to convey - to lead - the reader to conclusions that are a little further-reaching than the text really means," he told the BBC Radio 4 Today programme. "What stands accused is the culture of spin, of hyping. Advertisers will advertise a refrigerator in terms that we don't quite believe in. But we expect governments to be more serious and to have more credibility." Mr Blix yesterday told the Australian Broadcasting Corporation that he believed Iraq had destroyed "all, almost" of the weapons of mass destruction it had in its possession at the end of the 1991 Gulf war. He said that Saddam possibly kept up the appearance of having the weapons to deter a military attack.

"I mean, you can put up a sign on a door saying 'beware of the dog' without having a dog," he said from his home in Sweden. He today told the BBC that the believed the US and UK were convinced Saddam was developing WMDs - and said he considered it "understandable against the background of the man that they did so" - but said there was no conclusive proof of their existence. "In the middle ages when people were convinced there were witches, when they looked for them, they certainly found them. We were more judicious, we wanted to have the evidence," he said.

He added that it was ironic that the US and UK had not been prepared to give the UN inspection teams the time they needed to complete their work, but those same governments were now insisting that their own inspectors be given sufficient time to complete their own investigations. He said he did not believe WMDs would be found. "We have had a number of months, the US and UK have been there, they have had all the possibilities in the world to interview people who are not intimidated and to go anywhere. They have not found anything. "So I think more and more we are coming to the conclusion that there aren't any. And I think that the Americans and British are also leaning in that direction."
Source: The Guardian

More Waves From Sweden

Hot on my link to Abiola yesterday, more news on Alstom:

The conflict between the EU and France over Alstom intensified when Mario Monti, competition commissioner, won extraordinary powers to decide the fate of the company. After a prolonged debate, Mr Monti's fellow commissioners gave him the right to forbid France from taking a stake in Alstom in what what has become a test case for the European Commission's resolve over industry-distorting government subsidies. Alstom asked for its shares to be suspended on the Paris stock exchange after they headed for free fall in the wake of the Commission's decision and its announcement of an in-depth investigation into alleged government aid totalling €3.18bn ($3.58bn).

"The life or death of the company is now up to Mr Monti," one official said, as the beleaguered company called a board meeting on Wednesday night to "review the consequences of the situation". Mr Monti has five days to hammer out a deal with Paris, which insists the 110,000-strong group must receive €600m of government money this month or else face collapse. If no agreement is reached, Mr Monti can issue an injunction to prohibit France from investing in the group, as long as he has the consent of Romano Prodi, commission president.

The finance ministry issued a statement saying it would work intensively to seek a compromise "to save a large European company and its jobs". But by late afternoon, government officials and many financial analysts appeared to be increasingly alarmed that the room for manoeuvre to find a compromise was extremely narrow. Alstom's banks continue to insist on the government's direct participation in the rescue as the quid pro quo for their continuing support. The Commission sees the battle over France's plans to invest €600m in shares and loans in Alstom as a test of the credibility of its anti-subsidies regime, which has seen state aid to the European Union's manufacturing sector fall from €33.5bn in 1997 to €21.2bn in 2001.
Source: Financial Times

My impression is that this is a belated attempt to face up to the problem of the 'small country' frustration in the face of the 'big country' flouting. This must be one of the lessons of the Swedish vote. But one spectacular decision won't change everything, and meanwhile, it's far from clear what this is all about. It wouldn't have anything to do with off-balance sheet liabilities, would it?

China and the US Deficit: Part 339

Lloyd has been sending me some interesting links lately. A couple of weeks ago he sent me this from the ILO, which gives a fascinating birds eye view of international labour demographics. Today he's sent me a link to material on Prudent Bear. The topic is China and the US deficit and I see they have a piece by Richard Duncan as well as this piece by Marshall Auerbach

The Fed’s flow of funds data that was released last week more than ever highlights America’s acute dependence on the kindness of strangers, particularly those of the Asian variety. Globalisation has been turned on its head. Instead of the centre lending capital to the developing periphery, capital is flowing back to the centre--that is, the United States. Even poor nations are lending the United States huge quantities of surplus capital, mainly to keep America afloat as the world's buyer of last resort. China is the new “bad boy” of the global economy, having displaced Japan as the aggressive emblem of a trading system ferociously out of balance. Congress has begun making increasingly loud protectionist threats; the latest example is legislation that threatens to impose 27.5% across-the board tariffs on Chinese exports into the US if the RMB peg is not abandoned.

Even traditional American champions of globalization (including Federal Reserve Chairman Alan Greenspan) have begun scolding China for excessive ambitions, just as they once criticized Japan, to no avail. The National Association of Manufacturers issued a report warning that 2.3 million US manufacturing jobs have disappeared since 2000, largely due to international competition (not entirely from China). The United States risks losing "critical mass" in manufacturing, says the NAM. A Defense Department technology-advisory group confirmed that so much “intellectual capital and industrial capability” has been moved offshore, particularly in microelectronics, that the Pentagon is dangerously dependent on foreign producers to make its high-tech weaponry...........

But the nexus between China and the US is fundamentally unhealthy and ultimately points to the fragility at the heart of the global economy right now. China’s “kindness” is in effect killing America, although in the absence of Congressional disruption this curiously symbiotic death spiral could continue for a while longer. By allowing the US to buy more than it produces and borrowing to do so, it will eventually force an ugly reckoning. With its ever-swelling trade deficits, the moment of painful adjustment draws closer, but the debt cycle is unlikely to stop until creditor nations conclude that the US debt position is too dangerous and start withholding their capital. Alternately, if China's overheated economy gets mired in financial disorder or inflationary pressures, as appears to be the case today, it might need to bring its capital home--thus pulling the plug on American consumers and the “buyer of last resort” for the global system at large. The paradoxical relationship between China and the US provides a clear illustration as to why the global economy is so precariously placed. The two epicentres of growth both exhibit tremendous structural problems, so a multitude of things could go wrong in the months ahead. Ironically, Congress might turn out to be the author of America’s own misfortune. That is, if the Chinese don’t beat them to it first.

New York Two Years On

Paul Krugman has been talking a lot about US public finances lately, and one of the points he tends to make concerns the parlous state of finance in New York. That, and the lack of generousity on the part of Washington post 09/11. I have readers in New York, so I thought I'd check out what one of them had to say on the topic. This came in the mailbox from Bill today:

Every city, town and municipality is in a major fiscal crunch. What gets me even more upset is the fact that NY State had to raise our property taxes a lot due to the 20 Billion loss in the States retirement funds due to the Wall Street Bubble. So my property taxes are going up $3,000. In January to a total of $13,000. This is just for 1/6 of an acre of land in the County of Westchester.

We, I think the Bush Admin. Should keep their promises and help NY with the money that was earmarked for NY. The City can't afford to keep many Fire Depts. Open not to mention enough security to help out with Home Land Defense. NYC Mayor Bloomberg is pulling out all of the stops he learned in the business world to raise revenues for the city. He even signed a contract with the Snapple beverage company to be the main supplier of soda machine drinks. The city will in return get a few million each year.

Living in NY 2 years after 9/11 seems no different than 2 years before with the exception of the occasional Yellow alerts which then cause the police to run patrols on certain highways and bridges which makes things a bit hectic during the normal NY traffic. Of Course the first 2 weeks after 9/11 people in NY were so kind in the road, one did not even hear a single car horn go off. But people are back to the normal routines. But more folks are finally starting to question why 9/11 happened as opposed to just a Rambo Type of attitude.

Blogging and the Information Marketplace

Emergic's Rajesh Jain on the information marketplace:

While there is a lot of content out on the Internet, what is also needed is contact. This is where social network software comes in. People want to connect with other people. Websites like Ryze, LinkedIn and Friendster offer the promise of making connections between people. Email and IM offer one type of connectivity – with people whom we know directly. What social networks do is extend this to friends of friends.............

Blogs are giving a richness and personal touch to the web that hasn’t been seen before. They are what will give individuals and small businesses a mechanism to find a place on the Internet. It could be an individual writing about needlecraft or someone creating a weblog around Scrabble. Whatever it is, blogs have added a variety on the web that has been missing so far.............

Imagine the small, neighbourhood businesses that are there in every part of the world. It would be nice if each of them could publish a profile of themselves and what is new with their business. This could then be made available as an RSS feed. Users (consumers or other businesses) could then subscribe to these feeds in their news readers, and thus be alerted whenever there is something new and interesting. This creates a win-win situation for everyone: users get the relevant content, and the businesses get a way to reach the interested people.

The Information Marketplace is what is missing in today’s web. Search engines help us locate websites and pages of interest, but they do not get us access to regularly updating microcontent. The combination of simplified publishing tools and a syndication mechanism can help in bridging the information gap which exists. Business and the web share one thing in common: connections. This is what the Information Marketplace enables.

Nice idea. I would also bolt on some form of collaborative filtering via your community of similar-interest friends or you might get flooded. It is a question of how much as well as how little information you want. On the downside, the virtual social networks suffer from the same liability that the real world variety do: the problem of closed connections. How do you know that you are not filtering out the 'new' and the 'interesting'? What you need are plenty of what Granovetter calls 'connectors' - people with a high quantity of random connections - scattered around your 'inner circles'. In the end, I think there is no easy answer to this, either you are going to get too much, or too little. You have to choose.

On another front, Rajesh posts a link to Nick Denton on the impact of Google text ads:

"Text ads will force weblogs to become more like traditional media sites. Shorter front pages, more internal links, longer content...Google serves up text ads according to an analysis of the context. Internal pages are more specific, and therefore more appropriate for targeted text ads...And what will blogs look like, after they're optimized for Google? Much more like traditional media sites, designed to keep viewers bouncing around from item to item. Google text ads will give blogs a business model; but they'll also warp the format."

Now I know McLuhan said 'the medium is the message'. And I know that 'he who pays determines the medium', but I still think Nick is writing-off blogging just a little too quickly here.

You see, if things always went like this there would never be innovation. In the begining we were told business-driven internet sites would fail since nobody was going to click. Now we are told that blogs will be restructured by clicking. I remember when I was a kid my father used to tell me: 'and when you grow up you'll want to make money just like me'. Maybe, but there's still a hell of a difference between Google itself and eg AOL Time Warner, or the RIAA.

The biggest asset blogs have, and will have, are their readers. This is an attention economy, but the implicit value of all that attention doesn't have to be cashed in in the crudest and most crass of ways. I think it is too early to say, and we will see where blogging is heading. Certainly blogging is one way for young, talented people to get known. Mathew Ysglesias being just one example.

My own theory is that blogging is the destruction of form - a la Kandinsky. The traditional rhetorical rules of form and expression are breaking down. The old compartments won't survive. The stuation is fluid and we will see were we all are five years from now. Group blogging - Medusa style - is another example (so long as they don't all think alike). Many different voices in cacophony presenting multiple points of view. Just like the neurones in your head. Just right for the age of 'fundamental uncertainty'.

Wednesday, September 17, 2003

The Deflation Meter is Ticking Away

If the mood in the financial markets were anything to go by, the US recovery is a done deal. Why do I remain so skeptical? Because K says there's an Argentina type crisis lying in wait for us somewhere up the river? Not at all. This may, or may not happen, but it won't happen now. So why the doubts. Well of course there are the employment numbers (as long as you keep your mind off the headline spin and look at what is really happening). Then there is industrial production, which is definitely improving , but just not as much as everyone expected, or consumer sentiment which stubbornly refuses to improve, and seems bent on continuing its downward drift. Against this background, and the continuing strong growth in US labour productivity, yesterday's inflation numbers should hardly have come as a surprise: if we strip out food and energy the US inflation rate is hovering round the 1% mark.

Now let's remind ourselves, shall we, of what Federal Reserve Governor Ben Bernanke was saying back in July in his "An Unwelcome Fall in Inflation speech:

Within this framework for thinking about price dynamics, the factor most likely to exert downward pressure on the future course of inflation in the United States is the degree of economic slack that is currently prevailing and will likely continue for some time yet. Although (according to the National Bureau of Economic Research) the U.S. economy is technically in a recovery, job losses have remained significant this year, and capacity utilization in the industrial sector (the only sector for which estimates are available) is still low, suggesting that resource utilization for the economy as a whole is well below normal. By conventional analyses, therefore, even if the pace of real activity picks up considerably this year and next, persistent slack might result in continuing disinflation.5

A highly simplified, though not quantitatively unreasonable, calculation may help. Let us suppose that economic activity does pick up in the second half of this year, by enough to bring real GDP growth in line with its long-run potential growth rate--roughly 3 percent or so, by conventional estimates. Moreover, suppose that activity strengthens further next year so, so that real GDP growth climbs to approximately 4 percent, a full percentage point above potential. What will happen to resource utilization and inflation?

Focusing first on the implications for economic slack, we note that this projected path for real GDP gap would imply no change in the output gap through the end of this year, followed by a percentage point reduction in the output gap during 2004. Given the average historical relationship between the change in the output gap and labor market conditions, known as Okun's Law, the unemployment rate would be expected to remain at about its current level of 6.4 percent through the end of the year and then decline gradually to about 6.0 percent by the end of next year. This projection is fairly close to many private-sector forecasts.

Let us turn now to the implications for inflation. From 1994 to 2002, core PCE inflation remained in a stable range while the unemployment rate averaged about 5 percent; so let us suppose, for purposes of this example, that the unemployment rate at which inflation is stable is 5 percent. (If the unemployment rate at which inflation is stable is lower than 5 percent, the disinflation problem I am discussing becomes larger.) A little arithmetic shows that this scenario involves 1.9 point-years of extra unemployment (relative to the full-employment benchmark) between now and the end of 2004. Now make the additional assumption that the sacrifice ratio (the point-years of unemployment required to reduce inflation by 1 point) is 4.0, a high value by historical standards but one in the range of many current estimates. Then the additional disinflation between now and the end of next year should be about 1.9 divided by 4, or about 0.5 percentage points. So given our assumptions about GDP growth, core PCE inflation, say, might fall from 1.2 percent currently to 0.7 percent or so by the end of 2004.

So, to spell things out, Bernake is saying (and of course these calculations are not written in tablets of stone) that if things continue as they are at present we could be down to a 0.7% inflation rate by the end of 2004. And if the economy is a little weaker, and the slack is a little more, then naturally the disinflation will be greater. Since I don't see anything on the horizon right now that is going to turn all this round for the good (while there are plenty of factors which could help make matters worse) I think we have to imagine we might hit deflation in the US sometime around the end of 2004, beginning of 2005. That is why I don't buy the upbeat spin, and that is why I haven't been buying it for some time now.

Getting in Under the Radar

Blogging has been light today, partly from pressure of work, and partly because John over at Sinosplice has been doing a lot of backroom work helping me get China Economy Watch up and running on his server, so that it can be seen inside China. Maybe people who are not involved with China don't realise it, but it is incredibly difficult for many people inside China to read external material, especially blogs. So now I'm one of the lucky few, and I would like to take this opportunity to thank John, who does all this, may I add, for Amor del Arte, simply because he wants to. Well, I've certainly got a lot of potential new readers to think about.

Good and Bad News

First a quick word of welcome to another EU blogger, Mats Lind who has a Different Opinion . Mats has actually been around for a while, but I only just cottoned-on. More to the point Mats has a couple of posts worth considering. One which comes via Abiola concerns the 'bang for buck' (I think we need to change this phrase, it reminds me too much of Last Exit to Brooklyn) delivery of US education:

"The United States spent $10,240 per student from elementary school through college in 2000, according to the report. The average was $6,361 among more than 25 nations. Yet the United States finished in the middle of the pack in its 15-year-olds' performance on math, reading and science in 2000, and its high-school graduation rate was below the international average in 2001"

The other (and this is the good and bad news bit) comes from the latest figures for US infant mortality. The good bit is that it is coming down, the bad bit is 'look where it's coming from'.

"The U.S. rate in 2001 -- the latest data available -- fell to 6.8 deaths per 1,000 live births from 6.9 the previous year, according to the Centers for Disease Control and Prevention. The rate has declined 38 percent since 1983, when it was 10.9 per 1,000 live births. It has dropped to an all-time low in each of the last four years after a brief plateau in 1997 and 1998". Despite the improvements, the U.S. rate is more than twice that of other developed countries. In Sweden, for example, the rate was 3 deaths per 1,000 live births in 2000, the latest data available from the United Nations.
Source: AP, via Different Opinion

Now before we get too shirty over here in Europe we need to ask ourselves what these numbers mean. Some silly people in the US love to laugh at the Swedes. They should remember the old Chinese proverb that "when you point one finger at others, the other four actually point to you". So I don't think we should fall into their trap. I can think of two factors which may be relevant here. The first is the exraordinarily high level of immigration (and especially undocumented immigration) into the US in the 90s. Undocumented immigration implies fragility, and fragility can mean - among other things - higher than normal infant mortality. This can also impact itself on the school performace numbers as children using other languages and from other cultures enter the education system.

But this factor alone is not sufficient. Clearly the horribly low level of committment of the US system to welfare has its part in the explanation. The condition of the poorest 10% of American society is clearly important. Bush came to power on the promise of improving the US educational system: this is a promise we don't seem to hear too much about these days.

BTW: On the subject of new European Blogs, Euro Pundit David Weman is suggesting a complete list of 'euro level' blogs in his latest post at Fistful of Euros . So any suggestions please go over and post in the comments section. Meantime to correct an ommission (I think I am a bit slow sometimes) welcome to the other members of the Fistful team. Mathew Turner , Jurjen Smies , Tobias Swarz , Scott Martens , Iain Coleman , and Nick Barlow . Ok, that's it. You're blogrolled.

Swedish Waves

Sweden's no to the euro continues to make waves ( and here and here ). Much of the consensus seem to focus on when there will be another vote. Little seems to contextualise in relation to next years 10 new members. There is also not much comment on how the new alignment post-May 2004 will impact on the post-Iraq war differences. Blogger Abiola Lapite has a rather different take on the situation, focussing on how the abuse of power by the large states (and for another more recent example not mentioned by Abiola see this ) maybe affecting perceptions of the EU in the smaller states. Apart from the monetary and fiscal issues, the abuse of large-state power and the bickering over the pact (with the impression often being given that the rules can be rigged, that it's just a question of finding the right formula) undoubtedly took their toll in the Swedish vote. But somehow I doubt that this lesson will be learned.

What a surprise! And what I found even more surprising was the margin of victory - a huge 14.3%. I'd been expecting the pro-Euro camp to ride to victory on the back of the sympathy factor, what with all the press coverage that made Anne Lindh out to be the second coming of Mother Teresa, but it seems I underestimated the Swedes' ability to separate their feelings of grief from hard-headed calculations about the best choice for their country.

None of the arguments made on behalf of joining the Euro made any sense, whether considered from an economic or a political angle. The claim that the Euro would bring big economic benefits was never plausible on its' face: the EU is very far from being an optimal currency area, and income flows on the scale that would be required to counterbalance any asymmetric shocks to Eurozone countries are simply politically unimaginable anytime in the near future. Labor mobility is extremely low, even within most European countries, while the linguistic barriers are such that the only direction in which labor could easily flow would be towards the UK and Ireland, because of the demands by employers in even the smallest countries that all employees speak the local language fluently. Can anyone reasonably imagine a day when the Danes, the Dutch or the Portuguese would agree to the adoption of German or (most likely) English as the official working language within their own borders?

But even leaving aside the language issue for the moment, there is still the fact that academic credentials are not automatically recognized or correctly evaluated outside of the countries they are issued, that legal and professional standards differ across all EU countries, that moving from one country to another often means losing all your pension contributions, and a host of other imperfections in the labor market that ensure Europe will not be looking like America, where moving from one coast to another is a routine matter, anytime soon.

Tuesday, September 16, 2003

How Not to Defend Your Lifestyle

Mats asked a question on the comments section of SemiDaily Journal that merits an answer. Mats' question:

Edward writes - "The manufacturing jobs are not the problem. The numbers to watch are the services ones, and not the low end cleaning and age-care, but the high value end. If the US cannot produce growth there then there could be a big problem." - and I have to ask about the reason behind this. Because I got the impression that the US could produce just anything right now if there only was a demand for it. I mean; if demand is the main problem, wouldn't then the low end jobs (whose posessors are most likely to spend their wages and perhaps even more) be the most important ones?

Now I suppose I'm not sure demand is the main problem. This is a very long story, but to keep it quick, you have to think of the THREE deficits: federal, trade, and private indebtedness. So on all levels in one sense there is loads of demand. The US is buying a lot, what it needs to do is sell, since one day this money has to be paid back in some form or other. If not you have some version of the 'pyramid fallacy' - at a time when the age pyramid is inverting.

Now assuming something like a run-up from argiculture, to industry, to services, to information based services, all the OECD has moved from agriculture to industry, and mainly we are now moving (have already moved) from industry to services. So when I say the loss in manufacturing is no problem, I don't mean it isn't a problem for the people who work in the factories, obviously it is. I mean historically the US can only expect to maintain a very limited manufacturing base. So it has to import, so it has to export. What can it export? Information, and information based services. This is where the 'madman' Kurzweil is important. If we are on an exponential ride downwards as far as information costs go, then making a living selling information is going to be hellishly tricky.

Also, I have a second argument, which I owe to Mokyr, that start-up costs in the information age are a lot less than in the industrial one. Think Google. Also the human capital component is much more important, and human capital formation in parts of the third world is relatively cheaper. What they need is some 'on the job training' in the west. Schroeders short-term 'green card' visas are a godsend for the third world, and the worst of all worlds for the EU. I'm not in any way EU patriotic (I mean I'm a European, and I'm happy with this, but I still think patriotism is the 'last recourse of the scoundrel'), so I'm not worried about the 'problem'. Good luck to the third world for once.

Now back to the US. To pay for the manufactured imports they need to export. But it seems the trade surplus in services (see my US roundup on Bonobo last Friday) is declining. This is extremely bad news for the US. Then we come to the currency problem. They need to drop the currency to turn things round. This, of course, effectively means dropping per capita incomes in the US, as it means US consumers will have to pay more for their consumption. But then we have the problem of the 'reserve currency'.

If we had a gold standard the US could devalue with respect to gold. But when your currency is the modern equivalent of gold, what do you do? They tried devaluing vis a vis the yen and the euro, and this isn't working. They want now to try against the renminbi, but this is comic when you look at how much the renminbi would have to rise to make any difference. And then, of course, the best bet is that the Chinese financial system would crash under the strain. So there is a problem and no easy answer. That's why some people say gold will come back. I doubt this. But we are very much on a voyage into the unknown, and it is not clear how things will unfold. That's why I like these ideas of 'emergence' and 'self organisation'. You can't know what the program will produce until you run it.

The low end jobs, propensity to consume argument is OK, but you have to be able to defend the proportion of high end jobs in your economy if you want to maintain your 'lifestyle differential'. Of course, maybe neither Mats nor I would be crying too many tears about this problem.

Your Questions Answered

Kevin Drum now has the full transcript of the Krugman interview posted. Among the more notable extracts:

Train wreck is a way overused metaphor, but we're headed for some kind of collision, and there are three things that can happen. Just by the arithmetic, you can either have big tax increases, roll back the whole Bush program plus some; or you can sharply cut Medicare and Social Security, because that's where the money is; or the U.S. just tootles along until we actually have a financial crisis where the marginal buyer of U.S. treasury bills, which is actually the Reserve Bank of China, says, we don't trust these guys anymore — and we turn into Argentina. All three of those are clearly impossible, and yet one of them has to happen, so, your choice. Which one?

Will China keep financing that forever?

They're financing both the current account deficit, and, as it turns out, directly financing the government deficit. We were running a big current account deficit that accelerated through the late 90s, but there you could say that it was due to the strength of the U.S. economy, it was all this investment demand, technological revolution, and after all, the government was in surplus.

Now, we're back in twin deficits territory, and there are two related issues, the solvency of the federal government and the solvency of the United States per se, and both of them are now somewhat in question.

Maybe I'm a captive of my own model, but I think that what happens when the world loses faith in the U.S. as a place to invest is that the dollar plunges, but that in itself is not so bad because the lucky thing is our foreign debts are in dollars, so we don't do an Indonesia or an Argentina. But the federal government's solvency is a much more critical thing because it needs to keep on borrowing more and more just to pay its bills............

Oh, I don't think China is going to do it to pressure us. You can just barely conceive of a situation where they're mad at us because we're keeping them from invading Taiwan or something, but more likely they just start to wonder if this is really a good place to be putting their money.

So what happens is a plunge in the dollar when they decide to stop buying and start cashing in, and a spike in U.S. interest rates. But you might also get in a situation where the interest rates the government has to pay to roll over its debt become so high that you get an accelerating problem, which is what happened in Argentina. What happened was that suddenly no one would buy Argentine debt unless they paid a twenty something percent interest rate, and everybody says, but if they have to roll over their debt at a twenty percent interest rate, there's no way they can pay that back. So the whole thing grinds to a halt and the cash flow just dries up.

Yeah, just take the numbers as they now look, and that's where it heads. And you might say, OK, we can easily handle it. U.S. taxes are 26 percent of GDP in the U.S., in Canada they're 38 percent of GDP. If you raise U.S. taxes to Canadian levels there's plenty of money to cope with all of this. But politically we've got a deadlock, and it's hard to imagine that happening.

So it's a bit clearer. he isn't saying Argentina, as in Argentina, since the US has it's debts denominated in dollars. But he is saying there will be a big financial mess. He is saying the dollar is going to fall, substantially. This part is perfectly logical. I just have two problems. (Well two problems and an observation).

Firstly, we need to think through the implications of this. This substantial reduction in dollar value will imply a substantial reduction in the purchasing power of the US consumer. This will entail an internal re-adjustment in the US. This will also have political consequences. Since it is difficult to see what these might be, we are still pretty much in the dark. Brad is an optimist. He thinks the US civil society, with its strong democratic traditions will resist the pressure, and will rebound. I do not disagree. I am more with Brad than I am with Krugman here, I think sometimes the phantoms that haunt Krugman are real enough, and sometimes they are of his own creation. But we are still left with the question, what can be done? There is no easy way out. This needs following a step at a time. There are a lot of variables in play. And any future US government, whatever its political complexion, will be faced with some difficult choices. In particular the days of living on a never ending spiral of credit, the days of the US as the 'consumer of last resort' will be well and truly over. We are back with Roach's alternative growth engines.

Secondly, the end of the 'high dollar' is bound to have major repercussions for the whole global monetary system. If Krugman is right the dollar's role as the reserve currency will be in question. With the euro (for more reasons than I care to go into here) unlikely to be the ready recipient of this role we may well see the US financial mess being accompanied by a global monetary one. I hope not, but at least the possibility has to be entertained.

Now for the observation. Krugman has waxed strong on the 'baby boom' problem in the US. But what about the European one? Economics Commissioner Pedro Solbes is on record as saying that the finances of half the EU member states are unsustainable in the mid-term. This is an opinion just as important as the Krugman one, but which has received somewhat less exposure. So imagine it: Argentina style problems in the US, global monetary disorder, and default in a number of EU member states (Italy?, Spain?, Belgium?.........). Not a pretty picture, is it? Lets hope all this is up the gumtree.

In conclusion, and as a finale: Kevin wasn't the only one with questions. Here are mine and Maynard's:

First Maynard

He talks a lot about America, but not about the rest of the world. I'd like his opinion on such matters as

* We hear vast amounts of hype about China's rate of growth, while we hear about India's growth in services but not so much a massive growth in the economy. How much of this is real --- China really is getting richer much faster than India --- and how much is a product of hype and statistics that are more easily faked in China?
* Has China reached a take off point where they can grow their economy by themselves (this is a kinda fuzzy notion, but encapsulates things like technical expertise and capital equipment) without the US (US demand, US money, US-trained personel)? This is of interest because there's currently a whole lot of pissing on China by Congress going on right now, and it seems to me that the US needs China more than vice versa, but am I wrong?
* A larger question than the above is, how much does the rest of the world need the US? Let's assume that the US does continue down its present self-destructive path with everything that entails---massive debt, either heavy duty inflation or default on treasuries, a population that can no longer afford to buy from the rest of the world; does this REALLY doom everyone else as well. We hear (certainly this is _The Economist_'s second favorite theme after how great Bush is) that the US is the only engine of the world economy, blah, blah. But in a longer term scheme of things, say over 5 to 10 yrs, does the decline of the US really mean the decline of everyone else? It seems to me that countries like India and China have the potential for enormous demand for low-end goods, while places like Brazil and Thailand and Indonesia are moving more upscale in their demands. What am I missing?

Now Me:

Apart from everything in the spirit of what Maynard has just said, I would ask:

(a) The current round of GATS (services) negotiations in Cancun. Is it still so clear that globalisation will be beneficial to the US in the growing services area, given that the 'comparative advantage' of US workers may well be a lot less than their current salary differential. (This is NOT an anti-globalisation question, clearly globalisation can favour now this, now that country. It is therefore an EMPIRICAL question whether any particular counry will be a prime beneficiary at any particular moment in time. But no reasonable gambling school would let the punter who had just had the longest winning streak yet seen at the table simply walk away, sin mas).

(b) Assuming the other big problem of the moment is deflation, and (running a little 'what if' thought experiment) imagining a worst case scenario where Ben Bernanke's 'unconventional' tools don't fix the problem, what's the next move? I mean we should have a plan 'b' in reserve, shouldn't we?

(c) And if you're really stuck for questions you could try: are we running out of the fiscal policy option? We all know that conventional monetary policy has only one notch left to fall, but the World Bank Global Outlook suggested this week that, with aging populations around the OECD, and unfunded pension and health care liabilitieslooming, this round of the business cycle could be the last for the time being where we have the possibility of using fiscal stimulus in any big way (in fact France and Germany already can't, and maybe Japan shouldn't).

And in order to keep this last one from being a 'let out' question/excuse to talk one more time about the 'great GWB tax cut' I'd focus on Europe and Japan.

Rethinking the Desktop

Rajesh Jain has a problem. He's a busy man: so, with "a few hundred emails a day, dozens of IM sessions, tracking an ever-increasing number of websites and blogs.......... and the need for synchronisation with the other devices in our lives", it's obvious he's having a hard time keeping up, let alone getting any work done! His solution: re-engineer the desktop with a micro content client and a digital dashboard. Wow.

I think, when he speaks of having a focus on the 'new users, he's talking India, and the rest of the third world.

Home Users and SME employees need the simplest, cheapest device that can connect to the server and provide a graphical desktop to users. This is similar to the network computer idea that was put forth by Larry Ellison some years ago. In that case, they targeted the wrong market – the focus needs to be on the new users, not on existing users. To make this thin client, the need is for a USD 10 CPU as part of a USD 30 motherboard in a box which has an aggregate cost of USD 50. The processing power of the CPU needs to be about 66-75 Mhz, the memory on the box needs to be no more than 2 MB RAM. The box needs to be able to run any OS which can support the vnc (virtual network computer) software. What vnc does is project the full desktop from the server.

The USD 50 thin client needs five connectors: for keyboard, mouse, monitor, network and power. A new keyboard and mouse will cost about USD 10. A refurbished monitor should be available for USD 40-50. To make matters simple, it should be able to work on 12 volts DC power through an adaptor. Thus, it should be possible to assemble a complete thin client computing solution for about USD 100-110 for every user.

The thin clients need no management and never need to be upgraded. It is computing at its simplest. It leverages the fact that networks are becoming faster and unwired. In fact, the second generation of the thin client should have embedded WiFi support. Broadcom recently announced a single-chip WiFi for USD 12-13. This way, even the need for cabling in an organization or residential colony will be eliminated.

The computer desktop has barely changed in the past decade. The Windows monoculture has limited our world to files, directories, icons and double-clicks. This is even as the Internet and Web have taken over our lives, and created new interfaces – the web browser, the email client, the instant messaging client and now, the emerging RSS reader and aggregator. There is a need for a change on the desktop. The need is for richer web clients, ideas from computer gaming to make visually rich interfaces, and dashboards to provide us an integrated view of our digital lives and information. The volume of transactions that we do on a computer have skyrocketed in the past decade – a few hundred emails a day, dozens of IM sessions, tracking an ever-increasing number of websites and blogs with their microcontent, and the need synchronisation with the other device in our lives (the cellphone). It is time to rethink and re-engineer the desktop. What needs to take its place is not clear, but what perhaps comes closest is a mix of three ideas: a web services browser, a microcontent client and a digital dashboard.
Source: Emergic Org

What Happened in Cancun?

Now the dust is settling, this seems to be a useful question to be asking. The economist seems to think the intransigence of the EU and Japan was over agricultural issues , for Public citizens Global Watch it was the whole model of globalisation that came under fire. For Dsquared "the good thing about the Cancun collapse is that it allows us to get the measure of the character of the WTO as an organisation" while for Brad "You can be for the Singapore investment agenda. You can be against the Singapore investment agenda. But you are not allowed to be against it on the grounds that it is blocking the realization of a free society of associated producers".

The feeling I get from reading all this is that we are seeing any number of 'hobby horse' theories being given the run-around, but what we are not getting is any analysis of why this is happening right now. Not, that is, except from one Suresh Krishnamoorthy in Brad's comments column, who informs us without too many if's or buts that :

It is not that they (Europe, Japan, the US) are defending some high minded free market principles. India (software), China (trade) and Brazil (trade) have finally found the vice with which to squeeze the privates of the West. They want their long overdue pound of flesh and finally, finally they are in a position to demand it.

Now I think that is clear enough isn't it. Of course the Singapore issues have been around for years, of course they were always going to be on the agenda in Cancun. But also we could allow ourselves to note that the OECD countries are having a bundle of problems generating growth. They - more than many third world countries - apparently need another round of global trade expansion urgently. So why the reticence? Why the prinicipals and the sticking points?

Of course all of this could simply be incompetence and mishandling: when in doubt, this is often a safe theory. But could it just be that the rich countries are having second thoughts? It is too early yet to say whether Cancun will become the much feared high water mark of this wave of globalisation. Maybe it is just a hiccup along the road. But it is a question which is worth asking. I may not agree that the Hawley Smoot tarriff was the key to the great depression, I may not agree that protectionism produces deflation, but what I do agree with is the idea that any turning back on the global pathway will lead to more, not less problems, for all concerned.

Kevin Drum Talking to Paul Krugman

As is probably common knowledge by now, Calpundit Kevin has been talking to Krugman. We don't have the full transcript yet, but what he said was enough to make Kevin pretty depressed.

Here's an excerpt from my interview, where he talks about what he thinks is going to happen to the U.S. economy:

We’re headed for some kind of collision, and there are three things that can happen. Just by the arithmetic, you can either have

big tax increases, roll back the whole Bush program plus,

or you can sharply cut Medicare and Social Security, because that’s where the money is,

or the U.S. just tootles along until we actually have a financial crisis....and we turn into Argentina.

Which one of those is most likely? What’s your best guess?

I think financial crisis....

Really? A financial crisis in the United States? Like in Argentina? Krugman admits that conventional wisdom says this is impossible, so I ask him again:

And do you think that’s a serious possibility for the United States?

Yeah, I mean, you just take the numbers as they now look, and that’s where it heads....I think we have to take seriously the possibility that things won’t work out this time.

Brad has picked this up with a post I'm not too happy with. He seems to be saying that the US is too big to fail. Well this I don't buy. But that doesn't mean Krugman has to be right. The thing is, Paul is a clever guy. On one reading he shouldn't be saying this, since saying it begins to make it thinkable, which begins to make it happen. (I have the same problem about saying the euro may not work). Normally he wouldn't do this. But then, his opponents, in order to criticise have to allow that he is an intelligent and important economist, something they aren't going to do. So, you see, he has them.

But as with all these things, there'll be an internal and an external reading. Bush is a lot less popular outside the US than he is inside. This means that these declarations, which are really for US internal consumption, may well help shape the international consensus.

What was it they said: a country divided against itself....

I think Krugman is being sensationalist here, and intentionally so. His statement has to be read against the background of his dog-fight with the White House. This is unfortunate, since this makes it really difficult to evaluate the scientific basis of his arguments. Given how clever and talented he is, I think he would have done a lot better to stay out of the street fight, and send in his arguments with more precision, and possibly, more effect.

I mean it's very easy to talk about Argentina. I've been saying it myself about Spain and Italy in the debate about the euro and ageing. Curiously enough I have never used this argument in connection with Germany, or with Japan. This is not because I think these countries are too big to have crises, far from it, but because we have little recent experience of what such 'big' crises might be like. So with Germany, with Japan, with the US, I think it's better to take things a day at a time. Look at the emerging reality, and then draw conclusions. I don't even like Paul's use of numbers. Oh, I'm sure he's right that the Federal finances are off the rails, but there are too many unknown variables to make hard-and-fast calculations. We don't know, for starters, what is going to happen to the value of the dollar. We don't know as a consequence of that what is going to happen to the living standards of US consumers, we don't know whether the US will hit deflation, and if so how much, and we don't know what kind of growth (positive or negative) impact all this will have on US GDP. So as far as 2010 goes, your guess is as good as mine, or Krugman's. That's what 'fundamental uncertainty' means.