Economics 2008: 10 lessons
What a tumultuous year it has been for economics. The 'dismal science' has not seen such a 12-month period before - the year started on a boom and is ending with theories overturned, conventions abandoned and economies worldwide simultaneously falling into recession. Fiona Chan recaps the top 10 economic trends in a year where uncertainty has been the only constant
-- PHOTO: REUTERS
1 Inflation, deflation and stagflation
BEFORE the financial crisis exploded in September, inflation was set to be the year's biggest economic story.
As fuel and food costs skyrocketed, consumer prices soared to record highs around the region, including in Japan, South Korea, Thailand and Indonesia.
In Singapore, inflation hit a 26-year high of 7.5 per cent in April and May, partly due to the rise in the Goods and Services Tax over the previous year. In response, the Monetary Authority of Singapore (MAS) gave the Singapore dollar an immediate boost to help offset more expensive imported goods.
But the spectre of recession was looming ever closer, prompting predictions of the dreaded stagflation: low economic growth coupled with high inflation.
Then the financial crisis arrived, jamming the brakes on consumption in developed nations, export demand and oil prices. Inflation worries transformed into warnings of deflation as asset prices started to plummet.
The MAS reversed its Singdollar position in October, adopting a neutral stance that signalled its change of priorities from targeting inflation to stimulating economic growth. Inflation here is now expected to dive to between 1 and 2 per cent next year, after clocking in at 6.7 per cent in the first 11 months of this year.
But while deflation seems likely in the near term, economists warn of higher inflation in the middle term due to massive government spending and the need to aggressively boost money supply in the face of tighter bank lending. This, in turn, could end up in stagflation if the downturn proves prolonged.
Only one thing is definite: we have not seen the end of the inflation story yet.
2 Oil: What goes up must come down
OIL prices dominated headlines for much of the year, whether they were shooting up to a record US$147 per barrel in July or crashing to below US$34 just two weeks ago.
In the first half of the year, high demand from India and China, combined with rampant speculation, pushed up prices, which peaked at the height of tensions between Iran and the West. Predictions of oil at US$200 a barrel seemed feasible - until the market turmoil in September caused prices to plunge.
Recent moves by the Organisation of Petroleum Exporting Countries to cut supply appear to have had little effect on falling prices, reflecting the extent of uncertainty in the market and the bleak outlook for global growth next year.
Other commodities also had a roller- coaster ride this year.
Gold, however, breached US$1,000 per troy ounce in March and stayed high through the year as risk-averse investors literally poured their money into gilt assets.
3 Nationalisation and bailouts
DECADES of privatisation and lobbying for the liberalisation of markets came to a dramatic end this year as banking titans and giant companies, tottering on the verge of collapse from the unravelling web of bad mortgage loans, went hat in hand to governments for assistance.
Bankers that turned beggars included Wall Street's five hallowed investment banks: Bear Stearns was subsumed by JPMorgan Chase in March, Lehman Brothers collapsed in September, Merrill Lynch sold itself to Bank of America, and Morgan Stanley and Goldman Sachs transformed themselves into traditional bank holding companies.
More buyouts, bailouts and mergers were cobbled together as huge organisations such as insurer AIG, mortgage behemoths Fannie Mae and Freddie Mac and savings and loan company Washington Mutual hovered at the cliff's edge.
After an intense round of political jockeying, the United States unveiled a US$700 billion (S$1 trillion) bailout plan in late September. Britain followed about a week later with a £500 billion (S$1 trillion) bank rescue package, while European nations also acted together to save their banks.
The auto industry is the latest to jump on the bailout bandwagon, sparking an uproar over how much government help is too much. General Motors and Chrysler have obtained more than US$13 billion in US taxpayer funds to stay in business after they warned earlier this month that they would run out of cash in a matter of weeks.
4 Zero interest rates
SINCE October, central banks have been cutting interest rates in a bid to encourage borrowing and spending.
None have been more aggressive than the US Federal Reserve, which has cut its rate by 325 basis points since January. It used up its last interest rate bullet earlier than expected when it slashed rates two weeks ago to between zero and 0.25 per cent, an unprecedented level.
Having exhausted its main ammunition with little effect on the economy, the Fed must now turn to more creative and drastic measures, such as quantitative easing, to spur confidence and jumpstart growth.
5 Quantitative easing
IF YOU had to choose just one economic catchphrase to take into next year, this would be a good one.
This extreme policy of printing money and force feeding it into the system is adopted by governments only after traditional tools have been used up - for instance, when interest rates are already lowered to zero and cannot go further.
The Bank of Japan adopted this measure in the early 2000s during the country's battle with deflation. It flooded banks with money by buying government and commercial securities and avoided a liquidity crunch.
The US Federal Reserve appears to be going down a similar path. It is extending credit to banks through a wide array of facilities, providing them with more liquidity than they need with the aim of increasing money supply.
The Fed hopes this will boost confidence in the banks, encourage lending and economic activity, and even lift inflation, preventing a deflationary spiral.
6 Fiscal stimulus and the revival of Keynes
AS INTEREST rates reach new lows and the outlook worsens, governments around the world have taken a leaf out of the book of famed economist John Maynard Keynes and rolled out aggressive spending plans to keep their economies going as consumers cut back.
The US has taken the lead, with President-elect Barack Obama planning a stimulus package that could reach US$1 trillion. Europe has announced a ¥200 billion (S$411 billion) spending scheme, while China, Japan, South Korea and Canada have also unveiled stimulus plans in recent weeks.
Singapore has offered S$2.3 billion in loan and credit facilities for companies and S$600 million to retrain workers. The Government has also indicated that it will bring back some of the S$4.7 billion construction projects it deferred over the past year.
But the biggest fiscal boost is expected in next month's Budget, where individuals, households and companies are likely to get help to survive the downturn.
7 Decoupling debunked
PERHAPS the biggest economic myth to be demolished this year was the assertion that emerging economies in Asia and Europe had sufficient steam of their own to continue growing even when the US was in a recession.
Until June, economists were still arguing in favour of decoupling, pointing to China's continued strong economic growth as evidence that the region was insulated from Western problems.
But the credit crunch finally put paid to that theory, as the US proved once again that it has the capacity to throw a spanner into the works of the world economy.
The synchronised economic slowdown since then has illustrated how dependent emerging economies still are on export demand, a trend that is unlikely to disappear for as long as trade flourishes.
8 Bank deposit guarantees
SOME economists say the one thing that kept this year's recession from spiralling into the Great Depression 2.0 was the absence of bank runs by the public.
Learning from the lessons of the 1930s, governments moved quickly to shore up confidence in the banking system, with extraordinary measures such as guaranteeing deposits in all banks.
The US Federal Deposit Insurance Corp increased its guarantee of bank deposits to US$250,000.
Many governments, including those in Ireland, Germany, Switzerland, Australia, New Zealand, the United Arab Emirates, Kuwait, Hong Kong and Malaysia, also moved to guarantee deposits.
In Singapore, the MAS set aside S$150 billion in October to guarantee all the bank deposits of individuals and companies here until the end of 2010.
9 Recessions, technical and real
SINGAPORE became the first Asian country to enter a technical recession - its first since the dot.com bust of 2001 - when growth contracted in the third quarter. It followed similar contractions in the second quarter.
Hong Kong, Japan and New Zealand followed swiftly into recession. Outside the region, the US has been in recession for a year while the Eurozone has slipped into the red as well.
A global recession next year is now on the cards, according to the World Bank.
10 Currency volatility
CURRENCY traders had a rough ride this year as the financial meltdown hit 'riskier' commodity currencies and pushed up 'safer' ones.
The Australian dollar lost a third of its value against the US dollar within three months, while fears of a wrenching UK recession pushed the pound down to a new low against the euro earlier this month.
But the US dollar gained despite the American-made crisis, as countries and investors around the world bought into 'safe' US government bonds.
The Japanese yen has also shot up amid waves of global deleveraging.
fiochan@sph.com.sg
Wednesday, December 31, 2008
Monday, December 22, 2008
Weathering the financial storm in East Asia
Weathering the financial storm in East Asia
Submitted by James Seward on Tue, 12/16/2008 - 18:10.
"The East Asia and Pacific Region has not been spared the full fury of the economic storm." – East Asia & Pacific Update
The above quote is from the just-released World Bank East Asia Update, and the storm clouds are still gathering over Asia. Growth in East Asian countries was already slowing before the crisis reached a new level of intensity in the middle of September. Governments around the region have made efforts to boost domestic demand through fiscal stimulus programs and monetary policy actions, but the pace of economic expansion is set to weaken further in 2009. GDP growth estimates are now only 5.4 percent for the region in 2009, as compared to 9 percent in 2007. This reflects the significant deceleration in exports in particular, as well as decreased foreign investment and domestic consumption.
Given that the three largest trading partners of developing East Asia (U.S., EU and Japan) have fallen into a recession in 2008, export growth from the region is likely to decelerate further and faster, and countries more dependent on exports will be hit hardest. In fact, the recently released Global Economic Prospects Report found that world trade will decrease for the first time since 1982 and will decline by 2.1 percent in 2009! An example of how the declines in exports is hitting Asia: exports in China, Korea, and Taiwan fell for the first time in seven years (by 2.2 percent, 18 percent, and 23 percent respectively). In addition, industrial output is sliding across the region, with China being the latest to report a severe decline in growth. This worsening of conditions comes on the heels of the recent economic turmoil that hit Asia in late 2007 and early 2008 — the rise in inflation. The earlier turmoil was largely a result of imported inflation (i.e., food and fuel) and domestic factors, such as rapid credit expansion.
The financial systems in emerging Asia now face serious risks from the financial crisis, largely from the impacts on the real sector, in particular exporters and manufacturers, and other key domestic industries including real estate, construction, and infrastructure. Bank customers are under increasing stress and evidence indicates that credit is already drying up in various economic segments, as well as for certain classes of borrowers with particular emphasis on small- and medium-sized enterprises. As discussed in early August on this blog, this may be a sign of a wave of bad debt on the horizon because a number of the financial systems still have weak risk assessment, supervision and transparency among other issues.
Early signs of stress are emerging in the banking systems across emerging Asia. Recent reports issued by ratings agencies indicate that the nominal rise in overdue loans in Chinese banks had edged up by 30 percent in the first six months of 2008 (although the total amount is still relatively small in comparison to total lending). In Korea, the capital adequacy levels of the banks were recently reported to have fallen to the lowest levels in over seven years (but the average level is still above 10 percent). In addition, a small bank failed in Indonesia recently due to liquidity problems and was the first bank in the region to be taken over by a government since the 1997 Asian crisis. Three weeks later, another bank in the region failed – the fourth largest bank in Mongolia. Most recently in Hong Kong, the leading financial center in Asia, banks have been warning on profits for the year. In fact, the second largest bank in Hong Kong, Bank of China, just this week received a $2.5 billion loan from its parent bank in China. This is four times the size of its announced losses so far this year, which as a news report indicated could imply that the bank is preparing for much larger losses next year.
Editor’s note: This is the first of two posts looking at East Asia’s position in the ongoing financial crisis. Part two (click here to read) looks at what governments in the region have done to cope.
Submitted by James Seward on Tue, 12/16/2008 - 18:10.
"The East Asia and Pacific Region has not been spared the full fury of the economic storm." – East Asia & Pacific Update
The above quote is from the just-released World Bank East Asia Update, and the storm clouds are still gathering over Asia. Growth in East Asian countries was already slowing before the crisis reached a new level of intensity in the middle of September. Governments around the region have made efforts to boost domestic demand through fiscal stimulus programs and monetary policy actions, but the pace of economic expansion is set to weaken further in 2009. GDP growth estimates are now only 5.4 percent for the region in 2009, as compared to 9 percent in 2007. This reflects the significant deceleration in exports in particular, as well as decreased foreign investment and domestic consumption.
Given that the three largest trading partners of developing East Asia (U.S., EU and Japan) have fallen into a recession in 2008, export growth from the region is likely to decelerate further and faster, and countries more dependent on exports will be hit hardest. In fact, the recently released Global Economic Prospects Report found that world trade will decrease for the first time since 1982 and will decline by 2.1 percent in 2009! An example of how the declines in exports is hitting Asia: exports in China, Korea, and Taiwan fell for the first time in seven years (by 2.2 percent, 18 percent, and 23 percent respectively). In addition, industrial output is sliding across the region, with China being the latest to report a severe decline in growth. This worsening of conditions comes on the heels of the recent economic turmoil that hit Asia in late 2007 and early 2008 — the rise in inflation. The earlier turmoil was largely a result of imported inflation (i.e., food and fuel) and domestic factors, such as rapid credit expansion.
The financial systems in emerging Asia now face serious risks from the financial crisis, largely from the impacts on the real sector, in particular exporters and manufacturers, and other key domestic industries including real estate, construction, and infrastructure. Bank customers are under increasing stress and evidence indicates that credit is already drying up in various economic segments, as well as for certain classes of borrowers with particular emphasis on small- and medium-sized enterprises. As discussed in early August on this blog, this may be a sign of a wave of bad debt on the horizon because a number of the financial systems still have weak risk assessment, supervision and transparency among other issues.
Early signs of stress are emerging in the banking systems across emerging Asia. Recent reports issued by ratings agencies indicate that the nominal rise in overdue loans in Chinese banks had edged up by 30 percent in the first six months of 2008 (although the total amount is still relatively small in comparison to total lending). In Korea, the capital adequacy levels of the banks were recently reported to have fallen to the lowest levels in over seven years (but the average level is still above 10 percent). In addition, a small bank failed in Indonesia recently due to liquidity problems and was the first bank in the region to be taken over by a government since the 1997 Asian crisis. Three weeks later, another bank in the region failed – the fourth largest bank in Mongolia. Most recently in Hong Kong, the leading financial center in Asia, banks have been warning on profits for the year. In fact, the second largest bank in Hong Kong, Bank of China, just this week received a $2.5 billion loan from its parent bank in China. This is four times the size of its announced losses so far this year, which as a news report indicated could imply that the bank is preparing for much larger losses next year.
Editor’s note: This is the first of two posts looking at East Asia’s position in the ongoing financial crisis. Part two (click here to read) looks at what governments in the region have done to cope.
Saturday, December 20, 2008
Bailout Automotif Amerika Disetujui USD17,4 M
Bailout Automotif Amerika Disetujui USD17,4 M
Sabtu, 20 Desember 2008 - 00:02 wib
TEXT SIZE :
Rani Hardjanti - Okezone
Presiden Amerika George W Bush. (foto: news.yahoo.com)
WASHINGTON - Presiden Amerika Serikat George W Bush telah menyetujui dana talangan atau bailout sektor automotif senilai USD17,4 miliar. Dana ini digunakan untuk menyelamatkan para produsen kendaraan yang tengah megap-megap.
Dengan dana bailout ini, pemerintah Amerika akan menjadi pemegang saham bagi perusahaan yang menerima bantuan. "Kami akan segera melakukan tindakan terhadap produsen automotif Amerika yang kolaps," ujar Bush seperti dikutip dari Associated Press, Sabtu (20/12/2008).
"Jika tidak disetujui, maka akan memperburuk jumlah pengangguran dan pasar saham," ujar Bush. "Dan ini akan menambah ekonomi semakin memburuk," tambah presiden Amerika yang telah demisioner ini.
Di saat yang bersamaan, Menteri Keuangan Amerika Henry Paulson menyatakan, kongres harus menyetuji dana bailout USD350 miliar untuk menyelamatkan sektor keuangan dari krisis keuangan. "Ini merupakan bagian dari dana talangan USD750 miliar," ujar Henry.
Produsen automotif Amerika terancam kebangkrutan terjadi pada General Motors Corp atau Chrysler LLC. Hal ini akan membawa perekonomian Amerika Serikat ke dalam kekacauan. Para ahli industri dan ekonom mengatakan, produsen automotif akan menutup pabriknya, memecat puluhan hingga ribuan pekerja, serta memangkas produksi. Sebelumnya, dana bailout ini sempat ditolak oleh kongres.
"Industri automotif adalah elemen kunci dalam perekonomian," kata Bob Schnorbus, kepala ekonom pada JD Power & Associates di Troy, Michigan. "Segala sesuatu yang mengacaukan akan membuat perekonomian melambat melebihi yang sudah kita lihat," imbuh dia dikutip dari Bloomberg. (rhs)
Sabtu, 20 Desember 2008 - 00:02 wib
TEXT SIZE :
Rani Hardjanti - Okezone
Presiden Amerika George W Bush. (foto: news.yahoo.com)
WASHINGTON - Presiden Amerika Serikat George W Bush telah menyetujui dana talangan atau bailout sektor automotif senilai USD17,4 miliar. Dana ini digunakan untuk menyelamatkan para produsen kendaraan yang tengah megap-megap.
Dengan dana bailout ini, pemerintah Amerika akan menjadi pemegang saham bagi perusahaan yang menerima bantuan. "Kami akan segera melakukan tindakan terhadap produsen automotif Amerika yang kolaps," ujar Bush seperti dikutip dari Associated Press, Sabtu (20/12/2008).
"Jika tidak disetujui, maka akan memperburuk jumlah pengangguran dan pasar saham," ujar Bush. "Dan ini akan menambah ekonomi semakin memburuk," tambah presiden Amerika yang telah demisioner ini.
Di saat yang bersamaan, Menteri Keuangan Amerika Henry Paulson menyatakan, kongres harus menyetuji dana bailout USD350 miliar untuk menyelamatkan sektor keuangan dari krisis keuangan. "Ini merupakan bagian dari dana talangan USD750 miliar," ujar Henry.
Produsen automotif Amerika terancam kebangkrutan terjadi pada General Motors Corp atau Chrysler LLC. Hal ini akan membawa perekonomian Amerika Serikat ke dalam kekacauan. Para ahli industri dan ekonom mengatakan, produsen automotif akan menutup pabriknya, memecat puluhan hingga ribuan pekerja, serta memangkas produksi. Sebelumnya, dana bailout ini sempat ditolak oleh kongres.
"Industri automotif adalah elemen kunci dalam perekonomian," kata Bob Schnorbus, kepala ekonom pada JD Power & Associates di Troy, Michigan. "Segala sesuatu yang mengacaukan akan membuat perekonomian melambat melebihi yang sudah kita lihat," imbuh dia dikutip dari Bloomberg. (rhs)
Wednesday, December 10, 2008
Democrats push $15-B bailout for carmakers
Wednesday, December 10, 2008
Democrats push $15-B bailout for carmakers
WASHINGTON, D.C.: Democrats proposed a $15-billion bailout package for the troubled US auto industry Monday in a compromise that sources say may still not gain approval from the White House.
The proposal offers less than half of the $34 billion General Motors (GM), Chrysler and Ford said they would need to stave off a “catastrophic collapse” of the nation’s automotive industry.
The low-cost, government-backed loans are intended to sustain them through March, which will give President-elect Barack Obama time to address the problem after he takes office on January 20.
“Fifteen billion is the maximum that’s available, given the president’s threat to veto anything else,” said US Representative Barney Frank, one of the lawmakers spearheading talks on the rescue plan.
Officials close to the talks said earlier Monday that the US legislature could authorize the rescue package, which calls for massive restructuring and tough government oversight, by mid-week.
But a senior Bush administration official who requested anonymity said a deal on Monday was unlikely because the White House and the Democrats who control the US Congress were at odds on the issue of the long-term viability of the Big Three US automakers.
US President George W. Bush said that “the definition of viability is open to discussion,” and that “viability means that all aspects of the companies need to be reexamined to make sure that they can survive in the long term.”
“Hopefully we’ll get something done,” he told ABC television in an interview.
“These are important companies, but on the other hand, we just don’t want to put good money after bad.”
White House spokeswoman Dana Perino, who earlier had said a deal was “likely” on Monday, responded to the proposed bill by saying the administration was “reviewing draft legislation we received this afternoon and are continuing our discussions with Congress.”
“We’ll continue to work with members on both sides of the aisle to achieve legislation that protects the good faith investment by taxpayers,” the spokeswoman said.
The proposal calls for a presidential designee, or “car czar” to oversee the restructuring of the Big Three US automakers, distribute the funds and report to Congress on their progress in achieving “long-term viability,” according to a copy of the bill obtain by Agence France-Presse.
Automakers will have to continue to improve the fuel-efficiency of their fleets and also look into using their excess capacity to build bus and rail cars for public transit.
The bill also requires the automakers to sell their private jets and places strict limits on executive compensation.
Senate Majority Leader Harry Reid said the blueprint aimed to “give the automakers the chance to clean house and return to a responsible path toward profitability.”
“The jobs of millions of American workers are at stake, along with the financial security of millions of families. So while we take no satisfaction in loaning taxpayer money to these companies, we know it must be done,” he said.
General Motors, which had warned it could run out of cash as early as January, urged swift passage of the bill and vowed it will “abide by the conditions proposed in the bill and will continue our restructuring with great urgency.”
“We have listened to Congress and have put together a restructuring plan that will deliver a stronger, sustainable GM in a quicker timeframe and without the negative market consequences that could result from bankruptcy,” GM said in a statement.
Chrysler said it was “pleased that progress is being made” and that it looked forward to working with lawmakers and “to completing our restructuring in an orderly fashion.”
Ford, which has said it has enough cash on hand to weather the current downturn but requested a $9-billion line of credit to hedge against worsening conditions or the bankruptcy of one of its competitors, said it would not “not be seeking a short term bridge loan” under the bill.
“But Ford fully supports an effort to address the near-term liquidity issues of GM and Chrysler, as our industry is highly interdependent and a failure of one of our competitors could affect us all,” Ford said in a statement.
Obama has called a collapse of the auto industry “unacceptable,” and said Sunday he wanted a supervisory process that would keep the companies’ “feet to the fire.”
-- AFP
Democrats push $15-B bailout for carmakers
WASHINGTON, D.C.: Democrats proposed a $15-billion bailout package for the troubled US auto industry Monday in a compromise that sources say may still not gain approval from the White House.
The proposal offers less than half of the $34 billion General Motors (GM), Chrysler and Ford said they would need to stave off a “catastrophic collapse” of the nation’s automotive industry.
The low-cost, government-backed loans are intended to sustain them through March, which will give President-elect Barack Obama time to address the problem after he takes office on January 20.
“Fifteen billion is the maximum that’s available, given the president’s threat to veto anything else,” said US Representative Barney Frank, one of the lawmakers spearheading talks on the rescue plan.
Officials close to the talks said earlier Monday that the US legislature could authorize the rescue package, which calls for massive restructuring and tough government oversight, by mid-week.
But a senior Bush administration official who requested anonymity said a deal on Monday was unlikely because the White House and the Democrats who control the US Congress were at odds on the issue of the long-term viability of the Big Three US automakers.
US President George W. Bush said that “the definition of viability is open to discussion,” and that “viability means that all aspects of the companies need to be reexamined to make sure that they can survive in the long term.”
“Hopefully we’ll get something done,” he told ABC television in an interview.
“These are important companies, but on the other hand, we just don’t want to put good money after bad.”
White House spokeswoman Dana Perino, who earlier had said a deal was “likely” on Monday, responded to the proposed bill by saying the administration was “reviewing draft legislation we received this afternoon and are continuing our discussions with Congress.”
“We’ll continue to work with members on both sides of the aisle to achieve legislation that protects the good faith investment by taxpayers,” the spokeswoman said.
The proposal calls for a presidential designee, or “car czar” to oversee the restructuring of the Big Three US automakers, distribute the funds and report to Congress on their progress in achieving “long-term viability,” according to a copy of the bill obtain by Agence France-Presse.
Automakers will have to continue to improve the fuel-efficiency of their fleets and also look into using their excess capacity to build bus and rail cars for public transit.
The bill also requires the automakers to sell their private jets and places strict limits on executive compensation.
Senate Majority Leader Harry Reid said the blueprint aimed to “give the automakers the chance to clean house and return to a responsible path toward profitability.”
“The jobs of millions of American workers are at stake, along with the financial security of millions of families. So while we take no satisfaction in loaning taxpayer money to these companies, we know it must be done,” he said.
General Motors, which had warned it could run out of cash as early as January, urged swift passage of the bill and vowed it will “abide by the conditions proposed in the bill and will continue our restructuring with great urgency.”
“We have listened to Congress and have put together a restructuring plan that will deliver a stronger, sustainable GM in a quicker timeframe and without the negative market consequences that could result from bankruptcy,” GM said in a statement.
Chrysler said it was “pleased that progress is being made” and that it looked forward to working with lawmakers and “to completing our restructuring in an orderly fashion.”
Ford, which has said it has enough cash on hand to weather the current downturn but requested a $9-billion line of credit to hedge against worsening conditions or the bankruptcy of one of its competitors, said it would not “not be seeking a short term bridge loan” under the bill.
“But Ford fully supports an effort to address the near-term liquidity issues of GM and Chrysler, as our industry is highly interdependent and a failure of one of our competitors could affect us all,” Ford said in a statement.
Obama has called a collapse of the auto industry “unacceptable,” and said Sunday he wanted a supervisory process that would keep the companies’ “feet to the fire.”
-- AFP
Tuesday, December 9, 2008
The Key to Stabilizing House Prices: Bring Them Down
The Key to Stabilizing House Prices: Bring Them Down
December 2008, Dean Baker
This report states that bringing about the rapid adjustment of house prices to trend levels is the best means of returning stability to the housing market. The paper also calls for the restriction of GSE capital in bubble-inflated markets, with the intent of forcing house prices in these areas to return to trend level. The removal of capital from bubble markets and the consequent infusion of loans into non-bubble markets would stabilize prices in these areas, thus preventing a downward price spiral and overshooting of trend-level prices on the negative side. The report also advocates mortgage appraisal based on a price-to-rent ratio of 15 to 1. As well, the paper suggests giving families facing foreclosure the right to rent their homes both to keep them in their houses and offer banks real incentives to avoid foreclosure.
Emerging economies more dependent on foreign capital: BIS study
Emerging economies more dependent on foreign capital: BIS study
BASEL
Tuesday, December 9, 2008
EMERGING economies are increasingly dependent on foreign capital, making them more vulnerable to the current financial crisis, a study by the Bank of International Settlements found.
In the study published on Sunday, the world's top central bank body said: "Many emerging economies have increased their dependance on credit accorded by international banks."
However, with the ongoing financial crisis, these banks could reexamine their exposure to the emerging economies and cut back on lending, resulting in a "negative impact on the real economy" of these emerging countries.
In recent years, lenders particularly in eastern European countries such as Hungary and Poland have offered loans in Swiss francs or euros at lower interest rates than those of central European currencies.
While the low interest rates are attractive, borrowers were essentially betting on a constant exchange rate with a weak franc or euro.
But they were in for a rude shock when the franc or euro gained significantly in recent weeks against local currencies.
Hungary, which was severely hit by the financial crisis due to its heavy dependence on foreign capital, was forced to tap on aid from the International Monetary Fund and the European Union.
According to BIS statistics, international lending to emerging economies quadrupled after 2002, reaching US$4.9 trillion in mid-2008. International credit to Hungary increased seven-fold in the first half of this year, reaching almost 80 per cent of total credit accorded to the non-banking sector.AFP
BASEL
Tuesday, December 9, 2008
EMERGING economies are increasingly dependent on foreign capital, making them more vulnerable to the current financial crisis, a study by the Bank of International Settlements found.
In the study published on Sunday, the world's top central bank body said: "Many emerging economies have increased their dependance on credit accorded by international banks."
However, with the ongoing financial crisis, these banks could reexamine their exposure to the emerging economies and cut back on lending, resulting in a "negative impact on the real economy" of these emerging countries.
In recent years, lenders particularly in eastern European countries such as Hungary and Poland have offered loans in Swiss francs or euros at lower interest rates than those of central European currencies.
While the low interest rates are attractive, borrowers were essentially betting on a constant exchange rate with a weak franc or euro.
But they were in for a rude shock when the franc or euro gained significantly in recent weeks against local currencies.
Hungary, which was severely hit by the financial crisis due to its heavy dependence on foreign capital, was forced to tap on aid from the International Monetary Fund and the European Union.
According to BIS statistics, international lending to emerging economies quadrupled after 2002, reaching US$4.9 trillion in mid-2008. International credit to Hungary increased seven-fold in the first half of this year, reaching almost 80 per cent of total credit accorded to the non-banking sector.AFP
Monday, December 8, 2008
Japan's recession worse than thought: official data
Japan's recession worse than thought: official data
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Mon Dec 8, 7:41 pm ET
AFP/File – Tokyo Tower, a symbol of the Japanese capital. The country sank deeper into recession than previously …
TOKYO (AFP) – Japan's economy shrank 0.5 percent in the third quarter of this year, sinking much deeper into recession than previously thought, official figures showed Tuesday.
Asia's largest economy contracted 1.8 percent on an annualised basis in the three months to September, when Japan entered its first recession in seven years with a second straight quarter of negative growth, the government said.
An initial estimate last month had shown the Japanese economy shrank 0.1 percent in the third quarter, and 0.4 percent on an annualised basis.
Weak business investment was the main culprit for the revision as companies slashed investment in new equipment and factories by 2.0 percent, compared with an initial estimate of 1.7 percent.
Japan's export-dependent economy was also hit by sluggish exports as the global financial crisis hit international trade.
The latest snapshot of the Japanese economy was even more gloomier than analyst forecasts for a contraction of about 0.2 percent quarter-on-quarter.
The government said the economy shrank a revised 1.0 percent in the second quarter, which was also slightly worse than previously thought.
Japan has relied on brisk exports of cars, electronics and other goods to drive its recovery from recession in the 1990s.
But it has seen exports weaken in recent months due to worsening demand in recession-hit overseas economies.
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Mon Dec 8, 7:41 pm ET
AFP/File – Tokyo Tower, a symbol of the Japanese capital. The country sank deeper into recession than previously …
TOKYO (AFP) – Japan's economy shrank 0.5 percent in the third quarter of this year, sinking much deeper into recession than previously thought, official figures showed Tuesday.
Asia's largest economy contracted 1.8 percent on an annualised basis in the three months to September, when Japan entered its first recession in seven years with a second straight quarter of negative growth, the government said.
An initial estimate last month had shown the Japanese economy shrank 0.1 percent in the third quarter, and 0.4 percent on an annualised basis.
Weak business investment was the main culprit for the revision as companies slashed investment in new equipment and factories by 2.0 percent, compared with an initial estimate of 1.7 percent.
Japan's export-dependent economy was also hit by sluggish exports as the global financial crisis hit international trade.
The latest snapshot of the Japanese economy was even more gloomier than analyst forecasts for a contraction of about 0.2 percent quarter-on-quarter.
The government said the economy shrank a revised 1.0 percent in the second quarter, which was also slightly worse than previously thought.
Japan has relied on brisk exports of cars, electronics and other goods to drive its recovery from recession in the 1990s.
But it has seen exports weaken in recent months due to worsening demand in recession-hit overseas economies.
Saturday, December 6, 2008
Oil prices slump towards US$40
Oil prices slump towards US$40
LONDON
Saturday, December 6, 2008
CRUDE oil prices slumped close to US$40 a barrel in trading yesterday as the United States lost a stunning half a million jobs in November, raising prospects of a steep drop in energy demand.
In London, Brent North Sea crude hit US$40.72 a barrel, the lowest level since the start of 2005. Light sweet crude for January slid to US$42.00 in New York, also a near four-year low.
Later on London's InterContinental Exchange (ICE), Brent North Sea crude for delivery in January recovered to stand at US$41.47, down 81 cents from Thursday's close.
Meanwhile, the International Energy Agency yesterday cut its forecast for world oil demand growth in the next five years, the latest in a series of downward revisions in response to the slowing global economy.
Oil demand is expected to grow by 220,000 barrels per day (bpd) in 2009, the agency, which advises 28 industrialised countries, said in its Medium Term Oil Market Report.
The Paris-based agency gave its previous forecast, for growth of 350,000 bpd, in a monthly report on Nov 13.
The IEA also said new investment in oil refineries is expected to boost crude distillation capacity in the next five years at a faster pace than growth in demand, a trend that would ease any strain on supplies.
"Refinery investments are forecast to add 8.0 million barrels per day of crude distillation capacity by the end of 2013, significantly outpacing expected demand growth," the report said.
Global oil product demand is expected to grow by 1.2 per cent on average, or about 1 million bpd, every year between 2008 and 2013, from 86.2 million bpd to 91.3 million bpd.
Agencies
LONDON
Saturday, December 6, 2008
CRUDE oil prices slumped close to US$40 a barrel in trading yesterday as the United States lost a stunning half a million jobs in November, raising prospects of a steep drop in energy demand.
In London, Brent North Sea crude hit US$40.72 a barrel, the lowest level since the start of 2005. Light sweet crude for January slid to US$42.00 in New York, also a near four-year low.
Later on London's InterContinental Exchange (ICE), Brent North Sea crude for delivery in January recovered to stand at US$41.47, down 81 cents from Thursday's close.
Meanwhile, the International Energy Agency yesterday cut its forecast for world oil demand growth in the next five years, the latest in a series of downward revisions in response to the slowing global economy.
Oil demand is expected to grow by 220,000 barrels per day (bpd) in 2009, the agency, which advises 28 industrialised countries, said in its Medium Term Oil Market Report.
The Paris-based agency gave its previous forecast, for growth of 350,000 bpd, in a monthly report on Nov 13.
The IEA also said new investment in oil refineries is expected to boost crude distillation capacity in the next five years at a faster pace than growth in demand, a trend that would ease any strain on supplies.
"Refinery investments are forecast to add 8.0 million barrels per day of crude distillation capacity by the end of 2013, significantly outpacing expected demand growth," the report said.
Global oil product demand is expected to grow by 1.2 per cent on average, or about 1 million bpd, every year between 2008 and 2013, from 86.2 million bpd to 91.3 million bpd.
Agencies
Auto sector sinks deeper into crisis
Auto sector sinks deeper into crisis
Cash-strapped: Honda Motor Co president Takeo Fukui. Cash-strapped Honda quit Formula One. Picture: Reuters
TOKYO
Saturday, December 6, 2008
DEEPENING turmoil in the global auto industry depressed investor sentiment yesterday as the fate of the Big Three US automakers hung in the balance and cash-strapped Honda quit Formula One.
The fate of the Big Three US automakers remained uncertain after contrite chief executives asked sceptical senators to deliver a multi-billion-dollar bailout for the ailing industry.
Following a near-six-hour grilling of the car giant bosses, senior Democratic Senator Chris Dodd said he would work to broker a compromise but it was unclear whether a majority of lawmakers were ready to back a rescue.
The Big Three bosses must repeat their ordeal for the House Financial Service committee yesterday.
South Korea said it was considering tax cuts for automakers who are struggling with declining domestic and overseas demand.
Anglo-Australian mining giant Rio Tinto said it was likely to shut its iron ore mines in Western Australia for nearly two weeks over Christmas to cut production in the face of reduced demand.
Investors were concerned that a record 75 basis point rate cut by the European Central Bank and a 100 basis point reduction by the Bank of England would not bring much relief to markets in the near term.
"The previous coordinated rate cuts didn't work. No one expects the European economy to hit a bottom thanks to the cuts this time around," said Kazuhiro Takahashi, equity trading information chief at Daiwa Securities SMBC.
The heads of the struggling Big Three American automakers warned that their collapse could cost up to three million jobs in the auto sector and wider economy, and pleaded for US$34 billion in financial lifelines.AFP
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Cash-strapped: Honda Motor Co president Takeo Fukui. Cash-strapped Honda quit Formula One. Picture: Reuters
TOKYO
Saturday, December 6, 2008
DEEPENING turmoil in the global auto industry depressed investor sentiment yesterday as the fate of the Big Three US automakers hung in the balance and cash-strapped Honda quit Formula One.
The fate of the Big Three US automakers remained uncertain after contrite chief executives asked sceptical senators to deliver a multi-billion-dollar bailout for the ailing industry.
Following a near-six-hour grilling of the car giant bosses, senior Democratic Senator Chris Dodd said he would work to broker a compromise but it was unclear whether a majority of lawmakers were ready to back a rescue.
The Big Three bosses must repeat their ordeal for the House Financial Service committee yesterday.
South Korea said it was considering tax cuts for automakers who are struggling with declining domestic and overseas demand.
Anglo-Australian mining giant Rio Tinto said it was likely to shut its iron ore mines in Western Australia for nearly two weeks over Christmas to cut production in the face of reduced demand.
Investors were concerned that a record 75 basis point rate cut by the European Central Bank and a 100 basis point reduction by the Bank of England would not bring much relief to markets in the near term.
"The previous coordinated rate cuts didn't work. No one expects the European economy to hit a bottom thanks to the cuts this time around," said Kazuhiro Takahashi, equity trading information chief at Daiwa Securities SMBC.
The heads of the struggling Big Three American automakers warned that their collapse could cost up to three million jobs in the auto sector and wider economy, and pleaded for US$34 billion in financial lifelines.AFP
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US sheds over half million jobs in November
US sheds over half million jobs in November
WASHINGTON
Saturday, December 6, 2008
THE US economy lost a stunning 533,000 jobs in November, sending the unemployment rate to a 15-year high of 6.7 per cent, the Labor Department reported yesterday.
The monthly report on nonfarm payrolls, seen as one of the best indicators of economic momentum, highlighted the severe retrenchment by companies in the face of a struggling economy and tight credit.
The number of job losses was much higher than the 325,000 expected by private forecasters.
"This is almost indescribably terrible," said Ian Shepherdson, chief US economist at High Frequency Economics.
"In the past six months the US has lost 1.55 million jobs, almost as many as were lost in the whole 2001 recession, which included 9/11 and the two months after. The pace of job losses is accelerating alarmingly."
The Labor Department also made a sharp upward revision in the number of job losses in the prior two months: October saw a loss of 403,000 jobs (up from an earlier estimate of 240,00) and September job losses were revised up to 320,000 from 284,000.
"There is no sugar-coating this data," analysts at Briefing.com said. "It is bad news that will weigh heavily on consumer sentiment and will serve to increase concerns about the depth and length of the current slowdown."
Sophia Koropeckyj at Economy.com said that losses "were broad-based across both service-producing and goods-producing industries" and the worst single-month decline since 1974.
"The economy is in recession, and the severity will far surpass the depths of the last two recessions."
The jobless rate, based on a separate survey of households, was the highest since October 1993 but slightly better than the consensus estimate of economists of 6.8 per cent.
The Labor Department noted that since the official onset of recession in December 2007, some 2.7 million jobs have been lost, and the unemployment rate rose by 1.7 percentage points.AFP
WASHINGTON
Saturday, December 6, 2008
THE US economy lost a stunning 533,000 jobs in November, sending the unemployment rate to a 15-year high of 6.7 per cent, the Labor Department reported yesterday.
The monthly report on nonfarm payrolls, seen as one of the best indicators of economic momentum, highlighted the severe retrenchment by companies in the face of a struggling economy and tight credit.
The number of job losses was much higher than the 325,000 expected by private forecasters.
"This is almost indescribably terrible," said Ian Shepherdson, chief US economist at High Frequency Economics.
"In the past six months the US has lost 1.55 million jobs, almost as many as were lost in the whole 2001 recession, which included 9/11 and the two months after. The pace of job losses is accelerating alarmingly."
The Labor Department also made a sharp upward revision in the number of job losses in the prior two months: October saw a loss of 403,000 jobs (up from an earlier estimate of 240,00) and September job losses were revised up to 320,000 from 284,000.
"There is no sugar-coating this data," analysts at Briefing.com said. "It is bad news that will weigh heavily on consumer sentiment and will serve to increase concerns about the depth and length of the current slowdown."
Sophia Koropeckyj at Economy.com said that losses "were broad-based across both service-producing and goods-producing industries" and the worst single-month decline since 1974.
"The economy is in recession, and the severity will far surpass the depths of the last two recessions."
The jobless rate, based on a separate survey of households, was the highest since October 1993 but slightly better than the consensus estimate of economists of 6.8 per cent.
The Labor Department noted that since the official onset of recession in December 2007, some 2.7 million jobs have been lost, and the unemployment rate rose by 1.7 percentage points.AFP
Friday, December 5, 2008
Coping with the financial crisis
Coping with the financial crisis
By Daniel Inman | 5 December 2008
Financial luminaries at the Clinton Global Initiative meeting discuss the current crisis and how best to ensure a recovery.
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As part of the Clinton Global Initiative Asia meeting, six members of the world's financial elite got together to discuss the current financial crisis and how to steer the quickest course through it. In a panel discussion hosted by Thomas Easton, Asia business editor of the Economist, each panelist had a key point to make.
"We're in a post bubble world now," says Stephen Roach, chairman of Morgan Stanley Asia. Although it might have started off as a Wall Street phenomenon, he says, the successive collapse of bubbles – the bursting of the property bubble, followed by the bursting of the credit bubble, which in turn popped the US consumption bubble – is without doubt a problem that is hitting Asia.
"With two consecutive declines of real consumption of more than 3% in the last two quarters, the US consumer is now toast," he says. The result is that Asia, with 45% of its output directed towards exports, is more dependent than ever before on supplying goods to the rest of the world. "There is not a country in the region that is not in recession or slowing down as a result because the biggest end market for its export-led economies is in serious trouble," says Roach.
The outlook among panelists was generally pessimistic, but there was one optimist present. Marc Lasry, chairman and CEO of Avenue Capital Group, admitted that while it is impossible to pinpoint the bottom of the market, it is possible to time the cycle. "If you're comfortable that we're not going into a depression then now is a phenomenal time to buy," says Lasry.
When confronted with the idea that a turnaround might not be so quick, and that the US might experience a Japan style 'lost decade', Lasry replied that governments have forced the banks to recognise their loses "and as a result, the banks will start lending again in the first or second quarter next year after they've taken their hits. And when this happens the consumer will come back."
Laura Tyson, professor of Haas School of Business at the University of California, highlighted the role that governments need to play and pointed to two possible directions. First, since capital markets are "fundamentally broken" they can no longer recognise risk from lack of risk. As a result, the capital market crisis has turned into a panic and governments need to become buyers of assets.
The other role that government can play relates to spending. Since there is a total collapse of private demand, the government needs to make up the difference. And any country that can afford to engage in economic stimulus should be doing it now, she says. "It should be a quick spend out. It should be infrastructure, job creation, and mortgage relief.” She cited China as an early starter in this resolve and Germany as a country notably lacking in such a plan.
We are, she says, heading for an L-shaped recession. If government policy is effective, the recovery might be slightly less horizontal than otherwise.
Government policy was also on the mind of Lou Jiwei, chairman and CEO of China Investment Corp, China's sovereign wealth fund. After informing the audience that it can hardly be China's role to save the world economy, he turned to policy. What concerns him, he said, is the lack of constancy in the policy responses to the financial crisis in developed countries. "If it is changing every week, how can I be confident?" he asks. It is this high degree of uncertainty that has led him to avoid further investment in Western financial institutions.
© Haymarket Media Limited. All rights reserved.
By Daniel Inman | 5 December 2008
Financial luminaries at the Clinton Global Initiative meeting discuss the current crisis and how best to ensure a recovery.
advertisement
As part of the Clinton Global Initiative Asia meeting, six members of the world's financial elite got together to discuss the current financial crisis and how to steer the quickest course through it. In a panel discussion hosted by Thomas Easton, Asia business editor of the Economist, each panelist had a key point to make.
"We're in a post bubble world now," says Stephen Roach, chairman of Morgan Stanley Asia. Although it might have started off as a Wall Street phenomenon, he says, the successive collapse of bubbles – the bursting of the property bubble, followed by the bursting of the credit bubble, which in turn popped the US consumption bubble – is without doubt a problem that is hitting Asia.
"With two consecutive declines of real consumption of more than 3% in the last two quarters, the US consumer is now toast," he says. The result is that Asia, with 45% of its output directed towards exports, is more dependent than ever before on supplying goods to the rest of the world. "There is not a country in the region that is not in recession or slowing down as a result because the biggest end market for its export-led economies is in serious trouble," says Roach.
The outlook among panelists was generally pessimistic, but there was one optimist present. Marc Lasry, chairman and CEO of Avenue Capital Group, admitted that while it is impossible to pinpoint the bottom of the market, it is possible to time the cycle. "If you're comfortable that we're not going into a depression then now is a phenomenal time to buy," says Lasry.
When confronted with the idea that a turnaround might not be so quick, and that the US might experience a Japan style 'lost decade', Lasry replied that governments have forced the banks to recognise their loses "and as a result, the banks will start lending again in the first or second quarter next year after they've taken their hits. And when this happens the consumer will come back."
Laura Tyson, professor of Haas School of Business at the University of California, highlighted the role that governments need to play and pointed to two possible directions. First, since capital markets are "fundamentally broken" they can no longer recognise risk from lack of risk. As a result, the capital market crisis has turned into a panic and governments need to become buyers of assets.
The other role that government can play relates to spending. Since there is a total collapse of private demand, the government needs to make up the difference. And any country that can afford to engage in economic stimulus should be doing it now, she says. "It should be a quick spend out. It should be infrastructure, job creation, and mortgage relief.” She cited China as an early starter in this resolve and Germany as a country notably lacking in such a plan.
We are, she says, heading for an L-shaped recession. If government policy is effective, the recovery might be slightly less horizontal than otherwise.
Government policy was also on the mind of Lou Jiwei, chairman and CEO of China Investment Corp, China's sovereign wealth fund. After informing the audience that it can hardly be China's role to save the world economy, he turned to policy. What concerns him, he said, is the lack of constancy in the policy responses to the financial crisis in developed countries. "If it is changing every week, how can I be confident?" he asks. It is this high degree of uncertainty that has led him to avoid further investment in Western financial institutions.
© Haymarket Media Limited. All rights reserved.
Oil prices hit new multi-year lows
Oil prices hit new multi-year lows
Oil prices sank to multi-year lows during Asian trade Thursday in a market dominated by declining demand and dismal economic news, analysts said.
In afternoon trade New York's main futures contract, light sweet crude for January delivery, fell 93 cents to 45.86 dollars a barrel.
The contract at one point fell as far as 45.30 dollars, its lowest point since January 12, 2005, after closing down 17 cents at 46.79 dollars on the New York Mercantile Exchange Wednesday.
Brent North Sea crude for January delivery dropped 1.19 dollars to 44.25 dollars after dropping to 43.80 -- its lowest point since February 20, 2005.
The Brent contract closed unchanged at 45.44 dollars Wednesday in London.
"This market is trying to find the bottom," said Ken Hasegawa, manager of the energy desk at Newedge Japan brokerage in Tokyo.
Hasegawa said there are no bullish factors in the market, which he sees reaching as low as 40 dollars a barrel.
Oil prices have plunged by about 70 percent since striking record highs above 147 dollars in July, pulled down by a widening global economic slowdown that weighs on demand, analysts say.
The Eurozone, Japan and the United States are in recession, and weak U.S. economic data on Wednesday added to concerns for demand.
The U.S. private sector lost 250,000 jobs in November, the largest decline in six years, according to the ADP National Employment Report survey.
"The macroeconomic backdrop to the oil market continues to worsen," said Barclays Capital analyst Paul Horsnell.
"We are now projecting that global (crude oil) demand will decline in both 2008 and 2009," he added.
The market shrugged off a U.S. Department of Energy (DoE) report showing crude inventories fell by 400,000 barrels in the week ending November 28, confounding market expectations for a 1.4 million barrel increase.
The DoE said petrol stockpiles dropped 1.6 million barrels, in contrast to estimates for a gain of 1.6 million barrels.
U.S. distillates, which include diesel and heating fuel, declined 1.7 million barrels, compared with market expectations for no change.
Photo: Reuters
Oil prices sank to multi-year lows during Asian trade Thursday in a market dominated by declining demand and dismal economic news, analysts said.
In afternoon trade New York's main futures contract, light sweet crude for January delivery, fell 93 cents to 45.86 dollars a barrel.
The contract at one point fell as far as 45.30 dollars, its lowest point since January 12, 2005, after closing down 17 cents at 46.79 dollars on the New York Mercantile Exchange Wednesday.
Brent North Sea crude for January delivery dropped 1.19 dollars to 44.25 dollars after dropping to 43.80 -- its lowest point since February 20, 2005.
The Brent contract closed unchanged at 45.44 dollars Wednesday in London.
"This market is trying to find the bottom," said Ken Hasegawa, manager of the energy desk at Newedge Japan brokerage in Tokyo.
Hasegawa said there are no bullish factors in the market, which he sees reaching as low as 40 dollars a barrel.
Oil prices have plunged by about 70 percent since striking record highs above 147 dollars in July, pulled down by a widening global economic slowdown that weighs on demand, analysts say.
The Eurozone, Japan and the United States are in recession, and weak U.S. economic data on Wednesday added to concerns for demand.
The U.S. private sector lost 250,000 jobs in November, the largest decline in six years, according to the ADP National Employment Report survey.
"The macroeconomic backdrop to the oil market continues to worsen," said Barclays Capital analyst Paul Horsnell.
"We are now projecting that global (crude oil) demand will decline in both 2008 and 2009," he added.
The market shrugged off a U.S. Department of Energy (DoE) report showing crude inventories fell by 400,000 barrels in the week ending November 28, confounding market expectations for a 1.4 million barrel increase.
The DoE said petrol stockpiles dropped 1.6 million barrels, in contrast to estimates for a gain of 1.6 million barrels.
U.S. distillates, which include diesel and heating fuel, declined 1.7 million barrels, compared with market expectations for no change.
Photo: Reuters
Employment in Free Fall, Economy Loses 533,000 Jobs
December 5, 2008
By Dean Baker
CORRECTION: Job loss for the three-month period ending November 2008 was the highest since the period ending February 1975, not since "the months immediately following the end of World War II" as noted in today's Jobs Byte below.
The data hugely overestimate jobs created in new firms, which will be corrected next year.
The economy shed 533,000 jobs in November. This loss, combined with sharp upward revisions to the September and October data, brought the three-month job loss to 1,256,000 jobs, the largest three-month loss in any period since the months immediately following the end of World War II. (The job losses at the start of the recessions in 1949 and 1958 were larger relative to the size of the labor force.) The private sector lost 1,286,000 jobs over this period, as the public sector continued to add jobs at a modest pace.
The job loss was widely spread across sectors, although construction and manufacturing continued to be among the hardest hit. Employment in the construction sector fell by 82,000 in November, or 1.2 percent. The sector has lost 201,000 jobs over the last three months. Employment in the non-residential sector is now dropping as fast as employment in the residential sector, as this bubble has now burst also.
Employment in manufacturing fell by 85,000 or 0.6 percent. The sector has shed 258,000 jobs in the last three months. Production workers have accounted for virtually all of this job loss, with a decline of 253,000 production jobs (2.6 percent of employment). This suggests that firms are keeping supervisory and managerial personnel even as they have mass layoffs of production workers. The job loss was widely distributed across manufacturing sectors.
The employment services sector was an even bigger job loser, shedding 100,700 jobs in the month (3.2 percent of its total employment). This sector has lost 213,500 jobs over the last three months. Employers are dumping temporary employees as a way to keep on permanent staff.
Retail trade lost 91,300 jobs in November (0.6 percent of employment) and has lost 229,100 over the last three months. Transportation lost 31,500 jobs and financial services lost 32,000. Health care is the only sector that continues to expand at a healthy pace, adding 33,800 jobs. Health care has added 87,100 jobs over the last three months.
The actual job numbers are likely somewhat worse than the data in this report. The Bureau of Labor Statistics is imputing more jobs into the data for new firms than it did for the same months last year. The imputation from the firm “birth/death” model for September-November this year is 143,000. It was just 117,000 for the same three months last year. This figure will almost certainly be revised down sharply in the benchmark revision next year, showing an even more rapid rate of job loss for these months.
In addition to cutting workers, firms are also cutting hours. The index of total hours for production workers fell by 0.9 percent in November and is down 2.0 percent over the last three months, the sharpest three-month decline in any period since 1964 when the series began.
The household data are showing an equally bleak picture. The unemployment rate rose to 6.7 percent, with the employment to population ratio falling by 0.4 percentage points to 61.4 percent, the lowest level since March of 1993. The number of workers involuntarily employed part-time grew by 715,000 (11.0 percent) to 7,200,000. This helped to raise the U-6 measure of labor market slack to 12.5 percent, the highest rate since BLS began the measure in 1994.
The effects of the recession continue to be felt disproportionately by men (consistent with job loss in construction and manufacturing) and younger workers. Employment among married men with a spouse present has fallen by 634,000 over the last year, while employment among married women with a spouse present has fallen by 32,000 over the same period. Employment among workers over age 55 has risen by 880,000 over the last year, while employment for workers under age 55 has fallen by 3,242,000.
This report should eliminate any possible doubts about the seriousness of this downturn. The economy is falling at the sharpest rate since the Great Depression. As bad as the employment picture appears in this report, it will almost certainly appear far worse when the BLS adjusts its data in its benchmark revision for the loss of firms not captured by the survey.
Dean Baker is the Co-director of the Center for Economic and Policy Research. CEPR's Jobs Byte is published each month upon release of the Bureau of Labor Statistics' employment report. For more information or to subscribe by fax or email contact CEPR at 202-293-5380 ext. 102, or chinku [at] cepr [dot] net.
December 5, 2008
By Dean Baker
CORRECTION: Job loss for the three-month period ending November 2008 was the highest since the period ending February 1975, not since "the months immediately following the end of World War II" as noted in today's Jobs Byte below.
The data hugely overestimate jobs created in new firms, which will be corrected next year.
The economy shed 533,000 jobs in November. This loss, combined with sharp upward revisions to the September and October data, brought the three-month job loss to 1,256,000 jobs, the largest three-month loss in any period since the months immediately following the end of World War II. (The job losses at the start of the recessions in 1949 and 1958 were larger relative to the size of the labor force.) The private sector lost 1,286,000 jobs over this period, as the public sector continued to add jobs at a modest pace.
The job loss was widely spread across sectors, although construction and manufacturing continued to be among the hardest hit. Employment in the construction sector fell by 82,000 in November, or 1.2 percent. The sector has lost 201,000 jobs over the last three months. Employment in the non-residential sector is now dropping as fast as employment in the residential sector, as this bubble has now burst also.
Employment in manufacturing fell by 85,000 or 0.6 percent. The sector has shed 258,000 jobs in the last three months. Production workers have accounted for virtually all of this job loss, with a decline of 253,000 production jobs (2.6 percent of employment). This suggests that firms are keeping supervisory and managerial personnel even as they have mass layoffs of production workers. The job loss was widely distributed across manufacturing sectors.
The employment services sector was an even bigger job loser, shedding 100,700 jobs in the month (3.2 percent of its total employment). This sector has lost 213,500 jobs over the last three months. Employers are dumping temporary employees as a way to keep on permanent staff.
Retail trade lost 91,300 jobs in November (0.6 percent of employment) and has lost 229,100 over the last three months. Transportation lost 31,500 jobs and financial services lost 32,000. Health care is the only sector that continues to expand at a healthy pace, adding 33,800 jobs. Health care has added 87,100 jobs over the last three months.
The actual job numbers are likely somewhat worse than the data in this report. The Bureau of Labor Statistics is imputing more jobs into the data for new firms than it did for the same months last year. The imputation from the firm “birth/death” model for September-November this year is 143,000. It was just 117,000 for the same three months last year. This figure will almost certainly be revised down sharply in the benchmark revision next year, showing an even more rapid rate of job loss for these months.
In addition to cutting workers, firms are also cutting hours. The index of total hours for production workers fell by 0.9 percent in November and is down 2.0 percent over the last three months, the sharpest three-month decline in any period since 1964 when the series began.
The household data are showing an equally bleak picture. The unemployment rate rose to 6.7 percent, with the employment to population ratio falling by 0.4 percentage points to 61.4 percent, the lowest level since March of 1993. The number of workers involuntarily employed part-time grew by 715,000 (11.0 percent) to 7,200,000. This helped to raise the U-6 measure of labor market slack to 12.5 percent, the highest rate since BLS began the measure in 1994.
The effects of the recession continue to be felt disproportionately by men (consistent with job loss in construction and manufacturing) and younger workers. Employment among married men with a spouse present has fallen by 634,000 over the last year, while employment among married women with a spouse present has fallen by 32,000 over the same period. Employment among workers over age 55 has risen by 880,000 over the last year, while employment for workers under age 55 has fallen by 3,242,000.
This report should eliminate any possible doubts about the seriousness of this downturn. The economy is falling at the sharpest rate since the Great Depression. As bad as the employment picture appears in this report, it will almost certainly appear far worse when the BLS adjusts its data in its benchmark revision for the loss of firms not captured by the survey.
Dean Baker is the Co-director of the Center for Economic and Policy Research. CEPR's Jobs Byte is published each month upon release of the Bureau of Labor Statistics' employment report. For more information or to subscribe by fax or email contact CEPR at 202-293-5380 ext. 102, or chinku [at] cepr [dot] net.
Layoffs swell as global financial crisis drags on
Layoffs swell as global financial crisis drags on
More jobs to be culled: Credit Suisse says it made a net loss of about US$2.5 billion in the two months to the end of November, and announces it would shed another 5,300 jobs. Picture: EPA
SINGAPORE
Friday, December 5, 2008
CREDIT Suisse and Nomura Holdings announced big job cuts yesterday, further evidence the global financial crisis is unrelenting for an industry battered by heavy losses and weak markets.
The 5,300 layoffs by the Swiss bank and a further 1,000 in London by Japan's biggest broker are the latest in the global financial sector which has now seen over 150,000 jobs culled since September when Lehman Brothers filed for bankruptcy.
Of these, more than 50,000 were at Citigroup, which has made more writedowns than any other bank in the world during the crisis.
While the axe had been falling for months in the industry, Lehman's fall sparked carnage in financial markets and reshaped the industry landscape, resulting in job losses from New York to Singapore to Mumbai.
"I dont think people really know what's next. It depends on sentiment, which will in turn drive credit markets, which in turn will weigh on banks or not," said a London-based equities trader.
From the United States to Asian export giant Japan to European powerhouse Germany, the world's top economies are now in recession as the global crisis deepens. They are not the only ones', with Singapore, New Zealand and Hong Kong also joining in.
The losses at banks are increasing.
Credit Suisse said yesterday it made a net loss of about 3 billion Swiss francs (US$2.5 billion) in October and November.
It has already cut 1,800 jobs this year and said this week it would cut 650 investment banking jobs in Britain.
"Investment banking had a significant pretax loss, reflecting the challenging conditions in the financial markets in the quarter and the costs associated with risk reduction," the bank said in a statement.
Credit Suisse's shares jumped eight per cent in European trade in a broader market up 1.6 per cent.
In Asia, Nomura, Japan's biggest brokerage, said the decision to cut as much as 22 per cent of its London staff followed an internal review after the purchase of the Asian, European and Middle Eastern assets of Lehman Brothers.
Nomura had said the purchase of parts of Lehman Brothers would help the Japanese brokerage achieve its profit target despite poor financial market conditions.
"This is a natural move," said Azuma Ohno, a brokerage analyst at Credit Suisse Securities in Japan. "Once Nomura bought Lehman, it cannot continue Japanese-style life-time employment. It needs to be flexible in costs to be profitable."
Australia's top investment bank, Macquarie, is cutting 10 to 15 per cent of its jobs in Asia, two sources said last week.
Banks are axing jobs across Asia and even in countries such as India, where investment bankers were snapped up feverishly in the last few years in anticipation of strong initial public offerings and M&A markets.Reuters
More jobs to be culled: Credit Suisse says it made a net loss of about US$2.5 billion in the two months to the end of November, and announces it would shed another 5,300 jobs. Picture: EPA
SINGAPORE
Friday, December 5, 2008
CREDIT Suisse and Nomura Holdings announced big job cuts yesterday, further evidence the global financial crisis is unrelenting for an industry battered by heavy losses and weak markets.
The 5,300 layoffs by the Swiss bank and a further 1,000 in London by Japan's biggest broker are the latest in the global financial sector which has now seen over 150,000 jobs culled since September when Lehman Brothers filed for bankruptcy.
Of these, more than 50,000 were at Citigroup, which has made more writedowns than any other bank in the world during the crisis.
While the axe had been falling for months in the industry, Lehman's fall sparked carnage in financial markets and reshaped the industry landscape, resulting in job losses from New York to Singapore to Mumbai.
"I dont think people really know what's next. It depends on sentiment, which will in turn drive credit markets, which in turn will weigh on banks or not," said a London-based equities trader.
From the United States to Asian export giant Japan to European powerhouse Germany, the world's top economies are now in recession as the global crisis deepens. They are not the only ones', with Singapore, New Zealand and Hong Kong also joining in.
The losses at banks are increasing.
Credit Suisse said yesterday it made a net loss of about 3 billion Swiss francs (US$2.5 billion) in October and November.
It has already cut 1,800 jobs this year and said this week it would cut 650 investment banking jobs in Britain.
"Investment banking had a significant pretax loss, reflecting the challenging conditions in the financial markets in the quarter and the costs associated with risk reduction," the bank said in a statement.
Credit Suisse's shares jumped eight per cent in European trade in a broader market up 1.6 per cent.
In Asia, Nomura, Japan's biggest brokerage, said the decision to cut as much as 22 per cent of its London staff followed an internal review after the purchase of the Asian, European and Middle Eastern assets of Lehman Brothers.
Nomura had said the purchase of parts of Lehman Brothers would help the Japanese brokerage achieve its profit target despite poor financial market conditions.
"This is a natural move," said Azuma Ohno, a brokerage analyst at Credit Suisse Securities in Japan. "Once Nomura bought Lehman, it cannot continue Japanese-style life-time employment. It needs to be flexible in costs to be profitable."
Australia's top investment bank, Macquarie, is cutting 10 to 15 per cent of its jobs in Asia, two sources said last week.
Banks are axing jobs across Asia and even in countries such as India, where investment bankers were snapped up feverishly in the last few years in anticipation of strong initial public offerings and M&A markets.Reuters
Tuesday, December 2, 2008
World Economic Situation and Prospects (WESP)
World Economic Situation and Prospects (WESP) is a joint product of the Department of Economic and Social Affairs, the United Nations Conference on Trade and Development and the five United Nations regional commissions. It provides an overview of recent global economic performance and short-term prospects for the world economy and of some key global economic policy and development issues. One of its purposes is to serve as a point of reference for discussions on economic, social and related issues taking place in various United Nations entities during the year.
World Economic Situation and Prospects 2009
—Advance release of the Global Outlook 2009—
The world economy is mired in the severest financial crisis since the Great Depression. WESP of 2006, 2007 and 2008 had already warned of the risks for this to happen. All factors analyzed in those reports have now played out and have pushed the world economy into recession.
Growth in world gross product (WGP) is expected to slow to 1.0 per cent in 2009, a sharp deceleration from the rate of 2.5 per cent estimated for 2008 and well below the more robust pace in previous years. While most developed economies are expected to be in a deep recession, a vast majority of developing countries is experiencing a sharp reversal in the robust growth registered in the period of 2002-2007, indicating a significant setback in the progress made in poverty reduction for many developing countries over the past few years. The prospects for the Least Developed Countries (LDCs), which did so well on average over the past years, are also deteriorating rapidly. Income per capita for the world as whole is expected to decline in 2009.
The report analyzes in detail the evolution of the global financial crisis during 2008 and the more fundamental factors that led to its build-up. It further assesses the impact on global economic activity, especially in developing countries. The synchronized slowdown in both rich and poor countries is further evidence that the until recently widely held belief that developing country growth would have been ‘decoupled’ from that in the United States and Europe was dangerously misleading. The report also reviews the policy actions so far taken worldwide in response to the global financial crisis.
The report recommends more forceful fiscal policy stimuli need to be taken in an internationally concerted manner in order to prevent the world economy from falling into a much deeper and more prolonged recession. The WESP further details a number of more fundamental reforms to the international financial system that are needed to reduce risks of a recurrence of such a devastating crisis in the future.
The “Global Outlook” chapter of the UN World Economic Situation and Prospects 2009 was released on 1 December 2008. The full report, including regional overviews and detailed trends in global trade and finance, is due out in early January 2009.
World Economic Situation and Prospects 2009
—Advance release of the Global Outlook 2009—
The world economy is mired in the severest financial crisis since the Great Depression. WESP of 2006, 2007 and 2008 had already warned of the risks for this to happen. All factors analyzed in those reports have now played out and have pushed the world economy into recession.
Growth in world gross product (WGP) is expected to slow to 1.0 per cent in 2009, a sharp deceleration from the rate of 2.5 per cent estimated for 2008 and well below the more robust pace in previous years. While most developed economies are expected to be in a deep recession, a vast majority of developing countries is experiencing a sharp reversal in the robust growth registered in the period of 2002-2007, indicating a significant setback in the progress made in poverty reduction for many developing countries over the past few years. The prospects for the Least Developed Countries (LDCs), which did so well on average over the past years, are also deteriorating rapidly. Income per capita for the world as whole is expected to decline in 2009.
The report analyzes in detail the evolution of the global financial crisis during 2008 and the more fundamental factors that led to its build-up. It further assesses the impact on global economic activity, especially in developing countries. The synchronized slowdown in both rich and poor countries is further evidence that the until recently widely held belief that developing country growth would have been ‘decoupled’ from that in the United States and Europe was dangerously misleading. The report also reviews the policy actions so far taken worldwide in response to the global financial crisis.
The report recommends more forceful fiscal policy stimuli need to be taken in an internationally concerted manner in order to prevent the world economy from falling into a much deeper and more prolonged recession. The WESP further details a number of more fundamental reforms to the international financial system that are needed to reduce risks of a recurrence of such a devastating crisis in the future.
The “Global Outlook” chapter of the UN World Economic Situation and Prospects 2009 was released on 1 December 2008. The full report, including regional overviews and detailed trends in global trade and finance, is due out in early January 2009.
Monday, December 1, 2008
APEC on Global Financial Crisis
Lima, 23 November 2008
ADDITIONAL DOCUMENT DELIVERED BY LEADERS RAISED FURTHER MEASURES TO DEAL WITH GLOBAL FINANCIAL CRISIS
• Declaration of the Leaders of APEC on Global Economy demonstrates the commitment with free markets and openness of economy
• Leaders have refrained from raising new barriers to investment or trade in goods and services in the next 12 months
APEC PERU 2008 Leaders Week Fora modified its agenda to the global financial crisis. This became a predominant topic during the Leaders' Meeting, held on November 22 and 23 at the Ministry of Defense Convention Center. That is why we agreed to issue a statement to be attached to the outcome of the Meeting of Leaders.
The Declaration of the Leaders of APEC on the Global Economy addresses the issue of the financial crisis, sharing experiences to address it in Member Economies. "We have already taken urgent and extraordinary actions," states the document, and then to stress that "taking such actions and will continue to work closely coordinated and integrated to implement further actions to help us deal with this crisis."
One of the challenges facing the APEC is to restore confidence in their economies and maintain the region into a path of long-term growth. Therefore, the Lima Declaration proposes concrete measures, such as the regulation and supervision of financial systems, as well as the need to develop more effective standards of corporate administration, taking into account the importance of Corporate Social Responsibility.
Leaders support the Washington Declaration signed by the Group of 20. They also support the Action Plan for the reform of the financial markets proposed at the Summit of the group. The ways to achieve the desired results are, as expressed the Lima Declaration, "a close macroeconomic cooperation, avoid negative surplus, to support emerging economies and developing countries, and reflect and strengthen the International Financial Institutions."
The document highlights the firm conviction of the Leaders that "the principles of free trade and investment rules and open trade will continue to guide global growth, job creation and poverty reduction", it is also important to mention that the Orders for protectionist measures will not be considered, that only the current economic situation will be exacerbated.
Therefore, the Leaders declared: "we will abstain within the next12 months of raising new barriers to investment or trade in goods and services," expressing his commitment to free markets and openness of the economy.
With respect to the role of multilateral development banks, the text notes that “they play a critical role in assisting the economies affected by financial crisis." In that sense, it is recommended to the International Monetary Fund (IMF) to strengthen its collaboration with other financial institutions. It also decides on the Doha Development Agenda, expressing the expectation of the Leaders for an "ambitious and balanced conclusion" for growth and prosperity of the Economies.
Other topics that are in the document are the Bogor Goals, Agenda of Regional Economic Integration and Structural Reform, key points of the APEC Forum that relate to the search for a Free Trade Area within the Asia-Pacific region, and that are affected by international economic.
Also, the Leaders announced that they will not put aside other important challenges such as climate change, energy security, clean development, combating poverty, hunger, disease and terrorism. This way, the document shows that the Forum will dedicate APEC not only to alleviate the crisis but would also be used to continue with other items on its agenda of international economic cooperation within the framework of integrated actions to face the economic situation.
ADDITIONAL DOCUMENT DELIVERED BY LEADERS RAISED FURTHER MEASURES TO DEAL WITH GLOBAL FINANCIAL CRISIS
• Declaration of the Leaders of APEC on Global Economy demonstrates the commitment with free markets and openness of economy
• Leaders have refrained from raising new barriers to investment or trade in goods and services in the next 12 months
APEC PERU 2008 Leaders Week Fora modified its agenda to the global financial crisis. This became a predominant topic during the Leaders' Meeting, held on November 22 and 23 at the Ministry of Defense Convention Center. That is why we agreed to issue a statement to be attached to the outcome of the Meeting of Leaders.
The Declaration of the Leaders of APEC on the Global Economy addresses the issue of the financial crisis, sharing experiences to address it in Member Economies. "We have already taken urgent and extraordinary actions," states the document, and then to stress that "taking such actions and will continue to work closely coordinated and integrated to implement further actions to help us deal with this crisis."
One of the challenges facing the APEC is to restore confidence in their economies and maintain the region into a path of long-term growth. Therefore, the Lima Declaration proposes concrete measures, such as the regulation and supervision of financial systems, as well as the need to develop more effective standards of corporate administration, taking into account the importance of Corporate Social Responsibility.
Leaders support the Washington Declaration signed by the Group of 20. They also support the Action Plan for the reform of the financial markets proposed at the Summit of the group. The ways to achieve the desired results are, as expressed the Lima Declaration, "a close macroeconomic cooperation, avoid negative surplus, to support emerging economies and developing countries, and reflect and strengthen the International Financial Institutions."
The document highlights the firm conviction of the Leaders that "the principles of free trade and investment rules and open trade will continue to guide global growth, job creation and poverty reduction", it is also important to mention that the Orders for protectionist measures will not be considered, that only the current economic situation will be exacerbated.
Therefore, the Leaders declared: "we will abstain within the next12 months of raising new barriers to investment or trade in goods and services," expressing his commitment to free markets and openness of the economy.
With respect to the role of multilateral development banks, the text notes that “they play a critical role in assisting the economies affected by financial crisis." In that sense, it is recommended to the International Monetary Fund (IMF) to strengthen its collaboration with other financial institutions. It also decides on the Doha Development Agenda, expressing the expectation of the Leaders for an "ambitious and balanced conclusion" for growth and prosperity of the Economies.
Other topics that are in the document are the Bogor Goals, Agenda of Regional Economic Integration and Structural Reform, key points of the APEC Forum that relate to the search for a Free Trade Area within the Asia-Pacific region, and that are affected by international economic.
Also, the Leaders announced that they will not put aside other important challenges such as climate change, energy security, clean development, combating poverty, hunger, disease and terrorism. This way, the document shows that the Forum will dedicate APEC not only to alleviate the crisis but would also be used to continue with other items on its agenda of international economic cooperation within the framework of integrated actions to face the economic situation.
ABAC proposals on global credit contraction
ABAC proposals on global credit contraction
By Azlan Othman and Sonia K
http://www.brunei-online.com/bb/tue/11pic9.jpg
Minister of Foreign Affairs and Trade II (L) receiving the ABAC report from Salleh Bostaman Zainal Abidin, Fauziah Dato Talip and Stephen Ong from ABAC Brunei.
With the Asia Pacific Economic Cooperation (APEC) 2008 in Peru drawing closer in November, the APEC Business Advisory Council (ABAC) yesterday presented their report to the leaders at the Ministry of Foreign Affairs and Trade.
On hand to receive the report on behalf of His Majesty the Sultan and Yang Di-Pertuan of Brunei Darussalam's Government was the Minister of Foreign Affairs and Trade II, Pehin Orang Kaya Pekerma Dewa Dato Seri Setia Lim Jock Seng.
Presenting the report were Salleh Bostaman Zainal Abidin, Fauziah Dato Talip and Stephen Ong who were representing the Chairman of the APEC Business Advisory Council (ABAC), a group comprising some of the most successful and widely recognised names in private business in the Asia Pacific region.
This year's ABAC report addresses issues such as global credit contraction, Acceleration of Regional Economic Integration (REI), Small and Medium Enterprises (SME) and Micro-Enterprise Development, response to food supply and prices and mitigation climate change.
ABAC revealed these specific set of recommendations to address the issues:
The global credit contraction, sparked by the sub-prime mortgage crisis and write-downs by various international banks: Regulation should be activity-based and achieved through informal collaboration among regulatory bodies, within and across APEC Economies;
Acceleration of Regional Economic Integration (REI): APEC Ministers should accelerate work on the Free Trade Area for the Asia Pacific by completing REI studies and exploring all options to achieve the free flow of goods, services, labour and capital within the region;
Small and Medium (SME) and Micro-Enterprise Development: Governments should establish various forms of social and financial support in the development and Information Communication Technology (ICT); introduce intellectual property protection programmes and encourage the use of evolving new technologies;
Response to food supply and prices: APEC should renounce the use of embargoes and other export restrictions as a means of addressing perceived food shortages;
Mitigation of climate change: In order to more aggressively pursue energy efficiency to reduce greenhouse gas emissions, each APEC economy should formulate specific goals and action plans. A peer review mechanism should be established to monitor progress.
Because APEC goals are economic in nature, input from ABAC is a critical consideration of APEC policy-makers.
These and other recommendations will be formally issued to APEC Economic Leaders summit to be held in Lima, Peru.
By Azlan Othman and Sonia K
http://www.brunei-online.com/bb/tue/11pic9.jpg
Minister of Foreign Affairs and Trade II (L) receiving the ABAC report from Salleh Bostaman Zainal Abidin, Fauziah Dato Talip and Stephen Ong from ABAC Brunei.
With the Asia Pacific Economic Cooperation (APEC) 2008 in Peru drawing closer in November, the APEC Business Advisory Council (ABAC) yesterday presented their report to the leaders at the Ministry of Foreign Affairs and Trade.
On hand to receive the report on behalf of His Majesty the Sultan and Yang Di-Pertuan of Brunei Darussalam's Government was the Minister of Foreign Affairs and Trade II, Pehin Orang Kaya Pekerma Dewa Dato Seri Setia Lim Jock Seng.
Presenting the report were Salleh Bostaman Zainal Abidin, Fauziah Dato Talip and Stephen Ong who were representing the Chairman of the APEC Business Advisory Council (ABAC), a group comprising some of the most successful and widely recognised names in private business in the Asia Pacific region.
This year's ABAC report addresses issues such as global credit contraction, Acceleration of Regional Economic Integration (REI), Small and Medium Enterprises (SME) and Micro-Enterprise Development, response to food supply and prices and mitigation climate change.
ABAC revealed these specific set of recommendations to address the issues:
The global credit contraction, sparked by the sub-prime mortgage crisis and write-downs by various international banks: Regulation should be activity-based and achieved through informal collaboration among regulatory bodies, within and across APEC Economies;
Acceleration of Regional Economic Integration (REI): APEC Ministers should accelerate work on the Free Trade Area for the Asia Pacific by completing REI studies and exploring all options to achieve the free flow of goods, services, labour and capital within the region;
Small and Medium (SME) and Micro-Enterprise Development: Governments should establish various forms of social and financial support in the development and Information Communication Technology (ICT); introduce intellectual property protection programmes and encourage the use of evolving new technologies;
Response to food supply and prices: APEC should renounce the use of embargoes and other export restrictions as a means of addressing perceived food shortages;
Mitigation of climate change: In order to more aggressively pursue energy efficiency to reduce greenhouse gas emissions, each APEC economy should formulate specific goals and action plans. A peer review mechanism should be established to monitor progress.
Because APEC goals are economic in nature, input from ABAC is a critical consideration of APEC policy-makers.
These and other recommendations will be formally issued to APEC Economic Leaders summit to be held in Lima, Peru.
Saturday, November 29, 2008
Neo-Mercantilism
Neo-Mercantilism
Daily Article by Murray N. Rothbard | Posted on 2/9/1999
Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths prove a heady brew, as protectionists warn about this new "Japanese imperialism," even "worse than Pearl Harbor." This "imperialism" turns out to consist of selling Americans wonderful TV sets, autos, microchips, etc., at prices more than competitive with American firms.
Is this "flood" of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers? In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.
Keep Your Eye on the Consumer
As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: (1) protectionism means force in restraint of trade; and (2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few--and an inefficient few at that: people who cannot make it in a free and unhampered market.
Take, for example, the alleged Japanese menace. All trade is mutually beneficial to both parties--in this case Japanese producers and American consumers--otherwise they would not engage in the exchange. In trying to stop this trade, protectionists are trying to stop American consumers from enjoying high living standards by buying cheap and high-quality Japanese products. Instead, we are to be forced by government to return to the inefficient, higher-priced products we have already rejected. In short, inefficient producers are trying to deprive all of us of products we desire so that we will have to turn to inefficient firms. American consumers are to be plundered.
How To Look at Tariffs and Quotas
The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by high-priced New York or Rhode Island textile manufacturers who would then be complaining about the "unfair," "cheap labor" competition from various low-type "foreigners" from Tennessee or North Carolina, or vice versa.
Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on inter-state trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by less efficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Fortunately, inter-state tariffs are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose inter-state tariffs in another guise. Part of the drive for continuing increases in the federal minimum-wage law is to impose a protectionist devise against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.
During the 1966 Congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R-NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms hardest hit by an increased minimum wage (and the workers struck by unemployment) will be located in the south.
Another way in which interstate trade restrictions have been imposed has been in the fashionable name of "safety." Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk "unsafe."
If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America's first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose--fortunately not fulfilled--to prohibit all "imports" from outside of Detroit, and citizens were exhorted to buy only Detroit. If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.
So why not restrict and even prohibit trade, i.e., "imports," into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn't the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.
And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.
The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade--such as protectionism--cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of less efficient producers, at the expense of more competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.
The Negative Railroad
Protectionism is also peculiarly destructive because it acts as a coerced and artificial increase in the cost of transportation between regions. One of the great features of the Industrial Revolution, one of the ways in which it brought prosperity to the starving masses, was by reducing drastically the cost of transportation. The development of railroads in the early 19th century, for example, meant that for the first time in the history of the human race, goods could be transported cheaply over land. Before that, water--rivers and oceans--was the only economically viable means of transport. By making land transport accessible and cheap, railroads allowed interregional land transportation to break up expensive inefficient local monopolies. The result was an enormous improvement in living standards for all consumers. And what the protectionists want to do is lay an axe to this wondrous principle of progress.
It is no wonder that Frederic Bastiat, the great French laissez-faire economist of the mid-19th century, called a tariff a "negative railroad." Protectionists are just as economically destructive as if they were physically chopping up railroads, or planes, or ships, and forcing us to revert to the costly transport of the past--mountain trails, rafts, or sailing ships.
"Fair" Trade
Let us now turn to some of the leading protectionist arguments. Take, for example, the standard complaint that while the protectionist "welcomes competition," this competition must be "fair." Whenever someone starts talking about "fair competition" or indeed, about "fairness" in general, it is time to keep a sharp eye on your wallet, for it is about to be picked. For the genuinely "fair" is simply the voluntary terms of exchange, mutually agreed upon by buyer and seller. As most of the medieval scholastics were able to figure out, there is no "just" (or "fair") price outside of the market price.
So what could be "unfair" about the free-market price? One common protectionist charge is that it is "unfair" for an American firm to compete with, say, a Taiwanese firm which needs to pay only one-half the wages of the American competitor. The U.S. government is called upon to step in and "equalize" the wage rates by imposing an equivalent tariff upon the Taiwanese. But does this mean that consumers can never patronize low-cost firms because it is "unfair" for them to have lower costs than inefficient competitors? This is the same argument that would be used by a New York firm trying to cripple its North Carolina competitor.
What the protectionists don't bother to explain is why U.S. wage rates are so much higher than Taiwan. They are not imposed by Providence. Wage rates are high in the U.S. because American employers have bid these rates up. Like all other prices on the market, wage rates are determined by supply and demand, and the increased demand by U.S. employers has bid wages up. What determines this demand? The "marginal productivity" of labor.
The demand for any factor of production, including labor, is constituted by the productivity of that factor, the amount of revenue that the worker, or the pound of cement or acre of land, is expected to bring to the brim. The more productive the factory, the greater the demand by employers, and the higher its price or wage rate. American labor is more costly than Taiwanese because it is far more productive. What makes it productive? To some extent, the comparative qualities of labor, skill, and education. But most of the difference is not due to the personal qualities of the laborers themselves, but to the fact that the American laborer, on the whole, is equipped with more and better capital equipment than his Taiwanese counterparts. The more and better the capital investment per worker, the greater the worker's productivity, and therefore the higher the wage rate.
In short, if the American wage rate is twice that of the Taiwanese, it is because the American laborer is more heavily capitalized, is equipped with more and better tools, and is therefore, on the average, twice as productive. In a sense, I suppose, it is not "fair" for the American worker to make more than the Taiwanese, not because of his personal qualities, but because savers and investors have supplied him with more tools. But a wage rate is determined not just by personal quality but also by relative scarcity, and in the United States the worker is far scarcer compared to capital than he is in Taiwan.
Putting it another way, the fact that American wage rates are on the average twice that of the Taiwanese, does not make the cost of labor in the U.S. twice that of Taiwan. Since U.S. labor is twice as productive, this means that the double wage rate in the U.S. is offset by the double productivity, so that the cost of labor per unit product in the U.S. and Taiwan tends, on the average, to be the same. One of the major protectionist fallacies is to confuse the price of labor (wage rates) with its cost, which also depends on its relative productivity.
Thus, the problem faced by American employers is not really with the "cheap labor" in Taiwan, because "expensive labor" in the U.S. is precisely the result of the bidding for scarce labor by U.S. employers. The problem faced by less efficient U.S. textile or auto firms is not so much cheap labor in Taiwan or Japan, but the fact that other U.S. industries are efficient enough to afford it, because they bid wages that high in the first place.
So, by imposing protective tariffs and quotas to save, bail out, and keep in place less efficient U.S. textile or auto or microchip firms, the protectionists are not only injuring the American consumer. They are also harming efficient U.S. firms and industries, which are prevented from employing resources now locked into incompetent firms, and who could otherwise be able to expand and sell their efficient products at home and abroad.
"Dumping"
Another contradictory line of protectionist assault on the free market asserts that the problem is not so much the low costs enjoyed by foreign firms, as the "unfairness" of selling their products "below costs" to American consumers, and thereby engaging in the pernicious and sinful practice of "dumping." By such dumping they are able to exert unfair advantage over American firms who presumably never engage in such practices and make sure that their prices are always high enough to cover costs. But if selling below costs is such a powerful weapon, why isn't it ever pursued by business firms within a country?
Our first response to this charge is, once again, to keep our eye on consumers in general and on American consumers in particular. Why should it be a matter of complaint when consumers so clearly benefit? Suppose, for example, that Sony is willing to injure American competitors by selling TV sets to Americans for a penny apiece. Shouldn't we rejoice at such an absurd policy of suffering severe losses by subsidizing us, the American consumers? And shouldn't our response be: "Come on, Sony, subsidize us some more!" As far as consumers are concerned, the more "dumping" that takes place, the better.
But what of the poor American TV firms, whose sales will suffer so long as Sony is willing to virtually give their sets away? Well, surely, the sensible policy for RCA, Zenith, etc. would be to hold back production and sales until Sony drives itself into bankruptcy. But suppose that the worst happens, and RCA, Zenith, etc. are themselves driven into bankruptcy by the Sony price war? Well, in that case, we the consumers will still be better off, since the plants of the bankrupt firms, which would still be in existence, would be picked up for a song at auction, and the American buyers at auction would be able to enter the TV business and outcompete Sony because they now enjoy far lower capital costs.
For decades, indeed, opponents of the free market have claimed that many businesses gained their powerful status on the market by what is called "predatory price-cutting," that is, by driving their smaller competitors into bankruptcy by selling their goods below cost, and then reaping the reward of their unfair methods by raising their prices and thereby charging "monopoly prices" to the consumers. The claim is that while consumers may gain in the short run by price wars, "dumping," and selling below costs, they lose in the long run from the alleged monopoly. But, as we have seen, economic theory shows that this would be a mug's game, losing money for the "dumping" firms, and never really achieving a monopoly price. And sure enough, historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.
Another charge claims that Japanese or other foreign firms can afford to engage in dumping because their governments are willing to subsidize their losses. But again, we should still welcome such an absurd policy. If the Japanese government is really willing to waste scarce resources subsidizing American purchases of Sony's, so much the better! Their policy would be just as self-defeating as if the losses were private. There is yet another problem with the charge of "dumping," even when it is made by economists or other alleged "experts" sitting on impartial tariff commissions and government bureaus. There is no way whatever that outside observers, be they economists, businessmen, or other experts, can decide what some other firm's "costs" may be. "Costs" are not objective entities that can be gauged or measured. Costs are subjective to the businessman himself, and they vary continually, depending on the businessman's time horizon or the stage of production or selling process he happens to be dealing with at any given time.
Suppose, for example, a fruit dealer has purchased a case of pears for $20, amounting to $1 a pound. He hopes and expects to sell those pears for $1.50 a pound. But something has happened to the pear market, and he finds it impossible to sell most of the pears at anything near that price. In fact, he finds that he must sell the pears at whatever price he can get before they become overripe. Suppose he finds that he can only sell his stock of pears at 70 cents a pound. The outside observer might say that the fruit dealer has, perhaps "unfairly," sold his pears "below costs," figuring that the dealer's costs were $1 a pound.
"Infant" Industries
Another protectionist fallacy held that the government should provide a temporary protective tariff to aid, or to bring into being, an "infant industry." Then, when the industry was well-established, the government would and should remove the tariff and toss the now "mature" industry into the competitive swim.
The theory is fallacious, and the policy has proved disastrous in practice. For there is no more need for government to protect a new, young, industry from foreign competition than there is to protect it from domestic competition.
In the last few decades, the "infant" plastics, television, and computer industries made out very well without such protection. Any government subsidizing of a new industry will funnel too many resources into that industry as compared to older firms, and will also inaugurate distortions that may persist and render the firm or industry permanently inefficient and vulnerable to competition. As a result, "infant-industry" tariffs have tended to become permanent, regardless of the "maturity" of the industry. The proponents were carried away by a misleading biological analogy to "infants" who need adult care. But a business firm is not a person, young or old.
Older Industries
Indeed, in recent years, older industries that are notoriously inefficient have been using what might be called a "senile-industry" argument for protectionism. Steel, auto, and other outcompeted industries have been complaining that they "need a breathing space" to retool and become competitive with foreign rivals, and that this breather could be provided by several years of tariffs or import quotas. This argument is just as full of holes as the hoary infant-industry approach, except that it will be even more difficult to figure out when the "senile" industry will have become magically rejuvenated. In fact, the steel industry has been inefficient ever since its inception, and its chronological age seems to make no difference. The first protectionist movement in the U.S. was launched in 1820, headed by the Pennsylvania iron (later iron and steel) industry, artificially force-fed by the War of 1812 and already in grave danger from far more efficient foreign competitors.
The Non-Problem of the Balance of Payments
A final set of arguments, or rather alarms, center on the mysteries of the balance of payments. Protectionists focus on the horrors of imports being greater than exports, implying that if market forces continued unchecked, Americans might wind up buying everything from abroad, while selling foreigners nothing, so that American consumers will have engorged themselves to the permanent ruin of American business firms. But if the exports really fell to somewhere near zero, where in the world would Americans still find the money to purchase foreign products? The balance of payments, as we said earlier, is a pseudo-problem created by the existence of customs statistics.
During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If U.S. banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the U.S., and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance of payment deficits, thus bringing gold back into the country.
But now, in the fiat-money era, balance of payments deficits are truly meaningless. For gold is no longer a "balancing item." In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither id dollars "leak" out. The alleged "deficit" was paid for by foreigners investing the equivalent amount of money in American dollars: in real estate, capital goods, U.S. securities, and bank accounts.
In effect, in the last couple of years, foreigners have been investing enough of their own funds in dollars to keep the dollar high, enabling us to purchase cheap imports. Instead of worrying and complaining about this development, we should rejoice that foreign investors are willing to finance our cheap imports. The only problem is that this bonanza is already coming to an end, with the dollar becoming cheaper and exports more expensive.
We conclude that the sheaf of protectionist arguments, many plausible at first glance, are really a tissue of egregious fallacies. They betray a complete ignorance of the most basic economic analysis. Indeed, some of the arguments are almost embarrassing replicas of the most ridiculous claims of 17th-century mercantilism: for example, that it is somehow a calamitous problem that the U.S. has a balance of trade deficit, not overall, but merely with one specific country, e.g., Japan.
Must we even relearn the rebuttals of the more sophisticated mercantilists of the 18th century: namely, that balances with individual countries will cancel each other out, and therefore that we should only concern ourselves with the overall balance? (Let alone realize that the overall balance is no problem either.) But we need not reread the economic literature to realize that the impetus for protectionism comes not from preposterous theories, but from the quest for coerced special privilege and restraint of trade at the expense of efficient competitors and consumers.
In the host of special interests using the political process to repress and loot the rest of us, the protectionists are among the most venerable. It is high time that we get them, once and for all, off our backs, and treat them with the righteous indignation they so richly deserve.
* * * * *
This essay first appeared in 1986. Read a short biography of Murray N. Rothbard
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Daily Article by Murray N. Rothbard | Posted on 2/9/1999
Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths prove a heady brew, as protectionists warn about this new "Japanese imperialism," even "worse than Pearl Harbor." This "imperialism" turns out to consist of selling Americans wonderful TV sets, autos, microchips, etc., at prices more than competitive with American firms.
Is this "flood" of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers? In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.
Keep Your Eye on the Consumer
As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: (1) protectionism means force in restraint of trade; and (2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few--and an inefficient few at that: people who cannot make it in a free and unhampered market.
Take, for example, the alleged Japanese menace. All trade is mutually beneficial to both parties--in this case Japanese producers and American consumers--otherwise they would not engage in the exchange. In trying to stop this trade, protectionists are trying to stop American consumers from enjoying high living standards by buying cheap and high-quality Japanese products. Instead, we are to be forced by government to return to the inefficient, higher-priced products we have already rejected. In short, inefficient producers are trying to deprive all of us of products we desire so that we will have to turn to inefficient firms. American consumers are to be plundered.
How To Look at Tariffs and Quotas
The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by high-priced New York or Rhode Island textile manufacturers who would then be complaining about the "unfair," "cheap labor" competition from various low-type "foreigners" from Tennessee or North Carolina, or vice versa.
Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on inter-state trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by less efficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Fortunately, inter-state tariffs are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose inter-state tariffs in another guise. Part of the drive for continuing increases in the federal minimum-wage law is to impose a protectionist devise against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.
During the 1966 Congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R-NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms hardest hit by an increased minimum wage (and the workers struck by unemployment) will be located in the south.
Another way in which interstate trade restrictions have been imposed has been in the fashionable name of "safety." Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk "unsafe."
If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America's first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose--fortunately not fulfilled--to prohibit all "imports" from outside of Detroit, and citizens were exhorted to buy only Detroit. If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.
So why not restrict and even prohibit trade, i.e., "imports," into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn't the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.
And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.
The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade--such as protectionism--cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of less efficient producers, at the expense of more competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.
The Negative Railroad
Protectionism is also peculiarly destructive because it acts as a coerced and artificial increase in the cost of transportation between regions. One of the great features of the Industrial Revolution, one of the ways in which it brought prosperity to the starving masses, was by reducing drastically the cost of transportation. The development of railroads in the early 19th century, for example, meant that for the first time in the history of the human race, goods could be transported cheaply over land. Before that, water--rivers and oceans--was the only economically viable means of transport. By making land transport accessible and cheap, railroads allowed interregional land transportation to break up expensive inefficient local monopolies. The result was an enormous improvement in living standards for all consumers. And what the protectionists want to do is lay an axe to this wondrous principle of progress.
It is no wonder that Frederic Bastiat, the great French laissez-faire economist of the mid-19th century, called a tariff a "negative railroad." Protectionists are just as economically destructive as if they were physically chopping up railroads, or planes, or ships, and forcing us to revert to the costly transport of the past--mountain trails, rafts, or sailing ships.
"Fair" Trade
Let us now turn to some of the leading protectionist arguments. Take, for example, the standard complaint that while the protectionist "welcomes competition," this competition must be "fair." Whenever someone starts talking about "fair competition" or indeed, about "fairness" in general, it is time to keep a sharp eye on your wallet, for it is about to be picked. For the genuinely "fair" is simply the voluntary terms of exchange, mutually agreed upon by buyer and seller. As most of the medieval scholastics were able to figure out, there is no "just" (or "fair") price outside of the market price.
So what could be "unfair" about the free-market price? One common protectionist charge is that it is "unfair" for an American firm to compete with, say, a Taiwanese firm which needs to pay only one-half the wages of the American competitor. The U.S. government is called upon to step in and "equalize" the wage rates by imposing an equivalent tariff upon the Taiwanese. But does this mean that consumers can never patronize low-cost firms because it is "unfair" for them to have lower costs than inefficient competitors? This is the same argument that would be used by a New York firm trying to cripple its North Carolina competitor.
What the protectionists don't bother to explain is why U.S. wage rates are so much higher than Taiwan. They are not imposed by Providence. Wage rates are high in the U.S. because American employers have bid these rates up. Like all other prices on the market, wage rates are determined by supply and demand, and the increased demand by U.S. employers has bid wages up. What determines this demand? The "marginal productivity" of labor.
The demand for any factor of production, including labor, is constituted by the productivity of that factor, the amount of revenue that the worker, or the pound of cement or acre of land, is expected to bring to the brim. The more productive the factory, the greater the demand by employers, and the higher its price or wage rate. American labor is more costly than Taiwanese because it is far more productive. What makes it productive? To some extent, the comparative qualities of labor, skill, and education. But most of the difference is not due to the personal qualities of the laborers themselves, but to the fact that the American laborer, on the whole, is equipped with more and better capital equipment than his Taiwanese counterparts. The more and better the capital investment per worker, the greater the worker's productivity, and therefore the higher the wage rate.
In short, if the American wage rate is twice that of the Taiwanese, it is because the American laborer is more heavily capitalized, is equipped with more and better tools, and is therefore, on the average, twice as productive. In a sense, I suppose, it is not "fair" for the American worker to make more than the Taiwanese, not because of his personal qualities, but because savers and investors have supplied him with more tools. But a wage rate is determined not just by personal quality but also by relative scarcity, and in the United States the worker is far scarcer compared to capital than he is in Taiwan.
Putting it another way, the fact that American wage rates are on the average twice that of the Taiwanese, does not make the cost of labor in the U.S. twice that of Taiwan. Since U.S. labor is twice as productive, this means that the double wage rate in the U.S. is offset by the double productivity, so that the cost of labor per unit product in the U.S. and Taiwan tends, on the average, to be the same. One of the major protectionist fallacies is to confuse the price of labor (wage rates) with its cost, which also depends on its relative productivity.
Thus, the problem faced by American employers is not really with the "cheap labor" in Taiwan, because "expensive labor" in the U.S. is precisely the result of the bidding for scarce labor by U.S. employers. The problem faced by less efficient U.S. textile or auto firms is not so much cheap labor in Taiwan or Japan, but the fact that other U.S. industries are efficient enough to afford it, because they bid wages that high in the first place.
So, by imposing protective tariffs and quotas to save, bail out, and keep in place less efficient U.S. textile or auto or microchip firms, the protectionists are not only injuring the American consumer. They are also harming efficient U.S. firms and industries, which are prevented from employing resources now locked into incompetent firms, and who could otherwise be able to expand and sell their efficient products at home and abroad.
"Dumping"
Another contradictory line of protectionist assault on the free market asserts that the problem is not so much the low costs enjoyed by foreign firms, as the "unfairness" of selling their products "below costs" to American consumers, and thereby engaging in the pernicious and sinful practice of "dumping." By such dumping they are able to exert unfair advantage over American firms who presumably never engage in such practices and make sure that their prices are always high enough to cover costs. But if selling below costs is such a powerful weapon, why isn't it ever pursued by business firms within a country?
Our first response to this charge is, once again, to keep our eye on consumers in general and on American consumers in particular. Why should it be a matter of complaint when consumers so clearly benefit? Suppose, for example, that Sony is willing to injure American competitors by selling TV sets to Americans for a penny apiece. Shouldn't we rejoice at such an absurd policy of suffering severe losses by subsidizing us, the American consumers? And shouldn't our response be: "Come on, Sony, subsidize us some more!" As far as consumers are concerned, the more "dumping" that takes place, the better.
But what of the poor American TV firms, whose sales will suffer so long as Sony is willing to virtually give their sets away? Well, surely, the sensible policy for RCA, Zenith, etc. would be to hold back production and sales until Sony drives itself into bankruptcy. But suppose that the worst happens, and RCA, Zenith, etc. are themselves driven into bankruptcy by the Sony price war? Well, in that case, we the consumers will still be better off, since the plants of the bankrupt firms, which would still be in existence, would be picked up for a song at auction, and the American buyers at auction would be able to enter the TV business and outcompete Sony because they now enjoy far lower capital costs.
For decades, indeed, opponents of the free market have claimed that many businesses gained their powerful status on the market by what is called "predatory price-cutting," that is, by driving their smaller competitors into bankruptcy by selling their goods below cost, and then reaping the reward of their unfair methods by raising their prices and thereby charging "monopoly prices" to the consumers. The claim is that while consumers may gain in the short run by price wars, "dumping," and selling below costs, they lose in the long run from the alleged monopoly. But, as we have seen, economic theory shows that this would be a mug's game, losing money for the "dumping" firms, and never really achieving a monopoly price. And sure enough, historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.
Another charge claims that Japanese or other foreign firms can afford to engage in dumping because their governments are willing to subsidize their losses. But again, we should still welcome such an absurd policy. If the Japanese government is really willing to waste scarce resources subsidizing American purchases of Sony's, so much the better! Their policy would be just as self-defeating as if the losses were private. There is yet another problem with the charge of "dumping," even when it is made by economists or other alleged "experts" sitting on impartial tariff commissions and government bureaus. There is no way whatever that outside observers, be they economists, businessmen, or other experts, can decide what some other firm's "costs" may be. "Costs" are not objective entities that can be gauged or measured. Costs are subjective to the businessman himself, and they vary continually, depending on the businessman's time horizon or the stage of production or selling process he happens to be dealing with at any given time.
Suppose, for example, a fruit dealer has purchased a case of pears for $20, amounting to $1 a pound. He hopes and expects to sell those pears for $1.50 a pound. But something has happened to the pear market, and he finds it impossible to sell most of the pears at anything near that price. In fact, he finds that he must sell the pears at whatever price he can get before they become overripe. Suppose he finds that he can only sell his stock of pears at 70 cents a pound. The outside observer might say that the fruit dealer has, perhaps "unfairly," sold his pears "below costs," figuring that the dealer's costs were $1 a pound.
"Infant" Industries
Another protectionist fallacy held that the government should provide a temporary protective tariff to aid, or to bring into being, an "infant industry." Then, when the industry was well-established, the government would and should remove the tariff and toss the now "mature" industry into the competitive swim.
The theory is fallacious, and the policy has proved disastrous in practice. For there is no more need for government to protect a new, young, industry from foreign competition than there is to protect it from domestic competition.
In the last few decades, the "infant" plastics, television, and computer industries made out very well without such protection. Any government subsidizing of a new industry will funnel too many resources into that industry as compared to older firms, and will also inaugurate distortions that may persist and render the firm or industry permanently inefficient and vulnerable to competition. As a result, "infant-industry" tariffs have tended to become permanent, regardless of the "maturity" of the industry. The proponents were carried away by a misleading biological analogy to "infants" who need adult care. But a business firm is not a person, young or old.
Older Industries
Indeed, in recent years, older industries that are notoriously inefficient have been using what might be called a "senile-industry" argument for protectionism. Steel, auto, and other outcompeted industries have been complaining that they "need a breathing space" to retool and become competitive with foreign rivals, and that this breather could be provided by several years of tariffs or import quotas. This argument is just as full of holes as the hoary infant-industry approach, except that it will be even more difficult to figure out when the "senile" industry will have become magically rejuvenated. In fact, the steel industry has been inefficient ever since its inception, and its chronological age seems to make no difference. The first protectionist movement in the U.S. was launched in 1820, headed by the Pennsylvania iron (later iron and steel) industry, artificially force-fed by the War of 1812 and already in grave danger from far more efficient foreign competitors.
The Non-Problem of the Balance of Payments
A final set of arguments, or rather alarms, center on the mysteries of the balance of payments. Protectionists focus on the horrors of imports being greater than exports, implying that if market forces continued unchecked, Americans might wind up buying everything from abroad, while selling foreigners nothing, so that American consumers will have engorged themselves to the permanent ruin of American business firms. But if the exports really fell to somewhere near zero, where in the world would Americans still find the money to purchase foreign products? The balance of payments, as we said earlier, is a pseudo-problem created by the existence of customs statistics.
During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If U.S. banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the U.S., and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance of payment deficits, thus bringing gold back into the country.
But now, in the fiat-money era, balance of payments deficits are truly meaningless. For gold is no longer a "balancing item." In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither id dollars "leak" out. The alleged "deficit" was paid for by foreigners investing the equivalent amount of money in American dollars: in real estate, capital goods, U.S. securities, and bank accounts.
In effect, in the last couple of years, foreigners have been investing enough of their own funds in dollars to keep the dollar high, enabling us to purchase cheap imports. Instead of worrying and complaining about this development, we should rejoice that foreign investors are willing to finance our cheap imports. The only problem is that this bonanza is already coming to an end, with the dollar becoming cheaper and exports more expensive.
We conclude that the sheaf of protectionist arguments, many plausible at first glance, are really a tissue of egregious fallacies. They betray a complete ignorance of the most basic economic analysis. Indeed, some of the arguments are almost embarrassing replicas of the most ridiculous claims of 17th-century mercantilism: for example, that it is somehow a calamitous problem that the U.S. has a balance of trade deficit, not overall, but merely with one specific country, e.g., Japan.
Must we even relearn the rebuttals of the more sophisticated mercantilists of the 18th century: namely, that balances with individual countries will cancel each other out, and therefore that we should only concern ourselves with the overall balance? (Let alone realize that the overall balance is no problem either.) But we need not reread the economic literature to realize that the impetus for protectionism comes not from preposterous theories, but from the quest for coerced special privilege and restraint of trade at the expense of efficient competitors and consumers.
In the host of special interests using the political process to repress and loot the rest of us, the protectionists are among the most venerable. It is high time that we get them, once and for all, off our backs, and treat them with the righteous indignation they so richly deserve.
* * * * *
This essay first appeared in 1986. Read a short biography of Murray N. Rothbard
You can receive the Mises Daily Article in your inbox. Go here to subscribe or unsubscribe.
The Rise of the New Mercantilism (Part I)
The Rise of the New Mercantilism (Part I)
By Robert D. Atkinson | Thursday, May 29, 2008
With the balance of trade shifting from multinational corporations to large emerging markets — such as China and India — some nations have been tempted to turn to unfair practices to gain a trade advantage. As Robert D. Atkinson explains, these mercantilist practices are taking over knowledge- and technology-based industries.
When many of the trade enforcement tools were established by the U.S. Congress 30 or more years ago, the international trading regime was quite different than it is today. Services accounted for a small fraction of cross-border trade. A larger percentage of goods trade was in commodity-type products.
Many other nations — especially developed nations — focused their economic and trade policies on promoting natural resource production and commodity goods assembly. No nation — not even Japan — was so large that it could dictate terms of trade to multinational companies.
Managing the U.S. trade deficit
As a result, competition between nations for investment exerted at least some discipline on nations’ worst mercantilist impulses. And when countries erected mercantilist
Because the stakes are so much higher, nations have stronger motivations to employ complex and non-transparent means to gain an unfair advantage in the global trading system.
trade policies designed to unfairly gain competitive advantage, these usually consisted of tariffs, quotas or other relatively blunt means of protectionism that were easy to detect and confront. For example, in the 1970s and early 1980s, the Japanese government limited imports of semiconductors to no more than 10% of domestic consumption.
All of these factors worked to keep the U.S. trade deficit at relatively minimal levels.
Thirty years later, the global trading system is significantly different. With the rise of information technology and global communication networks, services trade has expanded significantly. While commodity-based goods are still traded, a growing share of goods trade is now in technology-based products.
Shift in the balance of power
And with the entry into the global trading system of nations with very large markets — like China and India — the relative balance of power has shifted away from multinational companies toward these nations, who increasingly use access to their huge and growing markets as leverage to dictate the terms of trade.
Moreover, a large share of nations, including developing nations, see the royal road to growth in shifting their economies more toward high value-added, innovation-based goods and services — the very sectors upon which the United States’ competitive advantage is based.
Unfair advantages
And indeed, a growing share of nations have turned to discriminatory mercantilist policies
If the United States is to maintain its advantage, we Americans will have to work for it — in part by boosting our innovation policies.
to gain jobs in those sectors, and in the process targeted U.S. technology jobs. Not surprisingly, the U.S. trade deficit has ballooned to record levels — as we have become the “importer of last resort” for most of the rest of the world.
Because the nature of trade has changed and because the stakes are so much higher, nations are able to employ a much wider array of complex and relatively non-transparent means of gaining unfair advantage in the global trading system — and they have much stronger motivations to do so.
In short, mercantilist trade policies have become the policy of choice for many nations.
Falling behind
The U.S. trade enforcement system has not kept pace with these changes — and it has failed to adequately respond to either the magnitude or the nature of the challenge.
As technology- and knowledge-based industries become a more important part of the global economy — and a key source of high-paying jobs — many nations have established policies to grow their technology industries. Many of these policies are quite legitimate and consistent with market-based competition.
An uphill battle
These include policies such as research and development (R&D) tax incentives, government investment in research, efforts
The United States is more dependent on protection of intellectual property (IP) than other nations. Over 50% of U.S. exports depend on some form of IP protection.
to increase education and skill levels (particularly in science and technology fields) — and spurring telecommunications development.
It would be one thing if that were all these nations were doing to compete for technology-based jobs. After all, there is nothing inherent about the United States’ competitive advantage in these sectors.
If the United States is to maintain its advantage, we Americans will have to work for it, in part by boosting our innovation policies — such as expanding the R&D tax credit and increasing support for federal research.
Skirting the rules
But the other nations’ efforts go far beyond legitimate and market-based innovation policies. Many have decided that to compete they have to erect a whole host of unfair and protectionist policies focused on systematically disadvantaging foreign, including U.S., companies in global competition.
Perhaps the most troubling part of this is that nearly all of the nations engaging in these unfair and distorting trade practices targeting U.S. technology leadership are members of the World Trade Organization (WTO). These nations made a free decision to join the WTO and when they did they agreed to reduce — if not end — mercantilist practices.
Both ends of the bargain
In fact, many of these nations saw membership in the WTO as an avenue to exporting to the
Over 90% of video games consumed in China are pirated. But China doesn’t just copy them — it is a leading producer and exporter of pirated software.
United States without committing to their responsibilities as WTO members. Here are a few tell-tale examples:
1. Tariffs: For example, The WTO’s 1997 Information Technology Agreement (ITA) was supposed to eliminate tariffs that distort trade flows on a wide variety of high-tech goods, including computers and telecommunications equipment.
Nevertheless, ten years after its passage, countries such as India and Indonesia still maintain tariffs on imported IT goods despite being signatories to the ITA — and maintaining high trade surpluses with the United States.
Europe and abroad
2. But it’s not just developing nations that are violating the letter and spirit of the ITA. The European Union has also decided that it must erect barriers to high-tech imports covered by the ITA. In recent years, it has been slapping tariffs as high as 14% on products — simply because companies have improved those products and added innovative features. These products include computer monitors and multi-function printers.
The argument that the EU makes for its tariffs is that these are new products and therefore they do not fall under the list of covered products under the ITA agreement. The real reason for their action is to erect a tariff wall so that high-tech production will move to economically disadvantaged regions of Eastern Europe.
The Office of the United States Trade Representative announced in late May 2008 that it intends to bring a case before the WTO on this issue.
Making exceptions
3. India applies a 12% excise duty on computers that local manufacturers (either domestic or foreign) can offset against their value-added taxes (VAT).
While commodity-based goods are still traded, a growing share of goods trade is now in technology-based products.
But foreign manufacturers are nonetheless at a disadvantage because they also pay a 4% countervailing duty (CVD), which the Indian government has specifically imposed to protect domestic computer manufacturers.
4. China recently created a tax scheme that blatantly violated the WTO when it applied a 17% VAT to both foreign and domestically produced integrated circuits (ICs) used in the semiconductor industry, and gave a rebate on most of the VAT only to companies producing ICs in China for export, but not to companies importing ICs.
Intellectual property
5. Intellectual Property Theft: As a net exporter of manufacturing know-how as intellectual property, the United States is more dependent on protection of intellectual property (IP) than other nations. Over 50% of U.S. exports depend on some form of IP protection, compared to less than 10% 50 years ago.
But this very strength is also a key vulnerability, for unlike physical property — which is relatively difficult to steal — IP theft or forced transfer is much easier. Many nations either turn a blind eye to IP theft or actually encourage it as a way to gain competitive advantage.
China is one of the most egregious violators. Not only does China fail to enforce its own intellectual property laws, but it also has implemented measures to block the trading and distribution rights of producers of U.S. entertainment products. Even the Chinese government continues to support theft of U.S. intellectual property.
Looking to China to uphold IP
For example, although China’s State Council ordered all government agencies to use only legal software in 1999, widespread lack of enforcement or monitoring ensures
With the entry of nations with very large markets into global trade — like China and India — the relative balance of power has shifted away from multinational companies.
that the Chinese government still favors pirated software, as is reflected in its low levels of government purchases.
Computer software theft is just the tip of the iceberg. The entertainment software industry (e.g. video games), in which the United States leads, suffers from rampant piracy in China. Over 90% of video games consumed in China are pirated. But China doesn’t just copy them — it is a leading producer and exporter of pirated cartridge-based entertainment software.
Yet China is by no means the main offender. Russia also is a distribution center for pirated entertainment software into Central and Eastern Europe. Malaysia is a primary source of pirated CDs, DVDs and console games — with a capacity of producing over 300 million disks per year.
Editor's Note: This is first in a two-part series. Part II will appear on The Globalist tomorrow.
By Robert D. Atkinson | Thursday, May 29, 2008
With the balance of trade shifting from multinational corporations to large emerging markets — such as China and India — some nations have been tempted to turn to unfair practices to gain a trade advantage. As Robert D. Atkinson explains, these mercantilist practices are taking over knowledge- and technology-based industries.
When many of the trade enforcement tools were established by the U.S. Congress 30 or more years ago, the international trading regime was quite different than it is today. Services accounted for a small fraction of cross-border trade. A larger percentage of goods trade was in commodity-type products.
Many other nations — especially developed nations — focused their economic and trade policies on promoting natural resource production and commodity goods assembly. No nation — not even Japan — was so large that it could dictate terms of trade to multinational companies.
Managing the U.S. trade deficit
As a result, competition between nations for investment exerted at least some discipline on nations’ worst mercantilist impulses. And when countries erected mercantilist
Because the stakes are so much higher, nations have stronger motivations to employ complex and non-transparent means to gain an unfair advantage in the global trading system.
trade policies designed to unfairly gain competitive advantage, these usually consisted of tariffs, quotas or other relatively blunt means of protectionism that were easy to detect and confront. For example, in the 1970s and early 1980s, the Japanese government limited imports of semiconductors to no more than 10% of domestic consumption.
All of these factors worked to keep the U.S. trade deficit at relatively minimal levels.
Thirty years later, the global trading system is significantly different. With the rise of information technology and global communication networks, services trade has expanded significantly. While commodity-based goods are still traded, a growing share of goods trade is now in technology-based products.
Shift in the balance of power
And with the entry into the global trading system of nations with very large markets — like China and India — the relative balance of power has shifted away from multinational companies toward these nations, who increasingly use access to their huge and growing markets as leverage to dictate the terms of trade.
Moreover, a large share of nations, including developing nations, see the royal road to growth in shifting their economies more toward high value-added, innovation-based goods and services — the very sectors upon which the United States’ competitive advantage is based.
Unfair advantages
And indeed, a growing share of nations have turned to discriminatory mercantilist policies
If the United States is to maintain its advantage, we Americans will have to work for it — in part by boosting our innovation policies.
to gain jobs in those sectors, and in the process targeted U.S. technology jobs. Not surprisingly, the U.S. trade deficit has ballooned to record levels — as we have become the “importer of last resort” for most of the rest of the world.
Because the nature of trade has changed and because the stakes are so much higher, nations are able to employ a much wider array of complex and relatively non-transparent means of gaining unfair advantage in the global trading system — and they have much stronger motivations to do so.
In short, mercantilist trade policies have become the policy of choice for many nations.
Falling behind
The U.S. trade enforcement system has not kept pace with these changes — and it has failed to adequately respond to either the magnitude or the nature of the challenge.
As technology- and knowledge-based industries become a more important part of the global economy — and a key source of high-paying jobs — many nations have established policies to grow their technology industries. Many of these policies are quite legitimate and consistent with market-based competition.
An uphill battle
These include policies such as research and development (R&D) tax incentives, government investment in research, efforts
The United States is more dependent on protection of intellectual property (IP) than other nations. Over 50% of U.S. exports depend on some form of IP protection.
to increase education and skill levels (particularly in science and technology fields) — and spurring telecommunications development.
It would be one thing if that were all these nations were doing to compete for technology-based jobs. After all, there is nothing inherent about the United States’ competitive advantage in these sectors.
If the United States is to maintain its advantage, we Americans will have to work for it, in part by boosting our innovation policies — such as expanding the R&D tax credit and increasing support for federal research.
Skirting the rules
But the other nations’ efforts go far beyond legitimate and market-based innovation policies. Many have decided that to compete they have to erect a whole host of unfair and protectionist policies focused on systematically disadvantaging foreign, including U.S., companies in global competition.
Perhaps the most troubling part of this is that nearly all of the nations engaging in these unfair and distorting trade practices targeting U.S. technology leadership are members of the World Trade Organization (WTO). These nations made a free decision to join the WTO and when they did they agreed to reduce — if not end — mercantilist practices.
Both ends of the bargain
In fact, many of these nations saw membership in the WTO as an avenue to exporting to the
Over 90% of video games consumed in China are pirated. But China doesn’t just copy them — it is a leading producer and exporter of pirated software.
United States without committing to their responsibilities as WTO members. Here are a few tell-tale examples:
1. Tariffs: For example, The WTO’s 1997 Information Technology Agreement (ITA) was supposed to eliminate tariffs that distort trade flows on a wide variety of high-tech goods, including computers and telecommunications equipment.
Nevertheless, ten years after its passage, countries such as India and Indonesia still maintain tariffs on imported IT goods despite being signatories to the ITA — and maintaining high trade surpluses with the United States.
Europe and abroad
2. But it’s not just developing nations that are violating the letter and spirit of the ITA. The European Union has also decided that it must erect barriers to high-tech imports covered by the ITA. In recent years, it has been slapping tariffs as high as 14% on products — simply because companies have improved those products and added innovative features. These products include computer monitors and multi-function printers.
The argument that the EU makes for its tariffs is that these are new products and therefore they do not fall under the list of covered products under the ITA agreement. The real reason for their action is to erect a tariff wall so that high-tech production will move to economically disadvantaged regions of Eastern Europe.
The Office of the United States Trade Representative announced in late May 2008 that it intends to bring a case before the WTO on this issue.
Making exceptions
3. India applies a 12% excise duty on computers that local manufacturers (either domestic or foreign) can offset against their value-added taxes (VAT).
While commodity-based goods are still traded, a growing share of goods trade is now in technology-based products.
But foreign manufacturers are nonetheless at a disadvantage because they also pay a 4% countervailing duty (CVD), which the Indian government has specifically imposed to protect domestic computer manufacturers.
4. China recently created a tax scheme that blatantly violated the WTO when it applied a 17% VAT to both foreign and domestically produced integrated circuits (ICs) used in the semiconductor industry, and gave a rebate on most of the VAT only to companies producing ICs in China for export, but not to companies importing ICs.
Intellectual property
5. Intellectual Property Theft: As a net exporter of manufacturing know-how as intellectual property, the United States is more dependent on protection of intellectual property (IP) than other nations. Over 50% of U.S. exports depend on some form of IP protection, compared to less than 10% 50 years ago.
But this very strength is also a key vulnerability, for unlike physical property — which is relatively difficult to steal — IP theft or forced transfer is much easier. Many nations either turn a blind eye to IP theft or actually encourage it as a way to gain competitive advantage.
China is one of the most egregious violators. Not only does China fail to enforce its own intellectual property laws, but it also has implemented measures to block the trading and distribution rights of producers of U.S. entertainment products. Even the Chinese government continues to support theft of U.S. intellectual property.
Looking to China to uphold IP
For example, although China’s State Council ordered all government agencies to use only legal software in 1999, widespread lack of enforcement or monitoring ensures
With the entry of nations with very large markets into global trade — like China and India — the relative balance of power has shifted away from multinational companies.
that the Chinese government still favors pirated software, as is reflected in its low levels of government purchases.
Computer software theft is just the tip of the iceberg. The entertainment software industry (e.g. video games), in which the United States leads, suffers from rampant piracy in China. Over 90% of video games consumed in China are pirated. But China doesn’t just copy them — it is a leading producer and exporter of pirated cartridge-based entertainment software.
Yet China is by no means the main offender. Russia also is a distribution center for pirated entertainment software into Central and Eastern Europe. Malaysia is a primary source of pirated CDs, DVDs and console games — with a capacity of producing over 300 million disks per year.
Editor's Note: This is first in a two-part series. Part II will appear on The Globalist tomorrow.
ROI, Paulson's Plan, and the Rise of Neo-Mercantilism
ROI, Paulson's Plan, and the Rise of Neo-Mercantilism
As our government continues to recklessly spend its way into an increasingly larger debt, it's about time that American society embraces a different disposition towards government. For years, we've all heard "pro-government" versus "anti-government" arguments but this strikes me as nothing more than an exercise in ideological hogwash. Government is absolutely necessary in certain areas and not needed in others; it's difficult to dispute this. Moreover governments are a lot like corporations --- sometimes they are run well and sometimes not-so-much. Hence, "more government" or "less government" is not the correct question; rather, the following questions should be asked in regards to any policy proposal:
Can the government provide a service more efficiently than the private sector?
If the government can provide something more efficiently, does the government plan being proposed achieve that objective?
Does the government plan achieve the greatest societal return on investment [ROI]?
It's a mystery to me as to why the concept of ROI is constantly evoked in the business world, yet almost never used when evaluating government policies. If the government can complete a task more efficiently than the private sector, then by all means it should do so. If it cannot, it should keep away.
Unfortunately, our government has a rather dismal record of providing things in a cost-effective manner. In fact, I'd argue that one of the biggest problems with the American government is not that we pay "high" taxes --- rather it's that we pay high taxes and receive very little in return when compared to other nations with similar taxes. In essence, we get a very poor return on our investment.
The Paulson Plan
All this brings me to the Paulson bailout plan. Make no mistake about it --- this could potentially be the most radical change to American economic policy in the past few decades. Certainly PNTR and NAFTA have changed American society to a great extent, but neither seemed to change the mechanisms of American capitalism quite like this bailout plan might.
There has been a scary trend going on in government for quite a while. It only occasionally makes the front pages, but it's there all the same. Various American governments have increasingly been taking the risk away from the private sector without gaining any of the rewards. The most notable parallel is the stadium construction proposals that various cities, states, and localities have given out --- the major complaint about these proposals is that the private sector profits while the taxpayer receives the bill. In essence, it is a shifting of wealth from the taxpayers (who come from lower, middle, and upper income classes) to individuals that are already wealthy. Or to put it another way, it does not provide much of an ROI to taxpayers.
The Paulson bailout plan is a stadium construction plan on a grand scale --- the only difference is, the taxpayers don't even get a football team out of it. Instead, we are being asked to subsidize the losses of major financial institutions without receiving any of the benefits. To their credit, a majority Democratic Congress has at least tried to pressure the Administrator into a modified package that would give the taxpayers (via the U.S. Government) an equity interest in these financial institutions in exchange for the bad assets. However, even at that, this policy does signal a frightening acceptance of a doctrine of shifting risks to the taxpayers while most of the rewards remain in the private sector. To go back to our theme of government and ROI, I am not seeing how this plan creates the highest ROI for the taxpayers.
So What's the Rush?
Congress is being pressured by the Administration to rush through the proposal. Apparently, it's imperative to pass legislation that could have far-reaching ramifications on the American economy system for decades to come in a few days' time.
Haven't we seen this before? It has become a pattern that this Administration uses any and every crisis as an excuse for usurpation of power from the Legislative Branch. Yet, Congress keeps biting. It was irritating when a Republican Congress passively accepted Executive attempts to seize power from it (presumably on the basis of party loyalty), but it's going to be even more infuriating if a Democratic Congress allows the Administration to do the same thing to it. All the same, it wouldn't surprise me if that is exactly the way it goes.
Will It Even Work?
While I've already mentioned some of the negative socio-economic ramifications of this proposal, it's worth asking if this will even work? Are we going to spend $700 Billion of taxpayer money on a plan that has maybe a 50-50 chance of achieving its short-term objective? Let's not even focus on the long-term questions yet (which are numerous!). Senator Richard Shelby (R-AL) has echoed these concerns stating:
In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted and may actually cause the government to revert to an inadequate strategy of ad hoc bailouts.
Reading over various articles, it's very clear that this wide-reaching proposal that has the capacity to change the functioning of the American economic system for many decades to come is nothing more than a skeletal draft. We don't know if this proposal only deals with "mortgage-related assets" or any "troubled assets." Little thought has been given to the scope and there appears to be virtually no oversight. This proposal sounds a lot like trying to bake a cake by randomly grabbing the first ingredients you can find in the cabinet. And if your idea of a great cake involves vanilla icing, cayenne pepper, and horseradish sauce, maybe this plan seems like a great idea.
Long-Term Ramifications
In the short-term, the plan might work or it might not work. But even given a best-case scenario, what are the long-term ramifications? For starters, the plan will create even more inflationary pressures. That's a frightening thought given that Former Federal Reserve Chair Paul Volcker already believes the actual inflationary rate to be around 11% at the present time. Could the U.S. experience 20%+ inflation in the near future? It doesn't seem all that far-fetched. Better hoard up on precious metals!
Then there's that whole "housing bubble" thing. You see --- for some reason, Federal policymakers have convinced themselves that the problem is not ineffective market mechanisms that allow prices to become extremely out-of-whack with underlying valuations. Rather, we've heard from many policymakers that the real problem is that housing prices have gone down. Hence, the solution is to drive them back up. Yet, isn't this essentially the same boneheaded wisdom behind rent controls? Just because the government forces prices upwards does not mean, what we'll call the "market reality" for a lack of a better term, will necessarily follow.
Until the recent bursting of the bubble, it was no stretch to suggest that housing prices had gotten insane. Lower and middle income earners had an extremely difficult time affording housing in that environment. In a sense, the bursting of the housing bubble was the greatest thing to happen for a lot of people who couldn't afford things at the overpriced rates things were going for. The only reason prices skyrocketed upwards was because reckless lending practices were increasing demand to absurd levels.
With the bailout proposal, the Feds are sending the message to the lending institutions to start handing out loans without much of a care again. So in essence, if I read the Feds correctly, the problem wasn't the nature of a system that encouraged reckless lending practices, drove housing prices sky-high, and created a bubble that was bound to burst. Rather, the problem was that the Feds did not come up with policies that allowed the bubble to stay artificially inflated for all of eternity.
So here we are with a bailout proposal that attempts to reinflate the bubble. Another 3, 5, 10 years down the road, the thing merely bursts again and it's even worse than it was this go around because we have a government that refuses to address underlying issues, only thinks in short-term, and is more concerned about symbolic reform that makes the national airwaves rather than fixing real problems in our society.
The Rise of Neo-Mercantilism
To be sure, the short-sighted economic policies of our government have put us in a lose-lose situation and, at this point in time, all that is left is to find the least-worst solution. Yet, the Paulson plan seems far, far from that. Rather, it affirms a dangerous trend of redistributing wealth via taxpayer monies to a class of people that are already wealthy. It's yet another step towards destroying the American middle class. And without the American middle class, the American economy suddenly becomes only a fragment of what we have become accustomed to in the not-so-distant past.
What's even worse is that the plan completely undermines basic market mechanisms like risk-reward. This isn't a simple tweak to the system like Paulson suggests --- rather, this is a shift towards an alternate system. Some have called it "socialism" --- a strange misnomer since socialism involves the working class taking power and essentially redistributing wealth to the lower and middle classes. This isn't socialism at all, but history does reveal a somewhat similar system we used in the past.
Remember mercantilism? It was an early form of capitalism where the government and certain business interests acted in concert. Government established monopolies and hindered real competition with policies that favored certain interests over others. It was this exact system that Adam Smith criticized in The Wealth of Nations for the extreme inefficiencies that resulted. Yet, we appear to officially be entering an age of neo-mercantilism here in America.
The Alternatives
If we are indeed in a lose-lose situation, what are we to do? There seem to be few good options. We could keep government out of this, let the institutions that fail go ahead and do so and ride this out. One way or another, we are going to have to suffer the consequences. It might take a few years to see the light, but contrary to what some suggest, I believe we will emerge eventually.
Another plan I am intrigued by is one mentioned by Seeking Alpha blogger Jason Lindt. His plan calls for a Reconstruction Finance Corporation that invests in preferred stock of financial institutions, which would increase their capital cushions and potentially allow them to ride this thing out. While this still gets into the sphere of government investing in companies, it is an infinitely less intrusive plan than Paulson's, it would probably cost much less, and it makes a whole lot more sense. Though, I worry more about the second part of his plan since it would seem to reinflate housing prices to some extent.
Regardless, if the government is going to create a plan, it needs a much more cost-efficient and well thought out plan than Paulson's. We can't simply rush forward a plan that radically changes the American economic system while giving little thought to the ramifications.
Conclusions
The Paulson proposal increases our Federal debt substantially without guaranteeing any real return. The question we all as taxpayers should be asking is whether or not we will see a good return on our investment. If we adopt Paulson's original version, the answer is undoubtedly no! The Democratic proposal is a bit iffier since the taxpayers would at least own an equity interest in these companies. However, even that modified plan seems too expensive and way too intrusive. We should consider alternative plans that are not quite as intrusive to market mechanisms such as the Lindt plan.
The Paulson plan also seems to signal a dangerous shift away from liberal market mechanisms into an age of neo-mercantilism. This should concern both American conservatives (destruction of Smith's Liberalism) and American liberals (since the system naturally favors certainly wealthy interests at the expense of largely lower and middle income taxpayers). While it's unlikely we'll all line up around the country while holding hands and decide to agree everything, certainly we should agree that a government that takes our taxpayer monies and distributes it out to already-wealthy individuals who have shown a reckless disregard for managing that money in the past does not provide us with much of an efficient return on our own investment.
H.J. Huneycutt
http://seekingalpha.com/article/97155-roi-paulson-s-plan-and-the-rise-of-neo-mercantilism
As our government continues to recklessly spend its way into an increasingly larger debt, it's about time that American society embraces a different disposition towards government. For years, we've all heard "pro-government" versus "anti-government" arguments but this strikes me as nothing more than an exercise in ideological hogwash. Government is absolutely necessary in certain areas and not needed in others; it's difficult to dispute this. Moreover governments are a lot like corporations --- sometimes they are run well and sometimes not-so-much. Hence, "more government" or "less government" is not the correct question; rather, the following questions should be asked in regards to any policy proposal:
Can the government provide a service more efficiently than the private sector?
If the government can provide something more efficiently, does the government plan being proposed achieve that objective?
Does the government plan achieve the greatest societal return on investment [ROI]?
It's a mystery to me as to why the concept of ROI is constantly evoked in the business world, yet almost never used when evaluating government policies. If the government can complete a task more efficiently than the private sector, then by all means it should do so. If it cannot, it should keep away.
Unfortunately, our government has a rather dismal record of providing things in a cost-effective manner. In fact, I'd argue that one of the biggest problems with the American government is not that we pay "high" taxes --- rather it's that we pay high taxes and receive very little in return when compared to other nations with similar taxes. In essence, we get a very poor return on our investment.
The Paulson Plan
All this brings me to the Paulson bailout plan. Make no mistake about it --- this could potentially be the most radical change to American economic policy in the past few decades. Certainly PNTR and NAFTA have changed American society to a great extent, but neither seemed to change the mechanisms of American capitalism quite like this bailout plan might.
There has been a scary trend going on in government for quite a while. It only occasionally makes the front pages, but it's there all the same. Various American governments have increasingly been taking the risk away from the private sector without gaining any of the rewards. The most notable parallel is the stadium construction proposals that various cities, states, and localities have given out --- the major complaint about these proposals is that the private sector profits while the taxpayer receives the bill. In essence, it is a shifting of wealth from the taxpayers (who come from lower, middle, and upper income classes) to individuals that are already wealthy. Or to put it another way, it does not provide much of an ROI to taxpayers.
The Paulson bailout plan is a stadium construction plan on a grand scale --- the only difference is, the taxpayers don't even get a football team out of it. Instead, we are being asked to subsidize the losses of major financial institutions without receiving any of the benefits. To their credit, a majority Democratic Congress has at least tried to pressure the Administrator into a modified package that would give the taxpayers (via the U.S. Government) an equity interest in these financial institutions in exchange for the bad assets. However, even at that, this policy does signal a frightening acceptance of a doctrine of shifting risks to the taxpayers while most of the rewards remain in the private sector. To go back to our theme of government and ROI, I am not seeing how this plan creates the highest ROI for the taxpayers.
So What's the Rush?
Congress is being pressured by the Administration to rush through the proposal. Apparently, it's imperative to pass legislation that could have far-reaching ramifications on the American economy system for decades to come in a few days' time.
Haven't we seen this before? It has become a pattern that this Administration uses any and every crisis as an excuse for usurpation of power from the Legislative Branch. Yet, Congress keeps biting. It was irritating when a Republican Congress passively accepted Executive attempts to seize power from it (presumably on the basis of party loyalty), but it's going to be even more infuriating if a Democratic Congress allows the Administration to do the same thing to it. All the same, it wouldn't surprise me if that is exactly the way it goes.
Will It Even Work?
While I've already mentioned some of the negative socio-economic ramifications of this proposal, it's worth asking if this will even work? Are we going to spend $700 Billion of taxpayer money on a plan that has maybe a 50-50 chance of achieving its short-term objective? Let's not even focus on the long-term questions yet (which are numerous!). Senator Richard Shelby (R-AL) has echoed these concerns stating:
In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted and may actually cause the government to revert to an inadequate strategy of ad hoc bailouts.
Reading over various articles, it's very clear that this wide-reaching proposal that has the capacity to change the functioning of the American economic system for many decades to come is nothing more than a skeletal draft. We don't know if this proposal only deals with "mortgage-related assets" or any "troubled assets." Little thought has been given to the scope and there appears to be virtually no oversight. This proposal sounds a lot like trying to bake a cake by randomly grabbing the first ingredients you can find in the cabinet. And if your idea of a great cake involves vanilla icing, cayenne pepper, and horseradish sauce, maybe this plan seems like a great idea.
Long-Term Ramifications
In the short-term, the plan might work or it might not work. But even given a best-case scenario, what are the long-term ramifications? For starters, the plan will create even more inflationary pressures. That's a frightening thought given that Former Federal Reserve Chair Paul Volcker already believes the actual inflationary rate to be around 11% at the present time. Could the U.S. experience 20%+ inflation in the near future? It doesn't seem all that far-fetched. Better hoard up on precious metals!
Then there's that whole "housing bubble" thing. You see --- for some reason, Federal policymakers have convinced themselves that the problem is not ineffective market mechanisms that allow prices to become extremely out-of-whack with underlying valuations. Rather, we've heard from many policymakers that the real problem is that housing prices have gone down. Hence, the solution is to drive them back up. Yet, isn't this essentially the same boneheaded wisdom behind rent controls? Just because the government forces prices upwards does not mean, what we'll call the "market reality" for a lack of a better term, will necessarily follow.
Until the recent bursting of the bubble, it was no stretch to suggest that housing prices had gotten insane. Lower and middle income earners had an extremely difficult time affording housing in that environment. In a sense, the bursting of the housing bubble was the greatest thing to happen for a lot of people who couldn't afford things at the overpriced rates things were going for. The only reason prices skyrocketed upwards was because reckless lending practices were increasing demand to absurd levels.
With the bailout proposal, the Feds are sending the message to the lending institutions to start handing out loans without much of a care again. So in essence, if I read the Feds correctly, the problem wasn't the nature of a system that encouraged reckless lending practices, drove housing prices sky-high, and created a bubble that was bound to burst. Rather, the problem was that the Feds did not come up with policies that allowed the bubble to stay artificially inflated for all of eternity.
So here we are with a bailout proposal that attempts to reinflate the bubble. Another 3, 5, 10 years down the road, the thing merely bursts again and it's even worse than it was this go around because we have a government that refuses to address underlying issues, only thinks in short-term, and is more concerned about symbolic reform that makes the national airwaves rather than fixing real problems in our society.
The Rise of Neo-Mercantilism
To be sure, the short-sighted economic policies of our government have put us in a lose-lose situation and, at this point in time, all that is left is to find the least-worst solution. Yet, the Paulson plan seems far, far from that. Rather, it affirms a dangerous trend of redistributing wealth via taxpayer monies to a class of people that are already wealthy. It's yet another step towards destroying the American middle class. And without the American middle class, the American economy suddenly becomes only a fragment of what we have become accustomed to in the not-so-distant past.
What's even worse is that the plan completely undermines basic market mechanisms like risk-reward. This isn't a simple tweak to the system like Paulson suggests --- rather, this is a shift towards an alternate system. Some have called it "socialism" --- a strange misnomer since socialism involves the working class taking power and essentially redistributing wealth to the lower and middle classes. This isn't socialism at all, but history does reveal a somewhat similar system we used in the past.
Remember mercantilism? It was an early form of capitalism where the government and certain business interests acted in concert. Government established monopolies and hindered real competition with policies that favored certain interests over others. It was this exact system that Adam Smith criticized in The Wealth of Nations for the extreme inefficiencies that resulted. Yet, we appear to officially be entering an age of neo-mercantilism here in America.
The Alternatives
If we are indeed in a lose-lose situation, what are we to do? There seem to be few good options. We could keep government out of this, let the institutions that fail go ahead and do so and ride this out. One way or another, we are going to have to suffer the consequences. It might take a few years to see the light, but contrary to what some suggest, I believe we will emerge eventually.
Another plan I am intrigued by is one mentioned by Seeking Alpha blogger Jason Lindt. His plan calls for a Reconstruction Finance Corporation that invests in preferred stock of financial institutions, which would increase their capital cushions and potentially allow them to ride this thing out. While this still gets into the sphere of government investing in companies, it is an infinitely less intrusive plan than Paulson's, it would probably cost much less, and it makes a whole lot more sense. Though, I worry more about the second part of his plan since it would seem to reinflate housing prices to some extent.
Regardless, if the government is going to create a plan, it needs a much more cost-efficient and well thought out plan than Paulson's. We can't simply rush forward a plan that radically changes the American economic system while giving little thought to the ramifications.
Conclusions
The Paulson proposal increases our Federal debt substantially without guaranteeing any real return. The question we all as taxpayers should be asking is whether or not we will see a good return on our investment. If we adopt Paulson's original version, the answer is undoubtedly no! The Democratic proposal is a bit iffier since the taxpayers would at least own an equity interest in these companies. However, even that modified plan seems too expensive and way too intrusive. We should consider alternative plans that are not quite as intrusive to market mechanisms such as the Lindt plan.
The Paulson plan also seems to signal a dangerous shift away from liberal market mechanisms into an age of neo-mercantilism. This should concern both American conservatives (destruction of Smith's Liberalism) and American liberals (since the system naturally favors certainly wealthy interests at the expense of largely lower and middle income taxpayers). While it's unlikely we'll all line up around the country while holding hands and decide to agree everything, certainly we should agree that a government that takes our taxpayer monies and distributes it out to already-wealthy individuals who have shown a reckless disregard for managing that money in the past does not provide us with much of an efficient return on our own investment.
H.J. Huneycutt
http://seekingalpha.com/article/97155-roi-paulson-s-plan-and-the-rise-of-neo-mercantilism
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