Beggar-thy-neighbour banking Export credit agencies are an enduring instrument of mercantilism

Jul 5th 2014 | From the print edition

FOR most of its 80 years, America’s Export-Import Bank has laboured in obscurity, providing loans, loan guarantees and credit insurance to foreign buyers of American products from jumbo jets to quiche. All of a sudden, it is in the spotlight: Tea Party conservatives have declared it to be the embodiment of corporate welfare. Republicans are threatening to block reauthorisation of the bank when its mandate expires on September 30th.

The fight over ExIm has drawn rare attention to one of the most pervasive and enduring instruments of mercantilism in the world trading system. Export-credit agencies got their start early last century. Britain’s, established in 1919, was part of an effort to improve its balance of payments and thus return to the gold standard. America’s ExIm Bank was originally conceived as an instrument of foreign policy, to provide leverage over the Soviet Union and support for Cuba.
The global financial crisis gave such banks a new lease of life. When banks pulled back from trade finance after Lehman Brothers collapsed in 2008, governments prodded their export agencies to fill the gap to prevent a bigger fall in trade volumes. Official export credit extended by the G7 alone soared from $35 billion in 2007 to $64 billion in 2009, and has remained around those levels since (see chart below).

Subsidised loans for exports have long been recognised as a form of mercantilism, which is why rich countries struck a gentlemen’s agreement in 1978 to curb them. Signatories to the “OECD arrangement” agree to maximum loan maturities, commercially-based interest rates and minimum risk premiums for insurance. When one signatory strikes a financing deal, it notifies the others, giving them the opportunity to match the terms.

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Free exchange: Fluid dynamics

America’s famously flexible labour market is becoming less so

Aug 30th 2014 | From the print edition

AT FIRST glance, the labour markets in America and Europe could not be more different: in the former unemployment has fallen steadily since 2010, while in the euro zone, it is still close to an all-time high. Not surprisingly, Janet Yellen, the chairman of the Federal Reserve, and Mario Draghi, the president of the European Central Bank, struck very different notes at an annual economic conference held in Jackson Hole, Wyoming, in late August. Ms Yellen made it clear the Fed is debating how close the economy is to full employment and thus how soon rates, currently near zero, should rise. Mr Draghi, in contrast, hinted that more measures to stimulate the European economy are in the offing.Yet Ms Yellen, Mr Draghi and many other central bankers at the conference share a common concern: their labour markets are bifurcating into secure, predominantly skilled jobs on the one hand and insecure, mostly unskilled work on the other. The fear is that the split is due to inflexible labour markets that make it hard to climb up the job ladder.Historically, Europe and Japan have suffered more from inflexible labour markets. In Spain, for example, centralised wage bargaining and other protections for workers made it difficult for employers to sack permanent employees or cut their wages (these rules were recently eased). Instead, firms hired armies of temporary workers, who bore the brunt of the massive job losses that began in 2007. Similarly, the prevailing system of “lifetime” employment made it hard to reduce labour costs when deflation ate into Japanese firms’ profits. They have responded by making ever greater use of part-time workers with few protections.

Bandwagon behaviour: Why missing out on one job application is bad news for your chances in the next

Jul 20th 2013 |From the print edition

[Greg Ip] A TRULY informed diner would choose a restaurant based on the quality of the menu and the chef’s experience. The discerning investor would decide which company to back after studying the business plan and meeting the founders. In reality, people often copy the choices of others. Diners pick the crowded restaurant over the empty one. Investors go with the company that already has multiple backers.

Such bandwagon effects are not necessarily irrational. Often, the buyer knows less about a product than the seller; the collective wisdom of the crowd can correct for such “asymmetric information”. It can also be a way of coping with a surplus of choice: rather than study 100 models of music player, why not assume the market has already figured out the duds?
The existence of bandwagon behaviour can be hard to prove. A product or an asset usually becomes popular (or unpopular) in the first place because it is genuinely superior (or inferior). But some have tried to isolate the self-fulfilling effects of popularity. One 2004 study* by Alan Sorensen, now of the University of Wisconsin, examined accidental omissions from the New York Times bestseller list. By comparing the sales of books that did make the list and unlisted books that should have, the author could isolate the effect of inclusion—a modest boost to first-time authors’ sales. In a 2008 study by Matthew Salganik of Princeton University and Duncan Watts, now at Microsoft Research, participants tricked into believing a song was more popular than it actually was were more likely to download it.

Scholars are now asking whether herd behaviour also prevails in labour markets.

Where did everyone go?

Demography may explain the weakness of America’s recovery

Mar 23rd 2013 |From the print edition
[Greg Ip] MILTON FRIEDMAN once compared the business cycle to an elastic string stretched on a board. How far the string is plucked determines how much it springs back; similarly, the depth of a recession decides the strength of recovery. America’s recent experience has not been kind to the plucking model. Although the recession was the deepest since the second world war, the recovery has been a disappointment. In the three years since the end of the recession in mid-2009, growth averaged 2.2%, barely half the 4.2% average of the seven previous recoveries.

In part, this is because recoveries from financial crises face greater difficulties. Consumers are too much in debt; businesses cannot or will not spend; a damaged banking system stifles credit. But in its annual economic report, issued on March 15th, Barack Obama’s Council of Economic Advisers argues that this is not the whole story. The plucking model presumes that after a recession, the economy returns to an underlying trend rate of growth that is determined by the supply of workers, capital and technology. Mr Obama’s economists argue that the trend is now much lower than in the past. The recovery, then, is not nearly as disappointing as it is often portrayed; Americans have set their sights too high.

How to solve the fiscal cliff: The Obamney tax plan

Nov 8th 2012, 23:33 by G.I. | WASHINGTON, D.C.

This post has been updated.

PRESIDENTS choose their words carefully. So when Barack Obama talked of  “tax reform” but not “tax rates” in his acceptance speech early Wednesday, he was presumably sending a signal. And it was similarly significant that later that day John Boehner repeatedly stated his opposition to higher tax “rates” rather than tax revenue.

Within those two statements lies the nucleus of a deal: raising tax revenue through some means other than higher tax rates.

Free exchange: Game, set and match

Alvin Roth and Lloyd Shapley have won this year’s Nobel for economics

Oct 20th 2012 | from the print edition

[Greg Ip] IN MOST countries it is illegal to buy or sell a kidney. If you need a transplant you join a waiting list until a matching organ becomes available. This drives economists nuts. Why not allow willing donors to sell spare kidneys and let patients (or the government, acting on their behalf) bid for them? The waiting list would disappear overnight.

The reason is that most societies find the concept of mixing kidneys and cash repugnant. People often exclude financial considerations from their most important decisions, from the person they marry to the foster child they adopt. Even some transactions that do involve money are not really about price. Universities in America do not admit students based on who pays the most, for example. Rather, they select students based on complex criteria that include grades, test scores and diversity. Similarly, students choose their university on more than just financial factors.

Money is not essential to a market. After all, economics is about maximising welfare, not GDP. But the absence of a price to allocate supply and demand makes it harder to know whether welfare is being maximised. This year’s Nobel prize in economics went to two scholars—Alvin Roth, who has just joined the economics department at Stanford University, and Lloyd Shapley, a retired mathematician at the University of California, Los Angeles—who have grappled with that very problem.

Financial markets: Solvency can wait, for now deal with liquidity

Sep 15th 2011, 16:12 by G.I. | WASHINGTON

[Greg Ip] CENTRAL banks are once again coming to the financial system’s rescue. In a move coordinated with its counterparts in America, Japan, Switzerland and Britain, the European Central Bank today announced it would make special, three-month dollar loans to euro-zone banks to cover funding needs over the year-end.

This has delivered a shot in the arm to European stock markets, and bank stocks in particular. European banks regularly borrow in dollars to make dollar loans and finance dollar-denominated inventory. But concerns about the banks’ solvency should their holdings of peripheral sovereign debt sour have prompted the American money market funds and others who lend to the banks to pull back. European banks have lost access to $700 billion in dollar funding in the last year, according to this excellent analysis in today’s Wall Street Journal.

Today’s operation is a bandage, not a cure.

The politics of Medicare: Medicare has a lemons problem

May 25th 2011, 21:53 by G.I. | WASHINGTON

THERE are many problems with Paul Ryan’s budget and his plans for Medicare, but for Democrats, one is paramount: it is unpopular. His proposal initially put Democrats on the back foot, but within days they took heart as press commentary and polls turned negative. Mr Ryan’s plan, they concluded, was an electoral gift. That culminated in the upset victory by Kathy Hochul, a Democrat, in a predominantly Republican New York district in a special congressional election rightly seen as a referendum on RyanCare.

At the Peterson Foundation’s fiscal summit this morning, Mr Ryan complained that Democrats “are shamelessly demagoguing and distorting” his budget. It’s hard not to smile. As James Kwak thoughtfully reminds us with some choice press releases from Mitch McConnell, this is precisely how Republicans captured the elderly vote in last November’s midterms. Old folks, they said, would have their care rationed, and treatment decisions left to a cruel committee of unelected bureaucrats (the Independent Payment Advisory Board, which they have vowed to repeal).

Mr Ryan’s critics, however, should curb their schadenfreude.

Paul Ryan, deficit hawk or dove?

Jan 7th 2011, 23:06 by G.I. | WASHINGTON, DC

[Greg Ip] FOR politicians, power is usually its own reward. But doing the right thing sometimes comes at the expense of power, which means they need other incentives, too. This seems to be the thinking behind the “FI$CY“, awarded to policymakers who lead “on confronting our fiscal challenges.”

The Committee for a Responsible Federal Budget, the Comeback America Initiative and the Concord Coalition handed out the awards Wednesday night. Two of the three recipients make sense: Mitch Daniels, Indiana’s Republican governor, has balanced his state’s budget with tough but judicious spending cuts and tax increases. Kent Conrad, the long-serving Democratic chairman of the Senate Budget Committee, was a driving force behind what eventually became the Bowles-Simpson deficit commission.

The third choice, Paul Ryan, is more of a puzzle.

Read the entire post here.

Response to Meltzer on Depression comparisons

 

Unlike any since the Depression

Posted by:

The Economist l WASHINGTON

Categories:

Monetary policy

[Greg Ip] IN MY many years of reporting on the Federal Reserve, I have turned more times than I can count to Allan Meltzer. Volume One of his history of the Federal Reserve (he’s still working on Volume Two) is one of the most thumbed books on my shelf, and I consider him one of the leading authorities on 20th century economic history. Naturally I was intrigued by his criticism of comparisons between the current period and the Great Depression in the Wall Street Journal.

It’s a fascinating piece but I have several qualms with it.