The year of the two-faced internet

I've written about the importance of internet transparency before. It's an issue that does not get nearly enough attention; unless of course international reporters find themselves blocked from websites in Beijing.

Should we really be surprised that the Chinese reneged on their promise to allow reporters unfettered use of the internet? These games have been plagued by contradictions and abuses on the part of Chinese officials before they have even begun. But to say that "banned topics were not part of the athletic events and should not be of interest to reporters anyway" is simply beyond ridiculous.

Chinese nationalism is gaining power with assertions of economic independence and political obstinacy. Neither of these are bad things in themselves but when they inspire autocratic party officials to say anything for gain only to later reverse course then action is needed. Ignoring international opinion is one thing; to spit in its face is another. Continuing coverage simply increases the Chinese officials sense of entitlement and invincability. Print and electronic journalists should pull out and let the games flop on their own images.

Who wants to see choking runners anyway?

Dr. No (or, the future of multilateral trade)

As I mentioned a couple days ago (and gave updates on all last week), the "make or break" talks to save the Doha Round collapsed this week. There is a lot of doom and gloom about the WTO's future here and here and here and here and here and here... and, uh, about 3,000 other places. Without being overly repetitive, I have a few thoughts to add.

First, this is not doomsaying, this really is a big deal: in the entire history of post-war multilateral trade negotiations, we've never had a negotiating round collapse. Perhaps more notably, this was the first time that a round was negotiated under the new organizational structure of the WTO, not the more fluid and less-institutionalized structure of the GATT. Doha's collapse will fuel criticisms that the WTO's structure makes it very hard to do deals.

Second, as much as I respect China and India for playing hardball in trade negotiations, this collapse strikes me as a short-sighted and quite likely Pyrrhic victory for both of them. At the end of the day, both of these countries have relatively open economies and need the certainty of market access that the WTO and its dispute settlement procedure provide. Furthermore, despite the obvious legalistic and economic undertones, trade negotiations are still fundamentally diplomatic negotiations. I don't think this sort of behavior positions either country well in future trade talks, be they regional or otherwise, and I suspect that the perception of recalcitrance will not disappear quickly. Side note: I do still think that India's trade minister Kamal Nath has the coolest nickname of any trade diplomat ever: Dr. No, because, well, he liked to say 'no' a lot.

Third, I am rather pessimistic about the WTO's future. Failure to perform is one thing, but failure to perform when there is a perceived viable alternative in the shape of regional trade agreements (RTAs) is quite another. I have said before that RTAs (or FTAs or PTAs) are a dangerous substitute for multilateral free trade, a bit like taking infomercial diet pills instead of going to the gym every day. I understand the political economy arguments for RTAs very well, but I do not think they pass muster. This is a subject I hope to explore this weekend.

To continue with the WTO, however, I agree with Clive Crook that the most likely outcome of Doha's failure is a gradual marginalization of multilateral trade over the next 10 - 15 years. As I'm arguing in the dissertation that I hope to have done by next week, the WTO's institutional legitimacy in the next few years now hinges on litigation through Dispute Settlement Understanding (DSU). If, and this is a big if, the DSU continues to deliver quality and sophisticated resolution for trade disputes, it provides a good reason for the WTO's continued relevance and might buy negotiators enough time to reconvene in a few years and find a new way forward.

This is unlikely to be enough, however. And speaking of Dr. No, one of Mr. Bond's most famous lines from that movie probably applies to the WTO in its current state: "That's a Smith and Wesson. And you've had your six."

Creating an evolution?

For anyone who's been paying attention there's a fascinating dialogue going on. Creative Capitalism was spurred by a charge Bill Gates gave during a recent speech in Davos.

While the exact meaning of the term and his exact aims are somewhat unclear, the exchange between preeminent economists has bridged topics from morality and ethics to politics and development. The forum dedicates a lot of time to ideas that seem to fall between philanthropy, charity, and Corporate Social Responsibility. Depending on who is piping up, corporations have a variety of obligations that range from saving the world to simply maximizing profits.

Personally I think that Paul Ormerod (a la Hayek) comes closest to pinning down what is really at stake here. There is no such thing as a completely free market. Whether it is some type of government intervention (which exists on at least some small level in every transaction) or a cultural preference, capitalism (or any political or economic system for that matter) advances not by analysis and planning but evolution and experiment.

At a time when everyone seems to be clamoring about inequality and global development, this is a most welcome experiment.

Pakistani doubletalk

I've discussed the importance and role of Pakistan in South Asia before. Now CIA officials are taking a hard line with the ISI (Pakistan's intelligence agency) regarding their involvement with militant groups. Prime Minister Yousaf Raza Gilani has denied the supposed links.

The ISI ran arms to the Mujaheddin and other Afghans fighting against the Soviets. Back then it was with CIA backing, but Pakistan retains a vested interest in being seen as an ally of whatever group grabs power in Afghanistan. The new coalition government wants to see democracy thrive in Afghanistan. It would promote peace and stability within Pakistan and increase their international standing. But their porous border in the FATA region prevents any such events. The ISI could certainly, with CIA help, close this border, or at least tighten it. But there are factions of the ISI that are more than happy to assist the Taliban in their various nefarious activities, and take a nice cut off the top. In addition to this, the military men running the ISI are hedging their bets by supporting both sides of the power struggle in Afghanistan. They are stuck in an outdated mindset and hoping for an Afghan ally, regardless of who is in power, to counter the perceived threat from India.

I've said it before and I'll say it again. The stability of Afghanistan and the entire region is hinged on a working relationship between Afghanistan, India, and Pakistan. The US is right to force the ISI's hand and demand a legitimate and appropriate response. But military and intelligence aspects must be tempered by transparent, civil structures. We should be encouraging, and diplomatically maneuvering for, civilian control of the ISI. Counter-terrorism requires a civilian, not military, response. We should help Pakistan in developing just that.

Doha talks have collapsed

The Doha talks collapsed today because the US, China, and India could not reach an agreement on agriculture.

Oil is fungible

FP Passport is drawing the wrong conclusions about the graphic accompanying today's story in the Washington Post about global oil production. (see right; source: Washington Post) FP writes: 

First, despite repeated calls to wean America off Middle Eastern oil, the United States actually imports most of its foreign oil from our friendly neighbors to thenorth and south. Also, while we hear countless warnings of China's impending rise and the impact growing Chinese demand will have on oil markets, the U.S. still imported nearly four times more oil than China in 2007.

There are a couple problems with this analysis. First, it doesn't matter who the United States buys oil from, because oil is a fungible commodity, which essentially means that all units of oil are substitutable no matter where they come from. Once refined, oil from Canada is the same as oil from Saudi Arabia. Thus, even if we buy our oil from Canada, another country that wants oil will have to get theirs from Saudi Arabia. Put another way, if Canada decided to stop selling us oil, it wouldn't harm the US as long as they sold it to someone else (let's say Australia.) This would mean that the overall global supply of oil remains constant, and the US could then just buy oil from another producer instead, perhaps whoever was selling to Australia before they started buying from Canada. Back in February, Hugo Chavez made this same mistake about his ability to play hardball when he threatened to stop selling Venezuela's oil to the US.

What does matter is how much oil is actually for sale globally (supply) and what proportion of this the US actually buys (consumption). Our consumption drives up the overall demand for oil, which includes demand for oil from the Middle East.

Second, of course the United States imported four times as much oil as China in 2007. We are the richest, most industrialized country in the world, and they are not. But they're growing rapidly, and the point is that as China industrializes, it increases the total global demand for oil, which creates upward price pressure. It also raises the future price of oil, as traders bet that China's oil consumption needs will grow as it further industrializes (that's a pretty solid bet.) In short: American oil needs + China's oil needs + future perceptions about these two countries' oil needs = higher oil prices.

Credit freeze

The New York Times reported today that many banks and financial institutions are reducing business loans. This sounds justified given the IMF's most recent report that credit risk remains elevated. There is no doubt that the sub-prime mess has spread through the economy. But personal loans should and have been tightened; they contribute little to economic growth unless in the form of overvalued housing prices or discretionary purchases. To tighten access to capital for businesses is a worrying step. This constrains the private sector expansion and innovation that contributes to overall economic growth.

But despite my views on what it may do to growth, for banks that haven't been bailed out this is probably a wise move. They should be allowed to navigate the credit crisis in what they see as a responsible and fit manner for themselves and their shareholders. But banks that were "too large to fail", and rightfully bailed out, should at least be forced to give the government a seat at the table and this is a perfect example. The current crisis and new environment present a ripe opportunity to overhaul the regulatory framework. Cyclical ups and downs will not be relegated to the past but new regulation may mitigate the impacts of future downturns to one sector or aspect of the economy.

Regulation does not have to mean outright control or even lower profits. If government officials (or at least Fed overseers - partisan ideas should not be involved) were given a short term advisory and observatory role, new rules may be drawn up in a compromised manner. This temporary set up would preclude any delusions about a new waves of GSEs and result in a new class of government wonks uniquely suited to draw up and implement new regulation based on inside understanding and access to financial and bank executives.

Economic crises require new regulation and ideas to prevent misatkes from recurring. Ideology can only carry one so far; let's hope pragmatism follows.

Economics and cable news just don't mix

I've been watching more cable news than is probably healthy since I moved back to the US. What can I say: every day is a new struggle to put off writing my dissertation. Anyways, one thing that I've noticed in particular is that the cable news format is atrocious for discussing economic news. As is such, I feel compelled to comment on two issues that I saw today:

1. The price of oil: CNN's economic "experts' have been cheering as the price of oil continues to tumble. Light Sweet Crude for September delivery is trading around $124.70 on the NYMEX. Today, they even had a poll asking whether viewers would go back to their old driving habits now that the price of gas is falling again. Easy there, CNN: oil's price fundamentals are still pointing up and any reversals may well be temporary. These days, there is high volatility within oil markets and price swings within wide margins are likely to become the norm. Oil prices may be down temporarily, but there is no evidence at this point that they'll stay down. Don't buy that new Hummer just yet.

2. The budget deficit: All the major cable networks are giving a lot of play to the new US deficit figures, the largest ever at $482 billion. Democrats are screaming bloody murder at GWB. Republicans are blaming Democrats. I don't like to take sides on things like this, but this is an election year and the Dems are really overreacting. Don't get me wrong: deficits do matter, in the sense that they signify that the government is spending more money than it is taking in. But the size of the deficit as a percentage of GDP is more important than the overall figure. Right now, the deficit is at 3.3% of GDP, compared with highs of 6% in the early 1980s. By comparison, I borrowed roughly 100% of my "personal GDP" last year to finance graduate school. Granted, this was an investment in future earnings, but many people wouldn't bat an eye at credit card bills that were higher than 3% of their yearly salary.

However, the government's budget deficit in any given year is far less important than the overall national debt, which is the total amount that the government owes from all of the times it has borrowed money to finance expenses. Again, it's important to consider this figure in relation to the GDP and GDP growth. This metric suggests that the debt isn't historically bad or unsustainable at its current level (see graph above. Source: Wikipedia.)

Enjoy cable news, but please enjoy responsibly.

Inflation woes

The Central Bank of Zimbabwe is set to lop some more zeroes off the Zimbabwe dollar. They knocked off three back in 2006, and this round is set to see another 3-6 zeroes get the chop. Excuse this humble commentator for his cynicism, but when the annual rate of inflation is above 2.2 million per cent, this isn't going to help much. It will likely improve transaction efficiency for a short period of time, but unless Zimbabwe takes some concrete steps to rein in inflation, sooner than later the currency will be just as worthless as it is today.

Venezuela tried this trick last year, when it introduced the Strong Bolivar, which President Hugo Chavez promised would help curb inflation. A 'Strong' Bolivar is essentially just a normal Bolivar, Venezuela's unit of currency, with three zeroes lopped off. Unfortunately, Venezuelan inflation has actually gotten worse since then, reaching 32% in Caracas in the month of June.

I wrote last month about how inflation is fast becoming a major financial worry. This is especially true in developing countries and emerging markets . As painful as the medicine may be, now is the time when such countries should be prioritizing inflation control over economic growth. The short term losses are undesirable, but the long term dangers are too real to ignore. Keynes said it best:

As inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundations of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

It's troubling when there exists such chronic financial mismanagement in economies like Venezuela and Zimbabwe, which could both be in much better shape than they are. But they're not, and unfortunately it is the citizens of those countries who pay the highest price for that.

Comment of the week

We here at Zeitgeist appreciate insight. We also really like humor. So without further ado, here's our comment of the week: Dave, on the origins of North America's work ethic:

The work ethic partly derives from the people who colonized North America: the northern European Protestants, Calvinists, 'Stiff-upper-lippers' and puritans of all stripes. One does not start up a farm in Iowa or Saskatchewan without some appreciation for 'good old-fashioned hard work.'
Granted, the French had a toe-hold briefly, but the 35hr workweek for soldiers proved disastrous.

Die another day

The Doha talks are doing their best James Bond and simply refuse to die. Word is coming out of Geneva that after another marathon session, the G-7 (the major Doha players: Australia, Brazil, China, EU, India, Japan, United States) have come to some consensus over a general plan advanced by WTO Director General Pascal Lamy. It must be stressed, of course, that this remains a vague framework with the specifics yet to be determined, but it is a way forward and talks are going into overtime. Of the G-7, only India is expressing serious reservations about Lamy's framework, and Brazilian foreign minister Celso Amorim has raised his predictions of success from "50-50 to 65-35." You gotta love his precision - let's hope he's right.

Bridges has the deal's specifics if you want to get into the nitty gritty.

Doha mini update

From Bridges (emphasis mine): 

"The next 24 hours will determine whether governments can rescue WTO talks from the brink of collapse, officials said Thursday evening.

A crucial day lies ahead for the ongoing attempt to strike framework deals on liberalising agricultural and industrial trade. Discussions have been largely stalemated since they started Monday, and negotiators are under increasing pressure to find common ground -- and soon -- or potentially face the breakdown of the troubled Doha Round. 

'Tomorrow is the day in which we will know if it's possible or not,' Brazilian Foreign Minister Celso Amorim told reporters Thursday night. "We're doing our best. It's not easy, but we're trying.'"

Do read the whole analysis: for trade reporting, Bridges is peerless. But the talks have predictably come down to the wire and today's the day we see whether they can cut a deal. Stay tuned.

Leisure vs. consumption

French President Nicolas Sarkozy (pictured right with his supermodel wife) has been quite busy of late, whether it's modernizing France's military (insert requisite joke here), or, perhaps even more drastically, dismantling the mandatory 35-hour work week. This was actually a central campaign promise of M. Sarkozy's: travailler plus pour gagner plus (work more to earn more.) Under the new legislation, it will be easier for employers to set longer working hours, which should allow workers to make more money.

I don't imagine many étrangers, particularly North Americans, will have much sympathy for the fact that the French may have to work more. Americans in particular tend to put in long hours and if we do it, the reasoning goes, why shouldn't they? But then an equally valid question becomes: why do Americans work so much?

I think the answer to both questions speaks to general differences in cultural preferences/norms. Americans value higher consumption. The French, as well as most of Western Europe, value leisure highly. As a result, welfare-maximizing individuals in both countries pursue these goals: in the US we put in more hours at the office and earn more money, so we get to come home to our nice McMansions and flat-screen TVs, while in France you've got less fric ($$$) but you can duck out at 3 and go meet your buddies in a cafe to discuss how meaningless life is.

Jokes aside, I do think my main point holds: Western Europeans tend not to be as rich as Americans, but a large part of this is because they place a higher premium on leisure time. So if you want to laugh at how ridiculous the idea of a mandatory 35-hour French work week is, it's probably worth keeping in mind that the French find our 55+ hour weeks equally absurd. Which lifestyle do you think is better?

 

N.B. for simplicity I left out some important caveats about the French work week, like the fact that most French people work more than 35 hours and use it to build up vacation time or that French workers are the fifth-most productive per capita in the world.

Trashing gas

I'm done with expensive gasoline, thank you very little. I've sold my car and am now the proud owner of a Genuine scooter. Bad boy gets 80 miles to the gallon: traded the van for it straight up. But I'm still concerned about gas prices: more so given what they reflect about the American economy, climate change, and the status of oil. The New York Times gave me a little hope today by outlining how garbage and waste may be the wave of the future. But please, we've all heard this before...



But seriously. This technology has been around for a while (I'm dubious of the claim that it has existed for decades) but still remains far away from perfection and economic feasibility on a scale of mass production. All the more reason to continue extending subsidies to more and more types of clean technology and renewable energy. Solving this new type of energy crisis requires far more than one "savior" technology (read: ethanol) and it is wise for the government to cover all their bases. The private sector needs to jump in as well and is doing so at a breakneck pace. Perhaps this is one side of the bubble needed to cure Wall Street's hangover.

Loose nukes

In a time when every politician seems to be calling for a nuclear renaissance to solve climate change and the danger of "baby nukes", shouldn't non-proliferation be of the utmost concern to the US government? The recent disparities between various foreign negotiations certainly don't suggest the uniform strong policy that an issue of such concern would require. 

Iran announced today it will not scale back its nuclear activities to the ire of the West. I'm certainly not a proponent of any type of Iranian nuclear capability but I think we should enforce our stipulations evenly. We certainly haven't. In fact we've gone out our way to ensure India can continue to advance its nuclear capabilities by supporting a government that wants to be excused from the non-proliferation treaty. It makes more sense for India to be allowed nuclear weapons rather than North Korea or Iran. And to pretend India should not exercise its nuclear capabilities while hostile neighbor Pakistan does so would threaten the little remaining stability of the region.

There's no simple answer to a multi-faceted problem such as this and no such thing as a unilateral, one size fits all nuclear containment policy for the world. No matter the complexity of the situation, nuclear allowances cannot be dangled for economic gain and political promises. Nuclear proliferation has far too many implications to be bait in strategic US negotiations; it has worldwide effects and requires international cooperation and a singular compromised voice as such.

Voting with your wallet. Literally.

If you read one article about Election 2008, make sure it's this piece that Clive Crook wrote for the FT. Truth be told, I'm fascinated by the so-called "horse race" aspect of American Presidential politics, which is a show quite unlike anything else. But I try not to get too obsessed with it: I think we all realize that the endless day-to-day minute campaign analysis is largely meaningless.

This is the essence of Mr. Crook's column: tune out what the pundits say every day and focus on the big picture. Economic growth is low, and GWB has very low approval ratings and has been in office for 8 years. As Mr. Crook writes, political scientist Alan Abramowitz has a very simple formula which accounts only for these three variables, and he's used it to correctly predict the outcome of 14 of the last 15 presidential elections. (I might add that he got the 1968 election wrong by a tiny margin.)

His model is predicting not just a win but an absolute cakewalk for Barack Obama, similar to the trouncing that Ronald Reagan gave Jimmy Carter in 1980. Leaving your own politics out of it and keeping this article in mind, now might be a good time to head over to intrade and buy some "Obama Wins Presidency" contracts. I've copied the price chart for you below: as of July 23rd, they're trading at $6.53 and will pay out $10.00 if Obama wins.

Full Disclosure: I do not personally hold any financial positions pertaining to the 2008 Presidential Election and am not connected in any way to either presidential campaign.

Disclaimer: All investments involve a degree of risk and there are no guaranteed returns.

Bank failures...but not the kind you think

The world's international financial institutions have had a rough day. A new study linked the rise in tuberculosis in Eastern Europe and Russia with IMF loans to post-Soviet countries. The study comes on the heels of an internal review by the World Bank found that the Group has done a lackluster job of enforcing environmental standards in developing countries.

The first study does not imply causation, regardless of how much the NY Times wants it to, but merely an association. Though disturbing, it should not be surprising that IMF loans, which advocate government thrift (often by cutting social programs), result in a rise in disease. Government doctors lose jobs when socialized medicine is cut and disease rates go up - especially TB, which requires short term care and intensive medical supervision. But ideally, as economic growth spreads through the private sector, health care should become a social privilege available to most, if not all. Just don't tell the US government that the Washington Consensus might apply at home. 

More troubling than an obvious, though somewhat scary, epidemiological correlation is the World Bank's apparent disregard for environmental protection. Environmental safeguards may be a vanguard luxury of the US left but for developing nations nature cannot be divorced from responsible development. Water scarcity due to Bank sponsored agricultural expansion and recent food scares prove that attention must be paid to the environment to create sustainable development. Without proper institutional protection, the environment suffers, citizens of the developing world suffer, and the world suffers as climate change grows more ubiquitous.

The IFIs may be growing less relevant in a globalized world but that does not excuse such behavior. Shape up.

Mini-ministerial day two

There's not a lot of major news coming out of Geneva after two days of trade talks. This is not uncommon for these sorts of negotiations, though: Bridges notes that Monday's discussions were little more than political positioning and grandstanding. The real wheeling and dealing will likely come towards the end of the week.

However, the FT reports that the United States offered on Tuesday to lower its farm subsidy ceiling to $15 billion/year, with some conditions attached. This is still comfortably higher than what the US actually spends on farm subsidies each year, which is about half that. Developing countries say the move is not enough. The US retorts that the offer is a genuine concession. We'll keep you posted on how things shake out as more information becomes available.

Side note: as these talks are ongoing, I am currently very busy writing a dissertation for my Master's Degree about the WTO. Ironically, if the talks fail, my dissertation topic will become extremely relevant, timely, and a good deal more interesting than it is presently. I stand by what I wrote yesterday, though - let's hope a deal gets done.

African missteps

The African Union was busy today ignoring human rights and political freedom.

Their request to the UN Security Council to drop war crime charges against Sudan's President Bashir was actually a good step. The ICC's decision to charge Bashir was a misguided one. The blood shed in Darfur is on the hands of many, not just Bashir. Hated as he may be, his removal would create a power vacuum that would simply jeopardize any future attempts at peace.

The AU decision to back South African reconciliation efforts was a meek and tepid attempt to avoid criticism. Relegating such responsibility to South African President Mbeki, an implicit Mugabe supporter, was an irresponsible move and Tsvangirai should have demanded more from the African and international community. 

The situation in Zimbabwe was much more severe than Kenya and as such requires a stronger resolution than a power-sharing agreement. Kenya's violence, though country-wide and intense, was not as extreme as Mugabe's methodical extermination. The people of Zimbabwe deserve better and the international and African institutions responsible should give it to them.

Why Doha matters

Trade ministers from about three dozen WTO member-nations are meeting in Geneva this week to try and break a stalemate in negotiations to conclude the Doha Round, which was launched in 2001 after the 9/11 attacks. The so-called mini-ministerial conference is being hailed as a "make or break" moment in the Doha negotiations. If you follow international trade relations, these sorts of doomsday phrases get thrown around a lot, but there is good reason to believe that it really is now or never for Doha this time. Nothing gets done in the WTO without the United States, which is heading into a hotly-contested presidential election amid rising protectionist sentiment. As the FT notes, a global free trade deal is unlikely to be a priority for either candidate, and a general election in India and changes on the European Commission further complicate things.

So where exactly is the impasse in negotiations? On the one hand, developing countries want increased market access for agricultural products, which means tariff and farm subsidy reductions, largely from the EU and the US. On the other hand, developed nations are demanding increased access for manufactured goods in the form of lower industrial tariffs. Oh, and the negotiators also need to resolve disagreements about trade in services, address LDC and LLDC (less-developed and least-developed countries) concerns about preference erosion, and sort out disagreements over "banana trade, location-based food names, and biodiversity-related patent rules." (Bridges)

Some advances have been made, but there's still a whole lot of negotiating to do. It also probably doesn't help that India's Trade Minister won't be there for the first two days as he's participating in a vote of confidence in the Indian Parliament. India has been a critical player in the Doha Round. Still, the WTO's Director-General, Pascal Lamy (pictured above right), put the odds of success "above 50%" in late June and has since indicated that they have marginally improved.

Why does all of this matter? One, freer trade is a positive-sum game in that all participants benefit to some extent. Second, reduced agricultural market distortions will help improve long term price stability and food supply, which is particularly salient given the recent global food crisis. Additionally, improved agricultural market access and tariff reductions are also beneficial for farmers in developing countries who simply cannot compete with first-world farmers at present. There are other significant benefits as well: for a quick summary, I recommend this Reuters FACTBOX.

One of the more sophisticated critiques of the drive to complete this round is something I like to term the "small-potatoes argument." It goes something like this: "tariffs are already low, and the gains to be had are relatively small, so why is Doha so important?" It's a valid point and actually speaks to the success of previous GATT/WTO rounds in lowering tariffs and improving market access. But Doha will bind tariffs at a lower rate and lock-in gains.

I also believe that the institutional legitimacy of the WTO is on the line here, especially given the rapid acceleration of economic regionalism as an alternative. If Doha doesn't deliver, it's not difficult to imagine the WTO's gradual decline and the marginalization as an international institution. (I hope to return to this theme  of regionalism vs. multilateralism in a future post, but for now, I would encourage anyone who's curious about it to read this brief article.) Others, such as the nonpareil Dani Rodrik, have argued that globalization (including multilateral trade) proponents need to pursue a broad public "legitimacy-enhancing strategy" instead of pushing through further trade deals aimed at improving market access. I would agree that further public buy-in is essential to sustaining economic globalization in the long run, but at this particular moment, I'm more focused on and rooting for a successful conclusion of Doha. 

And I hope you are, too.

The buck stops where?

The Times reported yesterday on the latest announcement in Raul Castro's string of changes to Cuba's stagnant economic structure.

The most recent aspect of his shift from the socialism of his elder brother allows farmers access to government land to privately farm up to 99 acres. More so than the bureaucratic fat-trimming he promised when he took office, the new policy reflects a substantive shift away from outdated ideology, ill-advised borrowing, and staggering inefficiency.

The successes of China and the domestic and international umbrage towards Chavez may have awakened Raul that he needs to move beyond his brother's policies. His attempts to revitalize the economy and allow for private enterprise are a step in the right direction. It's a wise move for his political stature and the fate of his countrymen.

We should not get too excited as the government will still own the land and political freedoms are still woefully inadequate. We can only hope that with economic liberalization, political space will soon open up. I'll leave you with a quote from Raul struck me as quite insightful to the state of Cuba and his vision.

“Socialism means social justice and equality, but equality of rights, of opportunities, not of income...equality is not egalitarianism.”

Nuts & Bolts

We've gotten a lot of feedback on the blog so far, and to our surprise a good deal of it has been positive. But we're always looking to improve things, and we've added two new features based on your comments:

• It's now possible to subscribe to Zeitgeist by email. The box is at the top of the page on the right-hand side.
• We've added ShareThis, which is the little green button at the bottom of every blog post, right next to the comments button. If you like (or hate!) a particular post, you can use to share it on all the popular social websites like Digg, Facebook, MySpace, etc

Liberalize it...

It always strikes me as interesting that many items on the modern Republican social agenda require a huge amount of government spending and intervention to prevent their acceptance and assimilation into the fabric of society (think immigration). The war on drugs is a great example.

I'm a strong advocate of liberalizing drug policy - across the board. People have been doing drugs a long time - legalizing the inevitable raises income (through direct savings and taxation), will promote better addiction treatment, and allow for better regulation. And it will not increase the number of addicts (does legalizing gay marriage make people gay? did prohibition end alcohol consumption?). 

Estimates of US expenditure on the drug war range from 12 to 20 billion dollars a year in direct enforcement spending. Any way you cook the books that's a LOT of money. Money that could be very well used elsewhere - this is obviously the main benefit of liberalizing drug policy. The other benefit of liberalization, and I think this is implied in Mankiw's article, is a relaxation of prison sentencing. Since the 1980s, when the crack epidemic spurred mandatory sentencing, incarceration rates have skyrocketed - at no small cost.

Finally, think of the revolutionary implications for US foreign policy. Think if instead of eradicating poppy seeds in Afghanistan and coca plants in Colombia (thus turning farmers - and all the money - to warlords), the US government  bought the harvest while transitioning farmers to alternative crops. 

People may not want to hear such things but I believe in the idea strongly, even though the political will to make it a reality is lacking. I'm sure plenty of you disagree - let's hash it out in the comments. 

ADDENDUM: I largely agree with the rest of Mankiw's agenda (minus 8 - this should be done for all fields). I think it's relatively benign though and would love to see his specific take on what policies are needed to do these things in a responsible manner.

DISCLAIMER: This post is not an endorsement of drug use. Don't use it Saturday night at 4 am in your argument that you're fighting for a better America. Even if you don't inhale.

TGIF

One of our favorite readers suggested we post this clip, and it's too funny not to share. Plus, it brings up an important point: chicks dig blogs (and, presumably, bloggers.) 

Have a great weekend, everybody. But keep checking in: Zeitgeist doesn't take weekends off.

How to win the crucial economists' vote

Greg Mankiw, a very well-respected economist and prodigious blogger, had a piece in the New York Times this past weekend about the policies the candidates would adopt if they were courting Economists' votes. I encourage you to read the whole entertaining article, but here's the gist of it:

1. Support free trade
   
2. Oppose farm subsidies
3. Leave oil companies and speculators alone
4. Tax the use of energy
5. Raise the retirement age
6. Invite more skilled immigrants
7. Liberalize drug policy
8. Raise funds for economic research

I'm personally ambivalent/in cautious agreement with number 7, and I imagine number 8 would amount to some heroic pandering to the dismal scientists. That said, I do agree with numbers 1 - 6, and I agree particularly strongly with 1, 2, 4, and 6. There is a lot of material here, but I'll take number 6 right now because it strikes me as the most straightforward case.

Invite more skilled immigrants. Whatever your thoughts on immigration in general, skilled immigrants, particularly younger ones, are a big "get." They generate a lot of economic value. They make a lot of money, a lot of which gets spent in their country of residence, and they pay higher taxes, which go to funding schools, police, Medicare, etc. Like the affluent in general, they are less likely to put a strain on social welfare systems. Finally, there's little worry that they'll take all the jobs away from local workers (don't make me post the South Park clip again.) First, forget the old Lump of Labor Fallacy. Then recall that truly skilled workers tend to be in high demand and have less trouble finding employment. Having more skilled workers in the economy should also increase economic growth, thereby creating more demand for skilled workers overall.

I'll return to some of the other issues in the future, because they're timely and important as the election approaches. Also, I would be interested to see what my esteemed coauthor thinks about some of these issues. And you too, dear reader. Hit up the comments below.

n.b. I do not particularly want to hear from Lou Dobbs, possibly our country's most pompous blowhard. Stick around until about the 2:50 mark, though, because he starts to go on a very angry, hilarious rant: 

Back to the future on uranium

There's a lot of hot air in the news these days about how America is going to solve its energy crisis. Literally. T. Boone Pickens, lifelong oilman, is on TV exhorting his fellow Americans to support massive investments in... wait for it.... wind power. Ba dum bum - I'm here all week, folks.

Anyways, I had a look at the plan and you've got to admire the guy for being proactive, which is all the more impressive seeing that he's an octogenarian billionaire. Wind is a great start to diversifying energy sources, but it's clearly not going to be sufficient alone. Which brings me to another possible solution - more nuclear power.

I know that nuclear power conjures up some bad images, but it has its benefits. First, it's relatively inexpensive once you make the initial investment to construct a plant. According to the Economist, it costs about 6.5 cents to generate a kilowatt hour of electricity with nuclear power, which is almost as cheap as coal (5 cents per kWh). It will almost certainly be cheaper if carbon emissions are taxed in the future, which is likely. Second, modern nuclear plants are generally quite safe, and each plant generates a lot of energy. Third, it is carbon-friendly.

This fact has not gone unnoticed by countries around the world, and recent high energy prices have spurred a lot of talk and some action on building more nuclear plants. This is particularly true in some of the major emerging markets, such as China, India, and Russia, but also Canada and Japan.

The price of uranium has reflected this new attitude toward  nuclear power in recent years. It spiked to record highs of $138/lb in June 2007, before falling drastically off what most investors felt was an unsustainable peak. Still, some recent rumblings suggest that uranium is about to take off again after languishing for at least the first half of 2008.

Finally, as an aside, it's worth noting that the history of uranium production and trade is both fascinating and complicated, and I would be happy to write about it if anyone wants me to. Suffice to say: 60 years ago it was mainly used to produce weapons of imponderable destructive capacity, and today it's more likely to be used to heat our homes. 

A new boom in town?

The Washington Post reported today on a Saudi program to build 15 new cities meant to stimulate economic growth beyond oil production. A few thoughts.

-Technology is the way to go in this endeavor. If you have an untrained workforce (see below), more money than God, and a landscape not particularly adapted to any ecological pursuits then cutting-edge technologies are a good bet. Learn them, perfect them, and advance them.

-You better believe that incorporating social development aims (women may be allowed to drive!) with greater economic freedoms necessitates political reform. If the royal family does not initiate it themselves then someone else will. And that's less than ideal - for us and them.

-Thankfully management, though not regulatory oversight, will be conducted by the private sector. Only if the royal family respects the decisions and actions of the foreign managers will this be successful. If done properly it will avoid increasing an already inflated bureaucracy. Let the people do their jobs.

Saudi Arabia has weathered one oil boom already. Their industrial and infrastructure development work during the 1970s was the correct move but was not enough to avoid the "oil curse" (26 years later this is more relevant than ever). More than foreign capital and petro-dollars are needed to make this economic reconstruction a success. The most important step remaining is a complete overhaul of the educational system. If this is done quickly and extensively, perhaps native sons can fill the new cities.

There's gold in them thar... oil fields?

Barrick Gold (ABX), which I believe is the world's largest gold mining company by volume, announced yesterday a hostile bid for Alberta-based Cadence Energy (CDS. TO). The cash bid amounts to C$354 million, which is a 10 percent premium on Cadence's market value.

With the price of gold near record highs, why does Barrick want to buy a junior oil company? Unfortunately gold isn't the only thing that's expensive these days - oil prices have spiked nearly 50% this year, and 25% of Barrick's production costs are fuel-related. Cadence produces more than 3,500 bpd, which would help Barrick lock in fuel costs and hedge against further increases. 

Still, this is an interesting example of how the effects of expensive oil are reverberating through even very profitable sectors of the global economy.

 

Obama's change?

Obama gave a speech today on national security in which he admired the ideals and effects of the Marshall plan. He spoke, eloquently as usual, on the need for increased non-military aid in Afghanistan, Pakistan, and Iraq.

He is right that development aid is a key tool in revitalizing war torn areas and advancing our national interests in Afghanistan, Iraq, and Pakistan. Our money will help and will hopefully slow the recent "militarization of foreign policy". But the development paradigm constructed in the aftermath of WW II that gave us the Marshall Plan, the World Bank, and later the Washington Consensus has become stagnant as evidenced by the global economic slowdown and ineffectiveness of African aid.

Today, large packages of government money are often lost in corruption and inefficiency. Small targeted solutions work much better. Each political and economic situation today is contextual. There is no blueprint for the Middle East and South Asia like there was for post WW II Europe. Development today occurs in a complex, globalized, Post-America world. It requires innovation and creative practices based in technology and broad social understanding - certainly not a policy framework that leaps back 60 years.

We don't need another Marshall Plan. It helped allocate resources and restock capital but more so, exported a particular ideology. It hinged on creating a global order friendly to the US. It was intended to instill confidence in America's dominance and ability to rebuild. On occasion after occasion in modern times this approach has been shown to fail. Why try the same tired formula? To propose one is a cheap pitch at a type of idealism that is long dead and is certainly not in the vein of pragmatic foreign policy Obama has espoused.

Moratorium opprobrium

President Bush announced today in a Rose Garden press conference that he was revoking the presidential moratorium on offshore drilling.

The moratorium, originally enacted by his father, is not the only ban on offshore drilling. A congressional ban is also in place. Lifting the ban is largely a political move to place pressure on Democrats and presumably an intended boon to Sen. McCain, a new proponent of offshore drilling.

So what will the removal do? In short, nothing. Democrats won't lift the ban, despite record gas prices. And even if a bipartisan coalition did manage to allow new drilling, the oil would not hit the market for at least 5 years - little consolation to the present crisis.

Increases in oil production (whether from tar sands in Canada, protected land in ANWR, or increased Saudi output) will do nothing, regardless of how big the finds are, until new refineries are built. Oil producing states such as Nigeria, Iran, and soon Iraq are forced to export their crude to refineries to make gasoline. The world's top five refineries are in Venezuela, South Korea, Singapore, and India.

The removal of the ban, like McCain's plan to subsidize nuclear energy, is fiscally irresponsible and short-sighted. Increased drilling does nothing without more refineries but the plants take too long, are too expensive, and face far too much public opposition to relieve any current pressures on oil production and prices. Do we really want or need energy policy that will tie us to oil for another 15 years?

Hot commodities

Resource Investor has a great piece comparing returns on commodities from 1999 - 2007. While none of this is really new, it's still quite impressive to see the numbers behind the hype. Some choice selections:

• The price of crude oil increased by nearly 700% (1999-2007), or roughly 26% per year. Oil is up 46% this year so far.
• Wheat was the best-performing commodity in 2007 (77% gain). This will come as little surprise to anyone who's followed the global food crisis with even a passing interest. For anyone concerned about food supplies, you will be happy to know that wheat stocks are expected to rise dramatically this year due to more acreage planted and better weather.
• In comparison, the NASDAQ increased by 21% (1999-2007), with an annualized return of 2.1%. Small wonder there's so much money in commodities markets these days.

Why don't more people like to trade?

International trade is an issue that is near and dear to my heart. Relentless economics instruction at both the undergraduate and graduate levels have made me into a committed free trader, and I'm still convinced that it's one of the best ways to save the world.

Others disagree: 

With the Doha Round at (yet another) make-or-break stage, and Election 2008 heating up, this sort of "trade backlash" is something that needs to be understood. There are several reasons why people in developed countries are so angry about trade:

1. Comparative advantage, the underlying principle of free trade, is counterintuitive and difficult to understand at first glance, even for reasonably intelligent people.

2. Any free trader worth his salt will tell you that trade is not Pareto efficient (making someone better off without making another person worse off) but rather Kaldor-Hicks efficient (making someone better off while making someone else worse off, but with the aggregate gains being higher than the aggregate losses.) In other words: although the gains outweigh the losses, there are clear winners and losers from trade. 

3. The gains are disperse and the losses are usually heavily concentrated. We all gain when we buy cheap imported goods at WalMart, but we may not notice it or get overly excited about it. However, if your job gets outsourced, you can bet that you're going to be furious.

4. There is a clear preference towards consuming goods produced by (and, for that matter, trading with) our countrymen. For example, several economic studies have demonstrated that even after NAFTA liberalized trade borders between the US and Canada, volumes of trade between Canadian states is still much higher than cross-border flows.

I'm sure the list could go on, but I think these are some of the most important reasons. Feel free to add in the comments below. This all begs some questions: if you think free trade is the way to go, what do you make of these objections? Is this an issue worth trying to build broad public consensus on when the general public is so reflexively skeptical? And if you think that you need a public remit for free trade, how do you get it? 

Talibanistan?

Pakistan is quickly becoming home to more foreign terrorists than ever before. This is not helped by the truce being cut between the government and tribal groups from the northwestern FATA region. Baitullah Mehsud, a warlord widely suspected of plotting Benazir Bhutto's assassination, is leading the charge. The deal comes fresh on the heels of a suicide bomb attack on the Indian embassy in Kabul that killed 41 civilians and injured 139.

While the US demurly denies any direct link between Pakistan and the bombing, the Afghan government has been more than forthright sharing its belief that Pakistan, specifically their ISI intelligence arm, was behind the attack. The rumor mill is awash with tales of varying veracity but one thing is certain. The possibility of success in Afghanistan is directly hinged on a working relationship between its two tenuous neighbors: India and Pakistan.

The lack of news from Afghanistan - a $4 billion G8 pledge for Afghani security and development was pushed to the back page this week - reflects a worrying sense of idleness and complacency. The situation in Afghanistan is growing worse by the day and requires delicate maneuvering by its neighbors to prevent any further decline.

The relationship between India and Pakistan is shaky at best. Foreign pressure and nuclear co-habitation are the two main reasons they still talk and flare-ups, such as the recent protests in Kashmir, are still common, though violence is at an all-time low. But if there is to be success in Afghanistan, Pakistan and India must restrain their public voices and defuse the situation using diplomatic back channels. Their relationship is too perilous to permit unfounded nationalist rhetoric.

Regional stability is at risk but Afghanistan also needs all the help it can get - especially from two such powerful players. The country's development and freedom requires the military cooperation of Pakistan and the economic support and guidance of India. Without these two pillars, peace may never take hold. The bombing represents many things but not a personal attack on India; the Taliban agents carrying out such work are not Pakistani but Chechnians, Uzbeks, and Arabs. Their fight is a global one. India must realize this and work with Pakistan to stamp out such extremism in Afghanistan. The US must help.

It is unwise and unfair for the US to openly criticize the tribal negotiations. Though more jihadis are now in the FATA, this reflects a perceived chance of success in Afghanistan and one of defeat in Iraq. In this case, correlation is not causation. The negotiations may not be to the US' liking but after supporting an autocratic ruler like Musharraf for so long we must be willing to back a democratically elected government, regardless of whether we like their actions. If Karzai can maintain his grasp on Afghanistan and Pakistan can bring quiet to the FATA, even through devolution of power, then the billions of development dollars pouring into both countries may be put to some use. Without security, and at least the semblance of due political process, extremists will continue to prevent any advancement or peace. NATO forces are already planning their withdrawal: shouldn't they at least leave the Afghans a chance of success?