Ladies and Gentlemen, your Republican VP nominee...

Whoops, sorry! Here we go:

Man, I really hope (for America's sake) that Tina Fey finds the time to make a guest appearance on SNL this fall...

(Photos via People.com and Living Alaska blog)

Ouch

A surging dollar is great if you’re a consumer. But if you’ve recently moved back to the United States from the UK and still hold most of your assets/get paid in Sterling, it’s… not so great. I just realized that in the last six weeks, the tumbling GBP (against the USD) has wiped out about 8% of my savings. Ouch.

Ironically, after studying the Politics of Money in the World Economy for an entire year, I’ve broken one of the major rules of international finance: wherever possible, match the currency of your assets with that of your liabilities. Now who said grad school was a waste of time?

(Photo by Tracy Olson)

Hot potato

I know I'm not the only one dismayed by the lack of coverage Iraq has been given in the media and the presidential campaign. With rising inflation, unemployment, and a seemingly never ending fall in the housing market, it is no surprise that the economy has become issue #1 in this race. These are real and legitimate domestic problems, and Afghanistan may pose a bigger threat to the overall security of the US, but let's not forget the US government spends $720 million a day in Iraq. The war should be a central concern of our national consciousness and it's not. When news that the US will hand over security in Anbar to Iraqi forces is on page 14 of the NY Times and barely mentioned throughout the blogosphere, it is obvious how far our foray into Iraq has slipped from the political dialogue.

But, whenever politicians do talk about Iraq some sort of unspoken consensus emerges. With a timetable agreed to by pretty much everyone, there is no longer a real discussion of whether this is the right path for Iraq (or what will follow). With developments like this handover slowly occurring, is Iraq really a stable and peaceful democracy?

In a word, no. BUT, if the Iraqi government is reaching oil deals, maintaining security, and on the path to elections have we done our job in Iraq? That's a bit of a loaded question since we never really had a defined goal. Iraq is certainly not stable nor peaceful but is on the road there. More important than transitional takeovers and timetables is the manner our exit is executed and the legacy we leave behind.

Just keep in mind that Anbar is where the Sunni Awakening started...

Zeitlinks

A new biweekly feature on Zeitgeist, in which we share here what we’ve been sharing on Google Reader. Consider this a choice selection of the best of the rest.

Patrick:
1. Let’s not throw out the theory with the Big Mac: Dan Drezner shows why the fundamental assumptions that underpin Tom Friedman’s vaunted Golden Arches Theory are still valid even after the Russia-Georgia War.

2. Where China goes next: This Time Magazine article explores the challenges to political authoritarianism that are resulting from continuing rapid economic growth.

3. Legitimacy on the Cheap: Via The Economist’s Free Exchange Blog, Richard Baldwin delivers the best analysis that I’ve read of why Russia’s leaders are stoking nationalism and what it means for the West.

Nick:
1. Schools, skills, and synapses: James Heckman explores the link between the decline of the family and the rise of inequality. Richard Baldwin breaks down the implications for both candidates.

2. Riding a dead horse: I don't think Owen Barder's sarcasm will solve the Afghan crisis, but maybe local knowledge will...

3: Dense Fever: The New Republic's energy and environment bloggers think incentives may help California's environmental regulations become more efficient. Only in a state where the Governor drives a hydrogen engine Hummer might this work.

Influencing the masses

If you don’t live under a rock, you might have noticed that election season is upon us here in the United States. Interest is particularly high given that Americans of all stripes (and many others around the world) feel like the Bush Presidency has been a train wreck, to put it mildly. There are also many key issues at stake. In the coming weeks and months, Zeitgeist will explore as many of them as we can to help you understand everything in a nonpartisan way. I can’t speak for my coauthor, but I also intend to make an endorsement much closer to the election.

Over at IPE Journal, Dave (who’s really been on a roll lately) examines the idea of subconscious voter bias. It got me thinking about a related issue which has gotten a lot of buzz in recent years: behavioral economics. In a nutshell, behavioral economics challenges the fundamental notion of classical economics that individuals always act rationally (i.e. they are welfare-maximizing). The field incorporates insights from other disciplines such as psychology and neuroscience to paint a more accurate picture of how real humans make decisions, as opposed to the rational economic individual. Or to be clever, behavioral economists seek to replace Homo Economicus with Homo Sapiens (this link is a great overview paper if you have time to read it). Behavioral economists have identified all sorts of biases which characterize (or distort) the decision-making process. Of particular note are the status-quo bias and the importance of framing choices.

There are clear implications for public policy decisions, which is why I am so excited that Richard Thaler is informally advising Barack Obama’s campaign. He’s the coauthor of Nudge, which discusses the issue of bias in decision-making, and one of his central arguments is that governments can positively influence people’s behavior by acknowledging and compensating for these biases. The most famous example: people don’t save nearly enough money in their 401(k) plans, even though it is economically rational to do so in most cases and there are huge incentives (money for savings plans is tax-exempt.) One problem may be that the default option is not to divert any money into the 401(k). But if the government were to mandate that the default option is to save money, the thinking is that many more people would then make the ‘rational’ decision.

You’ve probably heard of this before: policy-making like this is often referred to as libertarian paternalism, whereby the government ‘helps’ you make the right decision, but you still have the option to choose however you want. I’m enthusiastic about the prospects of this: I think it’s an innovative idea that might help solve public policy problems like personal savings and obesity. However, not everyone is sold, and a principal argument is that the state cannot help us make the right decision, because it has access to less information than individuals.

I would also worry about potential abuse: if libertarian paternalism works successfully for less-controversial matters, what’s to stop it from being applied too widely? How do we correct the biases of individuals within government who decide where it is and is not appropriate to use such strategies? When does libertarian paternalism cross a line?

(Photo by Andrew Pescod)

An Afghan dilemma

Given this election has placed a prime focus on foreign policy, it is no surprise that each candidate is dedicating alot of oratory to Afghanistan. But it is certainly troubling that they are both getting it so wrong. McCain and Obama are not the only ones misinterpreting the situation and drawing inaccurate comparisons: Patrick Fitzgerald at FP Passport says...

With the surge's success in bringing military (but not political) stability to Iraq, the spike of violence in Afghanistan led to calls for a similar surge there...[and] it's clear that more troops alone aren't going to solve the problem (emphasis mine).

Though Fitzgerald correctly calls for other means of aid, the analysis is problematic not only because it calls for more troops but because it is rooted in the same incorrect assumption that most politicians are making: namely, associating the recent decline in Iraqi violence with the surge alone. What everyone seems to be forgetting is that the surge followed the Sunni Awakening. To credit the surge for the lull in violence after 80,000 insurgents essentially switched sides is not only naive but irresponsible. How many times must we be reminded...Correlation is not causation!

If people were drawing the correct comparisons and actually learning any lessons from Iraq, then Afghanistan might also be on a slow but steady path to peace. But instead of engaging insurgent groups in a dialogue and drawing extremists into the political fold, US officials and Patrick Fitzgerald are calling for more troops. Given President Karzai's recent rhetoric, Afghanistan needs a reduction in troops (and an increase in clandestine intelligence and special forces) if America is to maintain any type of support from the Afghan public. If the US can couple such a drawdown with greater support for political participation and development then we just might have a recipe for success.

Alas, no one is saying anything to that effect. In the words of Brad DeLong: why, oh why, can't we have a better press corps?

Cotton subsidies under attack

The IHT is reporting that Brazil is seeking recommendations from the WTO on the application of retaliatory sanctions against the United States, which refuses to abandon its subsidies to cotton farmers. This is a significant development, because the WTO’s Dispute Settlement Understanding (DSU) takes a considerable amount of time to proceed to a point where sanctions are authorized. The DSU process goes something like this: 1.) the two countries try to settle their disputes through consultations. 2.) If no solution can be reached, then a panel is formed and rules on the dispute. 3.) Either the defendant country or the complainant country can appeal the ruling, in which case the Appellate Body reviews the ruling and either upholds or overturns it. 4.) If the defendant country is ruled against (complainants usually win) and does not comply with the adverse ruling after a reasonable period, then the complainant is authorized to apply sanctions. In this case, Brazil first challenged the US all the way back in 2002 (DS267: United States subsidies on upland cotton.)

Having just finished my Master’s dissertation on the WTO’s DSU, this is quite exciting. The cotton subsidies are glaringly inconsistent with America’s WTO obligations, and it would be better for the majority (the interests of American consumers, American taxpayers, international consumers, Brazilian producers vs. the interests of American producers) if the subsidies were eliminated.

It will be interesting to see how much the Appellate Body prices the trade distortion at, and whether or not Brazil’s sanctions have any effect. In my dissertation, I argued that ‘high-value’ disputes such as these tend to emphasize relative power capacities over the legal process in determining outcomes. To put it bluntly, it will depend on whether Brazil can hit the US hard enough with its sanctions to make keeping the subsidies more painful than eliminating them. According to the US Dept of Commerce, American exports to Brazil were worth $24.6 billion in 2007. That ought to give the Brazilians a hefty amount of retaliatory capacity.

Brazil is also considering initiating a trade dispute against American ethanol tariffs. International litigation is hardly an ideal way for America to develop coherent domestic policies. But if the United States is unable to produce farming and energy plans that don’t overly-privilege specific domestic sectors at the expense of the rest of the country, perhaps we can look to our trading partners to sue the hell out of us until we see the light. (That was a joke, but only just…)

(Picture by Brian Hathcock)

Tear down this firewall

Given my co-author's recent discussion of authoritarian capitalism, I found the NY Times' recent discussion of media coverage of the Olympics to be particularly interesting. Expecting a furious backlash from the international community over Chinese stances on human rights and political dissent , NBC's decision to broadcast the games was seen as an extremely risky move. The network met, and vastly exceeded, industry expectations.

What I think is interesting about this success is not the high TV ratings; the hype of these games plus their perfect translation into prime time was a recipe for success. More impressive is the network's deft handling of internet coverage. Vast media conglomerates have a poor track record when it comes to embracing web technology (think of any business deal revolving around a social networking site - virtually none have turned a profit).

I believe traditional business models partly explain this lack of success. They lack the inherent creativity of new internet ventures that cater to the individuality and tastes of their users. Personalization and customization are hallmarks of the web and NBC hit the nail on the head by allowing users to essentially construct their own content rather than be force-fed packaged network sob stories. It's an unnoticed (but seemingly significant) contrast that the Olympics held in the one of the most authoritarian, collectivized countries in the world also saw the most success for the most open and individual domain of our generation. 

It's too bad the Chinese populace was not able to celebrate this unexpected success. 

Can capitalism and democracy be decoupled?

Frank Fukuyama had a very interesting op-ed in the Washington Post this weekend exploring the limits of authoritarianism. It ties in nicely with our recent discussions of nationalism and globalization. In a nutshell, he argues that, despite recent events, democracy and capitalism have no viable ideological alternatives. Modern China and Russia, he contends, are fuelled by nationalism, not a political-economic ideology like communism. Conversely, the Western combination of democratic capitalism is still winning the global war of ideas.

Mr. Fukuyama makes some excellent points, especially about the need to evaluate states individually instead of lumping them into categories. However, I do think that he is a bit dismissive of the idea of authoritarian capitalism. His writing belies a conviction that capitalism and democracy are natural partners, and that having one without the other is impossible to sustain.

I strongly suspect that this is the case in the 30+ year outlook: it is hard to imagine the Communist Party in China being able to maintain its grip on power when the economy stops growing so rapidly, which it will at some point. However, as Mr. Fukuyama notes, the ‘Beijing Consensus’ of free markets with closed political systems is widely appealing to many developing countries. Granted, he is probably also correct in observing that it would be difficult to replicate the model in many places, particularly states in Sub-Saharan Africa which traditionally have weak, ineffective, and corrupt bureaucracies. But that won’t stop countries like Cuba from trying to emulate the Chinese model, which speaks to its ideational power. While it’s probably impossible to permanently sever the link between economic and political freedom, perhaps it will prove feasible to temporarily decouple them.

If this is the case, is this a development that should be welcomed? In situations where authoritarianism is ‘benign’, where leaders have the long-term interests of the country in mind, it could be beneficial. Centralized governments insulated from political pressure have a freer hand to implement long-term and necessary but controversial reforms. The problem is that, by virtue of human nature, there are very few enlightened despots in the world. If we concede that most leaders have ulterior motives, combined with a monopoly on the political process, authoritarianism looks like a riskier development model. It’s possible that such leaders could engineer necessary reforms and later be forced out of power as the population grows richer and demands more freedom. But it’s also possible that leaders could use the benefits of increased economic growth to primarily reinforce their own power apparatus.

In short, ‘authoritarian capitalism’ is dangerous medicine. Conversely, capitalist democracy is inefficient, because it empowers actors who might be adversely affected by necessary economic reforms and because democracies can be weak at executing coherent long-term plans. However, it has a better human rights record and is more likely to ensure political stability, which is essential for sustained development.

Which would you choose?

(Image from Tinou Bao’s flickr photostream)

On kidneys and coffee

Regular readers of Zeitgeist have probably noticed that I write about trade a lot. Sure I enjoy it, but I also do it because understanding trade is also key to understanding how the world works. Commerce affects our lives in more ways than we imagine. Don’t believe me? Check out these two interesting trade-related stories from just the past week:

Legalizing the organ trade? Looking at the example of Singapore, Time wonders out loud what the world would look like if it was legal to buy and sell human organs. Your initial reaction is probably one of disgust. It’s a controversial issue, and there are legitimate concerns that allowing for the sale of organs exploits the poor at the benefit of the rich. But let me play Devil’s Advocate for a minute here: if you were on a 9-year waiting list for a kidney, wouldn’t you at least want to have the option to purchase one? What if we could regulate organ markets and monitor organ trade closely? What if it solved the chronic shortage of organs (or blood, for that matter) in the public health system? Why is it that we permit the sale of reproductive materials and not organs?

Fair trade coffee. Dave over at IPE Journal raises a ‘fair’ (HA) question: does fair trade really work, or is it another one of those well-meaning ideas that does more harm than good? Dave, here’s my answer: I am personally strongly opposed to initiatives like ‘fair trade’ which seek to intervene and ‘improve’ market outcomes in the absence of demonstrable market failure. The problem is that fair trade distorts the most accurate market signal (price) and encourages overproduction, because the price is kept artificially higher than the market says the beans are worth. This is not good for producers in the long run. Fair-trade certification is also a bit like a cartel, and it disadvantages farmers without the fair-trade credentials. No sir. Kudos to fair traders for their good intentions, but in my book, fair trade is free trade, and that’s what we should be working towards. I’m in good company on this issue, as well. (Aside: I always found it funny that the cafes on the campus of the London School of Economics had more fair trade products per capita than any place other place I'd ever seen.)

So there you have it: you can look at almost any issue from a trade/commerce perspective, from public health and the kidneys you can’t legally buy, to your daily caffeine fix and the coffee that you probably pay too much for.

A bunch of hot air

Honestly, this is one of the stupidest, most pointless moments of the campaign.



Money is involved in politics?! How have we been deceived for so long! Seriously, who gives a damn how many homes John McCain owns. Didn't Barack Obama graduate from Harvard Law? Doesn't Bill Clinton charge six figures for a speaking engagement?

I was excited by this election a few months ago. Not because I thought either candidate was especially qualified or groundbreaking but because I actually believed (I know, how stupid am I) that these were men, not politicians, who were capable of engaging each other in a civil and intellectual manner. I am more than disappointed to see this campaign descend into a pissing match at a time when our country deserves so much more.

As usual, McArdle puts it better than most:

I do not think that I am engaged in a titanic battle, in which the forces of good must beat back the cosmic evil that threatens to engulf us all. I think I'm deciding which of two politicians to hand a lot of power I don't want either of them to have. It should be possible to debate the issues in this election at a level above "My guy's awesome and your guy is a big fat doody-head". But it doesn't seem to be. I find this profoundly depressing.

On this happy note, enjoy your weekend.

The rise of nation building

Ok, last post Afghanistan or Pakistan for a while. Promise.

Today, I had the pleasure of meeting James Dobbins. He was former special envoy to Afghanistan and spoke at the New America Foundation about the lessons he learned while engineering the Bonn Agreement, which established the Afghan government following the US invasion and was a foundation for their new Constitution. His discussion leant itself toward more technical aspects of political development and nation building but allow me to summarize two of his more interesting points regarding the current situation in South Asia.

The Pakistani government regards the current conflict in FATA as a problem between the US and extremists NOT as a problem between Pakistan and extremist militants.

I have said something to this effect before. A large part of this sentiment stems from Pakistan's longstanding support of separatist rebels in Kashmir. The country has a history of harboring extremist groups that may benefit Pakistan at some point (and the Taliban serves to counter Indian influence in Afghanistan).

The current icy relations with Iran are a result of misguided confidence in Iraq.

This sounds controversial. Conventional knowledge says Iran has been adversarial since Khomeini came to power. Not true. Iran has played an instrumental role in the reconstruction (and financial support) of Afghanistan and wanted to be heavily involved in development efforts. By shunning Iranian attempts to aid in reconstruction (when they were willing to capitulate to a host of US demands), the Bush administration seriously miscalculated their position. Seeing quick "success" in Afghanistan and hoping for the same after a quick military takeover of Iraq, Rumsfeld's belief was that once surrounded by two functioning democracies, built from the ground up by the US and allies, Iran would be forced to meet ALL US demands. Well I don't need to remind you that's not quite how events unfolded.

These were two of the more interesting and provoking stances Dobbins took but the entire event is worth checking out.

The return of history

Eric Posner over at the Volokh Conspiracy makes an interesting prediction:

"When historians write about the post-cold war era, which began in 1989, the date of its termination will not be 9/11/2001, as has been frequently claimed, but 8/7/2008, when Georgian forces attacked separatists in South Ossetia and Russia responded with an invasion. August 7 marks the end of American sole-superpowerdom, or hyperpowerness, or hegemony, or whatever you want to call it, an interval somewhat longer than but still very similar to the periods of global preeminence the United States enjoyed for a few years after World War I and World War II."

The war in Georgia has sparked some intense reflection on the state of international relations and American power. I agree that the American moment of hyperpower (I really love that term) is over. But this was never an unexpected development: the US used its hegemonic position after the Second World War to foster a liberal international economic order and promote stability, mutual economic cooperation, and growth. But hegemony is a concept that measures states’ relative power capacities, so by encouraging a system which facilitates world economic growth, sooner or later America’s power would decline in relation to the rest of the world. As hegemonic stability theory teaches us, a good hegemon sows the seeds of its own decline.

International relations is driven by political and economic factors. The political events by which we mark history may lead us to conclude that America’s decline is something new, but in reality the economic forces which caused it have occurred gradually since the end of World War II. Thus, while perhaps the political environment after the Cold War suggested an ‘end to history’, a cursory look at the world’s economic structure would have cautioned that, at best, history was taking a short break.

In any case, the world has certainly woken up. State relations will need to evolve to accommodate a new power structure, but I am not particularly pessimistic about a multipolar world. Today, the US is still the world’s most powerful nation politically, militarily, and economically. The United States will continue to lead but increasingly will need to engage with other nations on less favorable terms. That said, we should be careful not to overestimate the importance of Russia’s recent actions in Georgia. Economic growth has empowered both potential rivals like Russia and new partners like Brazil and India.

In many ways, Russia is an outlier in modern international relations and may need to be treated as such. Its wealth is based largely on strategic energy reserves. It is a bully when it comes to trade (look at its relations with the EU regarding natural gas.) But if you look at the other BRIC countries, you see economies with strong global links that have an interest in systemic stability. It is more likely that such countries can become “responsible stakeholders” in the global political-economic structure.

History clearly isn't over. But then again, it never was.

(Related: see Rory’s excellent treatment of the resurgence of nationalism over at IPE Journal)

In cahoots? Or, T. Boone Pickens II.

Flying under the media radar (poor pun completely intended) is Mayor Bloomberg's newest authoritarian plan for New York: wait for it...wind power!

Announced yesterday, Mr. Bloomberg's proposed urban makeover would place wind turbines of varying shapes and sizes - and one should assume, efficiency - all over the New York skyline (talking with Pickens much?). No one said the man was not ambitious (remember his congestion tax?!) but this is a plan that deserves support. Though this exact proposal will never come fully into effect it is worth monitoring. Despite the NIMBY sentiments most New Yorkers will loudly and proudly voice, their city presents a perfect laboratory for testing the feasibility of future renewable energy.

New York is about as urban, regulated, and crowded a city one can find in the West. If Bloomberg can streamline the city's energy systems, legal hurdles, and population into a coherent framework for instituting his idea, the world will be forced to consider such plans much more seriously.

Besides, if he's wrong the city loses nothing and will probably wind up with a more efficient political and regulatory environment. And if Bloomberg's right? Well then the world will be shown that even a city that never rests won't be running on empty anytime soon.

Trade on the march in Southern Africa

Interesting news that might have slipped under the radar: this past weekend, the Southern African Development Community (SADC) officially launched a free trade area (FTA), as outlined in its Regional Indicative Strategic Development Plan (RISDP). The free trade zone encompasses 12 countries and nearly 250 million Africans, and they don’t plan to stop there. The plan calls for a customs union by 2010 (free trade with a common external tariff), a single market by 2015 (customs union plus free movement of goods, labor, services, capital), monetary union by 2016 (all currencies fixed to one another with the goal of creating a single currency and monetary policy), and a single currency and central bank by 2018.

The idea behind the SADC’s FTA is to promote regional economic integration, create trade, enhance collective bargaining power, and encourage the development of economies of scale. This is pretty standard stuff for an FTA. It could make the SADC a more attractive place to do business because of the expanded tariff-free zone. But corruption, regional political instability, and violent risks are still rife. I do also wonder about the trade creation claims (how much intra-SADC non-commodities trade goes on right now?) I’d be curious to see some figures on export penetration from China and other countries to see if trade diversion is a real concern. Once the member nations progress to a customs union, one indicator would be if the tariff schedule for basic manufactures and agricultural products in the common external tariff framework is suspiciously high.

Nonetheless, I see this as largely a positive development. With the exception of South Africa, many of these countries are poorly integrated into the multilateral trading system and are indifferent traders. Perhaps regional economic integration will be a shot in the arm. Yes, I realize that this leaves me open to criticism given my position on regional trade agreements, but we shouldn’t let the perfect be the enemy of the good in such situations. (I promise I’ll write that post detailing my thoughts about economic regionalism very soon.)

I’m most concerned about the ambitious timeline for further regional integration. A customs union should be doable, but after that further integration becomes enormously difficult. We’re talking about liberalizing capital flows, immigration policies, and investment regulations, among other things. These are difficult technical issues which require sustained (and highly competent) government commitments to successfully execute. And a monetary union? Is the SADC an optimal currency area? And do the member states have the monetary discipline (or, for that matter, capacity) to fix their respective currencies and establish a convincing peg?

We should remember that the world’s preeminent economic and monetary union took more than 40 years to progress from the Treaty of Rome to the introduction of the euro. And this was put together by some of the world’s most advanced countries. Considering that the perfect can be the enemy of the good, I do hope that the SADC’s over-ambitious plans don’t cause an otherwise encouraging project to fall apart.

Going, going, gone

Despite my obvious interest in Pakistan, I did not want to write about Musharraf's resignation until I had some time to really think about the implications. There has been plenty of commentary, most of which is missing the point.

Musharraf was an army man at heart who eschewed democracy for iron fisted control of the military and intelligence communities. His biggest accomplishment was holding onto power for this long. Just after that was his ability to hoodwink the US into believing he was the man who could lead the region into stability. 

History will wait to judge Musharraf until Pakistan's position in the geopolitical realm is resolved. If Pakistan remains stable and is able to control extremism (it will never be fully stamped out), he will be praised for his military prowess and vision in aligning Pakistan with the US. If Pakistan slides deeper into decline and becomes a lawless frontier, then he will be blamed for not doing enough and leaving the civilian government with its hands tied. The truth is that, as much as people call for the coalition to stay strong, they will continue to quibble over the problematic domestic issues that hang over the country (judges, inflation, and violence).

Matthew Yglesias almost gets it right. The US needs a Pakistan policy that is not based on a "new Musharraf" or other figurehead; but this is simply not possible. Pakistani politics, like the Indian variety, are based on cults of personality. Until Pakistani political discourse becomes rooted in policy and not people, the US has little chance of influencing the country's course. The only possibility of guiding Pakistan to a more stable economy and democracy is to divert money from the military to development schemes. If we can build private enterprise and political participation, perhaps the people of Pakistan will demand more from a better leader. Unfortunately, the rudder remains up for now.

Distance makes the heart grow fonder

Last week, I blogged about the rising cost of transportation and whether it would unravel global supply chains, a key component of global economic integration. My answer: rising oil costs matter, but probably not enough to do real damage in the 1 -3 year outlook. In my mind, the real question is whether another decade of rising oil prices dampens new investment in delocalized production chains.

Now we have this fascinating analysis from C. Meissner and D. Novy via VoxEU, which argues that higher shipping costs are unlikely to affect international trade. Using a gravity model, the authors contend that transportation costs actually fell faster in the first era of globalization than the current one (defined as 1945 - present), and that in our era, falling transportation costs have only accounted for about a third of the increase in trade.

Drawing on other research, they further argue that the tariff equivalent of international trade (i.e. the total additional cost to producing something abroad and moving it across domestic borders to markets) is about 74%, only a third of which is transportation-related. This is a reassuring analysis, which implies that countries should still be able to trade in the face of higher transportation costs. The authors also note that protectionist measures in the interwar period effectively strangled international trade and conclude that "unless there is a backlash in the form of rising protectionism, world trade has the potential to keep growing strongly over the coming decades."

Given our present global situation, this raises two questions. First, how worried should we be about a strong upswing in protectionism? I'm not suggesting that we are near a point politically or economically where we could plausibly see a new Smoot-Hawley Tariff. But protectionism is always a worry, given public scepticism about globalization and sluggish economic performance. According to the always insightful Dan Drezner and his Protectionism Advisory System, our current warning level is: Edge of the Cliff (level 2 of 5).

Second, if trade continues to expand, should be worried about the kind of trade we end up with? With the Doha Round on the ropes, the future of multilateral trade is murky. However, as I've said repeatedly, further economic regionalism seems almost certain. It will be interesting to observe what effect preferential trade agreements have not just on channeling trade flows, but the overall volume of trade as well.

Help us help you (suggestions open thread)

You may have noticed that we've undergone a few stylistic changes here at Zeitgeist. We've cleaned up the tag cloud (now top right), changed the fonts and colors, and, best of all, added a fancy new header. Many thanks to AT (pictured, far left) for his sweet photoshopping, bow-hunting, and computer hacking skills. If you subscribe to our feed or email and don't actually visit the website, I'd encourage you to click through and check it out.

We've been doing this for almost two months now and we're having a great time with it. But we never forget who the boss is, so what other sorts of blog features do you guys want? Improved sharing options? Comment on a particular issue (issues)? More Chavez-bashing? Now's your chance to make a suggestion - the band is taking requests, and we will play Freebird if you ask nicely.

Up, down, all around

They say there's no cure for high prices like high prices. It really feels like this is what happened with commodities: after a while, the prices just got high enough to weaken demand. As I mentioned briefly a week or so ago, commodities markets have been falling fast recently, led by oil and gold but including most of the base metals and agricultural commodities as well. Most of us will be breathing a huge sigh of relief - the government says gas prices are at a 14 week low, and food prices should nudge downward a bit as the USDA is predicting record global harvests.

It will be interesting to watch whether or not the dollar can continue its ascent. As I've written before, I'll be surprised if oil goes much lower than it does, and of course, this doesn't solve any major problems over night. There's still strong, fundamental, long-term demand for more food, energy, construction materials, etc. But hey, it's still summer: let's enjoy it while we can. Maybe now you can afford to drive to the beach.

Update: Perhaps I spoke too soon about food prices easing: as of August 21st, the USDA is predicting the largest rise in food prices since 1990.

Collective isn't a four letter word

Chris Blattman had an interesting post up today on the roots of group action. Drawing on his field experience in Liberia, he offers an anecdote that seems to reveal he believes that collective action is a social phenomenon capable of improving the efficacy of international aid.

It is an interesting conception. He is right in saying that donors prefer to give money to "groups". Agencies like to work with organizations as it offers a sense of legitimacy and allows for a more for formalized relationship than could exist with unorganized communities or individuals. More importantly, such group think or collective action can promote greater civic engagement, pride and hopefully efficiency and production. This is not a new idea: de Tocqueville surmised that American civic associations were behind our unique embrace of a radically new political (and resultant economic) system. More recently, Robert Putnam gained notoriety with Bowling Alone, his work that equated the decline of American power with lower rates of social interaction and public discourse.

The premise seems rather obvious. Our social capital, the net worth of our relationships and the "wealth" they create, increases if we participate in group life. Blattman gets at the real question though: how do we encourage this type of behavior in the context of war-torn or otherwise struggling states? Attaching strings to aid money is not enough. If anything, it favors those who already have enough access to influence and power to initiate the formation of such groups. What is required is a structural shift in how we disseminate aid. Incentives are a good place to start. I'm generally somewhat skeptical of the merits of libertarian paternalism but this seems to be a good test case for wielding such soft influence.

Whether governments, institutions, or donors steer people toward collective action, if it yields better results it can only help the efficiency of, and in turn argument for more, foreign aid.

Foreign correspondence

Something that I've noticed lately because of the Georgia-Russia conflict. American cable news networks (CNN, MSNBC, FOX) don't spend a lot of time covering foreign news. So how come when they do have a 'foreign correspondent' on the air, that person almost always has a British accent? Does cable news think that people with non-American accents have more street cred to talk about international issues? Or is it because there aren't very many American-born foreign correspondents?

I suspect it's the former, which is frankly a little sad. Thoughts?

The death of the death of... nationalism?

What good timing! One day after Zeitgeist considers how transport costs might bring an end to our current era of globalization just like the last one, Paul Krugman writes a column about how this era of globalization might be destroyed by a resurgence of nationalism... just like the last one. (Do you think he gets his column ideas from us?)

Anyways, it's a very interesting column and it gives us a chance to continue our "death of the death of" theme here at Zeitgeist. (Ok, last one, I promise.) But I'm not quite sure what Mr. Krugman wants us to take away from it. It's quite pessimistic and seems to lead the reader toward the conclusion that we should somehow 'hedge our bets' on globalization, without quite coming out and saying it.

Yet I know Mr. Krugman is aware that if every country took this logic to its natural conclusion by striving for national self-sufficiency, the 'fragility of globalization' would be a self-fulfilling prophecy. Perhaps he simply meant to highlight the fact that global integration is not the natural state of international relations and is susceptible to nationalism. This is an excellent point that we should take to heart, but precisely because economic globalization is so fragile suggests that we should be doing everything we can to defend it. The alternative is simply worse.

In any case, the situation might not be quite as dire as Mr. Krugman implies. He writes:

And if Russia is willing and able to use force to assert control over its
self-declared sphere of influence, won’t others do the same? Just think about
the global economic disruption that would follow if China — which is about to
surpass the United States as the world’s largest manufacturing nation — were to
forcibly assert its claim to Taiwan.

But as Dan Drezner, aptly points out, China is not Russia, and Taiwan is not Georgia. I'm also not convinced that his point about the food crisis is entirely valid, either:

For years we were told that self-sufficiency was an outmoded concept, and that
it was safe to rely on world markets for food supplies. But when the prices of
wheat, rice and corn soared, Keynes’s “projects and politics” of “restrictions
and exclusion” made a comeback: many governments rushed to protect domestic
consumers by banning or limiting exports, leaving food-importing countries in
dire straits.

This is true, but it's a bit misleading. At least some of the shortage can be attributed to heavily-regulated and closed markets sending inadequate signals to farmers (I'm thinking India and Pakistan especially.) And self-sufficiency is an outmoded concept: a lot of countries don't have enough arable land to produce enough food to survive; others have more than enough. The food crisis was a perfect storm of increasing long-term demand for agricultural commodities combined with poor harvests and exacerbated by government export controls. With the world population expected to hit 9 billion by 2050, now would be a bad time to look for alternatives to international agricultural trade. If anything, we should be looking to improve trade flows by reducing barriers and subsidies (which should allow for the most accurate pricing and price signals in the long term.)

I'll be the first to admit that things are not great in the world at the moment, but let's not throw in the globalization towel just yet.

The death of the death of...Chrysler?

Given my co-author's recent discussion of transportation costs, Chrysler's announcement today that it is aiming to cut supply chain costs 25% within the next three years seems particularly relevant.

It's certainly a strange time to announce such a thing. With manufacturing centers all over the world (that are expensive and take a long time to construct), insanely complex shipping systems, and heavy products, car companies are the last corporations that should be able to cut costs so quickly and dramatically. On paper, Chrysler, as the smallest and least diversified of the big 3, should lose the most from rising oil prices. But apparently, "reducing complexity and maintaining a stable production schedule" is all you need to do (sounds easy enough, right?).

Remember that Chrysler is a private company; if it was traded I would be inclined to believe this was a PR stunt to prop up share prices. But as a Cerberus holding, the company has no public responsibilities. So what gives?

Chrysler has been taking a lot of heat lately for keeping their financial cards so close to their vest. An announcement like this is meant for one of two things. It is either a way to assure those associated with the company (and skeptical market types) that Cerberus is serious about actually streamlining the company and getting it back into the black OR it's a ploy to convince a number of Chinese foreign firms wishing to enter the domestic automobile market that Chrysler will be a bargain when it (soon) goes up for sale. What do you think?

Gimme a liter of cola

This map depicts all the nations in the world that don't use the metric system. Come on! Everybody knows the metric system is for nerds. Besides, America is in good company here - fight the power, Liberia and Burma!

(Hat tip, Frostfire Zoo)

Recession obsession

News is trickling in on the backs of quarterly reports that suggests Asian and European economies are not nearly as decoupled from American economic conditions as previously thought. The contagion of the American "credit crunch" is spreading and though these markets may be technically independent from the US economy (i.e. they have not bought securitized loan packages from American banks) they still face a number of problems.

The instruments of financial (not monetary - the ECB is notoriously opaque) work in Europe are close to ours. The loan bubble that caused the "credit crunch" here exists in Europe as well; it simply manifests in a slightly different form. Look at the housing markets in Spain and Britain, unemployment pretty much anywhere but Germany, and contracting export margins throughout Europe and Asia (especially China and Japan). Unlike the quick action of the Fed, the sclerotic pace of EU regulation and the inflation-bent of the ECB won't do anything to counter these effects anytime soon.

There are a number of other significant problems in what is increasingly looking like a global recession, which Larry Summers ties up nicely. But the problems now seem beyond the scope of interventionist policy. Even if they were not, I am not convinced the Fed could responsibly round up enough liquid cash to implement any type of further "injection" to buoy the economy. With more and more banks facing huge writedowns and even insolvency, the Fed cannot feasibly expand its own balance sheet. The one thing policy wonks should not be adding to the cacophony is a cry for another stimulus. The term "credit crunch" conjures up ideas that the situation would be resolved if there was simply more money around to lend out. This simply isn't the case.

The Fed "injects" money into the economy (whether it's a tax stimulus or a bail-out) by controlling the reserve supply of cash to banks. To ease short term interest rates (and thus push money) the Fed buys securities by crediting the account of their primary dealer (who is free then to lend out these reserves) thus expanding its own balance sheet. This practice, if ensconced permanently in policy, will yield disastrous results: essentially, an even greater expansion of GSEs (and not just ones dabbling in mortgages either) with bills passed to the taxpayer and profits distributed to managers and shareholders. This encourages reckless and risky investment policies which will even further undermine the financial system.

The crunch needs to be felt by those who helped cause it, not passed indefinitely down the line. Free markets need to be free in the good times and the bad. If only Paulson had seen it coming.

Georgia, Russia update

This is certainly something to watch carefully:

President George W Bush has said the US will use military aircraft and naval forces to deliver aid to Georgia following its conflict with Russia... Mr Bush hinted that Russia could be jeopardising its international ties. The Kremlin said the US must choose between partnership with Moscow, or with the Georgian leadership.

The death of the death of distance

Recently, there's been some chatter in the news and blogosphere about the how the high price of oil is putting some serious dents in the 'death of distance' theory, a subset Tom Friedman's ubiquitous 'flat worldism' (or is it flatism? I can never remember: I gave up trying to finish the World is Flat on my third try.) The gist of it is: high shipping costs mitigate the advantages you would get from delocalizing production, and if oil prices don't fall, we will see a reversal of a key component of globalization in the future.

Anyways, this is rather old hat - I remember reading a lot of doomsaying about transportation costs earlier this summer when it looked like oil was on a runaway train to $200. But the issue clearly still has traction, as oil prices are unlikely to drop signficantly anytime soon. Research shows that shipping costs clearly play a big role in determining trade volumes. For starters, we have the standard gravity model, which predicts trade volumes based on two variables: GDP size of the two trading nations and the distance between them. Perhaps unsurprisingly, as distance increases, trade declines. And for anyone who truly wants to get into the nitty gritty, I direct you to this NBER paper, which uses the gravity model to show how rising shipping costs helped destroy the last great era of globalization (give or take 1870-1914.)

My first thought is that the price of oil will have to get substantially higher to really reverse global integration. You don't create delocalized production chains overnight - they're the result of significant research and preparation, and they usually take the form of foreign direct investment. FDI, which often represents tangible physical investment, is by nature fairly illiquid. Also, shipping is still a fairly low portion of overall production costs, and certainly much less than labor costs. It would take very high shipping costs for the (cost of shipping + cost of labor in developing country) to exceed (cost of labor in rich country).

Still, there have been complaints that price-sensitive industries are under pressure. Chinese textiles and basic manufactures reportedly produced the slimmest of profit margins. This is a concern, but only if it's an industry-wide problem. In this case, the price of these goods will go up; if not, it will weed out inefficient producers very, very fast.

In my opinion, these concerns are most important in the 10-15 year outlook. If oil prices continue to trend upwards as they have for the past decade, what effect will that have on delocalized production? It's really difficult to make any sort of accurate forecast that far into the future, but one thing seems clear to me. If shipping costs become prohibitive, the biggest losers wouldn't be first-world consumers, it'd be third-world countries that rely on their comparative advantage in labor for economic development.

Don't let this keep you up at night (unless you happen to manage supply chain logistics for a living), but it's certainly something to keep an eye on. Both from a development standpoint and a business standpoint.

Addendum

Relevant updates on my most recent postings:

News has come in from Zimbabwe that Mugabe is planning on forming the next government with or without Tsvangirai. No surprise here really. A more potent force than Mbeki was needed to guide these talks if they were to arrive at any real compromise.

Pakistani news outlets are reporting that Musharraf has agreed, in principle, to step down and possibly leave the country. This may be seen as a step in the right direction, but unless the government exerts its new found strength and imposes civilian rule on the military and intelligence communities then the end result will be an even greater power vacuum than presently exists...and that, my friends, is a scary thought.

(Hat tip: FP Passport)

On Georgia and Russia

Reports are coming in that a peace plan has been agreed by Georgia and Russia. The details remain largely unclear, but French (and current EU) president Sarkozy, who helped broker the deal, assures that Georgia's territorial sovereignty will be guaranteed by the "spirit of the text." Whatever that means, an end to hostilities is welcome news in and of itself: this has truly been a nasty little war, and our deepest sympathy goes out to everyone who has been affected.

There has been an enormous amount of quality analysis of this mini-war from every conceivable angle. I imagine the military types in particular are falling over themselves for a chance to analyze how Russia's army has performed in a large-scale conventional military operation. We here at Zeitgeist have had several conversations about how we could add to the debate. Rather than trying to analyze the outcomes or their implications, we want to try to provide a framework for understanding why the major players behaved as they did (or in some cases, didn't.)

In situations like these, international politics looks a bit like a high-stakes card game. Each player makes a bet and wins or loses depending on how the other players react. In this particular hand, we had:

President Mikhail Saakashivili; President Saakashivili knows that tensions with Russia over South Ossetia and Abkhazia have been brewing for a very long time. Also, he perceives his own personal credibility to rest in large part on whether he can keep his election promises to bring the breakaway regions under control. He understands the power disparity between Russia and Georgia, but calculates that any response would have to be limited, because the terrority nominally belongs to Georgia, and also because Georgia has been seriously courting Western allies for the past few years. They have a disproportionate number of troops in Iraq and have upgraded their military with American weapons technology. Mr. Saakashivili doesn't think that the West will stand idly by if Russia does overreact.

President Medvedev/Prime Minister Putin; Leaving aside any discussion of who's actually in charge, Russia is keen to maintain hegemony in its 'near abroad', the area which comprises the former Soviet Union. The color revolutions and reorientation of Ukraine and Georgia toward the West have infuriated Russia, and Russia perceives Georgia's desire to join NATO as a direct threat. Combine all of this with the fact that Russia believes that NATO helped facilitate Kosovo's secession from Serbia. Russia is therefore looking for any plausible reason to further destabilize Georgia by encouraging the breakaway regions, both to punish Georgia and send a message to the West.

EU President Sarkozy; The European Union is keen to not antagonize Russia, a key energy supplier for much of Western Europe. Most of Europe is also much less enthusiastic about Georgia joining NATO than the United States. There is almost no chance that any European country would forcefully intervene in the conflict. Any actions would likely be primarily face-saving (carefully condemn the use of violence and work for any sort of deal that stops hostilities as soon as possible.)

President Bush; Georgia was a key pillar of Mr. Bush's freedom agenda, and relations between the two countries have been especially strong during his tenure. Mr. Bush is clearly unhappy with Russia's actions, but his hands are tied. He is personally extremely unpopular, American troops are busy fighting two other wars, and the injection of American forces into the conflict would be tantamount to a serious escalation. The US pushes a tougher rhetorical line than the EU and agrees to help transport Georgian troops back from Iraq to take part in fighting, but is highly unlikely to intervene otherwise.

Given the motivations and limitations of the main players, it is perhaps a bit easier to understand why things happened the way they did. Unfortunately, this was not a card game. This was real life, and there were real consequences.

Pakistan's rudderless course

Anonymous sources within the Indian government have finally come out and said what everyone in the international community is thinking: it is "negotiating with an elected Pakistani government that has little influence over the country’s more powerful army and spy agency."

It is true and it is scary. Much the same way generals will control Zimbabwe regardless of the political agreement there, the democratically elected government of Pakistan lacks the strength to control the country.

Even scarier than the thought of Pakistani hardliners destablizing the entire region (while in control of a nuclear bomb, no less) is that the government's actions suggest they do not care that they are not really in control. They are more than happy to build political capital and rake in the benefits.

Instead of tackling rampant inflation, securing their border, or quelling Kashmiri dissent, Yousaf Raza Gilani (with many others) has worked for the impeachment of Musharraf. Given the historical tension between the two parties in control, it is really no surprise that this is all they can agree on. But given the leadership void and seemingly "rudderless" path Pakistan is following, it would be nice to see the government take needed action. I just hope it does not come to the other choice.

Mistaking the race for the runner

Steven Levitt's most recent post on his Freakonomics blog makes the mistake many are still prone to in this day and age: misunderstand a fluid conception as a fixed one.

Throughout this post Levitt uncritically accepts race as a marked, set category that implies very real differences. He uses data (unclear from where) on mixed-race children to try and draw conclusions about the relation between race, behavior and intelligence. Implicit here are the same misunderstandings that fueled eugenics and Social Darwinism. The reductionist reasoning in this study attempts to divide extremely gray areas of culture into black and white with improper tools (in this case, economics).

Let's get this out there. Race is a social construction. Biologists (and any other scientists working with genes) have known this for almost as long as anthropologists. The amount of genetic variation between what we classically define as "races" is between 6-10%. This small amount of variation is a notoriously poor predictor of biological (and even more so, behavioral) outcomes. Culture (nurture, if you so please) has a lot more to do with how people think and act than the shade of one's skin. I am not saying that social differences do not exist between what we typically defines as races. It is an indisputable fact that such variation exists, but we need to remove the implicit bias from empirical study that such differences are a result of biology and not environment.

Perhaps Mr. Levitt missed the memo. 2008 is post-racial.

Lower oil prices ain't gonna happen... and that's not all bad

The price of oil soared this spring and earlier this summer. Remember that? Investors, journalists, and politicians were all sounding the doomsday whistle, and not a day went by without hearing some previous unthinkable news: Goldman Sachs says $200 oil is possible. For the first time ever, investors bet that oil would reach $300 by December. On July 11th, the price reached the dizzying heights of $147.25 per barrel. Then it suddenly lost steam and began to fall faster than it had risen. The price has settled for the time being in the $110-$120 range.

People who tend to believe that the spike in oil prices was the fault of speculative traders could be forgiven for thinking that the markets will continue to correct themselves and that prices will settle at even lower equilibrium, perhaps under $100. Unfortunately for consumers, this just isn't going to happen. You've heard it before, but it's true: the era of cheap oil is over. Markets, and especially long-term market pricing, are driven by supply/demand fundamentals, which don't look good for oil (unless you happen to work for Exxon, and if so can you please get me a job???) Supply capacity is strained, and demand is surging thanks to economic development in the non-Western world. We all know this part of the story.

Perhaps less obvious, bringing significant new amounts of oil to market is challenging. You can't think of oil reserves as an absolute number: you have to consider which sources of oil are 'economically recoverable'. This basically means whether or not the profit you make selling the oil is higher than your operating costs of pumping it. The really easy sources of oil to pump (say, the desert sands of Saudi Arabia) are going at near full capacity. The moderately-difficult sources of oil to get are also mostly tapped, and you increasingly have a scenario where you're looking at pumping oil in very inhosipitable places. Think oil sands in Alberta and deep offshore drilling. This kind of production ain't cheap, and the higher costs are built into the price consumers pay. According to CNN (although I can't independently verify this), the head of exploration for Conoco Phillips says that they need a long-term base price of about $100/barrel to make future investments profitable. Because of these higher production costs and the supply/demand fundamentals, I'm quite skeptical that we'll ever see oil again at less than $100/barrel for any extended period of time.

It's also important to remember that oil markets are probably more volatile than they've ever been, so large price swings in a very wide band are likely to be the norm. And for what it's worth, a number of analysts I trust think oil prices are currently sitting near the low end of that band. Don't be surprised if the markets resemble a roller coaster for the foreseeable future.

But there is an upside to high oil prices. It is the only way that large industrialized countries will ever seriously invest in alternative fuel technologies and actually sustain that investment. Necessity in the mother of all invention. Plus, oil prices closely track expectations about the economy: the main reason they collapsed in the last month was that markets perceived that the prices would be too high for struggling economies such as the US to afford. If prices continue to retreat right now, a large reason for that is weakened demand, which suggest the economy is struggling even more. At best, lower oil prices would be bittersweet.

IPE Journal

A couple good friends from LSE have started their own brand new blog. It looks great and will probably cover a lot of the same political economy issues we focus on here at z'geist. They already have a few posts up - I highly encourage you to check it out.

Talking points

The BBC is reporting today that negotiations on a power sharing deal in Zimbabwe are being adjourned, though not abandoned. According to the original agreement, the talks must reach an agreement by the end of this week.

I've said before that these talks were too timid. Such a response to the terror and chaos Mugabe has imposed on Zimbabwe is irresponsible and proving ineffective. Mugabe will not become a "figurehead"; more importantly, the generals who have become rich and powerful during his rule will not cease to cast long shadows on the country's development even if he does. Zimbabwe requires a lot of help and even if Tsvangirai is handed the reins, the country will need a vast and coordinated international effort to stem any further decline.

It would be encouraging to see a pro-active response to an African crisis that does not involve peacekeepers. Though Mbeki does not offer much hope as an impartial mediator, he will likely keep violence from returning. He will not be able to fully dispel Mugabe (though I doubt anyone would) but it is in his interest to see Tsvangirai in power. If he can get Mugabe on lesser footing, Western aid will sink into Zimbabwe likely stopping the flow of refugees and homeless into South Africa. This, and the resultant economic upswing, would have political benefits for him at home.

It may not be ideal but if Mugabe can be convinced or canoodled into any lesser role, the result will be an improvement. Let's hope that Mbeki can deliver.

Musharraf's last stand

I've talked about the importance of Pakistan a few times, especially concerning South Asian regional stability. The latest development there revolves around President Musharraf who is refusing to resign, despite impending impeachment charges.

The charges stem for a number of "offenses", varying in their legal strength. Despite his economic mismanagement and authoritarian streak, the only charge with merit concerns his dismissal of a number of judges, including the Chief Justice of the Supreme Court.

The next week will prove vital for Pakistan's democratic development and US strategic interests. Pakistan has had trouble embracing the democratic process and its history is littered with coups, some successful, others not. You can be sure that a lot of licit and illicit diplomatic maneuvering is occurring right now and will continue throughout the hearings. Pakistan is too strategically important to allow for any period of serious instability or confusion.

What the international community is hoping for, and should be working toward, is one of two things. Either a swift conviction of Musharraf, followed by his exile and the decoupling of the military from government hands to independent military men, preferably sympathetic to US training and presence OR Musharraf's acquittal where after he becomes a shadow controller of his loyalist party. I may be vilified for saying this but it is the most attractive option if the first does not happen, which, Pakistan being Pakistan, it will not.

While Musharraf was a "dictator" he kept Pakistan free of the extremism that has spread since he lost central power. While he certainly overstepped his bounds by attempting to strong arm the judiciary, if he worked behind the scenes and effectively kept Pakistan on the path to liberalization this would be vastly preferable to a democratically elected (but still corrupt) government lacking the strength and control to stabilize Pakistan.

Foreign policy is often about picking the best of the worst. And right now, unless Pakistan's government steps up, that pick will be Musharraf.

This is your brain on ethanol

As the other half of the Zeitgeist editorial board, I'd like to take this opportunity to strongly endorse my coauthor's denunciation of corn-based ethanol. By this point, I think it's safe to say that the only ones who are really benefitting from our flirtation with domestic ethanol production are the people of Iowa. The rest of us are really getting the short end of the stick. Some thoughts:

The relatively new and historically-unprecedented demand for corn is putting an enormous strain on American farmers' production capacity. Land that could be used to grow other crops is now devoted to corn, which causes the prices of those agricultural products to rise (this is why historically the grain futures markets track each other very closely, and why soybean prices almost mirror corn prices.) Meat is becoming more expensive, because a good deal of livestock feed is corn-based, and it takes about 700 calories of corn to produced about 100 calories of meat. A USDA economist recently estimated that about 3% of corn's price increase could be attributed to ethanol demand. Compare that with the UN Food and Agricultural Organization, which argued that it was almost 30% (did the USDA forget to move a decimal point?), and the World Bank who've put the number as high as 70%.

What to do about all of this? There are a few sensible steps to take. First, stop subsidizing ethanol production. It's an enormous waste of money and it's never going to be anywhere near efficient enough to justify. Another oft-repeated but damning statistic: you could feed a person for an entire year with the amount of grain it would take to fill an SUV's 25-gallon gas tank once.

Second, encourage investment in other energy projects. I'm skeptical that governments have the know-how to pick winners in these situations, so why not let venture capital markets take the lead? Anyways, they more or less already are. Governments might consider helping spur further research with calculated tax breaks/credits for green investment.

Third, import Brazilian sugar-cane based ethanol. In contrast to our ethanol made with corn, sugar-cane is more efficient (hence cheaper) and there's no worry about anyone starving because you use the cane to make ethanol instead of sugar. Besides, Brazil has plenty of land to grow the stuff on, without destroying the Amazon rain forests. They are investing heavily in the industry and already exporting significant amounts.

I might have lost the "energy independence" crowd with that last point. But here's an uncomfortable truth: energy independence is not going to happen anytime soon, if ever. As a country, we just consume far too much energy to realistically produce it all at home. (But why is that such a bad thing? Have we all forgotten about comparative advantage?) Anyways, if you are concerned with security, doesn't it make sense to start buying more fuel from a friendly, stable democratic state and "transfer less wealth" to backwards, authoritarian nations in the Middle East? Think of what that would do for our image in Latin America! Why, you can almost hear Mr. Chavez gnashing his teeth already!

(Picture from Rolling Stone Magazine.)