Pakistani truck art

My wife was quite taken by the chrome filigree and painted Rambos/flowers/Tigers/F-15s etc. that adorn public buses and trucks in Pakistan. It says something that these mobile works of art need to be schlepped all the way to France to be properly appreciated. There should be a "truck art" museum in Karachi or Lahore.

When is a deficit not a deficit?

Deficits deficits and more deficits! Deficits are bad, right? So who cares what kind they are -- fiscal, monetary, or current account -- all are bad bad bad (and the fault of BusHitler to boot).

I must confess, I don't care about any kind of deficits. I care about marginal tax rates, inflation, and real interest rates, and that's about it.

Let's talk about current account deficits. The US is running a large current account deficit, which means that it is importing more goods than it exports (conversely, exporting more debt than it imports). It's interesting to note that the US hardly imports or exports anything -- 90% of all economic activity is domestic, and the 10% that is foreign is mostly split between Canada and Mexico. But the US economy is so enormous that even the tiny sliver that interacts with the non-Canada/Mexico rest of the world matters.

Reader JC sends in a link where Paul Musgrave is worrying about the value of the dollar -- namely, it is falling against the Euro and he lives in Europe but saves in America. You will note that Paul's natural reaction (move money from the US to the Europe) will reduce the value of the $ and increase that of the Euro, while simultaneously reducing the American current account deficit. It is the decisions of people like Paul that are leading to the value of the $ falling in worldwide currency markets.

One interesting thing about currency markets is that they are zero sum--in other words, a perfectly hedged basket of currencies would always and forever be worth exactly the same amount. This is different to pretty much every market where you would expect a basket to move up (or down) over time.

The reason, and this is well understood, for the dollar's large fall against the Euro is that Asian central banks are buying dollars to prop up their export markets (a transfer, I might add, from their domestic savers to their domestic exporters). Stephen Roach, Morgan Stanley's chief economist, has a good piece on this in the NYTimes (of all places):

Suddenly all eyes are on a weakening dollar. In recent days, the American currency has fallen against the euro, the yen and most other currencies around the world. The renminbi is a notable exception; China has kept its currency firmly pegged to the dollar for a decade.

The fall of the dollar is not a surprise. It is the logical outgrowth of an unbalanced world economy, and America's gaping current account deficit - the difference between foreign trade and investment in the United States and American trade and investment abroad - is just the most visible manifestation of these imbalances. The deficit ran at a record annual rate of $665 billion, or 5.7 percent of gross domestic product, in the second quarter of 2004.

[China, Japan, and Europe gripe about America]. Yet global imbalances are a shared responsibility. America is guilty of excess consumption, whereas the rest of the world suffers from insufficient consumption. Consumer demand in the United States grew at an average of 3.9 percent (in real terms) from 1995 to 2003, nearly double the 2.2 percent average elsewhere in the industrial world.

Meanwhile, Americans fail to save enough - whereas the rest of the world saves too much. American consumers have borrowed against the future by squandering their savings. The personal savings rate was just 0.2 percent of disposable personal income in September - down from 7.7 percent as recently as 1992. Moreover, large federal budget deficits mean the government's savings rate is negative.

America's consumption binge has its mirror image in excess savings elsewhere in the world - especially in Asia and Europe. For now, America draws freely on this reservoir, absorbing about 80 percent of the world's surplus savings. Just as the United States has moved production and labor offshore in recent years, it is now outsourcing its savings.

This is a dangerous arrangement. The day could come when foreign investors demand better terms for financing America's spending spree (and savings shortfall). That is the day the dollar will collapse, interest rates will soar and the stock market will plunge. In such a crisis, a United States recession would be a near certainty. And the rest of an America-centric world would be quick to follow.

First, there would be a gradual rise in interest rates in the United States - compensating foreign investors for financing the biggest debtor in the world. That would suppress growth in those sectors of the American economy that are most sensitive to interest rates, like housing, consumer durables like cars and appliances, and business capital spending. The result: a higher domestic savings rate and a reduced need for foreign capital - a classic current-account adjustment.

What's certain is that a lopsided world needs to be put back into balance. The dollar is the world's most widely used currency, but its fall affects more than just foreign-exchange rates. A weakening dollar is an encouraging sign that the world's relative price structure - essentially the value of one economy versus another - is becoming more sensible. If the world can manage the dollar's decline wisely, there is more reason for hope than despair.

There's something about currency value, like national airlines, that rises above the mere Economic and becomes something more, some totemic symbol of national virility. An economy managed with a view towards totemic virility symbols (in other words, an economy managed by politicians) will make bad decisions and impoverish their people.

So what if the UN lacks virtue? Update

It seems that Kofi Annan's son, Kojo, was paid $125K for his part in the UN Oil-for-Kickbacks scandal. I wrote recently that the UN's abject corruption is, in fact, average for a large unaccountable bureaucracy. When there is no accountability and competition, and you have humans involved, there can be only one ultiimate outcome.

Similarly, a centralized, bureaucratic boondoggle, such as the Oil-for-kickbacks program (or, say, the Big Dig, to pick an example closer to home) is absolutely ripe for the sort of corruption, nepotism, and graft that colours this (and probably all) UN "operations". The only rational response to Kofi's sone being involved is "how much of a cut did the father get?" and "who are the other family members?"

The failure of the UN to do other than enrich its high officials, low functionairies, and their families on the back of starving Iraqis raises the question of how useful sanctions are, how well they can be "managed", and what use are supra-national organizations at all.

Happy Thanksgiving

I hope all readers had a great Thanksgiving!

So what if the UN lacks virtue?

Between the "Oil-for-Kickbacks" scandal, where Iraqis were impoverished and Saddam was made wealthy through corrupt UN bureaucrats, and the "Money-for-Sex" it seems that the UN lacks virtue. I'm not sure why this is surprising since it is staffed by human beings who, on average, have mediocre intelligence and morals, but there is something about groups that take a higher moral tone that raises expectations.

I believe that humans biologically "want" strong leaders that will "do the right thing", and this longing drives much of the demand for government intervention, and when the problem is too big for a nation state, supra-government intervention. And the mother of all supra-governments these days is the UN, which is why it's become the symbolic nexus of trans-national progressives (what the communitarian biological drive behind communism morphed into).

The problem with the UN is not that it is corrupt -- any human endeavors will have corruption -- but that there is no competition or accountability in its actions. With a lack of these, competition will move towards individuals power-seeking, money-seeking, safety-seeking, quiet life-seeking, and perk-seeking, with accountability only at the individual level (i.e. "did I get what I was seeking?") This is in essence why other communitarian systems, such as communism, fail--they do not factor in the human preference for putting themselves, their family, and their friends (in that order) above others.

So what to do with the UN? The human desire for a strong, virtuous leader collides with the human preference for selfishness--there will always be a desire for supra-governance, and this supra-governance will always be corrupt. Can there be several world-governments? Can the current pretender (the UN) be neutered, so it continues to act as a symbol, sating our atavistic longings, but doing nothing and thus costing no more than what American taxpayers flush down that stinking drain?

Economic Freedom vs Livability

The big, blue, Coastal cities are highly taxed, highly regulated, and expensive. Yet they also seem to be full. This needlessly stylized piece in Reason points out that these expensive cities are still a good deal, as evidenced by the fact that lots of people want to live there.

I think it makes more sense to turn the causality around and say that great places to live (New York, San Francisco) can bear the cost of lousy, expensive government because they are great places to live. People will put up with a more annoying and expensive life because the side benefits are worth it. The cities aren't fun because they have costly, lousy government, instead they have accrued costly, lousy government because their fun makes it bearable.

When I moved back to Boston over a year ago I thought it was to stay. But after living in New York (way more fun) and Chicago (way cheaper and easier) I'm pretty confident that I can do better elsewhere. One more year, and then adios.

Wright and Wrong

I'm not sure how I missed this long Robert Wright piece on fighting terrorism. It was written between 12/3/02 and 12/13/02 and certainly a great deal has happened between now and then. I last met Wright at a panel discussion where I was deeply unimpressed by his contributions.

There are two nice features to his (very long) Slate piece: 1) He highlighted the key propositions and key policy prescriptions in a way that makes the argument easy to summarize, and 2) it was written a while ago so we can see how some things worked out.

Below I have his propositions and prescriptions. I've used his wording throughout, and where there was ambiguity, I've added additional excerpts that clarify this meaning.

Propositions
- Al-Qaida and radical Islam are not the problem.
- For the foreseeable future, smaller and smaller groups of intensely motivated people will have the ability to kill larger and larger numbers of people.
- The number of intensely aggrieved groups will almost certainly grow in the coming decades of rapid technological, and hence social, change.
- The amount of discontent in the world is becoming a highly significant national-security variable.
- The current phase in the evolution of information technology is anti-repression.
- The problem isn't poor people; the problem—or at least part of the problem— is poor nations—or, at least, underglobalized nations.
- Globalization, though a large part of the solution, is also a large part of the problem.
- Globalization has doubly bad short-term side effects, bringing transitional alienation to both developing and developed nations.
- We are seeing, and will continue to see, the globalization of resentment. ("Thanks to television and other technologies, the world has become a small town, even a neighborhood, and America is by far the richest kid in it. Do you remember how you felt about the richest kid in your neighborhood?")
- The lines separating domestic policing and foreign policing, national security and international security, are rapidly blurring.
- The force is with us but only so long as we see and respect its power ("Moral progress is directly rooted in technological progress. Technological advances, ever since the Stone Age, have correlated the fortunes of people at ever-greater distances. [That is, technological progress has put people in more long-distance "non-zero-sum" relationships, if you want to describe this historical trajectory technically, as I've been known to do]. And the result is a growing interdependence that translates enlightened self-interest into an expanding circle of moral consideration")
- Understanding where technology is moving us in the long run can save us lots of short-run turmoil. ("Could Europe have averted some of the chaos brought on by the age of print? Suppose that the pope had grasped the pluralizing import of the printing press back in the 16th century and had gracefully made reforms to accommodate the restive masses. Or suppose that four centuries later, on the eve of World War I, the rulers of the Austro-Hungarian empire had realized that to keep suppressing Balkan nationalism in the age of print wasn't practical. Could World War I have been averted?")


Policy Prescriptions
- Take your bitter medicine early ("So, if there are burdens we can bear now—in money, even in lives—that will dampen future terrorism, they're probably worth it.")
- The substance of policies should be subjected to a new kind of appraisal, one that explicitly accounts for the discontent and hatred the policies arouse.
- The ultimate target is memes; killing or arresting people is useful only to the extent that it leads to a net reduction in terrorism memes.
- In a war on terrorism, applying force inconspicuously makes sense more often than in regular wars
- Support free expression and, ultimately, democratization in authoritarian Arab and other Muslim states.
- Emphasize trade at least as heavily as aid in fighting the kind of economic deprivation that breeds terrorism.
- To blunt some of globalization's sharper edges, carry political governance beyond the level of the nation-state, to the transnational level.
- Honor President Bush's pledge—make America a humble nation.
- Share the blame. ("Invite allies to participate more fully in the conspicuous application of violence.")
- Develop a serious international inspection system for biological weapons.
- Use the World Trade Organization as the fulcrum for ensuring compliance with international weapons-control law.
- Imagine how biotechnology would have to be policed in all nations for the United States to feel secure 20 years from now; implement and then continually refine that policing strategy in the United States, while beginning the long, laborious task of getting every other nation on the planet to eventually adopt a comparable system.

While I agree with all of his propositions, I think many of his policy prescriptions make no sense. Like Wright, I agree that technology is enabling ever smaller groups to mount ever more dangerous attacks. I also agree that these disenfrachised groups come from repressive societies that 1) fail and 2) do not provide constructive outlets for feelings of frustration. Globalization both intensifies the accuteness of failure (now you can compare yourself to others and see how failed you really are) but also, ultimately, provides the solution (an integrated country with decent personal freedoms will both succeed and channel frustration efficiently). The last proposition, about being able to guess at the first world war from the invention of the printing press is simply ludicrous, although I think such preternatural foresight would be cool too.

His policy prescriptions seem to be centered around dodging blame, pushing freedom, and using transnational actors to push through good rules.

While I am all for the US dodging blame, I am not sure why any other country would want to play along (unless they were ideologically sympatico). I read an article recently where the author argued that the Arab world rallied around Bin Laden when Clinton scolded him for blowing up US embassies in Africa. The fact that Clinton paid attention to this guy and his bombing attacks were what made him #1. If that truly is the dynamic behind the blame, then it seems the key to getting the target of the US's back is to create competitive political systems in Arab countries -- then you have an entire structured section of soceity blaming the guys in charge -- something absolutely foreign to Arabs currently.

The "pushing freedom" prescription was not something that Wright seemed to back in Chicago, when he said he was opposed to the Iraq war. I'm not sure how Wright thinks open markets and accountable government will come to the region if not from the barrel of a gun. This path is certainly not easy, and maybe hopeless, but the lack of credible alternatives and the rapid transition of Afghanistan from an oppressive theocratic terrorist training camp to a stable, democratic, feudal narco state must surely go down as one of the surprise successes of the developing world. And the fact that that counts as a "success" shows how low the bar is. Moreover, last I checked the plan was for a freer Iraq to be a model for the rest of the region. It should not pass anyone's notice that Iran is just next door.

Bush's policies mark a dramatic change from the "prop up the local thug against Communism" that served the US well through the Cold War. With the Cold War won, it was time they changed -- a pity more did not happen under Bush I and Clinton.

Finally, Wright's proposal that transnational institutions create and enforce good rules seems the most ridiculous. I honestly cannot think of a single good rule that transnational institutions have enforced. The League of Nations did not prevent the Second World War, the UN has not prevented the Cold War (and the Korean War, and Vietnam), the Iraq/Iran War, the Bosnian War, genocide in Darfur, genocide in Rwanda, the first Gulf War, the second Gulf War, the Afghan War, the Stalinist Purges, Mao's "Great Leap Forwards", PolPot's killing fields, or any intra, inter, or extra-national conflict since it was founded. The IAEA failed to stop North Korea, India, and Pakistan getting nuclear weapons, and is obviously impotant with Iran. Wright's proposal to hobble the already beleagured WTO with weapons control laws would seem to reduce the incentive for disconnected nations to start connecting with the rest of the world through Trade. We both agree that this is a good thing, so why make it harder?

The question of how to integrate peoples that have isolated themselves from the rest of the world--North Korea, the Arab World, Africa--is tricky. Nation building is very hard. Global Guerillas are learning how to disconnect a country from the world as a prelude to hijacking it for their own cause. It is not unhelpful that the US Armed Forces are currently in Iraq learning how to set up civic institutions and combat those who are, very literally, the enemies of modern civilized life.

W

It looks like Bush gets his 4 more years. But there is plenty for Democrats to console themselves with:

1) It isn't a bad thing that Bush gets to finish what the begun in Iraq. Right now I think it's too early to tell whether the invasion was a good idea or a bad one, but we should know in 3-4 years. Republicans will not be able to accuse Kerry of screwing things up though by his softness on terror.

2) I beleive that the US housing market is in a bubble, and that we shall see prices fall nationally (first time ever) and fall dramatically in the most overinflated markets in the next few years. Since more wealth is tied up in housing than other markets, I also expect to see consumer and business spending contract when this happens. It will be a rough ride for any administration.

3) Taxes go up and down like yo-yo's, while spending seems to remain fixed and unalterable. If you don't like Bush's tax cuts you will have every opportunity to hike them up again. The tax code seems to be every party's favorite playpen.

4) We are now assured not-Bush in '08. Whatever animosity he's gathered personally will be purged then and we can all get back to the "life-as-normal" existance that Kerry and the Economist offered. Getting "back-to-normal" after 6.5 years of the boot may be better than after 2.5 years. The international community isn't going anywhere, and with the (maybe) exception of Arab nations, we'll see a new set of faces in '08. Time enough for a fresh start then.

Kevin Muphy on Social Security

Kevin Murphy is one of the smartest people I met at Chicago. And that's really saying something. He has a post up on social security that I think is worth reading. His main points:
1) Privatization in and of itself does nothing to alleviate Social Security's impending fiscal imbalance or improve Social Security's rate of return.
2) So long as Privatization also reduces the stream of promised benefits by the amount of reduced taxes, it has no effect on the solvency of the Trust Fund; it reduces inflow to the Trust Fund to the same degree it reduces outflow from the Trust Fund.

Key conclusions:

The analysis here demonstrates that Social Security privatization is unlikely to improve solvency.

A broader question is exactly why solvency is an issue. According to conventional wisdom, solvency matters because exhaustion of the Trust Fund will mean Social Security is bankrupt.

It is merely an accounting fiction, however, that only Social Security taxes can be used to pay Social Security benefits. So the impending exhaustion means simply that at some point before Trust Fund exhaustion, Congress must either use other taxes to pay Social Security benefits, or cut benefits, or raise the Social Security tax rate.

The real issue, therefore, is that under current policy the U.S. is committed to spending a large and growing share of GDP on transfers to the elderly. This requires either increased tax revenues or decreased spending on other programs.

Society must therefore choose between two options. The first is to honor the existing liabilities of Social Security and accept the necessary taxation or lower expenditure on other programs. The second is to reduce the existing liabilities. There is no third option; privatization does not provide a free lunch.