Friday, December 31, 2004
I'm looking over the “Report on Industrial Depressions”, published in 1886 by the Commissioner of Labor of the United States. The Commissioner of Labor, according to the introduction, was appointed by the President to head the Bureau of Labor, which was then a part of the Department of Interior. The Commissioner of Labor’s job was “to collect information upon the subject of labor, its relation to capital, the hours of labor, and the earnings of laboring men and women, and the means of promoting their material, social, and moral prosperity…”
It looks like it has many gems worthy of note. Here the Commissioner takes on the issue of labor being displaced by productivity. He makes a great case for machines. First, he gives us an idea of the tremendous productivity gains that were brought by the technological advances of the 19th century.
“The oil industry in Pennsylvania has been affected a good deal by inventions. In the early days of petroleum every barrel of the liquid had to be hauled from the wells to the railroads, sometimes a distance of ten or fifteen miles. The railroads then carried it to distant parts of the country…the cost of all this transportation being from $1 to $3 per barrel. All this work is now done by the National Transit Company, controlled by the Standard Oil Company. When a well is competed, the pipe line’s agent connects the well in a few minutes with the main line’s tanks. The producer or the owner of the well pays nothing for having his oil transported through the pipe lines, but pays 50 cents per day storage for every 1000 barrels…the pipe lines displace 5,700 teams of horses and double the number of men in handling the oil, the production of the country being placed at 57,000 barrels per day.”
“The mechanical industries of the United States are carried on by steam and water power representing, in round numbers, 3,500,000 horsepower…if men were employed to funish the power to carry on the industries of this country, it would require 21,000,000 men, and 21,000,000 men represent a population…of 105,000,000. The industries are now carried by 4,000,000 persons…representing a population of 20,000,000 only…The present cost of operating the railroads of the country with steam power is…$502,600,000 per annum; but to carry on the same amount of work with men and horses would cost the country $11,308,500. These illustrations, of course, show the extreme straits to which a country would be brought if it undertook to perform its work in the old way”
Thursday, December 30, 2004
The government took on more debt today, when the Pension Guaranty Corporation took over United Airlines' pension plan.
The government calculates that United has promised its pilots pensions worth $5.7 billion in today's dollars, though the pension plan has just $2.8 billion in assets. Of the $2.9 billion shortfall, the pension agency said it will shoulder $1.4 billion by taking over responsibility for paying the covered portion of the 14,000 participating pilots' benefits.
Wednesday, December 29, 2004
The New York Times writes about the stunning progress of supermarket penentration in Latin America. "In the 1990's supermarkets went from controlling 10 to 20 percent of the market in the region to dominating it, a transition that took 50 years in the United States..."
The rise of supermarkets is transforming the agricultural sector, and is, of course displacing small farmers. The problem, of course, is the speed of the transformation, and not the fact that it is happening. If I ever saw a situation in which a safety net is called for, this is it. After all, it appears that there are massive increasing returns to scale in retail, as supermarkets can invest in technology and take advantage of their buying power in order to force providers to be more efficient. William Lewis does a wonderful job explaining how this happens in his book, The Power of Productivity.
After all, it is the inefficient farmers that are being displaced, because they "[lack] the expertise, as well as the money to invest in the modern greenhouses, drip irrigation and pest control that would have helped them meet supermarket specifications."
Supermarkets are putting low cost, high quality produce and other goods in the hands of an increasing number of consumers, bringing a significant improvement to the lives of many people who previously could not afford or simply had no access to high quality groceries. This improvement in productivity is most likely resulting in higher economic growth, and improved tax collection. In fact, the NYT article notes that one of the reasons small farmers cannot make a profit selling to supermarkets is that doing so puts them in the government's radar screen, and forces them to pay taxes.
Perhaps the governments should use these extra tax revenues to provide training programs and unemployment benefits to displaced small farmers. Or perhaps I am too idealistic in believing that such a program would work.
Tuesday, December 28, 2004
Enemies of the "Washington Consensus" across the planet are cheering this article, which supposedly proves that defauting on one's external debt, bankrupting one's financial system, and giving the finger to the international financial community is the way to end poverty and catapult a third-world economy into development.
...three years after Argentina declared a record debt default of more than $100 billion, the largest in history, the apocalypse has not arrived. Instead, the economy has grown by 8 percent for two consecutive years, exports have zoomed, the currency is stable, investors are gradually returning and unemployment has eased from record highs - all without a debt settlement or the standard measures required by the International Monetary Fund for its approval.
Argentina's recovery has been undeniable, and it has been achieved at least in part by ignoring and even defying economic and political orthodoxy. Rather than moving to immediately satisfy bondholders, private banks and the I.M.F., as other developing countries have done in less severe crises, the Peronist-led government chose to stimulate internal consumption first and told creditors to get in line with everyone else.
The writer is entirely correct in what he says, but unfortunately he is dismissing some very important and, in my opinion, crucial issues. The first is that Argentina has defaulted on its debt, but nobody has reposessed anything, and nobody is taking away any of the dollars that the country earns through its exports. If I stopped paying my mortgage, I could afford a much nicer car, and make my neighbors quite jealous. In essence, that is what has happened to Argentina. Moreover, the recovery isn't as impressive as it sounds. Yes, growth is fast when compared with last year, but this is a rebound from the sharpest contraction in Argentine history, which occurred after the default on its external debt.
The second thing this writer ignores is that developing countries in general are experiencing an economic boom that is happening because dollars happen to be free at the moment. I can't think of any country in the world right now that is experiencing a balance of payments constraint on growth. The prices of Argentina's exports have risen dramatically and, more importantly, its real effective exchange rate has been kept competitive thanks to the dollar's plunge against most world currencies (including the Brazilian real). Low interest rates in the US make capital flight less tempting, even if property rights aren't exactly respected in Argentina.
I fear that Argentina's temporary success is going to lead to a lot of mistakes in many other countries. Already I see people in Colombia suggesting all sorts of crazy things (some of which Argentina itself hasn't even tried) and justifying them by saying that "Argentina is growing very fast despite its unorthodox policies." I only wish people would use a bit longer time horizon for their comparisons. Argentina's economy actually hasn't grown if one uses 2000 (the year before its default) as a base of comparison. That's not too impressive when compared with Brazil, which did not default, and whose economy is now clearly larger than it was in 2000.
I don't want to defend market fundamentalism or Argentina's creditors here. Rather, I want to defend sensible economic policy from unfounded and potentially dangerous defamation.
Monday, December 27, 2004
"In any society that uses money, whether it be capitalist or socialist, there will be inflation if the sums being spent on producing investment goods exceed the sums that people are willing to save, unless the difference is either lent by foreigners or absorbed by a budget surplus. This is because there will be inflation if the sums spent by the public on buying consumer goods exceed the sums spent on producing producer goods. It is in this framework that we must see and compare the policies of such ountries as the U.S.A., Germany, Japan, and the U.S.S.R in the 1930's."
This quote gets at an idea that many people seem to be neglecting when they think about the US current account deficit. Consumer spending at the moment is financed by foreigners (as Brad Setser explains so well), and when they get tired of doing so, the result will be just like a huge supply shock. Suddenly, goods that were previously available at a very cheap price thanks to borrowed money will become more expensive. The only way to control this inflationary pressure is for the Fed to tighten monetary policy.
Sunday, December 26, 2004
I've just read a very interesting book, Economic Survey, 1919 to 1939 by Sir W. Arthur Lewis. It is a fantastic, succinct (200 pages) account of the economic history of the inter-war period.
The turbulent economic experience left the world with some important lessons that would make us better off if we remembered them. Here is the first one, on unilateral actions to correct economic imbalances. Here Lewis is referring to Japan's decision to dramatically devalue the yen in order to get through the great depression.
"It is a most important lesson that unilateral action of this kind is a breeding-ground for war. The first business of all trading nations must be to try to keep international trade continually expanding, for unless it is expanding, the changes in the relative importance of countries which circumstances continually demand cannot be achieved without friction. The world must contrive to make the problems of each the official problem of all, so that they may be solved by discussion and mutual concession. To return to the jungle of the thirties in matters of international currency and trade policy is to return to the inevitability of war."
Surely, few people believe this statement, as right now it seems that the necessary "changes in economic circumstances" that are being demanded are being achieved through unilateral policy (the US devalues the dollar). Either international economic policy will become much more coordinated in the near-term (unfortunately I am pessimistic about that), or we will find out whether Sir W. Arthur Lewis' lessons are valid.
This is what The Economic Review had to say about the economic conditions in Colombia in its edition of October 6, 1925. I am really amazed at what appears to be fiscal responsibility and sensible economic management. Or perhaps it is wishful reporting on the part of this journal?
Regardless, it seems like it's been all downhill from there.
The Economic Situation
“During the past two years national production and the export trade have favorable foreign trade balance has been considerably augmented. Business generally has become brisker, revenue increased, banking movements multiplied, the monetary circulation enlarged, and the general financial conditions rendered more satisfactory. Among agricultural products coffee and bananas together hold the most important position in the country’s foreign trade…the development should be still more satisfactory now that the railways are being extended and transports made more rapidly and at cheaper rates…Since the year 1920 the trade balance has been favourable. The total volume of exports in 1913 amounted to 238 million kilogrammes; in 1924 it had grown to 328 million kilogrammes…
In 1922 the Public Debt (foreign and internal) amounted to $48,236,221 ; on June 30, 1925, the aggregate Debt stood at $30,075,268.82, the foreign debt being $18,293,585 and the internal debt $11,781,683. Since June 30, 1923 the foreign debt has been reduced by over $15 mill, which amount has been amortised by the product of ordinary revenue.
The above satisfactory results have been achieved without creating new taxation and without in any way inflicting additional burdens upon the economic life of the country.” (italics mine)
On the railways:
"One of the most pressing questions of the day is the necessity for the development of the railway system in Colombia…The chief difficulty…is that of securing the requisite money for the work. It is estimated that at least 200 mill. pesos will be required; despite the country’s favorable economic situation this sum is beyond its present domestic capacity. On account of the general money stringency on the international markets it appears that the United States is the only country where this credit can be secured, but at rates that are not advantageous to Colombia…"
Saturday, December 04, 2004
In Beijing these days, one of the fastest-growing fortunes the world has ever seen is managed by fewer than two dozen traders, chosen for showing mathematical brilliance at China's top universities.
Generally lacking any financial experience outside China, they sit at trading stations around a gold stand bearing a jeweled globe, two feet in diameter and with seas of lapis lazuli, in a rented room on the fourth floor of an insurance building.
Most of the money in China's central bank coffers has accumulated in the last four years, the product of an investment torrent washing over China and the ever-expanding flood of goods pouring out of Chinese factories.