A new article suggests that, as a result of the economic crisis, current 18-24 year olds might be “more risk-averse, invest less in the stock market, want more state intervention, believe more in redistribution, and accept higher taxes.”
Looks like young lawyers aren’t the only youthful people losing faith in the market.
-Michael
I got abnormally excited when I saw Susan’s post about the Brazillian cotton case, as it relates to both my undergraduate thesis and my student note. So, I felt the need to note a few quick things for the fellow WTO nerds out there.
Brazil can’t get countermeasures when the U.S. has already complied. My undergraduate thesis tried to determine why the United States (seemingly against its own interests) complied with a WTO decision ruling U.S. “Step 2″ cotton subsidies illegal. So, I was surprised to see that Brazil recently sought countermeasures from the U.S. because they didn’t comply with the Step 2 decision. Huh? Was my thesis all wrong?! As it turns out, Brazil admitted that the U.S. repealed the Step 2 program a few years ago. Nevertheless, they tried to ignore one of the basic principles of WTO law: there’s no such thing as retroactive countermeasures. Essentially, Brazil argued that the U.S. did not repeal its Step 2 program fast enough and should be punished. But the arbitrators reminded Brazil that countermeasures are meant to induce compliance, not punish others. Since the U.S. had already complied (even though it was tardy compliance), Brazil couldn’t be awarded any goodies.
Brazil can probably force the United States to cough up GSM-102 numbers. Susan asked what sort of powers Brazil has to make the U.S. cough up numbers about its export subsidies. I’m guessing its powers are substantial, as the WTO arbitrator specifically included in its report a demand that the U.S. provide such figures:
The United States shall provide the most recent fiscal year data on GSM 102 transactions. The data on GSM 102 transactions by commodity and by obligor shall be supplied in the exact format (and software) as Exhibit US-78. Should the United States not be able to provide the most recent fiscal year data on GSM 102 transactions, Brazil shall use the data from the last available fiscal year.
I’m not aware of any specific sanction for failing to comply with a WTO arbitrator’s decision. Article 25.4 of the DSU says that Articles 21 and 22 (which are the important sections about compliance) apply mutatis mutandis to arbitration. Maybe this means that you can impose sanctions when a member doesn’t comply with an arbitrator’s demand? Nevertheless, I am sure that the WTO (as a body) would take action if the U.S. does not fork over the numbers requested by Brazil.
TRIPS-based sanctions remain a secondary remedy, but it’s not taboo. Although my student law review advocates note otherwise, the cotton decision emphasized that countries cannot simply jump straight to TRIPS-suspension whenever a country fails to comply with a WTO decision. TRIPS is the WTO’s intellectual property agreement; allowing a country to suspend that agreement essentially permits legal piracy (pirated copies of I Know Who Killed Me for everyone!) Although legal piracy sounds like the ulitmate punishment, you can’t engage in legal piracy anytime there’s an argument over grapes or cotton or undershirts.
I’ve recently been reading Consumed: How Markets Corrupt Children, Infantilize Adults, and Swallow Citizens Whole by Benjamin Barber.* The book basically expands on a premise first put forth by Marx: market economies, in an effort to encourage consumption, breed artificial “needs”. Barber suggests that adults are infantilized to make them more receptive to child-like products (and make them more malleable purchasers), while children are made into adults so that they can become little consumers. I’m still trying to figure out how much of his argument I buy, but clearly Barber is a progressive who thinks the market is eeeeeeeeevil (*said with sinister voice*).
I hadn’t really seen much in other sources about this supposedly pervasive infantilization. But, as it turns out, there’s also a conservative infantilization movement that points out all the devolving tendencies that Barber does, but instead blames it on the government. Now even one of my favorite economists, Thomas Sowell, is trying to sell this argument:
The most childish of all the things being said in the august setting of a joint session of Congress last week was that millions of people can be added to the government’s health insurance plan without increasing the federal deficit at all.
. . .
What is equally childish is the notion that the great majority of Americans, who have medical insurance and who say they are satisfied with it, should be panicked and stampeded into supporting vast increases in the arbitrary power of Washington bureaucrats to take medical decisions out of the hands of their doctors – all ostensibly because a minority of Americans do not have medical insurance.
But I just want to step back and ask, before we launch into a great debate about our devolving society (a la Idiocracy): are people really acting more childish? I recognize that we’re engaging in a few more child-like activities, many of which are pointed out by Barber. (Barber’s favorite example is video games! video games! video games!) Even so, we’ve also advanced in some important ways. One could argue that adults are more informed about goings-on throughout the world, as technology makes access to news almost instantaneous. Our economy has shifted from one focused on manufacturing and agriculture (i.e., a brute force eoconomy) to one focused on the provision of complicated services, like information technology and financial services. Those who decry the lack of civility in today’s world forget that men were once beaten on the floor of the Senate. Children and adults have become adept at using technological tools that our grandparents never even dreamed of.
I perfectly understand how some authors conclude that there is an insidious infantilization movement; I’m often shocked at my own generation’s frequent sense of entitlement, laziness, and lack of intellectual curiosity. Even so, I suspect that generations of the past also carried these characteristics, even if they manifested themselves in different ways. Perhaps we shouldn’t rush to diagnose the root of our society’s reversion to childhood until we’re certain that the “devolution” is not just our own sense of nostalgia for the good ‘ole days getting the better of us.
-Michael
*I’m not reviewing Consumed in this piece, but I have to say that I completely agree with this review on Amazon:
If there wasn’t a photo of him on the dust jacket, you would swear the author was a college freshman with a thesaurus writing his first serious essay. The writing is so pretentious, it makes the book hard to wade through. It’s a shame since Benjamin Barber has clearly given his subject considerable thought.
I suspected this after reading his most recent book, but Judge Posner made it official in The New Republic: he’s a Keynesian.
-Michael
Update: One economist responds.
I don’t usually pay much attention to Sarah Palin; if she’s the future of conservatism, the future is bleak. Still, I can’t help but comment on a few things she said in a speech today to an Asian investor conference. Here are some highlights, with my emphasis and thoughts added.
On the financial crisis:
We got into this mess because of government interference in the first place. The mortgage crisis that led to the collapse of the financial market, it was rooted in a good-natured, but wrongheaded, desire to increase home ownership among those who couldn’t yet afford to own a home. In so many cases, politicians on the right and the left, they wanted to take credit for an increase in home ownership among those with lower incomes. But the rules of the marketplace are not adaptable to the mere whims of politicians.
Lack of government wasn’t the problem. Government policies were the problem. The marketplace didn’t fail. It became exactly as common sense would expect it to. The government ordered the loosening of lending standards. The Federal Reserve kept interest rates low. The government forced lending institutions to give loans to people who, as I say, couldn’t afford them. Speculators spotted new investment vehicles, jumped on board and rating agencies underestimated risks.
(AP Photo/CLSA Asia-Pacific Markets, Jeff Topping)
First, one has to note that Palin’s last “cause” is an investor-driven cause: good old-fashioned market speculation. Second, I think it’s an overstatement to say that the government “forced lending institutions to give loans.” Presumably, Palin’s talking about the Community Reinvestment Act. (At least, I hope she is, otherwise that statement makes no sense.) Even so, although the CRA might have encouraged the atmosphere of “loose lending,” it certainly didn’t create it. Banks were lending like crazy not to satisfy any CRA obligations, but because they saw increasing home prices as an excellent opportunity to make some easy cash. Oddly, deregulation might have done more to precipitate loose lending standards than the CRA did, as state consumer protection laws were preempted by federal (softened) standards. Third, and finally, although I agree that the Fed’s “easy money” policy during the Greenspan years encouraged the asset bubble that created this crisis, bankers aren’t forced to lend that money (particularly to risky lendees).
On Milton Friedman:
Now even Milton Friedman, he recognized that the free market is truly free when there is a level playing field for all participants, and good financial regulations aim to provide the transparency that we need to ensure the level playing field does exist, but we need not, we need to make sure that this regulatory reform that we’re talking about is aimed at the problems on Wall Street and won’t attack Main Street.
Look, I’m a pretty big Milton Friedman fan myself. (I’m rereading Free to Choose right now, actually.) But I still don’t have any idea what Palin is talking about here.
On the Federal Reserve:
How can we discuss reform without addressing the government policies at the root of the problems? The root of the collapse? And how can we think that setting up the Fed as the monitor of systemic risk in the financial sector will result in meaningful reform? The words “fox” and “hen house” come to mind. The Fed’s decisions helped create the bubble. Look at the root cause of most asset bubbles, and you’ll see the Fed somewhere in the background.
Has Sarah been reading our blog? Look, I agree that the Fed is not my favorite choice for systemic risk regulator. Nevertheless, I think it’s intellectually disingenuous to say that the Fed is the “root cause of most asset bubbles.” I can’t figure out how Fed policy would have caused the dot-com bubble, the East Asian financial crisis, or the tulip mania of 1637. (Ok, I kid, I kid.) But seriously, can someone nudge Sarah and mention to her that the Federal Reserve didn’t play any role in creating the stock bubble that led to the Great Depression? (NB: I admit that the Fed’s subsequent monetary response–contracting the money supply–made the Depression much worse.)
On deficit spending:
Ronald Reagan, he was faced with an even worse recession, and he showed us how to get out of here.
If you want real job growth, you cut taxes! And you reduce marginal tax rates on all Americans. Cut payroll taxes, eliminate capital gain taxes and slay the death tax, once and for all. Get federal spending under control, and then you step back and you watch the U.S. economy roar back to life.
I’m a bit confused here. Palin’s clearly anti-deficit spending, suggesting she’s not really a Keynesian. But she can’t possibly be a monetarist, because guess who controls monetary policy? That’s right . . . “the root of the problem,” the Fed.
-Michael
One of the basic debates between “conservative” and “liberal” (i.e. Keynesian) economists concerns the extent to which government spending stimulates the economy. Keynesians argue that government spending stimulates money through a multiplier effect, wherein the initial government expenditure leads to further private sector spending (leading to a total economic addition greater than the economic loss caused by taxes). Conservatives contend that the government spending actually crowds out private consumption and investment. (Learn more about crowding out here or see one form of crowding out at right.) A new NBER paper [subscription required] by Harvard economist Robert Barro is sure to only add fuel to the fire. First, Barro finds that government spending (in this case, defense spending) has a multiplier coeffecient of only 0.6 to 0.7. In other words, every government dollar spent actually removed 30 to 40 cents from GDP. Second, Barro finds that (perhaps unsurprsingly) increases in taxes have significant negative effects on GDP.
I’m intrigued by this research, but I have to wonder if these conclusions hold up in a credit crunch like we’re in now. When banks and other financial intermediaries are unwilling to lend (and consumers are unwilling to spend), the money they’re hoarding produces no multiplier effects. Even if government spending is less than optimal, it would still have to produce better results in those circumstances than letting that money sit. Of course, in normal economic times Barro’s conclusions would seem to make perfect sense to a neoliberal like me: individuals would be more informed about what investments produce the best economic results than a government-centered approach.
Macroeconomic Effects from Government Purchases and Taxes
Robert J. Barro and Charles J. Redlick
NBER Working Paper No. 15369 (September 2009)Abstract: For U.S. annual data that include WWII, the estimated multiplier for defense spending is 0.6-0.7 at the median unemployment rate. There is some evidence that this multiplier rises with the extent of economic slack and reaches 1.0 when the unemployment rate is around 12%. Multipliers for non-defense purchases cannot be reliably estimated because of the lack of good instruments. For samples that begin in 1950, increases in average marginal income-tax rates (measured by a newly constructed time series) have a significantly negative effect on real GDP. Increases in taxes seem to reduce real GDP with mainly a one-year lag due to income effects and mostly a two-year lag due to substitution (tax-rate) effects. Since the defense-spending multiplier is typically less than one, greater spending tends to crowd out other components of GDP. The largest effects are on private investment, but non-defense purchases and net exports tend also to fall. The response of private consumer expenditure differs insignificantly from zero.
-Michael
In the wake of the financial crisis, many economists are trying to come up with creative new ways to deal with systemic risk: the risk of a “wholesale bank failure” and failure of the financial system in general. I just finished reading Judge Posner’s recent book, A Failure of Capitalism. In it, Judge Posner makes a convincing case that individual bankers can (and did) make rational decisions that, at least in the aggregate, greatly increase systemic risk. I don’t wish to go into the details of that analysis here; I just want to assume its truth.
When rational actors make decisions that create negative externalities, it often falls upon the government to adjust the incentives to account for those outside costs. In banking, for instance, Citigroup might make certain decisions that increase its risk of bankruptcy to 1%. For a smaller bank, that risk would only be negligibly important: the bank could fail and go into receivership. But for Citigroup, of course, such a failure would have broader effects: it would not be able to keep the (many) promises of payment it regularly makes to other banks (cascades); it would create a “fire sale” situation wherein bank assets would have to be sold by the FDIC at a sharp discount; and confidence in the economy overall would sharply decline. A systemic risk regulator would intervene to prevent a Citigroup (or one of its similarly-sized cohorts) from taking these individually rational (but systemically risky) actions. Even Tyler Cowen suggests that we might need such a regulator, and it probably needs to be the Federal Reserve. I respectfully disagree.
I think the best way to regulate systemic risk is to use the insurance premiums charged to banks by the FDIC’s Deposit Insurance Fund (DIF). In very simple terms, the FDIC charges banks an insurance premium that is used to cover depositor losses when banks fail. Under the current system, the FDIC charges a “risk-based” premium that is supposed to be based on: (1) the probability that the DIF will incur a loss for that institution (i.e., that the institution will fail); (2) the likely size of any such loss; and (3) the revenue needs of the Fund. Trouble is, the premium is only based on the individual size of each bank’s risk to the Fund. Therefore, when calculating Citigroup’s premium, the FDIC does not include any of the “contagion” effects noted above. The FDIC isn’t actually charging for the real “likely size of any loss” that the bank will suffer from a big, interconnected bank’s failure.
I’ve seen a few different studies outlining how we could actually set the premiums to account for the systemic effects of a bank failure. I’m not going to venture into that. My only point is this: properly scaled, deposit insurance premiums that include systemic risk would obviate the need for any “systemic risk regulator.” If banks that create systemic risk faced increased premiums of any significant size, one would expect them to adjust their behavior to reduce the risk. In fact, the best approach might to charge punitively high premiums. One could anticipate that these punitive premiums could quash the moral hazard created by government bailouts; banks would know that they would pay a high price for setting themselves up to be “too big to fail.” Best of all, even if a bank was so brazen as to generate systemic risk in the face of high premiums, the money collected from the bank’s premiums would be enough to clean up the (system-wide) mess resulting the bank’s failure.
Of course, to accurately assess the premiums and let the market work its magic, the FDIC would need access to an enormous amount of information at banks. Not a problem! The FDIC has the right to examine any FDIC-insured institution if the FDIC’s board of directors finds the examination is necessary “for insurance purposes.” 12 U.S.C. 1820(b)(3). That would simplify the issue of setting up an entirely new systemic risk regulator with the authority to examine the books of market participants.
Still, I recognize there’s a big sticking point: any effective premium would probably have to apply to financial institutions that do not even operate with tradititionally FDIC-insured deposits. I also recognize that “excessive insurance premiums may hinder a financial institution’s capacity to resolve its bad loan problems and/or reinforce its owned capital.” (Financial Crises in Japan and Latin America, pg. 82.) And, lastly, there’s always a chance that FDIC systemic risk premiums would be miscalculated. There is some suggestion, for instance, that the FDIC misjudged the systemic risk posed by the failure of Continental Illinois National Bank in 1984. Even so, I think that’s better than just handing the keys over to the Fed, which has enough to worry about (like managing inflation).
-Michael
Update: FDIC Chairwoman Sheila Bair doesn’t want a “super regulator” (*cough*the Fed*cough*) either.
I think it’s worth noting that two more banks were added to the FDIC’s Failed Bank List last Friday. Since September 2007, there have been an incredible 124 bank failures. (This number doesn’t include de facto failed banks that the FDIC does not take over, like Wachovia). In comparison, there was one bank failure between September 2004 and September 2007.
Despite these stark numbers, there’s some suggestion that the FDIC isn’t closing banks fast enough. Yikes.
-Michael
Today’s Trivia Question: What is a day in the life of a king worth, described in terms of days in the life of a prisoner? Show your work.
Answer found here in The Cambist and Lord Iron, by Daniel Abraham. (Or here if you don’t feel like reading!)
-Susan
Yuk yuk. Oh god, that one was really bad. Okay, I promise, there will be no more puns in the future.
But I’ve only just come across this article, “Obama can help free trade with tariffs,” and it’s managed to sufficiently irritate me enough that I can’t let it pass by without comment. We know now that Obama did, in fact, agree to the 35% increase in tariffs on Chinese tires. It was a poor decision, and I have my fingers crossed that this was an ugly unicorn of a decision that won’t be seen again.
But Prestowitz’s article is full of WTF.
The orthodox free-trade view of most pundits holds that if Mr Obama accepts the recommendation he will fail the free-trade test. In fact, the truth is just the opposite. Not to accept the tariff recommendation would be a severe blow to open trade and globalisation as well as to America’s future economic health.
The phrase “extraordinary claims call for extraordinary proof” comes to mind, but Prestowitz sure doesn’t deliver it. On why not imposing barriers to trade is not desirable, he writes:
This kind of trade is not win-win. Rather it is a classic zero-sum game. It is well-known to game theorists that in such situations a tit-for-tat response is the optimal strategy.
Horsedroppings. The ‘optimal strategy’ in any given trade situation is going to depend on what sort of strategy the other 190-odd players on the world market are going with. I seriously doubt that there’s any game theorist anywhere that has declared “in a classic zero sum game, always go with tit-for-tat.” (And for that matter, he’s not even come close to actually showing this is a “classic zero sum game” in the first place!)
But even if Prestowitz were right about the above, game theory alone is completely inadequate for making the sort of decision Obama just made. There are going to be serious political and diplomatic repercussions from the imposition of the tire tariff, and the last thing the U.S. wants to be doing right now is to be setting a precedent for the rest of the world that hard economic times justifies the enactment of short sighted and petty trade restrictions.
-Susan
Update: An economist responds to Prestowitz’s argument.
