Tag: economic recession

ARMs as Automatic Stabilizers

An argument often heard for keeping Fannie Mae and Freddie Mac, or some sort of subsidy for mortgages, is the desire to keep the 30 year fixed rate mortgage “affordable.” The 30 year fixed certainly has some merits - which borrowers should be willing to pay for - but it also has the downside of reducing the impact of monetary policy in stabilizing the economy.

Generally interest rates go down in a recession and up in an expansion.  Part of this is the reaction of the Federal Reserve, which tends to cut rates in a recession, but part is also the fact that the demand for credit also declines in a recession and increases in an expansion.

If borrowers moved to adjustable rate mortgages, then in recessions they would likely see a reduction in their mortgage rate, resulting in a reduction in their monthly payment, which would increase their disposable income, which itself should have some positive impact on consumption, helping to stabilize a weak economy.

The reverse would work in an expansion.  If the economy became over-heated, interest rates would likely go up, pushing up monthly payments, resulting in reductions in income and consumption.  While of course this would be unpleasant for the borrower, it would have the benefit of moderating a booming economy, reducing the likelihood of inflation and the occurrence of bubbles.

The latter effect would also increase the degree to which consumers care about inflation and demand price stability from the central bank.  Normally, borrowers have an incentive to favor inflation, as it reduces the real value of their debt.  If however, inflation resulted in an increase in their mortgage rate, their preference could switch toward price stability, which would in the long run be better for growth and the overall economy.

While I do not expect the above to settle the debate over the role of the 30 year fixed rate mortgage, we, as a society, should openly and loudly debate its costs and benefits before we simply assume it needs to be subsidized.

What’s Behind the Decline in Illegal Immigration? It’s the Economy, Stupid

A Pew Hispanic Center report released today confirms what has been widely known, that the number of illegal immigrants in the United States has dropped sharply since 2007. The real argument is over what’s behind the decline.

According to Pew’s Jeffrey Passel and D’Vera Cohn, the annual inflow of unauthorized immigrants dropped by two-thirds during 2007-09 compared to 2000-05. That plunge has contributed to an overall decline in the total number of illegal immigrants in the United States from a peak of 12 million in March 2007 to 11.1 million in March 2009. Pew calls this “the first significant reversal in the growth of this population over the past two decades.”

Advocates of more restrictive immigration policies have been quick to credit increased enforcement for the decline, but that thesis doesn’t hold up to scrutiny. While enforcement efforts have indeed been ramped up in the past couple of years, the change has not been dramatic. Resources devoted to border and interior enforcement have been increasing pretty steadily since the early 1990s.

It seems implausible that more recent, incremental increases would have such a visible effect when years of increased enforcement efforts before now so visibly failed. In fact, the same restrictionists who constantly complain that nothing has been done to enforce our immigration laws are among those now praising that supposedly non-existent enforcement for the drop in illegal immigrants. They can’t have it both ways.

The more obvious explanation is the steep economic recession that began to bite in 2008. The downturn has been especially brutal in the housing and construction industries where many illegal immigrants found employment during the previous boom. As evidence, the decline in the number of illegal immigrants has been steepest in those states, such as Nevada, California, and Florida, where the housing downturn has been the most severe.

When the economy revives, I predict the inflow and population of illegal immigrants will begin expanding again, too. This problem will not be solved until Congress and the president work together to enact comprehensive immigration reform that widens opportunities for legal immigration.

U.S. Antidumping Regime Restrains U.S. Export Growth

In honor of World Trade Week—and for its decreed purpose of educating Americans about trade—this post is about U.S. trade policy working at cross-purposes with other policies or goals of the administration. So numerous are these examples of trade policy dissonance, that a committed wonk could devote an entire website to the task of documenting them.

If the administration were serious about making trade policy work—rather than just paying it lip service—it would compile its own exhaustive list of laws, regulations, policies, and practices that actually undermine its stated objectives of facilitating economic growth, investment, and job creation through expanded trade opportunities. Then, it would make the changes necessary to ensure that our policies are paddling in the same direction. But that is not happening—at least as far as I can see.

At the beginning of the year, President Obama announced his goal of doubling U.S. exports in five years. He even formalized the goal by granting it an official name—the National Export Initiative. Well, I see no imminent harm in setting the ambitious goal of reaching $3 billion in exports by 2015 (although I am wary of the tactics under consideration and the evocation of Soviet Five-Year Plans). But it betrays a lack of true commitment to that goal when nothing is being done to reduce the competitive burdens imposed on U.S. exporters by our own myopic, anachronistic trade remedies regime. The president exhorts U.S. exporters to win a global race, yet he overlooks the fact that Congress has tied many of their shoes together.

The costs of the U.S. Antidumping and Countervailing Duty laws on U.S. exporters are manifest in various forms, but this post concerns the burdens imposed on U.S. producer/exporters who rely on the raw materials and other industrial inputs that are subject to AD and CVD measures. Indeed, most of the products subject to the 300 U.S. AD and CVD orders currently in effect (like steel and chemicals) are, in fact, inputs to downstream U.S. producers, many of whom compete (or try to compete) in foreign markets. (Just take a look at this list and decide for yourself whether these are products that you’d buy at the store or if they are inputs a U.S. producer would use to produce something else that you might buy at a store.)

AD and CVD duties squeeze these U.S. producer/exporters’ profits, first by raising their input costs and then by depriving them of revenues lost to foreign competitors, who, by producing outside of the United States, have access to that crucial input at lower world-market prices, and can themselves price more competitively. This is not hypothetical. It is a routine hindrance for U.S. exporters. And one that has eluded the president’s attention, despite his soaring rhetoric about the economic importance of U.S. exports.

Consider the case of Spartan Light Metal Products, a small Midwestern producer of aluminum and magnesium engine parts (and other mechanical parts), which presented its story to Obama administration officials, who were dispatched across the country earlier this year to get input from manufacturers about the problems they confronted in export markets.

Beginning in the early-1990s, Spartan shifted its emphasis from aluminum to magnesium die-cast production because magnesium is much lighter and more durable than aluminum, and Spartan’s biggest customers, including Ford, GM, Honda, Mazda, and Toyota were looking to reduce the weight of their vehicles to improve fuel efficiency. Among other products, Spartan produced magnesium intake manifolds for Honda V-6 engines; transmission end and pump covers for GM engines; and oil pans for all of Toyota’s V-8 truck and SUV engines.

Spartan was also exporting various magnesium-cast parts (engine valve covers, cam covers, wheel armatures, console brackets, etc.) to Canada, Mexico, Germany, Spain, France, and Japan. Global demand for magnesium components was on the rise.

But then all of a sudden, in February 2004, an antidumping petition against imports of magnesium from China and Russia was filed by the U.S. industry, which comprised just one producer, U.S. Magnesium Corp. of Utah with about 370 employees. Prices of magnesium alloy rose from slightly more than $1 per pound in February 2004 to about $1.50 per pound one year later, when the U.S. International Trade Commission issued its final determination in the antidumping investigation. By mid-2008, with a dramatic reduction of Chinese and Russian magnesium in the U.S. market, the U.S. price rose to $3.25 per pound (before dropping in 2009 on account of the economic recession).

By January 2010, the U.S. price was $2.30 per pound, while the average price for Spartan’s NAFTA competitors was $1.54. Meanwhile, European magnesium die-casters were paying $1.49 per pound and Chinese competitors were paying $1.36 per pound. According to Spartan’s presentation to Obama administration officials, magnesium accounts for about 40-60% of the total product cost in its industry. Thus, the price differential caused by the antidumping order bestowed a cost advantage of 19 percent on Chinese competitors, 17 percent on European competitors, and 16 percent on NAFTA competitors.

As sure as water runs downhill, several of Spartan’s U.S. competitors went out of business due to their inability to secure magnesium at competitive prices. According to the North American Die Casting Association, the downstream industry lost more than 1,675 manufacturing jobs–more than five-times the number of jobs that even exist in the entire magnesium producing industry!

Spartan’s  outlook is bleak, unless it can access magnesium at world market prices. Its customers have turned to imported magnesium die cast parts or have outsourced their own production to locations where they have access to competitively-priced magnesium parts, or they’ve switched to heavier cast materials, sacrificing ergonomics and fuel efficiency in the face of rapidly-approaching, federally-mandated 35.5 mile per gallon fuel efficiency standards.

And to add insult to injury, the Obama administration recently launched a WTO case against China for its restraints on exports of raw materials, including magnesium. Allegedly, since January 2008, the Chinese government has been imposing a 10 percent tax on magnesium exports. How dissonant, how incongruous, how absolutely imbecilic it is that, in the face of China’s own restraints on its exports (which the U.S. government officially opposes), the U.S. antidumping order against imported magnesium from China persists!  How stupid.  How short-sighted.

Spartan’s is not an isolated incident. Routinely, the U.S. antidumping law is more punitive toward U.S. manufacturers than it is to the presumed foreign targets. Routinely, U.S. producers of upstream products respond to their customers’ needs for better pricing, not by becoming more efficient or cooperative, but by working to cripple their access to foreign supplies. More and more frequently, that is how and why the antidumping law is used in the United States. Increasingly, it is a weapon used by American producers against their customers—other American producers, many of whom are exporters.

If President Obama really wants to see exports double, he must implore Congress to change the antidumping law to explicitly give standing to downstream industries so that their interests can be considered in trade remedies cases. He must implore Congress to include a public interest provision requiring the U.S. International Trade Commission to assess the costs of any duties on downstream industries and on the broader economy before imposing any such duties.

The imperative of U.S. export growth demands some degree of sanity be restored to our business-crippling trade remedies regime.

Going Bankrupt Double-Quick

George W. Bush and the Republicans worked hard to ruin the U.S. government’s finances.  The Obama administration and the Democrats are doing an even better job of wrecking the Treasury.

Reports Bloomberg:

Treasuries headed for their second monthly loss, pushing 10-year yields up the most in almost six years, as President Barack Obama’s record borrowing spree overwhelmed Federal Reserve efforts to cap interest rates.

Notes, little changed today, also tumbled this week on speculation the worst of the economic recession is over. A private report today will show confidence among U.S. consumers gained in May for a third month, economists said. South Korea’s National Pension Service, the nation’s largest investor, plans to reduce the weighting of U.S. bonds in its holdings, the government said in a statement.

“It’s a disastrous market,” said Hideo Shimomura, who oversees $4 billion in non-yen bonds as chief fund investor at Mitsubishi UFJ Asset Management Co. in Tokyo, a unit of Japan’s largest bank. “I expected yields to rise but not this fast. We will see new highs in yields.”

The benchmark 10-year note yielded 3.61 percent at 6:29 a.m. in London, according to BGCantor Market Data. The 3.125 percent security due in May 2019 traded at a price of 95 30/32.

Ten-year rates rose about half a percentage point in May, extending an increase of 46 basis points in April. The two-month climb was the most since July and August of 2003. A basis point is 0.01 percentage point.

As borrowing costs rise, so will future deficits, requiring more borrowing, which will push up interest rates, hiking future deficits, requiring…

Just how are we going to finance trillions of dollars for health care reform while wrecking the economy with cap and trade?  And then there’s the $107 trillion in unfunded liabilities for Social Security and Medicare.