May 24, 2006 12:07PM

Inconvenient Facts on Currency

Earlier this month, the Treasury Department released its semiannual “Report to the Congress on International Economic and Exchange Rate Policies.” The report’s key conclusion, that China is not a currency manipulator, was met with incredulity on the part of a number of members of Congress, some of whom suggested that Treasury’s “inaction” would move Congress closer to enacting provocative legislation to compel China to allow the yuan to rise.

The belief fueling this get‐​tough rhetoric is that the undervalued Chinese yuan is the primary cause of the $200 billion U.S. trade deficit with China, and that appreciation of the Chinese currency will restore greater balance of trade. But here’s a novel idea: before expending more energy grandstanding about the impact of the insidious yuan, devotees of the currency conspiracy theory might first attempt to validate their premises by looking at the relationships between other currencies and our respective bilateral trade balances.

What they would find is that other factors, such as changes in relative incomes and wealth, might play a more significant role than currency values in determining trade flows. For example, the U.S. dollar declined by 30 percent against the Canadian dollar between 2002 and 2005, yet the U.S. deficit with Canada increased by 58 percent. The dollar depreciated by 32 percent against the euro over the same period, and the deficit with the 12 euro‐​using EU countries increased by 33 percent. Likewise, the greenback decreased by 14 percent against the Japanese yen over the period, yet the deficit with Japan increased by 18 percent.

Of our 10 largest trade partners (which account for 75 percent of U.S. trade), eight have free‐​floating currencies (Malaysia’s and China’s are tightly managed). The currencies of seven of those eight appreciated against the dollar over the period of 2002 through 2005 (only the Mexican peso declined relative to the dollar). Despite pronounced dollar depreciation, the U.S. bilateral deficit increased with respect to 7 of those 8 countries (it decreased slightly with Taiwan).

What is so tiresome about the strident rhetoric from Congress is that it doesn’t stand up to simple analytics. The staffs of Senators Schumer and Graham must have access to some basic trade data and a pencil sharpener. Assuming they do, they might also notice that U.S. exports to China are soaring in 2006. First quarter figures from this year show a 39 percent surge in exports over the same period last year, which far exceeds the 14 percent growth in total U.S. exports and the 17 percent growth in U.S. imports from China.

Yes, the yuan has actually appreciated by about 4 percent since last summer, and greater currency flexibility is in China’s interest. But U.S. export growth is more a function of rising Chinese incomes than of relative price changes caused by currency movements. After all, U.S. exports to China grew at a rate five‐​times faster than exports to the rest of the world between 2002 and 2005, a period during which the yuan‐​to‐​dollar ratio was almost entirely constant.

In other words, U.S. exporters should and do welcome rising Chinese incomes. Punitive sanctions, such as the 27.5 percent tariff under consideration in the Schumer‐​Graham bill, would stunt Chinese income and choke‐​off access to our fastest‐​growing major export market. Congress should get out of the way and allow economics to run its course.

Ironic side note: Of the 33 countries to which U.S. exporters have sold over $1 billion worth of products so far this year, the two fastest growing markets from the same period last year are China (39%) and the United Arab Emirates (91%), both countries that have been so warmly embraced by Congress in recent months. That’s no way to treat the customers.

May 24, 2006 10:52AM

How to Pay Directly for Health Care

A New York Daily News column by “money coach” Jean Chatzky shows consumers that it is possible to comparison‐​shop for health care services. Chatzky notes some of the resources available to patients:

[Health care] prices are starting to emerge. Private insurers like Aetna have started programs in parts of the country (Cincinnati is an early example) where they’ll publish online the exact prices they’ve negotiated with doctors in the area for hundreds of medical procedures and tests…

Healthgrades, which is the largest provider of quality information on doctors and hospitals, is now publishing information on 55 different surgeries and procedures and what they cost on average, in total, across the country…

Chatzky offers patients the following advice:

Price Shop… Get the difference between the list price (what doctors and hospitals bill for, on average) and the discounted or negotiated price that a health plan negotiated (which you and your insurer typically share). These prices can be hugely different.

Negotiate… 70% of adults who talked with a hospital say they were successful in negotiating a lower price for their medical bills… 61% who negotiated with a doctor were successful…

Ask About Cheaper Options. There are often less costly choices to what the doctor has prescribed…

And last. If you’re one of the 40 million people without health insurance, you should know that one of these high deductible plans may in fact make insurance affordable for you.

Chatzky even tells the story of Cato board member Lew Randall, whose doctor recommended a less‐​expensive barium X‑ray (instead of an MRI) when Randall noted he would be paying cash. “If it were my shoulder, that’s what I’d have,” the doctor said. Randall saved $900 on that visit alone.

Health savings accounts have passed an important milestone now that consumer advocates are debunking the myth that health care is too complicated for consumers to be making their own decisions.

May 24, 2006 9:58AM

Is Taiwan Finally Getting Serious about Defense?

The government of Taiwanese president Chen Shui‐bian has proposed a surprisingly large (20 percent) increase in the island’s defense budget. It is a modest, long‐​overdue step toward enhancing Taiwan’s ability to deter military coercion from China. Yet, it merely boosts spending from a absurdly anemic 2.5 percent of GDP to a still anemic 3 percent.

The Taiwanese need to do far more–for their best interests and ours. Beijing maintains that Taiwan is merely a renegade province, and Chinese leaders in recent years have become increasingly vocal about using military force, if necessary, to compel reunification. As I explain in my latest book, Washington’s implicit commitment to help defend the island places this country right in the middle of a looming armed conflict in the Taiwan Strait sometime in the next decade. Although Americans can and should sympathize with the plight of a plucky democracy facing possible conquest by a dictatorial neighbor, maintaining the island’s de facto independence is not a vital American interest. It certainly is not worth risking war with a nuclear‐​armed China.

Taiwan’s inadequate commitment to its own defense encourages China to contemplate coercion, thereby increasing America’s risk exposure. Unfortunately, even the Chen government’s tepid proposal to boost military spending may not become reality. Chen’s approval rating in his country is even lower than George Bush’s rating in the United States. Even worse, the national legislature is controlled by the opposition Kuomintang Party and its ally, the People First Party. Their obstructionism has blocked for nearly 5 years funding of an arms package offered by the United States in 2001. The KMT and PFP apparently believe that Taiwan’s defense budget should consist of money to purchase a telephone to call Washington in the event of a crisis and urge the United States to send planes, ships, and troops forthwith. They are the ultimate security free riders.

U.S. officials should stress to Taiwanese of all political persuasions the need to get serious about their own defense. The most effective way to do that is to make it clear that the American cavalry is not about to ride to the rescue if trouble breaks out between Taiwan and China.

May 24, 2006 9:37AM

How Much to Trust the Medicare Trustees’ Projections?

The recently released Medicare Trustees Annual Report [pdf] contains a stark reminder of the Alice in Wonderland nature of Medicare’s financial projections and policy‐​making. Page 219 of the report carries the chief actuary’s “Statement of Actuarial Opinion.” Its contents should be mandatory reading for those worried about the program’s future. The statement’s second paragraph is reproduced here:

…the Board of Trustees has emphasized the strong likelihood that actual Part B expenditures will exceed the projections under current law, due to further legislative action [emphasis added] to avoid substantial reductions in the Medicare physician fee schedule. While the Part B projections in this report are reasonable in their portrayal of future costs under current law, they are not reasonable as an indication of actual future costs. Current law would require physician fee reductions totaling an estimated 37 percent over the next 9 years—an implausible result.

In other words: Despite Medicare being in a deep financial hole, don’t expect policymakers to stop digging for a while yet.

The funny part is that the actuarial method used in making projections is perfectly legitimate; it makes projections by completely ignoring future policy changes—no matter how likely they are. But the chief actuary is also correct to point out that certain aspects of current Medicare law are ridiculously out of touch with political reality.
Most official budget analysts have thrown a fit whenever I’ve used the words “debt” or “liabilities” to describe current‐​law Medicare obligations to future retirees. “We don’t ‘owe’ anyone anything because Congress can change current laws!” they’ve protested.

The chief actuary’s statement exposes the hypocrisy: His statement means that we are also obligated to pay future medical providers MORE than current laws stipulate. And, oh, by the way, don’t call that “debt” either because, in this case, Congress can choose NOT to change the laws!

May 24, 2006 9:02AM

Congress Rouses Itself

At last Republican congressional leaders have found an abuse of executive power that offends them:

An unusual FBI raid of a Democratic congressman’s office over the weekend prompted complaints yesterday from leaders in both parties, who said the tactic was unduly aggressive and may have breached the constitutional separation of powers between the executive and legislative branches of government.…

Republican leaders, who previously sought to focus attention on the Jefferson case as a counterpoint to their party’s own ethical scandals, said they are disturbed by the raid. Senate Majority Leader Bill Frist (R‑Tenn.) said that he is “very concerned” about the incident and that Senate and House counsels will review it.

House Speaker J. Dennis Hastert (R‑Ill.) expressed alarm at the raid. “The actions of the Justice Department in seeking and executing this warrant raise important Constitutional issues that go well beyond the specifics of this case,” he said in a lengthy statement released last night.

“Insofar as I am aware, since the founding of our Republic 219 years ago, the Justice Department has never found it necessary to do what it did Saturday night, crossing this Separation of Powers line, in order to successfully prosecute corruption by Members of Congress,” he said.…

Former House speaker Newt Gingrich (R‑Ga.), in an e‑mail to colleagues with the subject line “on the edge of a constitutional confrontation,” called the Saturday night raid “the most blatant violation of the Constitutional Separation of Powers in my lifetime.”

If they are finally awake to the executive branch’s indifference to constitutional restrictions, they could find some more opportunities for oversight and correction here and here.

May 23, 2006 5:34PM

Tories for Happiness

The politics of happiness research just got a bit more interesting. British Conservative leader David Cameron is now campaigning on a happiness platform. In a speech at a conference organized by Google in Hertfordshire, Cameron said,

It's time we admitted that there's more to life than money, and it's time we focused not just on GDP, but on GWB---General Well-Being.

This is interesting because up until now, the politics of "well-being" have been primarily a welfare-liberal or social democratic phenomenon. So why the happiness schtick for the Tories? Why now? The Financial Times editorial page says:

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