July 31, 2009 3:03PM

Since When Is Plunging Trade ‘Good News’ for GDP?

This morning’s Commerce Department report on second-quarter GDP contained what passes for good news these days: the U.S. economy shrank at an annual rate of only 1.0 percent in the April-to-June quarter. And in the twisted logic of conventional thinking, a drastic fall in international trade was supposedly part of the good news.

An Associated Press report beautifully captures the conventional wisdom. Buried deep in the story was this gem: “An improved trade picture also added to economic activity in the spring. Although exports fell, imports fell more, narrowing the trade gap. That added 1.38 percentage points to second-quarter GDP.”

Behind that statement is the Keynesian assumption that exporting goods adds to GDP, while importing subtracts because every car, shirt, or DVD player we import is supposedly one less that we make ourselves.  So never mind that exports have fallen sharply in the past year; imports have fallen even faster, leaving us supposedly better off.

The mistake is seeing imports as a subtraction from GDP. The fact that we import $1 million worth of t-shirts does not mean our GDP is therefore $1 million less than it would be if we did not import the shirts. In fact, the $1 million we sent abroad to buy the shirts quickly comes back to buy something valuable in our own economy.

The money foreigners earn selling in our market can be used to buy U.S.-made goods, but it can also be used to buy U.S. assets, such as stocks, real estate, or Treasury bonds. This investment also creates economic activity, and if the investment inflow is used wisely, it will actually raise our productivity and GDP. A rising level of trade allows us to deploy our economic resources more efficiently, boosting output and economic growth.

As I explain in a previous Free Trade Bulletin, rising imports are not a drag on growth but in fact usually signal rising demand in the domestic economy, just as falling imports are a reliable sign of slumping demand. That is why an “improved" (i.e., shrinking) trade deficit has accompanied every recent recession, including the one we’re still mired in.

If we want our economy to recover and grow, we should be rooting for more trade, not less.

July 31, 2009 1:46PM

Socialized Medicine Socializes the Cost of Irrationality, Too

Over at The New York Times' Economix blog, health economist Uwe Reinhardt has a fun post about the fundamental irrationality of American voters when it comes to health care reform:

To be responsive, then, to the “simple common sense” of the American people, any proposed health reform must not reduce the revenues of hospitals, lest some neighborhood hospital may have to close; or of doctors, lest some doctors might refuse to see patients; or of the manufacturers of health products, lest they are unable to innovate; or of anyone on the supply side of the health sector, lest they go out of business and have to lay off employees.

At the same time, the “simple common sense” of the American people dictates that any health reform that fails to bend down the growth curve of future health spending — the current jargon for controlling health spending better — is unacceptable, too.

But Reinhardt does not ask why the American public is so fundamentally irrational when it comes to health care reform.

The answer is actually pretty simple: government has given us a health sector where everyone is spending someone else's money.  In such an economy, individuals can make irrational demands (cut spending — but don't reduce my access to care!) because they don't bear the cost of their irrationality.

Professor Reinhardt closes, "Your homework assignment, dear reader, is to design such a plan," one that satisfies the irrational demands of American voters.

How about a plan that forces each individual to bear the cost of their own irrationality?  That would improve our health sector — and public discourse.

July 31, 2009 10:34AM

Battle Of Race‐​to‐​the‐​Top Editorials

In the battle of the Race-to-the-Top editorials, the Wall Street Journal beats the New York Times, hands down.

Yesterday, both papers ran editorials about the so-called "Race to the Top Fund," a pot of $4.35 billion over which U.S. Secretary of Education Arne Duncan was given control under the  "stimulus" law. Last Friday, as I reported, Duncan and President Obama staged a lovely dog-and-pony show for the release of draft Race to the Top regulations, and they naturally went on about how a new day was dawning, and this fund would force real reform, and blah, blah, blah, blah...

The Times must have been very impressed by the canine-and-equine event:

The federal government talks tough about requiring the states to improve schools in exchange for education aid. Then it caves in to political pressure and rewards mediocrity when it’s time to enforce the bargain. As a result, the country has yet to achieve many of the desperately needed reforms laid out in the No Child Left Behind Act of 2002 and other laws dating back to the 1990’s.

Education Secretary Arne Duncan is ready to break with that tradition as he prepares to distribute the $4.3 billion discretionary pot of money known as the Race to the Top Fund. States that have dragged their feet or actively resisted school reform in the past are screaming about the rigorous but as yet preliminary criteria by which their grant applications will be judged.

Now, the Old Gray Lady is absolutely right that the feds have talked tough time and again about demanding real improvment, but have produced precious little by way of improved achievement. In light of that, why would they possibly believe that Obama and his crew are really "ready to break with that tradition"? Oh, right: because they have produced draft regulations for Race to the Top that seem tough, and they appear to really, really want states to adopt national standards.


The Journal, in stark contrast to the Times, actually considered the federal track record — including Obama's so far — and saw a more or less unbroken trend: huge spending that rewards the status quo and those employed by it, and little else but rhetoric. I say "more or less," by the way, because the one way in which Obama has broken with the trend is in the shear, staggering size of the mountain of money he has sent the status quo's way:

The Obama Administration unveiled its new “Race to the Top” initiative late last week, in which it will use the lure of $4.35 billion in federal cash to induce states to improve their K-12 schools. This is going to be interesting to watch, because if nothing else the public school establishment is no longer going to be able to say that lack of money is its big problem.

Four billion dollars is a lot of money, but it’s a tiny percentage of what the U.S. spends on education. The Department of Education estimates that the U.S. as a whole spent $667 billion on K-12 education in the 2008-09 school year alone, up from $553 billion in 2006-07. The stimulus bill from earlier this year includes some $100 billion more in federal education spending—an unprecedented amount. The tragedy is that nearly all of this $100 billion is being dispensed to the states by formula, which allows school districts to continue resisting reform while risking very little in overall federal funding.

It should be noted that not all of the $100 billion in education stimulus is going to K-12 education — some goes to higher education and other areas — and states had to at least pay lip service to reform in order to get most of their money. But the cash infusion is still huge, and lip service is something we've never had in short supply. But bottomless abundance of lip sevice — or complete absence of any real reform so far — notwithstanding, as far the New York Times is concerned a new day really is dawning.

July 30, 2009 8:06PM

Keeping Allies at Bay

Many people who care deeply about the Henry Louis Gates incident will steer clear of it because of the racial component and the high dudgeon. Maybe I'm not so wise.  At the risk of sounding  "I know what it's like . . . ."

I've been harassed by police for idling my car outside of a grocery store, waiting for a friend to bring out his groceries. I gave them the wrong look as they passed, I guess, so they circled back to berate me on the pretext that the asphalt in front of the store was a fire lane. Never mind that it was after 11:00 p.m. and the parking lot was empty.

I held my tongue - even pretended to get a little weepy - and collected their car number. Once home, I called the sheriff's office, saying I had gotten some help from some officers and wanted to get their names to "write a nice letter or something." The next day I called back and spoke to their Senior Deputy, Deputy Arnaldi, about what was at a minimum rudeness and to me very threatening. It turns out that Deputy Tuller was a training officer bringing a young man named Vargas up to speed on how to intimidate and offend the public.

Also in college, police came to a party of mine because of a noise complaint - well-founded, I'll admit. Instead of quieting the party, they drew my roommate outside and claimed they needed his ID, but refused to let him get it. Instead, they encircled and harangued him. It appeared to me that they were trying to draw him into violence. It's a tribute to his lifelong decency and dignity that he didn't take the bait. My roommate was black, and the inference I drew from the circumstances is that the police had it in for him because he was black.

I was a little more assertive this time.  I demanded the name of the ringleader. He responded by asking me to come talk to him on the street, but I guessed that he would have stronger grounds to arrest me there so I declined.

His name was Abel Pibo. Abel Pibo of the Santa Barbara County Sheriff's Department is a stain. If he has family who loves him, they should know that other people feel very differently.

Next up, law school. In the summer between my first and second year, police officers in South Dakota invented a reason to convert a tail-light stop into a full-blown search of my car and passengers, complete with a drug-sniffing dog and a camera crew from a television show called "Real Stories of the Highway Patrol." The car, which had been broken into by thieves earlier in the trip, was ransacked again, by "law enforcement."

My assertiveness grows. To render the television footage unusable, I stood just off-camera swearing like a sailor throughout the search and the re-staging of events the officers did for the camera crew. Every combination of the filthy words I've ever known passed my lips twice.

Why recite these incidents in such detail? Why tell you what I think of Abel Pibo? To convey the depth of feeling I have - and so many of us have - about police abuses of power. 

I've been lucky, of course, because I haven't been arrested - even as I've gotten mouthier with age. And it's entirely clear to me as a person who resides in the upper echelons of society (putting aside traditional categorizations) that much worse is happening to other people.

It's not about being anti-police. During those college years, I worked in a nightclub where we often relied on and worked with local police. I won't use their last names, but Bill, Sid, and Dennis (aka "Sergeant Idol") are great guys. When I got decked by a guy wearing a ring and had to get my chin stitched up, Sid was ticked! I had never seen him scurry around quite so much. And I appreciate it.

As Tim Lynch noted, Radley Balko captured what won't be taught in this evening's teaching moment: "[T]he issue here is abuse of police power, and misplaced deference to authority."

Radley tells the story of our friend Brooke Oberwetter, who was arrested at the Jefferson Memorial for dancing on his birthday - perhaps, more accurately, for asking why she wasn't allowed to dance there on his birthday.

At a cross-ideological panel discussion on civil liberties post-9/11 some months ago, I told the story of Brooke's arrest and the slightly over-righteous commentary about "the state" in one of the videos.  A co-panelist from the NAACP observed to my delight (paraphrasing), "So your 'the state' is our 'the man!'" It was an absolutely hilarious comment - and a delight because it crystalized the common interest we all have. Police abuses I'm quite certain fall disproprtionately on African Americans.

With regret, I report that the NAACP is seeking policy changes that aren't grounded in these common interests.  They want anti-racial profiling training and race and gender sentivity training.

These things won't address the issue most central in the Henry Louis Gates incident, or the issue that will bring more communities and constituents on board. Unfortunately, this approach to the matter is keeping allies at bay.

July 30, 2009 4:28PM

The Benefits of Going Naked…Swaps and Derivatives

Key House Democrats have just proposed a new plan for regulating our Nation's derivatives' markets.  While the heart of the plan mirrors the Obama Administration's proposal to require standardized derivatives, such as credit default swaps (CDS), to be traded over a centralized exchange, the House proposal also goes further, raising the possibility of banning "naked" positions in the derivatives, equities and debt markets.

Taking a naked position, where one hedges or bets on a specific risk without actually holding the underlying asset or liability, has been widely blamed for bringing down our financial system.  This blame is misplaced.  For instance, credit default swaps betting that companies such as Fannie Mae, Bear Stearns or AIG would fail did not bring down those companies - bad management practices and excessive risk-taking did.  Of course when those companies were on the way down, their management wanted to blame everyone but themselves; short-sellers and speculators were just the messenger of a truth that management wanted to hide.

At heart, our markets, particularly our capital markets, serve as valuable aggregators of information, generally via the price mechanism.  Speculators, including those holding a naked position, help bring new and valuable information to the market place.  Recall it was the short-sellers who discovered Enron's frauds, not the regulators or the rating agencies.   Banning naked positions will only serve to reduce the information content of market prices, and also further entrench incompetent management.

In addition to the aid in price discovery, speculators also provide much needed liquidity to other holders of the same instruments.   For instance if you purchase a GM bond and also a credit default swap on GM to hedge the credit risk in that bond, you would prefer to be able to see that CDS contract in as broad a market as possible.  If you were limited to selling that contract only to another holder of that same bond, you will likely have both a harder time selling that contract and will receive a lower price for it.  One of the hardest parts of resolving AIG has been finding buyers for its derivatives contracts.  A deeper market in derivatives would lessen the potential "fire sales" that can occur when a large financial firm fails. 

Of course how one treats derivatives in the case of an issuer failure can greatly impact the stability of the financial system.  By removing derivatives and CDS from the automatic stay provisions of the bankruptcy code in 2005, Congress guaranteed that when a large issuer of CDS got into any trouble, there would be a run on its collateral.  The solution is not to ban naked positions, but to reduce the potential for collateral runs by treating CDS counter-parties like any other creditor.

July 30, 2009 12:39PM

Transparency: Read the Bill? See the Earmarks!

Via MLive.com, here's House Judiciary Committee chairman John Conyers (D-MI) pooh-poohing the idea that members of Congress should read legislation before they vote on it.

He is under attack for it -- attacks he can deflect because they're partisan and because he's from a quintissential safe district. So instead of gulping the too-potent elixir of outrage, let's sip a while on substance.

Members of Congress don't read bills. Instead, they efficiently (for them) place trust in staff and other politicians to know enough of what's in a bill, and enough of the politics, to get by.

I agree with the ReadtheBill campaign, which wants Congress to post all legislation online for at least 72 hours before it is considered. It's complementary to President Obama's 38-times-broken promise to post bills online for five days before he signs them.

The point, of course, is not having 535 people sit down and thumb through every single page of the legislation coming before them. It's having the 535 members of the House and Senate know what's in the bills they vote on. But even more than that, it's about letting the public know what is in the bills before Congress votes.

"What good is reading the bill if it's 1,000 pages and you don't have two days and two lawyers to find what it means after you read the bill?" says Conyers. Give us two days -- no, make it three -- and Americans, including lawyers, will let you know.

Media Name: earmark_map.jpg

The thirst for transparency is not speculative. WashingtonWatch.com (a site I run) recently asked the public to gather data about congressional earmarks, which have long been shrouded in secrecy. In under two weeks, ordinary Americans have put more than 8,000 earmarks into the database to create a "United States Earmarks Map." (It loads a little slowly because of all that data.)

Through this project, a relatively small group of people will help expose how the Washington spending machine works, and by exposing it, change it.

You can review Chairman Conyers's earmarks by selecting "Michigan" in the drop-down menu below the map, then selecting "Rep. John Conyers."  And if the earmarks your member of Congress requested are not in the database yet, you can enter them here.