Paul Krugman Loves Politics...and Costumes!

Paul Krugman's profile in the New Yorker!

Also, since Evelyne pointed out the part about how Paul Krugman loves costumes...
my Halloween costume two years ago was capital flight!

Paul Blustein on the Misadventures of the Most Favored Nations

"Clashing Egos, Inflated Ambitions, and the Great Shambles of the World Trading System"
That's the subtitle of Paul Blustein's book, Misadventures of the Most Favored Nations. How can one not want to pick up a book with that title/subtitle?!

The Washington Post says, "Blustein has thoroughly mastered the craft of breathing life into intrinsically dull material with compelling thematic narrative and delicious character studies." Delicious, indeed.

Paul Blustein came to Georgetown Law today to talk about his book, and it was so fun! He read some pages from his book and at one point he pretended to be an army guy yelling at trade representatives.
Apparently, Americans attending the Doha round were given the password "paging Mr. Black," which meant that there was a terrorist threat and all Americans had to evacuate so they could be taken to navy ships nearby. (To hell with the reps from other countries, right? Haha.)

Blustein talked about the frustrations of different countries during multilateral trade rounds like Doha, and the challenges that must be overcome when negotiating a deal between parties with disparate views and priorities. Towards the end of his lecture, Blustein said he felt that a moratorium should be placed on bilateral trade agreements because they draw attention away from multilateral processes.
I thought this was an interesting statement for him to make since he had spent so much time talking about the doomed nature of multilateral trade rounds. If multilateral rounds are so ineffective, isn't the opportunity cost of focusing on bilateral trade agreements insignificant? Why not focus on the pareto improvements that could be made through bilateral trade agreements rather than those that will never be made through multilateral agreements?
Blustein clarified: Although the WTO has its flaws, countries need to preserve this organization that has done so much to prevent trade wars (through its dispute settlement system). When countries start shifting toward bilateral agreements, there is less of an incentive for them to pursue/cooperate in multilateral agreements that can lead to more benefits at the margin. (He explained all of this much more eloquently that I have...)

I agree that countries need to start thinking about themselves as part of a global community, and not just the European community, or the East Asian community, etc. Like Lant Pritchett said, we need to stop having these "imaginary communities."

The Washington Post says, "Blustein leaves the book's punch line until its final section: The benefits of free trade have been grossly oversold. By the WTO's own accounting, even the utopian elimination of all tariffs would boost world GDP by less than a half-percent, with most of that benefit going to the wealthiest nations." However, it is difficult to swallow this idea after reading pieces like "Ricardo's Difficult Idea" by Paul Krugman.

A friend of Blustein argued that by claiming that the sky is falling, one is only doing more to catalyze the self-prophesied failure of the WTO. It's kind of like deflation - if people go around saying that there is the threat of deflation, even when there is none, we could end up in a deflationary death spiral like Japan's lost decade...

Related Links:
Blustein mentioned Smoot-Hawley at one point and it reminded me of the '93 debate where Gore gives Perot a framed picture of Smoot and Hawley and says, "I framed this so you can put it on your wall if you want to." Ha!

Professor Johnson used to do Ross Perot imitations. Those were fun. (Sigh, I miss Wellesley.)

Greg Mankiw blogged about VAT not too long ago.

In other news:
I'll be blogging about ridiculous things countries have done to discriminate against certain imports. (Are all cows the same?! Are all sardines the same?! What exactly is a "like good?")

Filling out paperwork for my retirement account and health insurance has made me even more depressed about turning 22 this week...Melky Cabrera is only 3 years older than I am and he plays on the best baseball team EVER, AND he has crater like dimples. How am I supposed to beat that?!

Anyway, time for sleep. Tomorrow's Thursday - my favorite day of the week! (b/c I get to go to International Trade and get out of work knowing that the next day is Friday...but I assure you, Friday is not my favorite day of the week. My favorite day of the week is Thursday.)

News

Hi everyone! These past two weeks have been absolutely crazy, so I haven't had a chance to blog much...

However, a few tidbits from the news:
Taxpayers are realizing profits as big banks repay their loans. This article reminded me of the Resolution Trust Corporation from the S&L crisis.

The WTO ruled that the U.S. would face ~$300 million in annual sanctions as a result of illegal subsidies to U.S. cotton growers. WP article here. Hrm...does this remind anyone else of corn subsidies?! Corn subsidies and sugar tariffs also make it impossible for Brazil to export sugar cane based ethanol, which is more environmentally friendly than corn based ethanol. Boo. I imagine Professor Johnson shaking his fists angrily as he tells his students this...

Paul Krugman's reaction to Greg Mankiw's post on SAT scores here. I guess even grown ups have frienemies...haha.

Pieces on health care from Free Exchange and WP.

Going to meet Chanda for bubble tea now! She is leaving for Peking University tomorrow. I am 80% excited, and 20% sad. Chanda, NY will miss you! That's right. ALL OF NEW YORK WILL MISS YOU, ESPECIALLY ME!

<3
ESJ

Green bill, Greenspan, Green with envy.

Yesterday:
Yesterday, the Minister Counselor and I had lunch with two congressional staffers on the Ways and Means Committee. It was one of the more exciting days at work, and not just because we were at a restaurant! They talked mostly about the KORUS FTA, but I had a chance to ask some questions about the U.S. auto industry in general, and the politics surrounding the issue of free trade. Evan and Alex were both really nice and patiently answered all of my questions.
For example,
I was thinking that on the one hand, it is an awful time to approach the issue of free trade because people gravitate towards protectionist policies during recessions in an effort to boost domestic markets. On the other hand, it is a great time to ratify free trade agreements because the global community has become (painfully) aware of the degree to which our economies are linked. Paul Krugman didn't win the Nobel Prize for nothing, right?

However, President Obama seems to be preoccupied with Health Care reform and the Energy Bill, which are also really important.

I also met Edward Gresser yesterday! He made a really good point about how the U.S. has some contradictory policies when it comes to the auto industry. For example, there is a 25% tariff on light trucks, which acts as an incentive for automakers to produce more light trucks. However, the government is simultaneously trying to get automakers to produce more fuel efficient vehicles. Why not just get rid of that 25% tariff?

BTW, isn't it interesting that in 1930, there was a 70% tariff on magic tricks and practical joke items?! So silly!

In other news: Brad DeLong blogged about the Fed and Greenspan. Chanda and I love all things Alan Greenspan. We want to adopt him as our grandfather.

Today:
I finally finished a report that I have been working on for one of the diplomats at the Embassy. He's such an interesting character. I saw him one Monday and asked, "how was your weekend?" and his response was, "I went to an Aerosmith concert with my friend and we stayed out past 11 PM! I went because I don't know if I'll be able to go once I get a little older..."
HAHA. He's so funny!

Anyway, the report was on tax incentives that motivate employers to hire disabled workers. I won't bore you with the details, but basically, employers can receive tax credits for hiring disabled workers or for making their work place more accessible. The efficacy of these tax incentives are disputed, but there have been arguments that such incentives would distort the labor market and lead to" displacement" and "churning." Displacement is the discrimination against those who will not allow the employer to take advantage of disabled worker tax credits. Churning is the act of replacing older disabled workers with new ones such that the employer would qualify for more tax credits. However, in 2001, the GAO testified before the Committee on Ways and Means and stated that 93% of employers surveyed reported that displacement and churning have little to no cost-effectiveness. So, no such labor market distortions.

Someone at work today said, "I am amazed by the wonderful opportunities and programs that are available to the disabled people in the U.S. (compared to Korea.) But then I wonder, how can the same country have such bad health care?!"

Haha. I thought that was really funny.

Tomorrow:
Having dinner with DJ Nabs and his wife, Alaka, tomorrow! I can't wait to ask them about the IMF and the World Bank. They're so awesome. I'm jealous.

Fair Inequality.

In the midst of the current macro-economic crisis, I have come across many angry people. Yes, modern finance is flawed, but what are the alternatives? [a question that Obama and his team will have to address] I also feel that much of people's anger is misdirected [towards Alan Greenspan, who at least had the courage to man up and apologize.]

Firstly, not everyone who makes a shit ton of money is corrupt/doesn't deserve it. Income inequality is sad, but is it unfair?

In "The Conscience of a Liberal," Paul Krugman argues that poor institutions are to blame and that "movement conservatism" has been contributing to income inequality. He gives the "Great Compression" as an example of how great institutions can make this world a happier, more equal place. Now, Paul Krugman is a Nobel Laureate, and I'm a half-person who only started taking Econ classes 2 years ago, so don't eat up everything I say here, Jess. Haha. But here's my response to Paul Krugman's view:

Although the “Great Compression” of World War II is largely attributed to such institutional changes as the creation of the NWLB, NIRA, a redistributive tax code, and the introduction of health care benefits, one can not argue that the inverse is also necessarily true.
The equality that is characteristic of the "Great Compression" can also be explained by simple supply and demand for unskilled vs. skilled workers.
During World War II, the composition of labor markets changed drastically as the relative demand for unskilled labor increased and the supply decreased. The egalitarian structure of society was retained even after the institutions of World War II were dissolved b/c although the relative demand for skilled labor increased after the war, the relative supply increased at a faster rate [Piketty, Thomas, and Emmanuel Saez. "Income Inequality in the United States, 1913-1998." Quarterly Journal of Economics CXVIII (2003): 1-37.]

Currently, DEMAND for skilled labor outpaces supply. The wages of American educated workers are some of the highest in the world as a result of increasing demand and increasing scarcity value. The richest 1 percent of wage earners received 80% of all income gains from 1980 to 2005 [Piketty-Saez]. The gap between the median earnings of men with B.A. degrees and that of all full-time male workers has also increased from 14% in 1967 to 120% in 2005 [Levy, Frank, and Peter Temin. "Inequality and Institutions in 20th Century America." National Bureau of Economic Research: 1-42.]

Globalization has also increased the elasticity of demand for low-skilled workers as firms gain access to foreign labor markets, thus decreasing the comparative viability of the domestic low-skilled labor force. And since labor is not subject to arbitrage to the extent that tradable goods are, institutions that skew the price mechanism [minimum wage laws] further exacerbate the loss of income accruing to low-skilled labor. Although minimum wage is meant to protect the lower income brackets, it actually creates excess supply of low-skilled workers in the domestic market and pushes firms to take advantage of cheaper low-skilled labor abroad. In 1974, a 25% increase in the minimum wage, from $1.60 to $2.00 was correlated with an increase in the unemployment rate in the U.S. from roughly 5.0% to 7.2% ["Why the Minimum Wage Law Causes Unemployment." NCPA. National Center for Policy Analysis. 18 Sept. 2008 ]
Edit: Larry Summers also finds that wages above market rate increase rigidity in the labor market/may increase long term unemployment.

Also, rent-seeking behavior is railed upon when observed in developing countries with corrupt gov'ts, etc. But how is the auto industry in the U.S. any different?
Subsidies and bailouts which also work contrary to market mechanisms, increase the opportunity cost of propping up U.S. industries that have become increasingly non-competitive at the global level. For example, in 1979, Chrysler faced financial difficulty as oil prices rose making its fuel inefficient vehicles unappealing to consumers. Congress and the Carter administration granted Chrysler an unprecedented subsidized loan which saved Chrysler; it has since been described as a case of moral hazard in which risky behavior can be defined as the absence of innovation. Furthermore, such subsidies and bailouts provide temporary solutions to the sectoral shifts that the economy must eventually address. As global markets lower the value of non-competitive U.S. sectors such as manufacturing, income inequality can only increase as wages in those sectors decrease. Innovation is the only way by which such “dying” sectors, which witness decreased productivity in the U.S., can achieve sustainability. [see Schumpeter for further inspiration] Since real wages reflect productivity, by addressing sectoral shifts in the economy we are pursuing policies that would mitigate income inequality.

Increased re-education and training programs for displaced workers as well as improvements in the education system for the future labor force will allow workers to take advantage of the sectoral shift as opposed to resorting to protectionist policies. During this transition, measures to decrease income inequality include less xenophobic views on imported skills and more means tested policies, such as the EITC that do not skew price mechanisms. Policies that take advantage of changing markets will allow the U.S. to continue to be viable in a global economy.
[Read "The Age of Turbulence" by Alan Greenspan for more on skill biased technological change. He's a great writer. It's a great book. He's so cute. When he first started working in D.C. he would go back to NYC on weekends to water his plants AND visit his mom. WHO does that?! ALAN GREENSPAN.]

So I think "Buy American" sucks and just keeps us from eating yummy Roquefort cheese, and I think rent-seeking industries should just get their shit together and step up.

I'm not saying I support inequality, and that I want some people to be way poorer than others. The purpose of this post was to get you to think about why inequality upsets you. Maybe the reasons will be a little different than what you thought before you read this post.

Special thanks to Chanda for contributing to research/creation of this blogpost. So, if you were bored, you can blame her. Haha. Just kidding.