About
Articles
Monographs
Working Papers
Reviews
Archive
Contact
 
 

The US Net IIP: Non-Hysterical Version

Much of the hysteria surrounding the US current account deficit reflects a basic lack of faith in US institutions and growth prospects.  David Levey and Stuart Brown have a refreshingly different perspective:

While the NIIP will continue to grow for many years to come, future dollar depreciation and market adjustments in interest rates and asset prices will mean that its increase will be far less dramatic than many fear. Moreover, focusing exclusively on the NIIP obscures the United States’ institutional, technological and demographic advantages. The classic doomsayer argument - that growing foreign indebtedness results from too little savings by Americans - neglects the fact that savings and investment are seriously undervalued in U.S. economic accounts. When you include capital gains, 401(k) retirement plans, and home values, U.S. domestic saving is around 20 percent of GDP, the same as in most other developed economies. And when you consider “intangible” investment (like new-product development and design experimentation) as part of total, the supposed increase in consumer
spending as a share of GDP turns out to be a statistical artifact.

Indeed, much of the explanation for chronic current account deficits relates to the U.S. economy’s strong fundamentals, not fatal structural flaws.

The country with the world’s strongest external investment position is Japan, which achieved this dubious distinction by trashing its potential growth rate and the returns on domestic investment through state-sponsored forced saving and the overcapitalistion of its economy. 

(thanks to Jack S. for the pointer)

posted on 20 February 2005 by skirchner in Economics

(3) Comments | Permalink

| More

Steve Hanke’s Currency Board Fetish

Steve Hanke is nothing if not consistent.  His fetish for currency boards seems to have spilled over into a love of almost any fixed exchange rate regime.  He even has the audacity to call the proponents of greater exchange rate flexibility in East Asia mercantilists. 

Hanke’s defence of HK’s currency board relies on financial instability that occurred more than 20 years ago.  The costs HK’s currency board has imposed on its economy in recent years are completely ignored (Singapore has done relatively better because of its more flexible approach to exchange rate management).

In relation to Japan, Hanke maintains:

Japan has been under mercantilist pressure, primarily from the U.S., to ratchet up the yen’s value against the dollar. Tokyo has complied. Consequently, the economy has suffered from strong-yen-induced recessions and hasn’t yet recovered from the enormous deflation of the 1990s. And the mercantilists in the U.S. remain agitated because Japan continues to register large trade surpluses.

Hanke has things exactly backwards.  Japan has not seen a yen-induced recession since 1985-6.  It has been Japan’s mercantilist attempts at resisting the secular appreciation of the yen, by laundering its massive current account surpluses through USD asset markets, that has landed its economy with a massive overhang of excess capacity.  China risks suffering the same fate, especially if its demographics ultimately turn as toxic as those of Japan.

Given the terrible havoc fixed exchange rate regimes have wrought in emerging market economies in recent years, and within the euro zone, it is incredible that anyone still defends them.  It is even more incredible that these hold-outs for Bretton Woods-era monetary regimes can still find a home within classical liberal think tanks.

posted on 18 February 2005 by skirchner in Economics/Financial Markets

(2) Comments | Permalink

| More

The Anglo-American Model Delivers

I recently came across a forsaken copy of Peter Brain’s (1999) Beyond Meltdown in a second-hand bookstore.  In the course of a diatribe against ‘neo-liberal’ economics and the ‘American’ economic model in Australia, Brain forecast that the Australian economy would enter a prolonged stagnation in the wake of the 2000 Olympics, during which the unemployment rate would return to the double-digit figures seen during the last recession in the early 1990s.

Instead, the Australian economy has gone from strength to strength, with the unemployment rate hitting multi-decade lows, precisely because it has generally avoided the policy prescriptions favoured by the likes of Brain.

The Anglo-American economies currently look a whole lot better than those countries that have followed less liberal policy prescriptions.  Japan has just gone back into recession for the third time since 1998.  Germany is just shy of its third recession in four years.

Meanwhile, the UK, Australia and NZ are all enjoying their lowest unemployment rates in decades.  This is particularly telling, since the ‘neo-liberal’ policies supposedly favoured by the Anglo-American economies are often stereotyped as anti-employment.  The evidence suggests otherwise.

Of course, there is no reason why the Anglo-American economies cannot also experience a downturn in the near future, but even in recession, they will fare much better than those economies outside the Anglo-American bloc, due to their greater commitment to liberal policy prescriptions.

UPDATE:  My Google ad strip is now rather amusingly showing “Discount GDP Forecasts: New and Used GDP Forecasts.”  It is of course an ad for Ebay, not Peter’s book.

posted on 17 February 2005 by skirchner in Economics

(0) Comments | Permalink

| More

Get Paid for Economics Blogging!

If you are a recent graduate and would like to be paid to work on an economics blog, Peter Jonson at Henry Thornton has a job opportunity for you.

posted on 16 February 2005 by skirchner in Economics

(0) Comments | Permalink

| More

The House Economics Committee Gets a New Chair

Those of us who argue for greater central bank transparency can only cringe when the Reserve Bank Governor fronts the House Economics Committee.  You have to admire the patience and politeness Governor Macfarlane displays in the face of the Committee’s woeful displays of economic illiteracy and ham-fisted attempts at point scoring. 

Things are not going to get much better under the Committee’s new chair, Bruce Baird, who has rather helpfully put out a press release alerting us to what is on the Committee’s collective mind.  Baird says:

I’m also interested in what incentives the Reserve believes are needed to encourage greater private investment and whether there should be a diversion away from investing in private housing.

This is of course well outside the Governor’s mandate and, dare I suggest, also outside the realm of legitimate public policy concern.  The implication that investment in housing is excessive is particularly galling coming from people whose own homes are, at a wild guess, a cut above average.  It is fine for them to invest in housing, but a dangerous ‘bubble’ when everyone else gets in on the act.

Baird is also a coordinator of the informal government committee, the Friends of Tourism Group.  This sits rather uneasily with his current efforts to deny Singapore Airlines access to the Australia-US route in order to protect Qantas jobs in his electorate, which includes Sydney Airport.  The sort of ‘friend’ tourism could do without.

posted on 16 February 2005 by skirchner in Economics, Politics

(0) Comments | Permalink

| More

Myth Busting the House Price ‘Bubble’

The prevailing mythology surrounding the Australian economy in recent years is that economic growth has been driven by consumption, which in turn has been driven by a house price boom.  It is true that consumption has largely accounted for headline GDP growth in recent quarters.  But as John Edwards has pointed out, consumption and national saving as a share of GDP have been remarkably steady.  What has changed is the investment share of GDP (including dwelling investment), which in real terms is currently the strongest it has been during the post-war period.  In this context, the deterioration in the current account balance is a cause for celebration, because it represents an investment boom, not a collapse in saving.

In the chart below, I have shown real Sydney house prices and GDP as percentage deviations from their linear trends.  It is remarkable the extent to which the cycle in real house prices has lagged the business cycle.  GDP has been consistently at or above trend since the end of 1997, but real house prices in Sydney only exceeded their own trend from the beginning of 2002, after a decade of below trend growth.  The chart puts the supposed ‘bubble’ in Sydney house prices in cyclical perspective.  Of course, some would argue that the secular trend in house prices is itself a bubble and one can take issue with the detrending methodology, but the notion that house prices have been leading the economy looks rather strained.

If there is anything to the stylised Australian house price cycle (turn of the decade booms, followed by middle of the decade slumps), then the cycle in house prices should bottom at the end of 2006 (as it did in 1986 and 1996), but only after the economy has already slowed for reasons that have little to do with house prices.

image

posted on 15 February 2005 by skirchner in Economics

(0) Comments | Permalink

| More

Supply-Side Constraints and House Prices

The Economist finally has something to sensible to say on house prices, reporting on research into the effects of supply-side constraints on house prices in US cities.  There is hope for The Economist yet!  The original paper is here.

Meanwhile, David Smith highlights the sorry record of house price crash predictions in the UK:

The first housing-crash story I could find in the present cycle came in 1996, when one Bob Beckman predicted a 20-year fall in prices. There was another batch in 1997, when the fear was that Labour’s election would hit house prices hard.

In 1998 and 1999, when the stock market was booming, there was a steady trickle of housing-crash predictions, building further when the stock-market boom turned to bust in 2000. The September 11 attacks on America persuaded many that housing was about to take a dive and, in the three years since, talk of a housing crash has built up to a crescendo.

David Smith’s skepticism is refreshing.  It is interesting that the debate about house prices in the US, Australia and the UK is very similar, yet so many commentators remain wedded to country-specific explanations for what is clearly a global price shock to this asset class.

posted on 15 February 2005 by skirchner in Economics

(2) Comments | Permalink

| More

Throw the FIRB on the Bonfire

The FT calls for a Ludwig Erhard-style bonfire of Australian controls, with the FIRB on top of pyre:

the Financial Times called on the Australian Government to overhaul its foreign investment regime and scrap the body that implements it, the Foreign Investment Review Board.

It said the usual suspects, notably “businesses that would find it convenient to have the [WMC] takeover stopped” had lobbied against Xstrata being cleared to have a tilt at WMC, but the real problem was Australia’s foreign investment screening system, which was “a protectionist relic” that sat badly with the Australian Government’s free market principles.

Other nations, including the United States, also screened incoming investments “but few operate regimes that are more opaque, unaccountable or open to political and bureaucratic manipulation”, the FT said, adding that the Government’s power to block deals or conditionally approve deals on “national interest” grounds relied on “a criterion so vague as to justify almost anything”.

Noting that the OECD had recently urged the Australian Government to accelerate the pace of economic reform, the newspaper concluded that “when Canberra next makes a bonfire of costly, perverse and inefficient regulations, the FIRB regime should be at the top of the pile”.

It is unfortunate that it takes a foreign newspaper to give this process some critical scrutiny.  The local press generally view the politicisation of the ownership and control of equity capital as unproblematic.  The above extract is taken from Malcolm Maiden, who also feels compelled to offer at least some defence of the indefensible.

posted on 13 February 2005 by skirchner in Economics

(0) Comments | Permalink

| More

Ross Gittins: Conspiracy Theorist

Ross detects a conspiracy:

When I wrote in last week’s column that the OECD hadn’t advocated a cut in the top tax rate, I was wrong. It did just that on page 65 of its report, although this proposition didn’t make it into the summary assessment and recommendations. Wonder why.

I don’t know Ross.  Maybe that’s why they call it a ‘summary.’

posted on 12 February 2005 by skirchner in Economics

(0) Comments | Permalink

| More

Woodside Revisited

Ian Harper on yet another outbreak of capital xenophobia:

As in the case of the Shell/Woodside deal, the Treasurer receives no guidance from the law as to what he should consider when weighing the national interest. The Foreign Investment Review Board will offer advice based on its interpretation of the act but the Treasurer is free to decide for himself what constitutes the national interest and whether XStrata’s ownership of WMC would compromise it.

Harper explores the contradictory logic employed in both episodes.  But the real issue here is not the merits or demerits of foreign ownership in a given case.  It is that the ownership and control of equity capital in Australia is subject to sweeping ministerial discretion, not to mention the bureaucratic discretion exercised by the ACCC.  The rule of law is almost entirely absent, which encourages rent-seeking behaviour and the misallocation of equity capital.

UPDATE:  The Treasurer is being praised for making the ‘right’ decision by not blocking the XStrata bid.  Steve Lewis says it is ‘a decision that will enhance Australia’s reputation as a haven for foreign investment,’ and that ‘…the Howard Government has sent another powerful signal that Australia is open for business.’ 

In fact, the decision sends a signal that any attempt to upset the status quo in relation to the ownership and control of Australian equity capital will have to run the gauntlet of the political process, allowing special interests to seek outcomes they could not otherwise secure in the marketplace.  Rather than praising the outcome, we should be damning the process, which has Australia running the fifth most restrictive FDI regime in the OECD.

posted on 11 February 2005 by skirchner in Economics

(0) Comments | Permalink

| More

Affiliate News

Affiliate relationships are an important source of support for Institutional Economics, so we will occasionally highlight special offers from affiliate sites.  Elliott Wave International is currently offering some of its services for free for a limited time.

To anticipate the inevitable criticism of technical analysis, I think the efficient markets hypothesis and technical analysis can be reconciled, once we allow for bounded rationality and transaction and information costs.  In this context, the existence of historical dependencies in financial market prices and other market anomalies become readily explicable.  Far from being an illustration of the ‘irrationality’ of markets, such dependencies are an illustration of the essential role markets play as discovery processes in a world that is far from frictionless.

posted on 11 February 2005 by skirchner in Economics/Financial Markets

(0) Comments | Permalink

| More

The New Institutional Economics

The new site is up and running.  Please email if you experience any difficulties using the address shown on the Contact page, or in comments.

As mentioned previously, comments are only open to registered members (click on ‘Register’ at the top right), but once registered, you need never login in again and you can use your registration to obtain email notification of other comments (email notification of posts in general will unfortunately have to await the next iteration).  New members will need to be approved.  I will not generally approve unidentifiable persons, especially those with free email accounts.  You are welcome to use a screen name to conceal your identity when commenting and can suppress your email address.

Posts from the old site have been turned into pdf files and posted below and in the archives.  This was the quickest way to bring across the old content.  There is still some content to be brought across.

Those who want to read the site via an aggregator can now do so with the various feeds provided at the bottom of the left-hand sidebar.  Note that it may take a while for some sites and search engines to index the new site configuration.  Again, if you experience any problems, let me know.

As readers will be aware, there has been enormous growth in economics-related blogging in the last year or so.  The days when you could count all the economics blogs on one hand have gone and keeping up with all these sites would be a major undertaking.  Fortunately, Professor Bill Parke has taken on the task of aggregating economics blogs at his Economics Roundtable.  Since Bill has done all the work, I have linked to his site, rather than attempting to maintain a comprehensive blog roll of related sites.

I have also put up my Technorati Link Cosmos, which is my rather cheap way of returning the favour if you have taken the trouble to link to me.  Readers should go visit these sites, since they are obviously run by people of taste and discernment!  I have linked to a few other sites of interest, but otherwise intend on maintaining a parsimonious set of links.  My failure to link to your site is not necessarily a comment on its worthiness, just a reflection of the burden blog roll maintenance.

posted on 08 February 2005 by skirchner in Misc

(0) Comments | Permalink

| More

Changes at Institutional Economics

The web site is undergoing a few changes, which should come on-line in the next week or so.  This also involves a host migration, so there may be some minor discontinuity in service.  The new site will add a number of features readers have been asking for, including permalinks, RSS syndication and comments, among others.

Readers will be familiar with the problems associated with open comments facilities.  As with all problems associated with the public sphere, the solution is to turn public space into private space (privatisation is the solution to everything!)  Those wanting to post comments will need to register as members of the site via a double opt-in email procedure.  While I appreciate that yet another registration is the last thing you all need, it has some advantages, including allowing you to set your own user preferences for things such as email notification of posts.  Members are welcome to use screen names to preserve their anonymity when commenting and can hide their email address, but I will need to be convinced that you are legit before approving your registration.  Since I know many of you personally (or at least know of you), this should hopefully not be a major problem.  If your attempt at registration gets bounced, just send me a note introducing yourself.  Rest assured your email address will not be made available to third parties.

I will make a further announcement when the new site is on-line.

posted on 03 February 2005 by skirchner in Misc

(0) Comments | Permalink

| More

Capitalist Internationale?

The WSJ’s Bret Stevens reports from the WEF meeting in Davos:

At an Internet café late Thursday night, I am set upon by two Swiss undergrads who earlier in the day had participated in an antiglobalization rally. How, they would like to know, do I justify my presence at this malign gathering of the Capitalist Internationale? O that it were the Capitalist Internationale, I reply. I explain that this year’s Davos is purpose-built to satisfy all of their grievances. They think the Forum’s concern for the poor and the environment is a meaningless gesture at best and probably a devious trick. I think: “The capitalists will sell the rope from which they will hang.”

(Thanks to John Rogers for the pointer).

posted on 01 February 2005 by skirchner in Economics

(0) Comments | Permalink

| More

The World Economic Forum

I have never been a fan of the WEF, although its demonisation by the anti-globalisation left is an endless source of amusement.  Gatherings of the great and the good rarely produce anything worthwhile.  This year’s Forum seems to have taken a turn for the worse, with the participation of celebrities such as Sharon Stone, Bono and Angelina Jolie, among others.  The discussions on poverty have provided plenty of opportunities for conspicuous compassion, yet many of these debates are pointless because they are blind to the fundamental causes of poverty.  Reducing poverty is not about rich countries spending money on poverty alleviation.  Indeed, by all accounts, such spending makes poverty worse by institutionalising statism and corruption in developing countries.  Reducing poverty requires promoting the necessary conditions for wealth creation: property rights, free markets and the rule of law.  Unfortunately, these are rather abstract concepts, difficult to translate into practical programs and well beyond the attention span of your average celebrity. 

Adam Smithee has been casting a sceptical eye over the WEF proceedings and is well worth a visit.

posted on 30 January 2005 by skirchner in Economics

(0) Comments | Permalink

| More

Page 104 of 106 pages ‹ First  < 102 103 104 105 106 > 

Follow insteconomics on Twitter

Read my blog on Kindle