Larry Summers on the US trade deficit

Guy at Full Context went to hear Larry Summers talk about the US current account deficit. As he notes, Summers analysis was very similar to the one I presented here. Guy has some useful comments, and notes the following, attributed by Summers to Rudi Dornbusch

Things always happen later than you expect, but when they do happen they happen faster than you expect.

This may not be true of all things, but it is a pretty good description of the way unsustainable economic imbalances are resolved.


Given that Labor obviously has to do something more than wait for the housing bubble to burst, one simple (but not easy!) organisational step would be to abolish factions. That is, membership of any organised factional grouping ought to be treated like membership of a rival political party, as grounds for automatic expulsion. Of course, it would be impossible to prevent informal or secret factions from operating, as they do in all parties. But, to my knowledge, the only major political party anywhere in the world with a faction system comparable to Labor’s is the notoriously corrupt Liberal Democratic Party in Japan, and even here PM Koizumi is largely independent of the factions.

There was a time (from the 1950s split to sometime in the 1980s) when the factional groupings corresponded to ideological divisions. But that has long since ceased to be true. It’s probably true that the average member of the Left faction is a little more likely to favor a ‘progressive’ line on social issues than the average member of the Right and Centre, but that’s about the strength of it. Each of the major factions is subdivided into smaller groups, often little more than extended families, with their retainers and servants.

Nowadays, the factions exist because they exist. No-one is willing to bell the cat. However, this is the kind of thing Latham could take on, and perhaps even win. It would certainly be more in his line than Simon Crean’s lame achievement of changing the union voting ratio from 60 to 50 per cent[1].

fn1. While I’m dreaming, I’d like an end to the formal link between the unions and the ALP. And a pony.

Kyoto ratified!

The lower house of the Russian Duma has voted to ratify the Kyoto Protocol. Although some formal steps remain, this was the last real hurdle to be cleared before the Protocol could come into force.

The only signficant holdouts now are the US and Australia. The Bush Administration has, as expected, said it will do nothing, and Howard will presumably follow. The ratification will pose some significant problems for Kerry, who has tried to sit on the fence so far – his position appears to be that he would seek to renegotiate the treaty to make the terms more favorable to the US. Realistically, this is probably a sensible outcome for the world, but I don’t know in practice how a treaty that’s already in force can be renegotiated unless all parties agree, which seems unlikely.

Unfair to the readers

I’ve never been a great fan of Steven Landsburg’s ‘Everyday Economics’ columns in Slate[1]. While he occasionally has something interesting to say, a lot of his columns are what Orwell called ‘silly-clever’, such as this piece defending looting. Economists are often prone to this kind of thing, and it doesn’t do the profession any good in my view, but it’s usually not worth refuting.

Landsburg’s latest piece is in a different category. It’s a repetition of dishonest rightwing talking points about taxation that have been refuted over and over, but apparently need to be refuted yet again. As is his wont, Landsburg seeks to defend a paradoxical claim, namely, that “Bush’s Tax Cuts Are Unfair …To the rich.” He makes a total hash of it.
Read More »

Read the whole thing, Part II

Following up on the theme of manufacturing decline, here’s a piece by Ronald McKinnon of Stanford, linking the decline of US manufacturing to the low rate of national savings. I’m not entirely convinced by the argument, which seems to rest heavily on the manipulation of identities that gave rise to the twin deficits hypothesis, but I’ll think about it a bit more.

It is certainly striking that all the English-speaking countries seem to have a broadly similar pattern of large current account deficits, low household saving, and rapid decline in the manufacturing sector (more I think than can be accounted for by long-run structural change). This would be an obvious basis for contagion in the event of a financial crisis affecting the US.


Quite a few people have pointed me to this piece by Barry Cohen which produces the unsurprising conclusion that Labor’s MPs are drawn from a very narrow range of occupations: union officials, 29; teachers, 18; state MPs and ministerial staff, 16; public servants, 14; party officials, 8; lawyers, 8. Before discussion what’s wrong with this, it’s worth pointing out that the situation is not that different on the other side of the aisle. Replace union officials with employer group officials, teachers with farmers and public servants with doctors, and you’d account for the great majority of Coalition MPs and ministers.

Whereas people once went into politics after spending a fair bit of time doing a variety of different things, political office is now part of a small set of fairly well-defined career paths. What’s mroe disturbing to me is that, at least for people who reached the heights of ministerial office, politics was almost always the last stage in a career. Now aspirants to the ministry are setting themselves up with contacts, and obligation networks for the time when they can really make big money, as consultants, lobbyists, chairmen of boards and so on. We don’t have to imagine the effect on public policy – there are already some egregious examples out there.

The only way to fix this, in my view, would be to greatly expand membership of political parties, and the only way to do that would be to give the members a real say in determining policy. Since that’s not going to happen, I don’t see a solution for this problem.