The US trade deficit came in marginally lower in September, but still above $US50 billion. There’s some evidence that the appreciation against the euro over the last four years is finally having an effect, and the more recent decline of the dollar to record-low levels against the euro may have more. But the improvement also included some surprising features like a decline in the value of oil imports, unlikely to be repeated any time soon. As General Glut notes
September’s trade deficit was still the third largest in history. The four largest in history have all occurred over the past four months.
He has a lot more posts with useful and interesting details
Category: Economics – General
Risk and government
I was in Canberra on Monday, giving a talk at a symposium for the Academy of Social Sciences on Government and the Risk Society. Those interested can click on the link for the PowerPoint presentation. As is my current pattern, I’m promising to write it up as a paper, in due course.
Also, I talked to a workshop here in Brisbane about abolishing our fuel subsidy and using the proceeds to finance infrastructure investments. As I well, I did my usual critique of Public-Private Partnerships. For this one, I’ve already written the paper, which is here.
What about the workers ?: unfair dismissals
If there’s one area where the Howard government’s Senate majority (or near-majority) seems likely to make a big difference, it’s in relation to our working lives. While the government’s commitment to free-market policies has waxed and waned, it has been absolutely consistent in representing the views of employers, whether they have demanded labour market deregulation (as in the stripping back of awards) or tighter regulation (as in anti-strike laws). The government and its supporters would, of course, claim that what is good for employers is good for employees, and there is clearly a good deal of truth in this claim. Still, there are plenty of occasions when employers and employees come into conflict (in such cases, it is more natural to refer to workers and bosses). I plan a series of posts looking at aspects of the government’s reform program, and the state of employment relationships more generally.
Of all the items on its agenda, the removal of unfair dismissal laws, at least for small businesses, is probably closest to the government’s heart. A contested dismissal is something like a contested divorce in the feelings it arouses on both sides, and the government hears all the time from the employer side of the dispute.
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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.
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.
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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.
Real business cycle theory
Various comments have suggested that I’ve been too nice, or not nice enough, about Real Business Cycle theory, the main contribution that got Kydland and Prescott their Nobel prize. My remarks weren’t really meant as a careful evaluation, so I’ll offer a slightly more considered view now, with the warning that there are plenty of readers of this blog who know more about dynamic macroeconomic theory than me – they can set me straight in the comments section. Non-economists may want to skip on to the next post.
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Nobels for Kydland and Prescott
The winners of The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for 2004 are Finn Kydland and Edward C. Prescott for their work on time-consistency in policy and on real-business cycle models. In my view, the time-consistency work is important and has generally been a positive influence on policy makers1].
Real business cycles models were an exciting idea in the 1980s, and continue to influence the way people think about macroeconomics, but haven’t in my view, lived up to their early promise.
One discovery of Prescott’s that I think is very important, but isn’t part of the Nobel citation is the equity premium puzzle, which he discovered jointly with Rajnish Mehra. This is the fact that thegap between the rate of return on equity and the rate of interest on bonds is much greater than can be accounted for by standard arguments about risk. This in turn explains why governments generally lose money from privatisation, as Simon Grant and I have pointed out.
fn1. Some central banks, like the RBNZ under Don Brash took ideas like credible commitment to an extreme, with bad results. But then, in this period, policy makers in NZ took everything to extremes and usually got bad results.
The markets and the election
Commenter “tipper” supplies the numbers on an issue I’ve discussed previously, observing
Centrebet has the Coalition at $1.55 and Labor at $2.30. For the non-punters, that means you have to bet $7 to win $4 on the Coalition and $10 to win $13 on Labor. I think I read somewhere recently, that the bookies have picked the elections better than the polls for the last couple of years. So go all you “true believers”, make an honest quid for yourselves, for the first time in your lives, by proving the bookies wrong. Or as John would put it, prove the “efficient market hypothesis” wrong.
If I’ve done my arithmetic properly, and allowing for the bookies’ margin, I get the implied probabilities as 0.60 for the Coalition and 0.40 for Labor. The polls have Labor ahead, but looking at all the discussion, I’d say that the consensus view is that the election is a 50-50 proposition, and that’s also my subjective probability.
How good a test of the efficient markets hypothesis will this be? Bayesian decision theory provides an answer[1]. If our initial belief is that the EMH is equally likely to be true or false, and the Coalition wins, we should revise our probability for the EMH up to 0.55. If Labor wins, we should revise it down to 0.45.
As regards the betting option, there’s a collective decision problem here. Given my subjective probabilities, a bet of $100 on Labor would have an expected net payoff of $15, but $15 isn’t enough to cover my transactions costs for placing the bet, etc. A bet of $1000 would have an expected net payoff of $150, which would be worthwhile in these terms. Unfortunately, the 50 per cent chance of losing the $1000 comes with the additional cost of having to explain to my (non-Bayesian) wife what a good choice I had made ex ante . The net expected benefit comes out as a big negative here.
fn1. The workings are easy for those who know Bayes’ theorem and accept the modern subjectivist interpretation , but they won’t make much sense to those who don’t.
The other deficit: Part II
In my previous post on US trade, I argued that if the current account deficit is to be stabilised at a sustainable level, the balance of trade on goods and services must return to surplus in the next decade or so. In this post, I’m going to ruIe out a soft option and argue that, while a smooth market-driven adjustment is not inconceivable, it’s unlikely.
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John Quiggin 