November 30, 2007 8:05
New article: The end of spend (?)
My newest dead-tree effort is in the issue with Barack Obama on the cover and online here. It begins:
It's the day after Thanksgiving at Aventura Mall, north of Miami, and David Weinberg is worrying about the economy. "People are underestimating the downturn in the housing market in Florida and are spending based on home equity," says the accountant from nearby Pembroke Pines, Fla. "We have not seen the worst of it yet." In light of these looming troubles, Weinberg, at the mall with his wife and two young kids, says he'd like to rein in spending this holiday season. "But," he adds, "I'm not always in control."Meet the American consumer of late 2007. Sure, he's worried. Apart from a brief blip after Hurricane Katrina in 2005, the University of Michigan's much watched Index of Consumer Sentiment hasn't been this low since 1992. But buying stuff is what we Americans do. The last outright decline in consumer spending came in 1991, and that was shallow and short-lived. Most indications are that this year's Christmas shopping season will be, if not exactly a blowout, better than the last one.
Short-term retail optimism brings no cheer, though, to the economy's wise men, who talk mainly of an imminent downturn. "The odds now favor a U.S. recession," writes former Treasury Secretary Larry Summers in a newspaper column. "I'd put the number at about a 75% chance," says investing guru Jack Bogle on TV. "We are becoming more certain that the recession is either here or no more than two quarters away," warns Merrill Lynch economist David Rosenberg in a note to clients.
Talk is cheap, and economists and laymen alike have a strikingly poor record of predicting recessions. But there are good reasons to be concerned that the economy is weakening. They involve struggling banks, the collapsing housing market, the volatile stock market, oil prices, the weak dollar and lots of nervous investors in far-off lands. All of which relate back to the financial condition of the people swarming the nation's malls. Read more.
Yes, this is another one of those maybe-consumers-really-are-tapped-out-this-time articles, as seen previously in Business Week, Fortune and probably elsewhere. Hey, I had to chime in at some point.
November 29, 2007 3:55
Can Richard Florida's creativity index explain the trajectory of real estate prices?
In response to popular demand (well, one commenter asked for it), I've put together what I promise will be my last multi-colored Case-Shiller housing price chart for a while, this time with the price indices adjusted for inflation:
This chart gives me the opportunity to explore something that Curious Capitalist reader Richard "Creative Class" Florida wrote on his blog in reaction to my chart of the Case-Shiller numbers from about a month ago:
Generally speaking, metros that score highly on our creativity index continue to perform well. Seattle and Portland remain up as do Denver and Atlanta. Boston and Minneapolis are down a but not too much. Places like Miami and Las Vegas are literally crashing and the outlook is bleak in Rustbelt centers like Detroit which never saw much appreciation to begin with. Before anyone says anything, LA does not score highly on the overall creativity index. Washington DC is really a tale of two housing markets: prices remain relatively stable in the city but are plummeting in the suburbs. San Francisco's declines are modest.
I'm a little dubious of using just a few years of data to draw conclusions about the real estate value of the creative class. But two decades of data, that's something else. So here are the metropolitan areas from the chart above, as ranked by creativity index in the paperback edition of The Rise of the Creative Class:
San Francisco, No. 2, (Austin, Tex. is No. 1), 136% real home price appreciation since Jan. 1987
Boston, 5, 30%
Portland, 7, 141%
Washington-Baltimore, 11, 90%
Denver, 14, 47%
San Diego, 19, 117%
New York, 20, 48%
Los Angeles, 31, 129%
Chicago, 39, 64%
Tampa, 51, 45%
Charlotte, 60, 14%
Miami, 72, 94%
Las Vegas, 95, 72%
Cleveland, 118, 17%
The creativity index measures how important high-tech is to a region's economy, how many patents are issued per capita, and how many gays and people working in "creative" occupations an area has relative to population. The creativity/real estate link doesn't not appear to be what you could call a slam dunk. Miami, Vegas and LA are the outliers on the real estate upside, although I guess we'll just have to wait and see how far they fall. Boston is the big outlier in the other direction, although I think the area's poor real estate performance can be partly explained by the fact it went through a real estate boom in the mid-1980s (remember the "Massachusetts Miracle"?) that was just peaking in 1987, which is where the Case-Shiller measure starts.
It's also the case that regionwide comparisons are of necessity pretty sloppy. On a neighborhood level, Florida has found pretty strong correlations (danger, pdf!) between real estate price increases and various of his creativity measures. Of course, a bigger question may be whether you really want your region's real estate prices to go up like Portland's. Charlotte has the smallest increase on the chart, yet it's no economic basket case. I imagine it's just a lot easier to get new houses built there than it is in and around Portland. Then again, I'd rather live in Portland than in Charlotte, but I don't think journalists really have much of an economic multiplier effect. Artistic, gay journalists with high-level computer skills, maybe.
Update: Florida elaborates on his blog. A (longish) snippet:
... over the long-run, the big outliers in terms of the Creativity Index boil down to two cities - Miami and Las Vegas - both of which perform much better on the Case-Shiller Index over the past two decades than their (low) scores on my Creativity Index would suggest. One explanation might be that both regions have high Gay Index values (their technology and talent scores are low) which as Charlotta Mellander and I have found are extremely closely associated with median housing prices.However, I think there is another, even more significant factor at work. The significant real estate appreciation experienced by Miami and Las Vegas over the past couple of decades was speculative and thus badly out of whack with their economic fundamentals. These are fun-and-games resort destinations which saw huge and unsustainable gains during the go-go years of the housing boom.
My main point is that now things are coming back to earth - and more into line with what the Creativity Index would predict. After two decades of significant appreciation Miami and Las Vegas have experienced big declines and are headed for even bigger ones, as the Case-Shiller Index documents. (I live in Toronto and want a house in warm weather and I`m prepared to wait it out another year or two until the south Florida market starts to really correct). My top Creativity Index regions - places like San Francisco, DC, Boston, Seattle, Portland, Denver, etc. - are showing mixed performance - some are declining more than others. But, if my priors are right, they should decline much more modestly than Miami and Las Vegas, and rebound quicker once things start to turn around.
November 29, 2007 7:42
Is this really the moment where Wall Street and the City go out of style?
Thus writeth Willem "Maverecon" Buiter of the London School of Economics and FT.com:
From the point of view of the efficient allocation of resources in the medium and long term, the relative (probably even absolute in the short run) contraction in the size of the financial sectors of the advanced industrial countries is a desirable development, as for a number of years now, the private returns in the financial sector have exceeded the social returns by an ever-growing margin. Too much scarce analytical and entrepreneurial talent has been attracted into activities that, while privately profitable and lucrative, were socially zero-sum at best. In the short run, this cutting down to size of ‘Wall Street’ and ‘the City’ will inevitably have some negative side effects for Main Street also. However, the entire financial sector in the UK accounts for only about 7.5 percent of GDP, and the banking sector for no more than five percent of GDP. A sectoral depression will be painful, but of limited macroeconomic significance. In the medium and long term, moreover, a more balanced sectoral allocation of the best and the brightest will be beneficial.
There was a lot of similar talk in the late 1980s/early 1990s, and I guess for a while there in the late 1990s the best and the brightest did start or join online purveyors of pet accessories (and the like) instead of taking jobs at Blackstone or Goldman Sachs. But then the financial sector came roaring back. I want to think Buiter's right. But I just can't quite bring myself to believe it.
November 28, 2007 3:21
Case-Shiller on house prices: The extended dance remix
Here, as promised, is what the chart looks like for the 14 metropolitan areas for which the S&P/Case-Shiller Home Price Indices go all the way back to 1987 (that is, before the last real estate bust, which sure doesn't look all that dramatic on the chart, except maybe in LA):
A couple of comments: First, keep in mind that this chart shows the increase since Jan. 1987 in each of these metro areas, not that actual relative prices of the different metros. Second: How about that Portland, Ore.?
November 28, 2007 10:40
Johnny Rotten, anti-Communist
My friend Jeff Gordinier has a totally brilliant Q&A with John Lydon (a.k.a. Johnny Rotten of the Sex Pistols) up on Conde Nast's men.style.com. (I presume there's a shorter version in the new Details magazine, but Peter Carlson of the Washington Post says reading that will make you stinky). Anyway, it took me a while to find a business/economics angle that would justify linking to it in this blog, but I finally did:
Q: Why do reunion concerts cause people so much consternation?
A: I think that word reunion—it just implies, Oh, they’re back for the money. Yeah, well, hello! Of course we’re back for the money! And what is the shame in that? When did America suddenly become Communist? We weren’t paid the first time out. We intend to be this time.
And here's a link for which I could find no business/economics angle but is just too brilliant to pass up, about Croatia's new national hero, the English opera singer who amusingly bungled the lyrics of Croatia's national anthem before their glorious victory over England at Wembley last week (via du Nord).
November 27, 2007 5:04
The real estate bust in all its many colors, second installment
The new Case-Shiller house price numbers are out today, and as you've probably already heard, they're ugly. But they can be made pretty, and I got so much attention from other blogs the last time Time.com graphics czar Feilding Cage and I did this chart that I figured I had to post the updated version. Here it is:
Case-Shiller has numbers for most its metro areas back to 1991 and in some cases 1987. And while for the current downturn it's really the post-2000 numbers that matter, I am curious what the longer-term chart looks like. So I'm going to work on that.
November 27, 2007 1:49
Economist Robert Hall sees "dark clouds," but don't go expecting him to declare a recession anytime soon
With all the recent talk of a looming recession, I figured I ought to check in with Stanford economist Robert Hall, chairman of the Business-Cycle Dating Committee of the National Bureau of Economic Research, the semi-official arbiter of when recessions start and end. I e-mailed:
When everybody starts talking recession, as is this case now, what do you folks on the Business-Cycle Dating Committee do? Schedule a meeting in Cancun? Set up a conference call? Start sending around lots of e-mails? Deputize somebody to keep an especially close eye on incoming economic data? (I just imagine there must be some form of heightened activity, and I’m curious as to what form it takes.)
He responded:
We all follow developments pretty closely. Now that Larry Summers has scooped us, all the more so.
The process begins with emails. We don't usually have a conference call until we are quite convinced that a turning point has occurred. Thus the subject of the call is not whether the recession has begun or ended, but rather when that event occurred. Consequently, the call occurs long after it is generally recognized that a turning point has occurred. There is usually a period of 6 months or so when the financial press excoriates us for tardy action.
We don't generally have a physical meeting, though we do if the time for action happens to coincide with the annual meetings of the American Economic Association at the beginning of January. So far there has been no suggestion of a meeting when that happens in 6 weeks, but things could change.
I can certainly add as an individual member, now not speaking as chair, that I see some dark clouds. The high levels of consumption seen in the past decade may decline to something closer to normal. The relation of the consumption bulge to the house-price boom is still unclear, but it would not be a surprise to see the two variables return to normal together.
The Business-Cycle Dating Committee is one of my favorite weird little American institutions. It was set up by Harvard economist Marty Feldstein after he took over as president of the NBER in 1977. Before that, veteran NBER staffer Geoffrey H. Moore (he'd been there since 1939) had more or less singlehandedly determined what was a recession and what was not. Feldstein decided such work was better done by a committee.
Moore went on to found the Economic Cycle Research Institute in New York, a forecasting firm that even after his death in 2000 remains the most reliable and timely indicator of when a recession has begun (the latest from ECRI managing director Lakshman Achuthan: Not yet, although there are "yellow flags"). But the final word comes only months later from the NBER committee.
Its members do not follow the short-hand rule that a recession is two consecutive quarters of negative growth in real GDP, a misdefinition that, I learned today (thanks, Barbara!), was probably the dastardly doing of Arthur Okun, chairman of LBJ's Council of Economic Advisers. That's partly because, given the constant revision and re-revision of GDP, you'd have to wait about five years to conclusively declare a recession. But it's also because economic downturns don't necessarily start and end on a quarterly basis. Here's the definition the NBER follows:
A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
There's little or no data to back up the argument that we're in one of those yet. But just you wait.
November 27, 2007 9:35
The S&P 500, as seen from outside the dollar zone
With the news that the stock market is now officially in "correction" territory (it's down 10% since October), I thought it might be interesting to check how bad things look if you adjust for the decline in the dollar. So I adjusted the S&P 500's performance this year to reflect the value of the dollar in a trade-weighted basket of foreign currencies calculated by the nice people at the Fed. And while not exactly earth-shattering, it is at least worth a chart:
November 26, 2007 2:30
Get ready for the federal deficit to start growing again
Menzie Chinn, who has been keeping an eagle eye out for signs that the rapid shrinkage of the federal deficit since 2004 might be coming to an end, finds them in the Monthly Treasury Statement for October. Tax receipts have clearly stopped growing as a share of GDP. Writes Chinn:
Seems to me a fair bet that, given current estimates for a slowdown to around 1.4% GDP growth ... in 2007Q4 ... receipts will fall as a share of GDP.Hence, I stick with the conclusion from my previous post on this subject: A balanced budget is far off.
Just as lots of people were taken aback by how quickly tax receipts rose as the economy and financial markets strengthened from 2004 to 2006, I think official Washington may be shocked at how quickly receipts fall now. The lesson from 2001-2003 is that federal revenues have become increasingly sensitive to corporate earnings and financial markets, as top earners are paid mostly with stock, performance bonuses and the like. And I hear corporate earnings growth has stalled and financial markets haven't been doing so great lately.
November 26, 2007 9:30
I knew going to college with Keith Blanchard was going to pay off at some point
From an article in Mediaweek (via Web Weekend Toronto):
Keith Blanchard, onetime editor of Maxim who worked on the sites of Wenner Media’s Rolling Stone, Us Weekly and Men’s Journal, sees print brands struggling to be responsible and authentic at the same time. “Perez Hilton was able to come up out of nowhere because he didn’t care about the legality of what he was doing,” pointed out Blanchard, now vp, director of programming at videogame maker Kuma Games.Online, it’s content that matters, not the source, he continued. “Newsweek, Time, don’t mean anything, but Justin Fox does,” he said, referring to Time’s business and economics columnist. “I don’t think people are very brand-loyal online.”
November 25, 2007 7:14
Does a 1,000% gain make a hedge fund manager a genius or a contrary indicator?
From the FT:
A Californian hedge fund has made more than 1,000 per cent return this year by betting against US subprime home loans, making it one of the world’s best-performing funds of all time.Lahde Capital, set up in Santa Monica last year by Andrew Lahde, last week passed the 1,000 per cent mark, after fees, following the latest leg of the credit market turmoil. ...
However, Mr Lahde ... has now begun to return money to investors, telling them in a letter: “The risk/return characteristics are far less attractive than in the past.”
In his letter, Mr Lahde said he expected the collapse in value of subprime mortgage-linked securities to be repeated for bonds backed by commercial property loans in a deep recession – which he also predicts.
“Our entire banking system is a complete disaster,” he wrote. “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.” He also said he would be putting some of his own profits into gold and other precious metals.
This raises an interesting question. Should you take Lahde's continued bearishness as a signal to join him in his gloom, or should you figure that a 1,000% gain cries out for mean reversion, and buy bank stocks? I have no idea what the right answer is. But it's a question that consumers of investment advice should always be asking themselves.
November 23, 2007 9:41
New column: So maybe those peak oil people weren't crazy after all
I've got a column in the new issue of Time with the brain map on the cover (or, in Europe, the inescapable mime), and online here. It begins:
In July 2006, the world's oil rigs pumped out crude at a rate of nearly 85.5 million bbl. a day. They haven't come close since, even as prices have risen from $75 to $98 per bbl. Which raises a question of potentially epochal significance: Is it all downhill from here?It's not as if nobody predicted this. The true believers in what's called peak oil--a motley crew of survivalists, despisers of capitalism, a few billionaire investors and a lot of perfectly respectable geologists--have long cited the middle to end of this decade as a likely turning point.
In the oil industry and the government agencies that work with it, such talk is usually dismissed as premature. There have been temporary drops in oil production before, after all--albeit usually during global economic slowdowns, not boom times. In most official scenarios, production will soon begin rising again, peaking at more than 110 million bbl. a day around 2030.
That's alarming enough in itself. Even the optimists think we have less than three decades to go? But at industry conferences this fall, the word from producers was far gloomier. The chief executives of ConocoPhillips and French oil giant Total both declared that they can't see oil production ever topping 100 million bbl. a day. The head of the oil importers' club that is the International Energy Agency warned that "new capacity additions will not keep up with declines at current fields and the projected increase in demand." Read more.
Regular Wall Street Journal readers will notice a lot of similarities between this piece and an article that ran on page one of the WSJ on Monday. I had already written most of the column when that came out (plus I'd already blogged on the topic), and this is kind of an important subject and all, so I decided to treat the article as yet more support for my argument rather than as a reason to write about something else.
November 21, 2007 9:31
The Thanksgiving/helium connection
Despite the apparent arrival of peak helium, they were still filling the Macy's parade balloons with the precious gas Wednesday afternoon next to the Museum of Natural History. There were the usual brand names--Shrek, Mr. Potatohead, Pikachu. I'm pretty sure the snowman isn't affiliated with any major media corporation, though. Neither is this Jeff Koons bunny:
Kermit is a major media creature, of course. But that doesn't make his discomfort any less genuine:
Anyway, Happy Thanksgiving!
November 21, 2007 9:55
The Persian Gulf/federal deficit/gas tax connection
From a note sent out this morning by Harm Bandholz, U.S. economist for Italo-German bank UniCredit:
[O]il-exporting countries have been continuing to channel the bulk of their petrodollars via London to the US … With rising oil prices, net purchases of US Treasuries made by the UK soared to USD 205 bn during the last 12 months. What makes this number even more impressive is the fact that during the same period, net purchases of US Treasuries by all foreign countries added up to USD 208 bn. Hence, 99% of all foreign purchases have been done by the UK and most of them were oil-related.
Interestingly $205 billion is also in the vicinity of the size of the federal budget deficit ($163 billion in the fiscal year that ended in September, probably bigger this year). So the Russians and the Gulf states are effectively financing our federal deficit with the dollars that we send them to buy oil.
What if we had chosen instead to close that deficit by levying a $1.50 per gallon gas tax? At current consumption levels that would generate $213 billion a year. The tax would presumably drive consumption down a bit, so let's say $180 billion. Enough to turn the deficit into a small surplus. Meanwhile, lower U.S. consumption would presumably drive global oil prices down a touch, and an in-balance federal budget would mean less downward pressure on the dollar--a major factor in the current spike in oil prices. So gas wouldn't cost that entire $1.50 extra per gallon (I have no idea how much more it would cost, though). That higher price would in turn increase the economic incentives for consumers to buy fuel-efficient cars and for car manufacturers and entrepreneurs to find for oil alternatives, thus reducing long-run demand for (and the long-run price of) oil.
That strikes me as a markedly better situation to be in than the one we've got, in which we have to worry about oil exporters deciding to shift their central bank reserves and other investments out of dollars, which would further depress the dollar (and thus further increase oil prices for Americans) and probably raise the interest rates the government has to pay on its debt. Fiscal responsibility actually does have its rewards.
November 20, 2007 4:45
One last Ponnuru health care post: You call that radical?
I don't think there's a whole lot of reader overlap between The Corner and the Curious Capitalist, so here's the bulk of Ramesh Ponnuru's latest response to my response to his response to my critique of his inaugural Time column:
The tax break for employer-provided coverage would stay on the books, although it would be flattened so as not to encourage gold-plating. It's just that the playing field between employer-provided and individually-purchased insurance would be leveled. I suspect that over time we would have a much larger individual market, but it would be a gradual shift. The Republican plan is radical in some respects, but it's not quite as radical as Fox makes it sound.... If you don't want a high-deductible plan, an employer-run system could leave you stuck with one against your will. A more robust individual market might not give you what you consider the perfect option, but you would at least be able to choose among the options yourself, based on your preferences rather than those of your employer.
I don't want to make Ponnuru feel forced to respond yet again (to quote Captain Picard in that Borg movie, "It ends hyeah!"), so I'll just say that if that's all he's talking about, then no, it's not very radical.
November 20, 2007 2:59
Are you ready for another Nixon shock?
Ultimately, what we are witnessing is a second Nixon shock played out in slow motion. And the Fed's dual mandate ensures that John Connally's remark from 1971 holds true today: "the dollar is our currency, but your problem."
That's from a post by Macro Man, a trader who appears to know what he's talking about. It's almost a week old, but I just noticed it (via Brad Setser via Menzie Chinn).
The "dual mandate" is Congress's 1977 instruction to the Fed to promote both price stability and maximum employment. Most other central banks--in particular the European Central Bank--are legally directed to worry only about prices. Of course, the people who run them obviously think about other stuff like unemployment, but there may be something to the argument that the Fed is always going to be slightly laxer than its brethren and that this is one reason for the weakness of the dollar.
The big reason, though, is something simpler: The economies of China and the Gulf states are in such different straits than that of the U.S. right now that it's crazy for them to keep allowing the Fed to run their monetary policy (which is what pegging their currency to the dollar more or less does). The Nixon shock to which Macro Man refers was the 1971 decision to sever the dollar's link to gold, and in the process break up the Bretton Woods system of managed exchange rates. In the past couple decades we've seen the evolution of what some call Bretton Woods II, in which emerging economies link their currencies to the dollar. That's what is unraveling now. Writes Macro Man:
What it all means is that we may be rapidly approaching that Minsky moment when dollar-peggers have to change policy. At that point, we could actually see currencies like the euro and sterling decline against the buck, with dollar weakness manifesting itself most against erstwhile peggers. For the time being, reserve diversification flows should keep the euro broadly supported for the next month and a half, but Macro Man is now entering profit-taking mode on his euro long.
As for John Connally's line about the dollar being "our currency, but your problem," I think it still holds. It won't forever, though.
November 19, 2007 10:30
Trading the tyranny of editors for the tyranny of readers
There's really nothing people like reading more than blog posts about panel discussions where journalists sit around talking about blogging. (Seriously: I got some major uptake the last time I wrote one.)
Anyway, I was on a panel Saturday afternoon in some kind of outbuilding of Jay Gould's old mansion in Tarrytown, NY. The event was a "Magazine Editors & Writers Symposium" put on by the Hudson Valley Writers' Center and instigated by my friend Jeff Gordinier. I missed the first discussion, titled "Can creative nonfiction save the world?" The world still exists, so I think the answer must have been yes. I did catch panels on how to turn magazine articles into books (takeaway: be lucky and write a good proposal) and how to sell articles to magazines (takeaway: stop sending magazine editors so many e-mails or pretty soon one of them is going to snap and kill you). My favorite anecdote came from Douglas Rushkoff, who said that in 1992 Bantam cancelled his contract for Cyberia because the bigwigs there were convinced that by 1993, when it was slated to come out, the Internet was going to be totally over. (And yeah, it probably was over in 1993. It just made a comeback.)
My panel was on "Technology: The world of writing on blogs and for e-zines." Because, you know, blogging is all about technology. And what did we (moderator Gordinier, Michelle Kung of the Huffington Post, Troy Patterson of Slate, Jason Boog of several places, and I) impart? Mainly that writing for the Web can allow one to escape from the tyranny of editors and agents, but usually replaces it with the tyranny of readers (in the form of traffic counts) and other Web writers.
I'm all for varying the tyrannies to which I am subjected. I also think the Web's rules of engagement are more transparent, and often make more sense, than those of the publishing world. A woman in the audience said it sounded from our discussion as if Web writing was all about entertaining readers, while she saw her role in writing for print publications as informing them. Maybe there's something to that, but I think one of the great failings of most American newspapers (magazines have their own, different failings) is that they do so little to engage their readers. What's wrong with a little entertainment?
November 19, 2007 6:26
What if they stopped pricing oil in dollars and nobody cared?
Iran's Ahmadinejad and Venezuela's Chavez have made some headlines by declaring that they've had it with pricing oil in dollars. Making headlines is what these two men aim to do, so in that sense their declarations were a big success.
They also got the other members of the Organization of Petroleum Exporting Countries to agree to look into pricing oil with a basket of currencies. But I would bet that it isn't going to happen anytime soon. And even if it did, it just wouldn't matter all that much.
The dollar is simply the pricing unit for the oil business. Its strength or weakness has no significant impact on the real price of oil. The dollar's swings just make oil prices look more volatile than they really are. Replacing the dollar with another currency such as the euro wouldn't change this reality--as soon as the euro started falling, as one of these years it surely will again, OPEC members would complain (as they're doing now with the dollar) that the weakness of the currency was making them look bad. Replacing the dollar with a currency basket would smooth the volatility, but it would also mean that oil would henceforth be priced in a unit with which hardly anyone was familiar. As a result, all media coverage of oil prices would involve translating the current basket price into dollars or yen or euros or whatever. Which would be a change from current practice, but not the kind of thing that would dramatically change the world or affect the value of the dollar.
Now there are other things that oil exporters can do that would affect the value of the dollar. They can insist on being paid in euros or other currencies, which Iran already does. They can shift some of their central bank reserves out of dollars and into other currencies, which lots of countries around the world--not just oil exporters--are already beginning to do. And if their home currency is pegged to the dollar, they can think about breaking or at least adjusting that link, as Saudi Arabia and several of its neighbors are contemplating.
All these things are putting downward pressure on the dollar and may continue to do so for a while. They may even result in a big, scary shift in which the euro takes over from the dollar as the world's reserve currency. I wouldn't bet on that, though: My money's on the renminbi (or heck, maybe the rupee) in 20 or 30 years.
In the meantime, Ahmadinejad and Chavez can yap all they want about moving oil prices out of dollars. It just doesn't matter much.
Update: The WSJ has a front-page piece today about the Gulf states rethinking their dollar pegs. Also, in the comments, Benedict Tan makes the good point that we use price indexes for lots of other things, so why not oil? My main response is that, with a pricing unit already available for which there's decades of history, it's going to be hard to get people to shift off it to an unfamiliar index. OPEC could make the shift only to find that futures markets keep trading oil in dollars. Still, he's right that using a currency basket would be better. It might get markets to focus on the real price of oil and not be distracted by the "dance of the dollar." Irving Fisher would totally approve. Although That Anonymous Dude's mention of Himalayan yaks (also in the comments) raises the question of whether they might make a good pricing unit for oil.
As for commenter Matt, who thinks I'm an idjit: The status of the dollar as the world's reserve currency has all sorts of real effects, mainly in allowing the U.S. to get away with financial behavior that other countries cannot. (This does not work indefinitely, though, so it's a mixed blessing.) All I'm saying is that pricing oil in dollars has no such effects that I can see. And China's economy is growing faster than India's, but I also think it's at higher risk of a wrenching political/economic blowup that could derail growth for years. Plus, India is expected to pass China in population within 25 years. So while I would agree that it's a longshot, I don't think it's totally crazy to mention the rupee as a possible future reserve currency.
November 19, 2007 7:54
Ramesh Ponnuru may or may not know more about health care economics than I, but my commenters certainly do
The feedback I got on my critique of Ramesh Ponnuru's inaugural Time column on health care was a good reminder both of why I hardly ever venture to write about about health care (it's complicated) and why I should probably do it more often. Ponnuru made the case for a new, "radical" Republican approach that would move responsibility for health insurance out of the hands of employers and into the hands of individuals. I responded that there are lots of Democrats (one of whom, Ron Wyden, has an actual bill with an impressive bipartisan list of cosponsors) who want to end the employer/health-care link too. More important, I wrote, the particular solution Ponnuru advocates seemed to ignore (a) the information asymmetries that make health care markets so weird and (b) the fact that few Americans are pining for the health-care structure he advocates.
Ponnuru responded on The Corner, the National Review's blog. Here's a sample:
I don’t find the lack of information argument terribly persuasive. Consumers typically have less information than producers and vendors, even in well-functioning markets. When markets are structured to respond to consumers, intermediary institutions often arise to provide them with better information. Fox thinks we can’t have free markets because we don’t have enough information, but it may be that we don’t have enough information because we don’t have free markets. I also think he has too much faith in government bureaucrats. (Note, for example, that “can make better decisions” does not mean “would make better decisions.”)... Fox writes that “hardly anybody in the U.S. wants the kind of health care system that Ponnuru advocates.” He therefore assumes that Republicans will drop these health-care proposals once the primaries are over. I think he is underestimating the potential political appeal of free-market health care. Last week, the Wall Street Journal reported on a poll commissioned by it and NBC: “By 49%-40%, Americans back conservative health-care solutions of tax credits and health-savings accounts over government coverage mandate backed by subsidies for the poor.”
First, the poll: The next sentence in that WSJ summary of the poll that he cites was this:
But by 51%-42%, they back liberal idea of tax increases on the rich to expand coverage over continued tax cuts.
As always, a lot depends on how you ask the question. If the pollsters had said, "Do you want high-deductible health insurance in which you have to pay out of pocket for lots of day-to-day medical expenses?" most people would probably say no way. From the Federal Times:
When the Federal Employees Health Benefits Program (FEHBP) first introduced high-deductible plans in 2005, only 3,905 signed up — less than a sliver of the program’s 8 million members. The next year: 6,325. Today: about 9,000.
This is despite the fact that these plans offer sweeteners in the form of employer-funded health-savings accounts, and are actually a pretty good deal for most people (that is, people who don't have chronic medical problems). I enrolled in the one offered by Time Warner after running through the costs and benefits, and I think I've come out ahead so far. I know for sure that the plan is extremely confusing and that it so far has had no impact on my family's use of the health-care system. We make exactly the same choices we did before and have, if anything, slightly lower out-of-pocket costs thanks to the health savings account. I just have to spend more time after the fact figuring out how they get paid for.
As I understand it, though, the "Republican" plan that Ponnuru embraces involves wresting this whole enterprise out of the hands of employers and leaving people to fund their own health savings accounts, albeit with tax incentives for doing so. That may be a great deal for some people who don't have insurance now, but it's clearly going to be a tough sell for the rest of the populace.
It still might be a good idea, but I don't see how it can ever work unless you have some sort of universal coverage mandate for individuals and community rating for insurers. Otherwise you'll still get insurers refusing coverage to people with health risks and healthy people choosing not to pay for insurance. But I know (not from the Time column, but from other writings) that Ponnuru opposes coverage mandates.
Then again, as the poll cited above shows, mandates aren't a big winner with voters either. Although I do think that, with the right wording, it's possible to get a majority of poll respondents to oppose any change in the current health care system.
As for Ponnuru's point that health care isn't the only market in which customers suffer from information disadvantages relative to the vendors, he's definitely right about that. Few people understand what their plumbers are really up to, but nobody (that I know of) advocates universal plumbing coverage.
That should be a hint, though, that there are lots of factors at work in health care that simply aren't present in other markets--and to get a sense of what some of them might be, check out the erudite exchange in the comments to my post between DrSteve (an economist) and Corey (a psychologist).
This is why lots of countries, including the U.S., that are otherwise generally willing to let markets work their magic are unwilling to do so entirely in the case of medicine. And interestingly, lots of national health care systems that give even less play to market incentives than the current U.S. system score better on all sorts of cost/benefit measures.
So while the argument that Ponnuru makes, that what our health care system needs is more and better market incentives, is certainly not prima facie wrong, it's probably not the first thing a reasonable person without an ideological agenda to peddle would come up with after surveying today's global health care landscape.
November 16, 2007 2:31
Banks overstated their profits, and now we all get to pay
Floyd Norris has a typically Floyd Norrisish (that is to say, really good) column in Friday's NYT:
Consider how banks make money. They pay low rates on short-term deposits and charge higher rates on long-term loans. So they love what are known as positively sloped yield curves. And they like to see big credit spreads, where risky borrowers are charged much more than safe ones. Put them together, and banks should clean up.By that light, nothing was going right in 2006 and early this year. The yield curve was inverted, or at best flat. And credit spreads were at historic lows. Risky loans, whether to subprime mortgage borrowers or junk-rated corporations, were readily available at rates that seemed to assume there was only the slightest risk of default.
And yet the bank stocks were buoyant, and so were reported profits.
Floyd's point is that much of this reported profit is turning out to be bogus, the result of banks failing to account for the silly risks they were taking. Which made me think of a chart I put together for my Citigroup article last week. It was in the magazine, but not online. So here it is:
The financial sector, in the BEA's reckoning, includes banks, insurance companies, securities firms, and much of the real estate business. I don't think that most of its spectacular gain in profitability between 2000 and this year was bogus. I do think it has proved to be unsustainable.
Which brings me to the end of Floyd's column:
The most important duty of the Federal Reserve is to preserve the health of the banking system. In the early 1990s, after the last big crisis, it engineered a steep yield curve for years, helping banks to recover. When the smoke clears, the Fed will try to do that again, even if it means significantly higher long-term interest rates.Higher long-term rates are not what either debt-laden consumers or the depressed housing market really need, of course. But such trade-offs are what come when big risks are taken, and ignored, for too long.
November 16, 2007 12:04
New story: Danes dig globalization
My September trip to Denmark has finally resulted in actual print-on-paper article that's in the new issue of Time and online here. It's a lot shorter than I had banked on. Actually, that's not quite right: Its two pages are about as much space as I had ever hoped to get in the U.S. edition of Time, but the original plan had been to run a longer version in the European edition. The European advertising stars failed to align to provide enough space in this week's issue, however, so it's two pages worldwide. I may post the extended dance version here soon, although it will make for an awfully long blog post. Anyway, the article begins:
Last year Danish toymaker Lego announced plans to outsource most of its manufacturing to Eastern Europe and Mexico. Of 1,200 blue collar jobs at Lego's headquarters in the town of Billund, only about 300 would remain.You might think this would make union leaders at Lego hopping mad. You'd be wrong. "We thought it was the best way to keep as many workers' places in Denmark as possible," maintenance man and union shop steward Poul Erik Pedersen tells me. "We aren't against the management. We want to make sure that they make money and we make money." Then, unprompted, he takes the argument a step further: "There are some good things about outsourcing. Where the jobs go, the standard of living is growing, and then they can afford to buy more Legos or other things from the West."
In most of the developed world, globalization is a deeply fraught topic. Not in Denmark. There, 76% of respondents in a recent poll said globalization was a good thing. And why shouldn't they? Living standards in Denmark are among the highest in the world. Per capita income trails that of the U.S. but is distributed far more equally. Unemployment is just 3.1%. The country exports more goods and services than it imports. And while only two Danish corporations (shipper A.P. Moller-Maersk and the Danske Bank) are big enough to make the FORTUNE Global 500 list, Denmark has more than its share of smallish, nimble, outward-looking firms well positioned in growth areas ranging from alternative energy to health care to high-end furniture.
All that adds up, according to the latest rankings from the World Economic Forum (WEF), to the third most competitive economy on the planet. But while economic competitiveness has often been sold as something that requires long hours, low taxes and minimal government--a litany often heard in the U.S.--Denmark doesn't fit that bill at all. Denmark has the second highest tax burden in the capitalist world (after Sweden, which is just behind it in the competitiveness rankings), a generous welfare state, a heavily unionized workforce and at least five paid weeks off every year. Read more.
That 76% polling number comes from the Eurobarometer 65 survey, conducted in spring 2006. Those surveyed were asked whether the term "globalisation" brought to mind "something very positive, fairly positive, fairly negative or very negative." Of the Danes, 22% said very positive and 54% fairly positive. By comparison, only 3% of the French were very positive and 26% fairly positive. Now in my article I take the big leap of assuming that positive feelings about globalisation are the same as positive feelings about globalization. This is called "journalistic license." Or maybe "journalistic licence."
A couple of articles I should note because they get into more detail about certain aspects of the Danish system and helped inspire me to write this one: "Denmark, the Model," by Jonathan Cohn in The New Republic in January, and "For the Danish,
a Job Loss Can Be Learning Experience," by Marcus Walker in the WSJ last year.
Finally, the new World Economic Forum competitiveness rankings are here. The U.S. tops the list (Switzerland is No. 2). So clearly, the Danish path to competitiveness isn't the only path. I just wanted to make the point that the Anglo-American path isn't the only one either.
November 15, 2007 5:46
Judith Regan shoulda been a New Yorker writer
I didn't know quite what to make of the news Wednesday that former superpublisher Judith Regan was suing HarperCollins for being really mean to her. Happily, I've got Roger Parloff to think (and read the filing) for me:
Regan’s [complaint] reads like one of those humor pieces in The New Yorker, where it not-so-gradually dawns on the reader that the narrator is out of his gourd. Even though you’re hearing only one side of the story, that’s enough to make up your mind against the griper. ...Regan’s 70-page, 345-paragraph, 24-count complaint was filed in state court in Manhattan on Tuesday, and is available here. [Warning! Pdf!] It mainly alleges defamation and breach of contract, but, almost in passing, it throws in a couple counts of sex discrimination, too. “Under Jane Friedman’s direction,” she alleges, “there is . . . a pattern within HarperCollins of firing high-level women in order to surround herself with men.” (She gives no examples besides herself.)
The complaint is signed by attorney Brian Kerr, of New York’s 175-lawyer Dreier firm, but it has an astoundingly unfiltered quality to it. ...
November 15, 2007 1:08
Libertarianism has its limits, and access to the McRib sandwich is one of them
My post from Madison a few weeks ago about the McRib and world peace has enabled me to enter the elite world of McRib bloggers, and while reading this fascinating post by a McRib-obsessed guy named Andy Fox (no relation, as far as I know) I came across this even more fascinating statement (in the comments, but also by Andy Fox):
i’m a republican/libertarian ... and I believe that the government should stay out of peoples lives unless its an emergency, I think the game McDonalds is playing with us qualifies as an emergency. Here it is, a week away from Thanksgiving and still no goddamned McRibs anywhere in Southern California.I’m getting furious just writing this.