Photo above: The Hertford Bridge in Oxford, England. Used by Permission. © Tom Ley 01302 782837

Sunday, January 31, 2010

RSG World Economic Brief - February 2010 by Dr. Douglas O. Walker

The latest RSG World Economic Brief looks at the global outlook for 2010 and the recovery of world stock markets from their lows of last year.

Here are some highlights from the Brief:
  • World stock markets have recovered somewhat from the sharp drop during the second quarter of 2009. The still remain well off their highs. Of all the developed countries, the market in the United States fell less than other economically advanced countries while the Euro Area was hardest hit.

Thursday, January 28, 2010

Quick Links on the Economy by Dr. Douglas O. Walker

Here are five links to articles on the Internet dealing with current economic topics:

1. Views of whether Bernanke should be re-confirmed as Fed Chief. In my view, Tyler Cowen offers the best reasons to retain Bernanke and Yves Smith the best reasons to dump him.

A Reluctant “Emperor”: Lessons from History by Dr. Mary Manjikian

In his State of the Union speech, President Obama focused on two eternal political themes – the importance of paying vigilant attention to the needs of voters and citizens at home, and the need to seek peace and continuity in the international community, while considering the costs of maintaining leadership abroad.

Wednesday, January 27, 2010

The CBO View of the Budget Deficit by Dr. Douglas O. Walker

The Congressional Budget Office released yesterday its latest assessment of the Federal budget and outlook for the economy.

It projects that if current law and policies remain what they are now the economy will grow by 2.2 per cent in real terms this year and by 1.9 per cent in 2011, the unemployment rate will remain elevated this year and next, and inflation will remain subdued.

RSG World Economic Brief - January 2010 by Dr. Douglas O. Walker

At the start of a new year the RSG World Economic Brief takes stock of the world economic situation and the prospects for main world regions in 2010.

Here are some highlights from the outlook for 2010:
  • Across the globe, many countries are beginning to recover from the recession. Nonetheless, unemployment remains high in most countries, the world financial situation remains unsettled, international trade and capital flows remain weak, and the potential for inflation in key international prices for commodities such as oil and food remains in place.

Michael Lackey on Venezuela by Dr. Douglas O. Walker

RSG student Michael Lackey, now a Research Associate at the Council on Hemispheric Affairs, recently published a COHA Research Memorandum on the devaluation of Venezuela's currency and its effect on inflation and corruption. Michael provides a thorough analysis of the situation in an objective and professional assessment and he provides all you need to know about this development.

Monday, January 25, 2010

Terrorism is a Symptom, Not a Disease by Dr. Mary Manjikian

In 1902, Britain’s armed forces suffered the most crushing defeat the British Empire had ever known. In total, over sixty thousand military and civilian casualties were sustained on both sides in a brutal war in the African Transvaal region. Despite the numerous English troops which volunteered or were called back into service, as well as the reinforcements brought in from Australia, Canada and New Zealand, at the end of three years the British Army admitted defeat and ceded control of the region to the White South Africans who would go on to establish apartheid rule.

Saturday, January 23, 2010

Does money affect elections and have political influence? by Dr. Doulas O. Walker

Newspaper article: Court decision opens floodgates for corporate political spending
“The Supreme Court on Thursday opened wide new avenues for big-moneyed interests to pour money into politics in a decision that could have a major influence on the 2010 midterm elections and President Barack Obama’s 2012 reelection campaign.
The long-awaited 5-4 decision overruled all or parts of two prior rulings by the court that allowed governments to restrict corporations and unions from spending their general funds on ads expressly urging a candidate’s election or defeat. But the decision upheld disclosure requirements for groups like the one that brought the case.”

How a Mozart string quintet helps explain high health care costs. by Dr. Douglas O. Walker

A recent article in the New York Times discusses the problem of high and rising health care costs and traces the problem to what is referred to in economics as “Baumol’s cost disease”.

William Baumol (1922-) was for many years a professor at Princeton and New York universities. He made contributions in many areas but is best known for the theory of contestable markets, the Baumol-Tobin model of transactions demand for money, and Baumol’s cost disease. A major influence on Professor Baumol was Joseph Schumpeter, and he claims that the object of his lifetime work was to develop a place in economic theory for Schumpeter’s entrepreneur.

In a famous 1967 article, Professor Baumol used the Mozart String Quintet to point out that the productivity of Classical music performers has not increased in 200 years. He noted it takes the same number of musicians and the same amount of time today to play the quintet as it did in 1787.

Professor Baumol did not directly address the economics of health care but rather looked at the general effects of automation on the U.S. economy.

At the time (and continuing today), the U.S. was undergoing a revolution of factory automation where the introduction of new technologies and processes was rapidly raising productivity in many lines of manufacturing production. Other sectors, however, such as education, health services, and government services, among many others, were more labor-intensive, and there was less scope to automate and substitute new technology-embodying capital for labor. Consequently, the more labor-intensive sectors did not experience much productivity growth. As a result, costs and prices (and total income and employment) tended to fall in those activities conducive to technological progress (such as manufacturing) while costs and prices remained relatively high in non-manufacturing sectors (especially services).

While many people who work in sectors experiencing high-productivity growth such as manufacturing lose their jobs to automation, those that remain are paid more and average incomes rise. The huge and growing output of manufactured goods resulting from the growth in productivity tends to saturate the market for these products and the income elasticity of manufactures -- their responsiveness to increases in income -- falls with time.

In contrast, in the more service-oriented sectors productivity gains are difficult to realize. Workers in these sectors nonetheless experience rising wages because they have the option of working in other occupations, and will leave if they are not adequately compensated. Moreover, many of these workers are also highly educated and would be difficult to replace should they resign. This also tends to keep their wages high. The service sector also benefits from a high income elasticity of demand as people choose to spend a growing proportion of their rising incomes on health care, education and other labor-intensive services where productivity gains are difficult to generate.

What this means is health care costs are high and rising because they involve high labor skills and direct personal attention and cannot be easily reduced by automation or spreading the costs over more people. Like a Mozart string quintet, a certain number of workers must be involved and the time taken to treat a patient, like the time it takes to play the music, is fixed and cannot be reduced. (But, let me note, that while it costs the same to produce the music from the string quintet, once recorded music it is much cheaper to consume today than it was in 1787, where once heard the music was lost. Now, the recording can be replayed at almost zero marginal cost. Unfortunately, this is not the case with health care where each “performance” is tailored to a specific individual and their unique condition.)

It is a mistake for Congress and the Administration to imply that public policy can do much to reduce health care costs or the general efficiency of the health care sector. Compared to other sectors of the economy the potential for productivity advance in health care is low and any expansion in the delivery of health care services will inevitably raise the share of health care in the economy and the expenditures of government to support it.

Talk by politicians about lowering health care costs is easy. Because of the nature of these costs, they will find actually accomplishing this goal is very, very difficult.

The beginning of the end for the euro as Europe's single currency by Dr. Douglas O. Walker

Greece is in the news and the news is not good, for Greece or for the countries of the eurozone.

The state of that nation's finances is terrible, and international ratings agencies have downgraded its credit rating because of a huge burden of public debt and a large budget deficit. Output declined last year and forecasts indicate another drop is set for this year, with unemployment reaching double-digit levels. However Greece decides to deal with its mounting economic troubles it faces a prolonged squeeze on its living standards as it addresses unsustainable fiscal imbalances and a current account deficit of more than 10 per cent of its GDP.

A major constraint on the ability of the Greek authorities in dealing with their deteriorating economic situation is their inability to change their exchange rate. Greece is part of the eurozone and its monetary policy by the European Central Bank in Frankfurt, not in Athens, constraining its policy options when dealing with its problems. Add to this a fiscal policy in disarray and the stage is set for continuing problems aggravated by a fixed exchange rate increasingly at variance with their domestic economic circumstances and needs.

Let me add many economists -- I was one of them -- were never a supporter of the euro precisely because we did not think Europe as a whole was sufficiently integrated to allow a single currency to operate across such a varied economic landscape with such diverse policy objectives and different institutional structures. But I was sympathetic to the need to reduce the transactions costs associated with currency conversions and fluctuating exchange values, and I hoped that the introduction of a single currency would sufficiently discipline economic policy and improve economic performance so as to limit any problems caused by the introduction of a rigid and unchangeable unit to effect transactions and carry out investments over such a wide area. Opening up Europe as a whole to flows of people and capital was also a good idea that could help a continent overcome a terrible history of nationalistic turmoil.

Our fear was the euro would shift the internal balance of payments adjustment process among these countries entirely to changes in the level of income (and hence employment), as fixed exchange rates inevitably do, rather than allowing changes in relative prices to absorb some of the adjustment effects, as more flexible exchange rates tend to do. Wider swings in growth and more persistent external imbalances would result if a fixed exchange rate were imposed and the unemployment rate would be higher. If this happened, the economic situation in some of these countries would worsen over the long-run, not improve, at least relative to the other countries. This is what appears to have happened to Greece.

The smaller and more peripheral countries of the eurozone now have a difficult decision to make. By accepting the euro they have turned the conduct of their monetary policy over to the European Central Bank. It is no longer available to them as a domestic policy instrument. Moreover, now their fiscal policy must be directed at their external concerns rather than their internal problems. For these countries, fiscal policy is no longer a domestic policy instrument. The fixed exchange rate of the euro has become the sole concern and focus of economic policy in these countries. They will either have to discipline their internal policies to the demands of their external monetary relationships or they will have to abandon the euro.

In the case of Greece, any attempt to meet the targets of the Maastricht Treaty that created the European Union and led to the introduction of the euro will only deepen the recession that has taken hold in this country. Similarly, any attempt to restore the competitiveness of the Greek economy with respect to the other members of the eurozone will mean years and years of at best slow growth and continual pain. For Greece, a break with the euro seems inevitable. The sooner Greece leaves the eurozone, the better.

Greece is not the only eurozone country struggling to meet the demands of a fixed exchange rate that is stifling its economy and imposing high costs on its citizens. In many of these countries the euro was adopted mainly for political reasons, with too little thought given to the costs associated with changing their national currency arrangements. Some of these countries are accumulating a mountain of external debt that will be very difficult to pay off or even reschedule. In these circumstances, they should give thought to abandoning the euro and adopting exchange rate arrangements which provide them with more flexibility than the euro.

While the euro will not end as the official currency of the European Union and will not be dropped by its major member-states, neither will it be the single and only currency used in the EU. Perhaps after some time Greece and other countries will be able to adjust their domestic economies to the requirements of a wider economic area and harmonize their domestic policies in a manner consistent with the rest of Europe. But until they do, pressures on the euro will continue and its will continue to unravel as Europe's most important currency .

Monday, January 11, 2010

Enhanced Security or Harassment: What’s the Difference? by Dr. Mary Manjikian

What do you call a situation where women who are in subordinate positions are intimately touched all over their bodies by an authority figure without their consent? What do you call a situation where an individual fears going somewhere because of the offensive, intimidating, or oppressive atmosphere generated there? The usual answer to the first question is “sexual harassment”. And the usual answer to the second question is “a hostile workplace environment.” If a subway traveler in New York or even Delhi, India, complained of unwanted intimate touching by a stranger while riding public transportation, the perpetrator would in all likelihood be arrested and with good reason.

But under the current measures taken by the Obama Administration because of the so-called Christmas Day underwear bomber, we now have a new answer to these questions. Beginning January 4, air travelers flying into the United States from Saudi Arabia, Nigeria, Yemen and other ‘countries of interest’ are to be subjected to enhanced screening techniques, such as body scans, pat-downs and a thorough search of carry-on luggage. Middle Eastern women who find themselves at an airport in a strange country undergoing a full body search which includes, according to the New York Times, the space between their breasts, are not undergoing harassment, but rather are experiencing “enhanced security measures.” And the threat that one will encounter this sort of full body search does not create a ‘hostile environment,’ but rather, ‘a climate of enhanced security.’

Feminist analysts have long maintained that in wartime, decision makers often make decisions largely by considering only the military ramifications. They seldom consider the effects their actions may have on vulnerable populations within society – including women and children. Thus, discussions about sanctions might neglect to consider issues of food security for children, and discussions about bombings and invasions might neglect to consider the refugee streams created as a result.

However, the situation currently created by the Obama Administration verges on ironic. From the beginning of America’s involvement in Iraq, we have heard from administration officials , including current Secretary of State Hilary Clinton, that women are not merely a footnote to America’s foreign policy. Instead, we have been told that one of the main goals of the operations both in Iraq and Afghanistan has been to increase the human rights and dignity of women throughout the world, including allowing them access to all of the educational and professional opportunities which their male compatriots enjoy. How strange, then, that the current security measures perhaps threaten to set women in these regions back hundreds of years.

While running for election, President Obama proudly proclaimed that “I want my daughters to have all the opportunities that you want for your sons.” And while the sentiment is indeed noble, it is human nature for fathers to worry more about their daughter’s safety and for governmental regimes to think differently about female combat casualties than about male combat casualties. Which brings us to the following problem: Given the likelihood that Islamic women might be intimately touched by male strangers in Western airports, how likely is it that a Nigerian, Yemeni or Saudi boss might simply decide not to send his best female employee and instead pass an opportunity for travel and advancement on to a male employee instead? How likely is it that female academics in the Middle East might find themselves less able to receive travel funds for participation in academic conferences and exchanges abroad? How likely is it that Middle Eastern parents will encourage their daughters to study at a university elsewhere, rather than in the United States? I think the answer is “extremely likely” and perhaps for the long term.

It’s ironic that so many of our U.S. foreign policy efforts in the Middle East have been on the creation of economic and educational opportunities for women, including the provision of US government academic exchange programs, and that all this progress could be undone in one fell swoop. Such a decision is ironic, short-sighted and sad.

Mary Manjikian is Visiting Lecturer at Regent University, Virginia Beach. She is a former U.S. foreign service officer with experience in organizing educational changes at the undergraduate and graduate level.

Wednesday, January 6, 2010

The United States After a Decade of Disappointment and Setback by Dr. Douglas O. Walker

At the dawn of the Twenty-first Century the position of the United States and other economically advanced countries in the world seemed unchallengeable. In the second half of the previous century, the countries of the West had marshaled the economic resources of the world, controlled its oceans and space, and extended their trading relationships not only to the other side of the globe but deeply into every country on every continent. The West's per capita incomes, already far higher than other areas of the world, had risen markedly as it witnessed a strong renewal of progress following a protracted and deep depression and a devastating full-scale war extending across several continents. Labor productivity rose rapidly in response to a broadening division of labor, more capital per worker, and innovations in organization, products, techniques and transport. As a result, living standards in the West far exceeded those of the rest of the world and as the end of the Twentieth Century approached Western countries enjoyed an economic boom.

Equally important, the development of poor countries that had lagged in the process of world development was spurred by the success of the more economically advanced countries, and prosperity spread, indeed, accelerated with time, across the globe. This was in no small part due to the leadership of the United States in establishing an international monetary and trading system that promoted world development.

The global economic landscape of year 2000 reflected the progress made by all countries during the previous half century. In the case of the West, its relatively small proportion of the world’s population, only some 15 per cent of all its inhabitants, produced the vast bulk of its wealth and was the center of scientific and technical advance. One country, the United States, endowed by its geography and history with the position of leader of the West, comprised a much smaller five per cent of all people on earth but exercised unchallenged global economic supremacy and political hegemony as its former adversaries either lay prostrate and exhausted from an economic competition that they could not win, as in the case of the states of the old Soviet Union, or were so weak and poor and divided so as to represent no threat to its dominant position. For Americans, a future of peace and prosperity smiled upon them.

But the last decade has not been at all successful for America. Two recessions, one very deep, growing internal and external imbalances, high unemployment and a financial crisis scorched the economy and left a legacy of tarnished hopes. It is not surprising that after a half century of progress a decade of setbacks soured Americans on what was a very difficult decade and changed their outlook about the future. It is not too much to say the experience of the past decade has shaken many Americans to their core.

In contrast, for much of the rest of the world the first decade of the Twenty-first Century was a very good one. Developing countries grew very rapidly most years during the decade and, while affected by the global financial crisis, it appears they are now rebounding strongly from the downturn. For these countries, and therefore for the vast majority of the world’s population, these have been very good years, even great years and there is promise of more to come.

Geopolitically, the first decade of the Twenty-first Century could represent a turning point in the political and economic history of the world. During the past decade, the United States has been incautious in its economic policies and allowed its economy to fall from being the wonder of the world to become the debtor to the world. At the same time, other countries, many initially much poorer and backward in their technological sophistication and business acuity, surpassed it in many areas. For them, the decade was truly one of great economic achievement.

The world economic landscape of 2010 is therefore very different than that of 2000, and it is different not only because of the success of other countries but because of a failure of the United States to conduct itself with the seriousness and purpose of a great country with great responsibilities. Americans made serious errors in policy and consequently suffered setbacks and financial panics at their own hands.

The world economic scene of 2020 is now being set. If the U.S. returns to the theme of limited government and free markets, it will prosper and retain its position in the world. If it continues down its current road of expansive government and interferences in and controls on the economy, it will find itself falling ever further behind a world economy dominated by the rapidly expanding economies of Asia, Africa and Latin America.