Friday, June 19, 2009

The crisis reveals the weakness of nation-based regulation

We Need Greater Global Governance. By Peter Mandelson
The crisis reveals the weakness of nation-based regulation.
The Wall Street Journal, Jun 19, 2009, p A13

Fingering the villain in the banking crisis of 2008 turns out to be tougher than it looks. Was it the banker with the skewed incentives and the poor grasp of risk? Was it the over-indebted consumer with the 125% mortgage? Was it the politicians and regulators who failed to see the risks in both?

The answer, of course, is that it was all three, and any number of other contributing factors. But what enabled the banking crisis to happen was a structural imbalance in the growth model of the global economy over the last two decades.

That model has produced unprecedented global growth, but it also developed a serious weakness at its center. Unless we address that weakness, any other counter-recessionary strategy is palliative at best. The risk is that as the global economy slowly returns to growth, the urgency to address this fundamental problem will recede.

Reduced to its crudest form the problem was this: Credit was too cheap in the developed world. It was kept cheap by a number of factors. The commitment of China to an export-led growth model, matched by a willingness from rich-world consumers to keep spending, created persistent surpluses in China in particular.

Those surpluses were invested in developed-world debt, particularly the U.S., pushing down interest rates. That encouraged investors to look for riskier and riskier investments to increase their yield. It also encouraged people to buy houses they couldn't afford with the help of people who probably shouldn't have lent them the money in the first place. That debt was sold around the world. The end of the housing bubble revealed the risk in the system.

The precise detail of this process matters less here than the simple problem it represents. The stability or otherwise of the global economy is the sum of sovereign national macroeconomic policies. There is no mechanism to mediate between those policies or insist on action that would counter systemic risk. Similarly, national financial regulators have a clear enough remit for national market stability, but financial markets are now regional and global. Nobody was asleep at the wheel of globalization because there is no wheel to speak of.

If these imbalances are to be unwound in an orderly way, China will have to build a social welfare system that reduces huge levels of precautionary saving and thus boost domestic demand. It will need to continue to move towards greater currency flexibility. The export-led growth models of other surplus economies such as Germany and Japan are also both going to have to give way to greater domestic demand. Both consumers and governments in the U.S. and Britain are going to have to repair their balance sheets. We are going to have to save and invest more and export more.

Is any of this actually possible? Is it possible to preserve the benefits of open trade and an open global economy, addressing macroeconomic risk while totally respecting the choices of sovereign governments?

The answer has to be: not really. No government in the global economy, and certainly not economies on the scale of the U.S., China, Japan and the European Union, can claim a prerogative over domestic action that entirely ignores the systemic affects of its policies. The only way forward is a totally renovated approach to international coordination of economic policy.

We need to strengthen and depoliticize the International Monetary Fund and give it a new surveillance role that covers all aspects of systemic risk. It needs to be mandated to make recommendations on weaknesses in the system, and countries should be obliged to take these recommendations extremely seriously. Peer pressure is going to be vital -- just as it has been in keeping trade barriers at bay over the last year.

We need much greater global coordination of financial regulation, facing up to systemic risk and ensuring that market participants are not able to play one regulatory jurisdiction against another. The Group of 20 leaders have taken the first steps down this road.

Free-market true believers will resist the conclusion, but the only way to preserve a global growth model based on the huge benefits of dynamic markets is to regulate it better. The bill for the benefits of an open global economy has arrived, and it can only be paid in greater global governance.

Mr. Mandelson is Britain's business secretary and was EU Trade Commissioner from 2004 to 2008.

WSJ Editorial Page: The NEA's Latest Trick

The NEA's Latest Trick. WSJ Editorial
Trying to deny military families.
The Wall Street Journal, Jun 19, 2009, p A14

Public school teachers are supposed to teach kids to read, so it would be nice if their unions could master the same skill. In a recent letter to Senators, the National Education Association claims Washington, D.C.'s Opportunity Scholarships aren't working, ignoring a recent evaluation showing the opposite.

"The DC voucher pilot program, which is set to expire this year, has been a failure," the NEA's letter fibs. "Over its five year span, the pilot program has yielded no evidence of positive impact on student achievement."

That must be news to the voucher students who are reading almost a half-grade level ahead of their peers. Or to the study's earliest participants, who are 19 months ahead after three years. Parents were also more satisfied with their children's schools and more confident about their safety. Those were among the findings of the Department of Education's own Institute of Education Sciences, which used rigorous standards to measure statistically significant improvement.

If you call that "failure," no wonder the program has been swimming in several times as many applications as it can accept. They come from parents desperate to give their kids a chance to get the kind of education D.C.'s notorious public schools do not provide. That's the same chance the Obamas have made by opting for private schools and Secretary of Education Arne Duncan has taken by choosing to live in a Virginia suburb with better public schools.

Contrary to the NEA's letter, the D.C. voucher program isn't magically expiring of its own accord. In March, Congress voted to eliminate the vouchers after the 2009-2010 school year unless it is re-approved by the D.C. City Council and . . . Congress. The program, which helps send 1,700 kids to school with $7,500 vouchers, was excised even as the stimulus is throwing billions to the nation's school districts.

The NEA's letter was a pre-emptive strike against the possibility that 750,000 students in military families would benefit from vouchers. That idea was raised in a Senate hearing this month, when military families explained that frequent moves and inconsistent schooling was harmful to their children. "The creation of a school voucher program should be considered," Air Force wife Patricia Davis dared to say.

President Obama pledged to support whatever works in schools, ideology notwithstanding. But neither he nor Mr. Duncan have dared to speak truth to the power of the NEA. Military families can join urban parents on the list of those who matter less to the NEA than does maintaining the failed status quo.

CBO on Federal President's health plan

ObamaCare Sticker Shock. WSJ Editorial
A $1.6 trillion deficit boost, and the uninsured will still be with us.
The Wall Street Journal, Jun 19, 2009, page A14

This was supposed to be a red-letter week for national health care, as Democrats started the process of hustling a quarter-baked bill through Congress to reorganize one-sixth of the economy on a partisan vote. Instead it was a fiasco.

Most of the devastation was wreaked by the Congressional Budget Office, which on Tuesday reported that draft legislation from the Senate Finance Committee would increase the federal deficit by more than $1.6 trillion over the next decade while only partly denting the population of the uninsured. The details haven't been made public, but the short version seems to be that President Obama's health boondoggle prescribes vast new spending without a coherent plan to pay for it even while failing to meet its own standards for social equity.

Finance Chairman Max Baucus postponed the health timeline, probably until after Congress's July 4 vacation. His team will try to scale down the middle-class insurance subsidies and make other cuts to hold the sticker shock under $1 trillion. (Oh, is that all?) Mr. Baucus also claims he's committed to a bipartisan consensus, yet most Republicans have been closed out of the negotiations, and industry lobbyists have been pre-emptively warned that even meeting with the GOP will invite retribution.

Useful to emphasize amid the mayhem is that CBO's number-crunching is almost always off -- predicting too much spending for market-based policies and far too little for new public programs, especially on health care. The CBO score for a new entitlement is only the teaser rate, given that the costs will inevitably balloon as the years pass and more people mob "free" or subsidized insurance.

Mitt Romney pitched his 2006 health reform -- which Democrats view as a model for universal coverage -- as modest and affordable, yet already its public option is annihilating the Massachusetts fisc. The original cost estimate for last year was $472 million; final spending came in at $628 million. Spending this year is at least $75 million over initial budget, while projections for next year range as high as $880 million -- and even those are probably too low.
Capitol Hill's entitlement Democrats are determined too press ahead, despite this cost detour. Still, this week's lesson is that ObamaCare might not be inevitable once Americans figure out the astonishing price tag.

Thursday, June 18, 2009

New Bisphenol A Study is of Very Limited Relevance to Human Health

New Bisphenol A Study is of Very Limited Relevance to Human Health. By Steven G. Hentges
ACC, Jun 18, 2009

The following statement can be attributed to Steven G. Hentges, Ph.D. of the American Chemistry Council’s (ACC) Polycarbonate/BPA Global Group. Dr. Hentges’ comments are in regard to a study from researchers at North Carolina State University (NCSU) and the National Institute of Environmental Health Sciences (NIEHS). The study, "Neonatal bisphenol-A exposure alters rat reproductive development and ovarian morphology without impairing activation of gonadotropin releasing hormone neurons," was funded by NIEHS and published online June 17 by the journal Biology of Reproduction. The study was co-authored by Heather B. Patisaul and Heather B. Adewale of NCSU and Wendy N. Jefferson and Retha R. Newbold of NIEHS.

ARLINGTON, VA (June 17, 2009) – “The American Chemistry Council (ACC) and its member companies have long-supported research to advance scientific understanding about chemicals and promote public health. To achieve these goals with limited resources, including limited use of laboratory animals, study designs should be based on sound scientific principles and data so as to be directly relevant to human health. This new study fails to meet these basic study design principles and practices.

“It is a continuing disappointment to see that researchers – including scientists from National Institute of Environmental Health Sciences (NIEHS) – conduct studies that involve injection of laboratory animals with bisphenol A (BPA). This experimental technique has recently been acknowledged by the NIEHS to have very limited value for assessing human health effects since people are orally exposed to BPA, not by injection. It is well-known that BPA is efficiently metabolized and rapidly eliminated from the body after oral exposure.

“The researchers also state, incorrectly, that their study is significant because it used a dose equal to the EPA reference dose for BPA, which is a science-based lifetime daily intake level determined to be safe by EPA. However, the EPA reference dose is specifically applicable only to oral exposure, not to injection exposure. Consequently, this study does not call into question the validity of the EPA reference dose.

“Although the researchers correctly note that ‘the research was done on rats, making it difficult to determine its applicability to humans...’, the study is of very limited relevance to human health, according to the NIEHS guidelines, due to these inherent study design flaws.

“Eleven regulatory bodies around the world have recently assessed the science on bisphenol A (BPA) and uniformly determined that BPA is safe for use in food contact products. In February, the U.S. Food and Drug Administration (FDA), in regard to their ongoing review, stated: ‘With regard to BPA generally, based on all available evidence, the consensus of regulatory agencies in the United States, Canada, Europe, and Japan is that the current levels of exposure to BPA through food packaging do not pose an immediate health risk to the general population, including infants and young children.’ ”

Learn more about BPA.

Views from India: Why Manmohan Singh is in Yekaterinburg?

Talking Heads: Why Manmohan Singh is in Yekaterinburg? By P. Stobdan
IDSA, June 16, 2009

Prime Minister Manmohan Singh is attending a slew of Russian hosted high profile meetings including those of the SCO and BRIC in Yekaterinburg which would be viewed keenly by most international watchers. The SCO, keenly nurtured by Russia and China as an exclusive nucleus, had hitherto excluded those with observer status from its core deliberations. The forum became popular as an embryonic counterpoise to the United States after 2005 when it bluntly issued a quit notice to the US from Central Asia and decided to salvage an assortment of autocrats being ostracized by the West. Since then, even Iran has been seeking shelter under the SCO auspices.

Why has Russia changed the summit format this time around to include Iran, India, Pakistan and Mongolia in the core deliberations? While it reflects the changing international realignment, the spin now emerging clearly indicates that Russia is counter-strategizing to deal with global issues or at the least it is unwilling to concede the challenges being posed by NATO. The rift with the trans-Atlantic alliance continues as Moscow has rejected the idea of exerting pressure on Iran over its nuclear programme in exchange for the US abandoning its planned missile defense system in Eastern Europe. For its part, NATO has not abandoned its quest to bring Ukraine and Georgia within its fold. The standoff over Georgia also continues.

It is also clear that Russia’s showdown with Georgia has changed the rules of the game. Moscow had lost diplomatic face not only in Europe but also in Asia. Many of Russia’s friends including SCO members were incensed by its adventurism towards former-republics, including the way in which it had been using gas as an instrument for arm-twisting. China and the Central Asian states were wary of Russia’s action and as such they did not endorse Moscow’s call for recognizing Abkhazia and South Ossestia during the last SCO summit in Dushanbe. The adroit Chinese were certainly not keen to pick a fight at the risk of ruining relations with the West. Moscow has also perhaps realized that it is fast losing influence in the Eurasian space, especially given that the global meltdown has made Central Asian states more dependent on China. The former Soviet republics are relying more on Chinese driven institutions than moribund organization led by Russia. Unlike Russia, China has showed no inclination for prematurely confronting the West. Instead, it was cautious about admitting Iran into the SCO as a full member and may have moderated Central Asian behavior to the chagrin of Moscow.

It is against the backdrop of this trend of Russia losing economic, political and cultural attractiveness vis-à-vis China that we should see Moscow’s attempt to bring India fully into the Eurasian space. Another reliable partner is Russia’s old trusted ally - Mongolia. India’s inclusion is also linked to the global financial crisis. Both Russia and China have been attempting to evolve a fresh financial architecture, including a proposal for a new global currency to replace the dollar as a way to preempt another financial meltdown. Russia hopes that Brazil, India and China would join hands as part of the BRIC forum to push the idea further.

The SCO meeting would be significant especially since it is being held against the backdrop of the new American Af-Pak Plan and Obama’s attempt to muster the support of regional powers to make his Afghan policy a success. The SCO, under Russia’s presidency, has been talking about Afghanistan more seriously than before mainly because the focus of geopolitics has shifted from Iraq to Afghanistan – Russia’s traditional backyard. In fact, the high profile March 2009 Conference in Moscow clearly set the stage for the SCO to play a stepped-up role, when it announced a roadmap to deal with increasing security concerns emanating from Afghanistan. It called for comprehensive cooperation against terrorism, drug trafficking and organized crime. The Russians suspect that the global economic downturn may have had an impact on the Taliban as well and thus strengthen the drugs trade. But SCO efforts are being hampered by the NATO presence in Afghanistan. The Russians claim that Afghan opium production increased 44 times after NATO and US troops were deployed in the region and since the withdrawal of Russian border guards from Tajik-Afghan border in 2005.

Moscow has shown willingness to provide transit routes for NATO shipment across Russia and Central Asia to Afghanistan. But this is being downplayed by the US which prefers to rely upon Pakistani supply routes. Attempts would be made by the SCO to bring Afghanistan within its fold this time. As the US intends to deal with and not confront the Taliban, Moscow fears that there will be a power vacuum in Afghanistan upsetting the existing balance. Some SCO declarations may come as music to Indian ears, since they would be a contrast to the NATO’s military approach and are likely to insist upon Pakistan stopping terrorism emanating from its soil. For New Delhi, the SCO may provide a useful platform to counter the negative fallout for Indian interests emerging from the Af-Pak plan. India had earlier pushed for a policy that integrates development projects in Afghanistan with security initiatives and has also insisted that there are no ‘good’ or ‘bad’ Taliban.

It is also likely that Russia is once again trying to use its leverage to soften India with regard to ongoing tension with Pakistan. Putin made a failed attempt earlier to bring together Vajpayee and Musharraf at a similar summit held in Almaty in 2002. Vajpayee did not relent.

The SCO carries a range of ambitious goals under its charter as letter of intent, including the development of an energy club, an inter-bank consortium, and cultural centres to set up an SCO university. But all in all, its strength is slightly exaggerated. The grouping suffers from nebulous internal contradictions. Everyone plays a game under the SCO template. There are internal discords and competing interests. Behind the SCO façade both China and Russia are competing for energy deals with Central Asian states. And like in Africa, Chinese firms are buying resource mines by befriending the region’s corrupt regimes, and in the process is fuelling corruption and undermining a host of environmental and labour standards.

The importance of India is occasionally aired by the SCO members, but in reality Russians and Central Asians only pay lip service while China effectively scuttles anything positive involving India in the Eurasian space. Decades of Indian efforts for an energy deal with Central Asian states remain frustrated. Except on security issues there is little that India can achieve in the SCO. The danger is that though the SCO is not a military block, it is increasingly getting securitized due to stepped-up co-operation to fight terrorism through intelligence consultations and large-scale military exercises. Many have dubbed it as an Asian NATO.

There is nothing wrong in Manmohan Singh attending the Yekaterinburg meeting even if it is a low diplomatic parade. It is also alright if the Prime Minister wants to dispel the myth that he only cares for Washington. In any event, India stands to gain by being courted by other centres of power rather than placing all its eggs in the American basket.

Prof. P. Stobdan is Senior Fellow at the Institute for Defence Studies and Analyses, New Delhi

Too Big to Fail, or Succeed: Everyone will want to become big enough to enjoy 'systemic risk' protection

Too Big to Fail, or Succeed. By Peter J Wallison
Everyone will want to become big enough to enjoy 'systemic risk' protection.
The Wall Street Journal, Jun 18, 2009, page A17

In a speech at the White House yesterday, President Barack Obama outlined what he envisions for future regulation of the financial system. He called his plan "a new foundation for sustained economic growth . . . a transformation on a scale not seen since the reforms that followed the Great Depression." Indeed it is.

His plan, if adopted, will fundamentally change the nature of our financial system and economy. The underlying concerns and assumptions are clear, and they are made clearer by considering other ways that his administration has dealt with the consequences of competition -- particularly the faux bankruptcies of General Motors and Chrysler and the impending change in antitrust policy. Although the president said in his speech that he supports free markets, these initiatives confirm that the administration fears the "creative destruction" that free markets produce, preferring stability over innovation, competition and change.

According to the administration white paper circulated prior to the president's speech, the Federal Reserve would be authorized to create a special regulatory regime -- including requirements for capital, leverage and liquidity -- for any firm "whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed." In addition, if a large financial firm is failing, the Treasury is to be given the power -- in lieu of bankruptcy -- to appoint a conservator or receiver to "stabilize" it.

Designating particular financial firms for this kind of special regulatory treatment clearly signals to the markets that these institutions are too big to fail. It will reduce the perceived risk of lending to them, enabling them to raise funds at lower cost than their smaller competitors.

In other words, the administration's plan would create what are essentially government-sponsored enterprises like Fannie Mae and Freddie Mac in every sector of the financial economy -- insurers, securities firms, finance companies, bank holding companies, and hedge funds -- where these specially regulated firms are to be designated. The result will be devastating for competition. Larger firms will squeeze out smaller ones and aggressive small companies will have less opportunity to overcome the government-backed winners.

Moreover, the administration's proposal to provide a special bailout mechanism for large firms confirms the likelihood that these firms will never be closed down or liquidated. Citing the market turmoil that followed Lehman's collapse, the administration will argue that failures like this are "disorderly." But failure comes from risk-taking -- the very source of our economy's strength -- and it is ultimately risk-taking and its consequences that the administration's plan is intended to prevent.

The turmoil following Lehman's failure occurred because market participants expected, after the rescue of Bear Stearns, that any larger firm would also be rescued. When Lehman wasn't, all market participants were required to recalibrate the risks of dealing with all others, causing a freeze-up in lending and hoarding of cash. Lehman's failure itself did not cause any substantial losses, and within two weeks of its bankruptcy filing Lehman's trustee sold its brokerage, investment banking, and investment management businesses to four different buyers.

Contrast this with AIG, the administration's paradigm, which was saved by the government because it was allegedly too big to fail. That firm is gradually wasting away under government control, with the taxpayers footing the bill.

The administration's fear of competitive outcomes is not reflected solely in financial-sector policies. Consider General Motors and Chrysler. They were defeated in the marketplace. Simply put, they failed to build automobiles enough Americans wanted to buy.

Their disappearance would not have threatened the stability of the financial system, although it would undoubtedly have been disruptive for suppliers, dealers and employees. Yet the administration wouldn't allow them to fail, either. Despite all the talk about credit priorities, the fundamental point is that the administration used taxpayer money to overturn the market's verdict. If we want a preview of what the administration will do with the resolution authority it wants for large financial companies, we need look no further.

The same pattern with regard to competitive markets can be seen in the Justice Department's new antitrust policy. Christine Varney, the new assistant attorney general in charge of antitrust policy, has said that U.S. policy should be more like Europe's. Until now, U.S. antitrust policy has tried to protect competition. Europe attempts to protect competitors. Protecting competitors means blunting the skills of superior players, allowing inferior managers and business models to remain in business and thus preventing better managements and business models from emerging. Again, stability wins out over change and progress.

The president has said on several occasions, including in yesterday's speech, that "I've always been a strong believer in the power of the free market." But his administration's prescriptions tell a different story. In AIG, GM, Chrysler, Fannie Mae and Freddie Mac we can see the future that the administration envisions for our economy -- a sclerotic and unchanging structure of big companies working with, protected by, and relying on big government.

Mr. Wallison is a senior fellow at the American Enterprise Institute.

On the New CCSP Report

Obama's Phil Cooney and the New CCSP Report. By Roger Pielke, Jr
Prometheus, Jun 16, 2009

Imagine if an industry-funded government contractor had a hand in writing a major federal report on climate change. And imagine if that person used his position to misrepresent the science, to cite his own non-peer reviewed work, and to ignore relevant work in the peer-reviewed literature. There would be an outrage, surely . . .

The Obama Administration has re-released a report (PDF) first issued in draft form by the Bush Administration last July (still online PDF). The substance of the report is essentially the same as last year's version, with a bit more professionalism in the delivery. For instance, the photo-shopped picture of a flood appears to be removed and the embarrassing executive summary has been replaced by something more appropriate.

This post is about how the report summarizes the issue of disasters and climate change, including several references to my work, which is misrepresented. This post is long and detailed, which is necessary to support my claims. But stick with it, or skip to the end if you've seen the details before (and long-time readers will have seen them often), there is a surprise at the end.

Here is the relevant paragraph of the CCSP report, found on p. 105:

While economic and demographic factors have no doubt contributed to observed increases in losses,346 these factors do not fully explain the upward trend in costs or numbers of events.344,347 For example, during the time period covered in the figure to the right, population increased by a factor of 1.3 while losses increased by a factor of 15 to 20 in inflation-corrected dollars. Analyses asserting little or no role of climate change in increasing the risk of losses tend to focus on a highly limited set of hazards and locations. They also often fail to account for the vagaries of natural cycles and inflation adjustments, or to normalize for countervailing factors such as improved pre- and post-event loss prevention (such as dikes, building codes, and early warning systems).348,349
Lets take it sentence by sentence.

Sentence #1

While economic and demographic factors have no doubt contributed to observed increases in losses,346 these factors do not fully explain the upward trend in costs or numbers of events.344,347Reference 346 is to a paper I co-authored:

Pielke, Jr., R. A., Gratz, J., Landsea, C. W., Collins, D., Saunders, M., and Musulin, R., 2008. Normalized Hurricane Damages in the United States: 1900-2005. Natural Hazards Review, Volume 9, Issue 1, pp. 29-42. (PDF)

In that paper we did indeed conclude that economic and demographic factors have contributed to losses related to hurricanes. In fact, we concluded that these factors accounted for all of the increase in hurricane losses over the period of record:

The lack of trend in twentieth century normalized hurricane losses is consistent with what one would expect to find given the lack of trends in hurricane frequency or intensity at landfall.

The CCSP report however, says the opposite, that these factors do not explain the upward trend in costs or numbers of events. To support this claim they provide two citations. Lets consider each in turn, first #344:

Mills, E., 2005: Insurance in a climate of change. Science, 309(5737), 1040-1044.

If you go to Mills, and I have, you will find that it is a commentary that does not offer any new research. Instead, its assertion that societal factors cannot explain the increase in disaster losses is based on a further reference; here is what Mills says:

Global weather-related losses in recent years have been trending upward much faster than population, inflation, or insurance penetration, and faster than non-weather-related events

You will see in my comprehensive discussion of Mills that he relied on two sources to support this claim. The first source actually refers to the second, so there is only one source. That one source is a 2000 Munich Re report, which for reasons I explain in the previous link does not actually support its claim.

But more problematically, why is a report characterized by Science Advisor John Holdren as being the "most up-to-date, authoritative, and comprehensive" analysis relying on a secondary, non-peer source citing another non-peer reviewed source from 2000 to support a claim that a large amount of uncited and more recent peer reviewed literature says the opposite about?

The second citation referred to is #347:

Rosenzweig, C., G. Casassa, D.J. Karoly, A. Imeson, C. Liu, A. Menzel, S. Rawlins, T.L. Root, B. Seguin, and P. Tryjanowski, 2007: Assessment of observed changes and responses in natural and managed systems. In: Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [Parry, M.L., O.F. Canziani, J.P. Palutikof, P.J. van der Linden, and C.E. Hanson, (eds.)]. Cambridge University Press, Cambridge, UK, and New York, pp. 79-131.

Which is of course Chapter 1 of the 2007 IPCC AR4 WGII report. That report relied on a single study to make the following claim (at p. 110):

A global catalogue of catastrophe losses was constructed(MuirWood et al., 2006), normalised to account for changes that have resulted from variations in wealth and the number and value of properties located in the path of the catastrophes . . . Once the data were normalised, a small statistically significant trend was found for an increase in annual catastrophe loss since 1970 of 2% per year.

Muir-Wood (2006) is of course the white paper prepared in advance of the Hohenkammer Workshop on disaster losses that I organized along with Peter Hoeppe (of Munich Re) in 2006. I called the IPCC out on this cherrypicking/misrepresentation when the report was first released. Even though Muir-Wood et al. (2006) found no trends from 1950, and more importantly the Hohenkammer Workshop resulted in a consensus finding that such attribution was not possible, the Muir-Wood et al. study has been cherry-picked by the IPCC and before that the Stern Review and now, indirectly, again by the CCSP.

So to summarize: sentence one is not supported by the citations provided, which lead in both cases to selectively chosen non-peer revied sources, and the citations that are peer reviewed on this subject come to an opposite conclusion and are ignored.

Sentence #2

For example, during the time period covered in the figure to the right, population increased by a factor of 1.3 while losses increased by a factor of 15 to 20 in inflation-corrected dollars.That figure appears to the right and its problems are many.

That figure appears to the right and its problems are many.

1. The figure includes a major earthquake and 9/11.
2. The figure and the text neglect the effects of increasing wealth.
3. Published peer reviewed studies show no long-term trends in flood or hurricane losses once adjusted for societal change, yet those data are included.

Sentences #3 and #4

Analyses asserting little or no role of climate change in increasing the risk of losses tend to focus on a highly limited set of hazards and locations. They also often fail to account for the vagaries of natural cycles and inflation adjustments, or to normalize for countervailing factors such as improved pre- and post-event loss prevention (such as dikes, building codes, and early warning systems).348,349

I have to think that that the third sentence is referring to at least some of my work. Places that have been looked at include the United States for floods, hurricanes, and tornadoes (I'll ignore other studies outside the US since this CCSP report is referring only to the US). So what does that leave remaining? Not much.

The fourth sentence cannot be referring to my work, since it explicitly considers variability, inflation, and mitigation. Strangely enough that sentence is supported (reference #348) by a letter to Science (PDF) that I wrote on the Mills (2005) paper. In that letter I stated:

Presently, there is simply no scientific basis for claims that the escalating cost of disasters is the result of anything other than increasing societal vulnerability.

So it is strange to see it cited suggesting something that it does not.

Finally, #349 goes to a new paper by Mills which can be found here in PDF. Mills 2009 offers nothing related to the subject of this sentence, so it is strange to see it cited as a source here.

How can we explain how such a patently bad paragraph full of misrepresentations appeared in a U.S. government report?

One answer might lie in the fact that Evan Mills was a co-author of the report (p. 159). Do you think that had anything to do with it? His list of consulting clients is positively Phil Cooney-esque. Here are a few businesses and organizations that he lists under Consulting & Advising in his resume:

* Armstrong/Energyn (US)
* Barakat, Howard & Chamberlin, Inc. (US)
* Better Energy Systems (UK)
* Ceres (US)
* CMC Energy Services (US)* Integrated Process Technologies (US)
* Investment Research, Inc. (US)
* Teton Energy Partners (US)

So a person responsible for misrepresenting science in a government report has ties and presumably financial interests with companies that have an interest in climate policy outcomes? No, couldn't be. Could it?

For those wanting a more rounded picture of extremes in the United States, here is what an earlier CCSP report concluded about extreme events in the United States, but which was uncited by this new CCSP report in this paragraph:

1. Over the long-term U.S. hurricane landfalls have been declining.
2. Nationwide there have been no long-term increases in drought.
3. Despite increases in some measures of precipitation (pp. 46-50, pp. 130-131), there have not been corresponding increases in peak streamflows (high flows above 90th percentile).
4. There have been no observed changes in the occurrence of tornadoes or thunderstorms
5. There have been no long-term increases in strong East Coast winter storms (ECWS), called Nor’easters.
6. There are no long-term trends in either heat waves or cold spells, though there are trends within shorter time periods in the overall record.

'Public Option': Son of Medicaid

'Public Option': Son of Medicaid. By Daniel Henninger
Lard atop lard that only a politician or bureaucrat could love.
The Wall Street Journal, Jun 18, 2009, page A15

In his speech on health care to the American Medical Association, President Obama explained why the U.S. has "failed" (yet again) to provide comprehensive reform that "covers everyone." He had a list of the failing people, who "simply couldn't agree" on reform: doctors, insurance companies, businesses, workers, others. And "if we're honest," he said (ergo, disagreeing with this is dishonest) we must add to the list "some interest groups and lobbyists" who have used "fear tactics."

It seems to me, if we're honest, that one other contributor to the health-care morass should have been on the president's list: Congress. Indeed a close reading of Mr. Obama's speech suggests he holds the political class innocent insofar as he blames everyone else but them. Can this be true?

Back before recorded history, in 1965, Congress erected the nation's first two monuments to health-care "reform," Medicaid and Medicare. Medicaid was described at the time as a modest solution to the problem of health care for the poor. It would be run by the states and "monitored" by the federal government.

The reform known as Medicaid is worth our attention now because Mr. Obama is more or less demanding that the nation accept another reform, his "optional" federalized health insurance program. He suggested several times before the AMA that opposition to it will consist of "scare tactics" and "fear mongering."

Whatever Medicaid's merits, this federal health-care program more than any other factor has put California and New York on the brink of fiscal catastrophe. I'd even call it scary.

Spending on health and welfare, largely under Medicaid, makes up one-third of California's budget of some $100 billion. In New York Gov. David Paterson's budget message, he notes that "New York spends more per capital ($2,283) on Medicaid than any other state in the country."

After 45 years, the health-care reform called Medicaid has crushed state budgets. A study by the National Governors Association said a decade ago that because of "new requirements" imposed by federal law -- meaning Congress -- "Medicaid has evolved into a program whose size, cost and significance are far beyond the original vision of its creators."

In his speeches, Mr. Obama makes the original vision of his "public option" insurance plan sound about as simple as driving through toll booths with an electronic pass on your windshield. It's going to be all about "best practices" with patients "reimbursed in a thoughtful way," as if the federal government is about to become just another big Google.

Medicaid is a morass. Since the program's inception, Congress has loaded it up every few years with more notions of what to cover, shifting about 43% of the ever-upward cost onto someone else's tab, mainly the states. A 1988 congressional mandate requires local schools to pay for schooling and related services for disabled children, but because Congress underfunds its mandates, the states pay the rest through Medicaid.

The list of add-ons is endless, and there's little about it that is thoughtful. Why shouldn't one think that, as with Medicare and Medicaid, the Obama Public Option in time will become an impossible fog for patients to navigate? But unto eternity the program's administrative complexity will provide work for bureaucrats, Members of Congress, their staffs, lobbyist spouses and the "health-care" establishment of foundations and economists.

Oh, and the courts. The fact that this is a public program ensures not just congressional meddling but also makes it vulnerable to litigation. Over time, the Sotomayors of the federal bench will make it bigger. One piece of California's incredible budget mess flows from a federal judge's 2006 decision to seize control of the state's prison-health system and make the state pay billions for new health spending imagined by his appointed federal overseer.

Medicaid alone didn't put California and New York on the brink. Add in spending on public education and you've accounted for about 60% of their budgets. This drives the deficits and gets all the ink, but not least among the casualties of bigness is the idea of governance.

The elected legislatures of California, which holds 36.7 million American citizens, and New York, with 20 million, are essentially falling apart as governing bodies. The whole country has witnessed the spectacle of the comic "coup" in New York's Senate in Albany the past two weeks.

With collapse comes a truth: The bigger the government, the smaller the politicians. As mandated entitlements grow, the spending "crowds out" the need or obligation to think or to govern. Legislators with nothing very real to do become lazy, slack and corrupt. They become Albany. Or Sacramento. Or Trenton.

Mr. Obama's plan is intended to "guarantee" health insurance for all. Whatever the truth of that, its outlays -- larded atop Medicaid, Medicare and Social Security -- guarantee that Congress will become more like the states' clown shows. But they are expensive clowns.

In his speech, Mr. Obama said the cost of the Public Option won't add to the deficit: "I've set down a rule for my staff, for my team -- and I've said this to Congress -- health-care reform must be, and will be, deficit-neutral in the next decade." If we're honest, that means tax increases are inevitable. Sounds scary to me.

Congress and the IMF's Power Grab

Congress and the IMF's Power Grab. By Judy Shelton
There are better ways to promote international economic stability
WSJ, Jun 18, 2009

A sad spectacle played out in Washington this week as House Democrats pushed through a $106 billion supplemental appropriations bill to fund our troops in Iraq and Afghanistan that also provides a whopping $108 billion in expanded credit to the International Monetary Fund (IMF). The bill, which will soon be voted on in the Senate, also permits the IMF to sell $13 billion in gold for the chief purpose of establishing a permanent endowment for itself.

The Obama administration went to great lengths to get the IMF its billions. Last week, congressional leaders received a letter that made a firm connection between global economics and global security. "We know from the 1930s that a protracted global economic slump can foster undesirable and unforeseeable reactions to hardship and adversity," it stated. "Financial hardship and poverty breed desperation, which helps terrorist networks to attract new recruits with messages of hate, violence and intolerance."

The letter then urged Republicans and Democrats to support the president's request for IMF funding. "We believe that the current instability poses a significant risk to the long-term prosperity and security of the United States." It was signed by Secretary of State Hillary Clinton, National Security Adviser James Jones, and, most notably, Secretary of Defense Robert Gates.

Whoa! Clearly the implication was that a vote against the IMF funds would be a vote against national security. But does such a claim make sense? To answer that we must first seriously consider: 1) the impact of international financial instability on global security, and 2) whether the IMF is a force for good in establishing a stable financial foundation for economic prosperity.

The era of the 1930s is invoked often these days, usually to compare today's economic recession with the Great Depression years triggered by the U.S. stock market crash on Oct. 29, 1929. The international impact was exacerbated as countries grew protectionist and turned inward, erecting tariff barriers against imported goods and engaging in competitive currency devaluations. Monetary nationalism and the breakdown of international trade worsened the downward global economic spiral, paving the way for Adolf Hitler to come to power in hard-hit Germany and leading to World War II.

Certainly, it was recognition of the damaging economic impact of currency chaos and its worrisome political implications that drove U.S. Treasury Secretary Henry Morgenthau to ask his deputy, Harry Dexter White, to begin devising a plan for coordinated monetary arrangements among the U.S. and its allies. It was Dec. 14, 1941, one week after the attack on Pearl Harbor. The goal was to lay the groundwork for a more hopeful future for the Allied nations. Instead of returning to the beggar-thy-neighbor policies of the 1930s, they could look forward to a stable postwar international monetary system that would provide a foundation on which to rebuild their economies and attain new levels of prosperity.

Ultimately, the plan was developed into the Bretton Woods agreement of 1944 -- which established the IMF to operate a gold-exchange standard. White had decided early on that maintaining stable exchange rates was a separate task from providing cheap loans to Allied countries. A different organization -- the International Bank for Reconstruction and Development (later called the World Bank) -- was designated to perform that function.

The IMF carried out its exchange-rate duties for the next quarter century, permitting foreign central banks to redeem excess dollars at the fixed conversion rate of $35 per ounce of gold. The period from 1947 to 1967, known as the "Bretton Woods era," marked the emergence of a new world economic order based on solid money and increasingly free competition in the international marketplace.

The system came under pressure in the late 1960s as the U.S. began to inflate its money supply to accommodate growing fiscal strains. A liberal agenda of increased spending for social programs coincided with an escalation of the Vietnam War. The U.S government borrowed money to pay for it all, forcing other nations to absorb some of the inflationary impact through their own fixed-exchange rates with the dollar.

The Bretton Woods system ended on Aug. 15, 1971, when President Richard Nixon "closed the gold window" -- i.e., denied the convertibility privilege and thus delinked the dollar from gold. Since then, in the absence of a monetary anchor, exchange rates have been left to "float." Today, the dollar's residual role as key global reserve currency reflects the waning credibility of the U.S. government in carrying out responsible fiscal and monetary policies. Which is why China, Russia, Brazil and other developing nations are now calling for a new global reserve currency to provide an alternative to the dollar. And why the IMF funding provision in the current wartime supplemental bill needs to be closely examined.

Officials concerned about global security are right to recognize that financial instability breeds discontent and fosters social resentment that can challenge ruling interests and topple whole regimes. The question is whether short-term fixes -- in the form of emergency loans to a flailing government, the sort of assistance the IMF is prepared to offer -- provide a solid foundation for economic growth.

Just as overdone fiscal "stimulus" undermines confidence in future prosperity due to its inflationary consequences, it makes no sense to throw money at struggling nations without providing the hope of a more permanent solution that will enable them to meaningfully participate in the global marketplace. Money meltdown occurs when governments face overwhelming gaps between revenues and expenditures; foreign investors abandon the currencies as they race to the exits, leaving bereft citizens with worthless paper.

Putting out financial fires has become the specialty of the IMF, and the temporary respite offered through emergency loans may mitigate immediate damage to certain vulnerable countries, especially those exposed to contagion from neighbors. But the IMF is not capable of fulfilling its original mandate to oversee a stable international monetary system because there is no international monetary system. And the IMF's desire to sell gold to obtain windfall profits to fund its own permanent endowment was never envisioned under the Bretton Woods Articles of Agreement.

That agreement offered the countries fighting World War II the prospect of a more stable world. All the IMF is offering our dangerous world is the prospect of lurching from one short-term economic fix to the next.

Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

Tom Goldstein' op-ed on Sotomayor on TNYT

Today’s New York Times Op-Ed on Judge Sotomayor. By Roger Clegg
Bench Memos/NRO, Tuesday, June 16, 2009

The New York Times today has an op-ed by Tom Goldstein about Judge Sotomayor’s decisions involving race.

Mr. Goldstein “conclude[s] that Judge Sotomayor does not allow bias to infect her decision-making.” It’s not a persuasive op-ed.

Let me note at the outset that others, including our own Ed Whelan, have earlier noted some problems with Mr. Goldstein’s methodology. Let me note also that others, including The Washington Post, have counted the cases involved differently than Mr. Goldstein.

Mr. Goldstein’s discussion in today’s op-ed begins and ends tendentiously, lamenting that “many of us remain incapable of having a conversation about ethnicity that does not devolve into charges of racism,” that “critics have latched onto [Judge Sotomayor’s] decision” in the New Haven firefighters case to “infer … that Judge Sotomayor must be biased against whites”; he calls this “hysteria” and ends with another lament, of “[u]nsubstantiated charges of racism.” It’s ironic that the op-ed, which implicitly calls for a white lab-coat, calm and disinterested review of the facts, should bracket its discussion with such name-calling.

Mr. Goldstein’s discussion of a narrow range of cases also completely ignores the fact that some of the suspicion of Judge Sotomayor, and the fear that she might be influenced by race, ethnicity, and sex in her opinions, is fueled by the fact that, in her talk and writing off the bench, she has said that judges are influenced by race, ethnicity, and sex in their opinions, and seems to think that this is perfectly fine. So it’s not unreasonable for the judge’s critics to be looking especially hard for problems in her decisions.

Nor is it very persuasive to argue, as Mr. Goldstein does, that such fear can be refuted by statistics showing that, in percentage terms, most of Judge Sotomayor’s decisions are not problematic. Suppose the shoe were on the other foot, and a conservative judge had just a couple of decisions that the Left objected to in, say, the abortion area — would that be the end of the matter? The answer, of course, is that it would not — and I’m not hypothesizing here: We know from past experience that is not. Nor should it be: A bad decision in a particularly difficult and sensitive case can reveal a lot about what kind of a justice a judge will be, when her cases will almost all be difficult and sensitive.

On the court of appeals, on the other hand, we would not expect that all or even most decisions would be problematic. No doubt most cases are so clear-cut, one way or the other, that judges on both ends of the spectrum will agree on their disposition. What’s more, saying that a panel is unanimous doesn’t mean that the decision was not problematic (the panel might have been composed of all activists); saying that some of those panels included “a Republican-appointed judge” does not avoid that problem (there are plenty of activist Republican-appointed judges — like, say, Earl Warren and William Brennan, not to mention David Souter and Judge Sotomayor herself, who was, technically, a Republican-appointed district judge).

I have not “reviewed every single race-related case” on which Judge Sotomayor has ruled, but I know of at least three disturbing ones. There’s the New Haven case, of course; and Hayden v. Pataki¸ in which, Mr. Goldstein acknowledges, “she concluded that felon disenfranchisement laws are [racially] discriminatory and violate the Voting Rights Act”; and Brown v. City of Oneonta, which Ed discusses here.

Oh, and by the way: Mr. Goldstein is looking only at decisions in one area. So he’s not considering her decisions on property rights, the Second Amendment, etc., which have also come in for criticism.

In this regard, I should also note that one of the cases that Mr. Goldstein (and the Washington Post, in an article last week) cites as supposedly reassuring involved a policeman who was fired for mailing out racist and anti-Semitic fliers. Judge Sotomayor, in dissent, wanted to rule against the police department — just as the ACLU's New York affiliate had urged the court to do. So, sure, her position favored a bigoted policeman, but she also wanted to use an aggressive interpretation of the First Amendment to tie the hands of the police department. Thus, this decision is hardly evidence of non-activism, which is the real issue. And in that regard, pace Mr. Goldstein’s op-ed, the fact that Judge Sotomayor doesn’t urge judges “to disregard the plain language of any statute or to invent exceptions to statutes” obviously doesn’t mean that she isn’t doing so.

There is, in sum, plenty for the Senate Judiciary Committee to be concerned about.

Reagan's reaction on Poland events - Solidarnosc, Solidarity

Does Obama care?. By Scott Johnson
Powerline blog, June 17, 2009

Barack Obama's muted and ambivalent response to the events in Iran raises the question whether he cares about the fate of freedom in Iran, and what his attitude toward the Iranian regime is. Does he identify with the regime or its opponents? Does he care?

Ronald Reagan's reaction to the imposition of martial law in Poland provides an instructive contrast with Obama's muted reaction. On arriving in office, John O'Sullivan writes in The President, The Pope and the Prime Minister, Reagan had impressed upon his aides that he wanted to be kept well informed on Polish developments. "Less than two weeks after his inauguration," O'Sullivan relates, "Reagan met with his senior foreign policy advisers to discuss how to undermine Communist power in Poland and discourage Soviet intervention."

When the Communist government of Poland declared martial law to crush Solidarity on December 12-13, 1981, more than 4,000 Solidarity activists were arrested, Lech Walesa was interned and Solidarity itself was outlawed. Steven Hayward reminds us in his forthcoming The Age of Reagan: The Conservative Counterrevolution: 1980-1989, "the fact that the Soviets had the Poles do their own dirty work provided enough of a fig leaf for Western leaders to downplay the matter."

Western leaders spoke up to express their understanding of the government's crackdown on Solidarity. They all but supported it.

Not Ronald Reagan: "Ronald Reagan," Hayward recounts, "was livid over Poland." Ed Morrissey notes that Reagan immediately reacted to the imposition of martial law by publicizing his conversation with Pope John Paul II the next day:

The President. "Your Holiness, I want you to know how deeply we feel about the situation in your homeland."

"I look forward to the time when we can meet in person."

"Our sympathies are with the people, not the government."

Reagan elaborated his views three days later at a press conference:

All the information that we have confirms that the imposition of martial law in Poland has led to the arrest and confinement, in prisons and detention camps, of thousands of Polish trade union leaders and intellectuals. Factories are being seized by security forces and workers beaten.

These acts make plain there's been a sharp reversal of the movement toward a freer society that has been underway in Poland for the past year and a half. Coercion and violation of human rights on a massive scale have taken the place of negotiation and compromise. All of this is in gross violation of the Helsinki Pact, to which Poland is a signatory.

It would be naive to think this could happen without the full knowledge and the support of the Soviet Union. We're not naive. We view the current situation in Poland in the gravest of terms, particularly the increasing use of force against an unarmed population and violations of the basic civil rights of the Polish people.

Violence invites violence and threatens to plunge Poland into chaos. We call upon all free people to join in urging the Government of Poland to reestablish conditions that will make constructive negotiations and compromise possible.

Certainly, it will be impossible for us to continue trying to help Poland solve its economic problems while martial law is imposed on the people of Poland, thousands are imprisoned, and the legal rights of free trade unions -- previously granted by the government -- are now denied. We've always been ready to do our share to assist Poland in overcoming its economic difficulties, but only if the Polish people are permitted to resolve their own problems free of internal coercion and outside intervention.

Our nation was born in resistance to arbitrary power and has been repeatedly enriched by immigrants from Poland and other great nations of Europe. So we feel a special kinship with the Polish people in their struggle against Soviet opposition to their reforms.

The Polish nation, speaking through Solidarity, has provided one of the brightest, bravest moments of modern history. The people of Poland are giving us an imperishable example of courage and devotion to the values of freedom in the face of relentless opposition. Left to themselves, the Polish people would enjoy a new birth of freedom. But there are those who oppose the idea of freedom, who are intolerant of national independence, and hostile to the European values of democracy and the rule of law.

Two Decembers ago, freedom was lost in Afghanistan; this Christmas, it's at stake in Poland. But the torch of liberty is hot. It warms those who hold it high. It burns those who try to extinguish it.

Over the two weeks following the imposition of martial law Reagan convened meetings of the National Security Council about the Polish crisis almost daily. Hayward quotes Richard Pipes's description of "an emotionally charged atmosphere inspired largely by Reagan's mounting fury." Reagan derided the "chicken littles" in Europe.

Turning to archival sources, Hayward finds Reagan at the December 22 NSC meeting declaring that this was "the last chance of a lifetime to go against this damned force." Reagan expressed his disgust in an indignant message to Brezhnev via the hotline on December 23: "[N]othing has so outraged our public opinion as the pressures and threats which your government has exerted on Poland to stifle the stirrings of freedom." On December 23 Reagan also gave his eloquent speech condemning the Polish crackdown. Reagan declared:

I want emphatically to state tonight that if the outrages in Poland do not cease, we cannot and will not conduct "business as usual'' with the perpetrators and those who aid and abet them. Make no mistake, their crime will cost them dearly in their future dealings with America and free peoples everywhere. I do not make this statement lightly or without serious reflection.

What prevents Barack Obama from making a similar declaration? Does he care?

Wednesday, June 17, 2009

How many jobs are onshorable? Re-interpreting the Blinder numbers in the light of new trade theory

How many jobs are onshorable? Re-interpreting the Blinder numbers in the light of new trade theory. By Richard Baldwin
VoxEU, Jun 15, 2009

According to Alan Blinder, constant improvements in global communications will bring much more offshoring of “impersonal services’’, with an estimated 30 million to 40 million US jobs potentially offshorable. This column warns against taking these numbers at face value and recalls that the US is actually a net insourcer. With the advance of communication technologies, the US should see lots more service jobs “offshored” and lots more “onshored”.

Before the global crisis hit, offshoring was one of the scarcest things on rich nations’ economic radar screens – especially the offshoring of “good” service sector jobs. Alan Blinder was one of the first to point out the threat in his 2006 Foreign Affairs article “Offshoring: The Next Industrial Revolution?” He wrote: “constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of ‘impersonal services’’— that is, services that can be delivered electronically over long distances with little or no degradation in quality.”

Blinder has more recently produced some estimates of the size of the revolution. And they make it look like “the big one”. Blinder (2009): "I estimated that 30 million to 40 million US jobs are potentially offshorable."

This sort of media-friendly statement is part of what I consider to be very confused thinking by non-specialists – not that the economists involved are necessarily confused, but tacitly or not, they are allowing the media to misinterpret the numbers.

Let me start off by saying that I consider Alan Blinder to be one of the world’s leading macroeconomic policy specialists. Moreover, I greatly appreciate the way he uses his knowledge of economics to make this a better world (rather than focusing entirely on impressing the other inhabitants of academe). This time, however, I’m not sure it has worked out right.

I don’t wish to take issue with his numbers or methods. I wish to question the implications of those numbers. The trouble is that his numbers are being interpreted in the light of the “old paradigm” of globalisation – the world of trade theory that existed before Paul Krugman, Elhanan Helpman, and others led the “new trade theory” revolution in the 1980s.

The new trade theory: Micro, not macro, determinants of comparative advantage

Krugman’s contribution, which was rewarded with a Nobel Prize in 2008, was to crystallise the profession’s thinking on two-way trade in similar goods.1 This was a revolution since the pre-Krugman received wisdom assumed away such trade or misunderstood its importance. In 1968, for example, Harvard economist Richard Cooper noted the rapid rise in two-way trade among similar nations and blamed it for the difficulty of maintaining fixed exchange rates. Using the prevailing trade theory orthodoxy, he asserted that this sort of trade could not be welfare-enhancing. And since it wasn’t helping, he suggested that it should be taxed to make it easier to maintain the world’s fixed exchange rate system – a goal that he considered to be the really important thing from a welfare and policy perspective (Cooper, 1968).

Trade economists back then took it as an article of faith that trade flows are caused by macro-level differences between nations – for example, national differences between the cost of capital versus labour. Nations that had relatively low labour costs exported relatively labour intensive goods to nations where labour was relatively expensive.

This is the traditional view that Blinder seems to be embracing.

What Krugman (especially Krugman 1979, 1980) showed was that one does not need macro-level differences to generate trade. Firm-level differences will do.

In a world of differentiated products (and services are a good example of this), scale economies can create firm-specific competitiveness, even between nations with identical macro-level determinants of comparative advantage. Krugman, a pure theorist at the time, assumed that nation’s were identical in every aspect in order focus on the novel element in his theory (and to shock the “trade is caused by national differences” traditionalists). His insight, however, extends effortlessly to nations that also have macro-level differences, like the US and India.

This brings us to interpreting Blinder’s 30 to 40 million offshorable jobs.

Blinder’s calculations

Blinder’s approach is easy to explain – a fact that accounts for much of its allure as well as its shortcomings.
  • Step 1 is to note that Indian wages are a fraction of US wages.
  • Step 1a is to implicitly assume that Indians’ productivity-adjusted wages are also below those of US service sector workers, at least in tradable services.
  • Step 2, and this is where Blinder focused his efforts, is to note that advancing information and communication technology makes many more services tradable. The key characteristic, Blinder claims, is the ease with which the service can be delivered to the end-user electronically over long distances.
  • Step 3 (the critical unstated assumption, if not by Blinder, at least by the media reporting his results) is that the new trade in services will obey the pre-Krugman trade paradigm – it will largely be one-way trade. Nations with relatively low labour costs (read: India) will export relatively labour-intensive goods (read: tradable services) to nations where labour is relatively expensive (read: the US).

The catch

This last step is factually incorrect, as recent work by Mary Amiti and Shang-Jin Wei (2005) has shown. They note: “Like trade in goods, trade in services is a two-way street. Most countries receive outsourcing of services from other countries as well as outsource to other countries.”

[graph: US insourcing and outsourcing of jobs]
Source: Author’s manipulation of data from Amiti and Wei (2005), originally from IMF sources on trade in services.

The US, as it turns out, is a net “insourcer”. That is, the world sends more service sector jobs to the US than the US sends to the world, where the jobs under discussion involve trade in services of computing (which includes computer software designs) and other business services (which include accounting and other back-office operations).

The chart shows the facts for the 1980 to 2003 period. We see that Blinder is right in that the US importing an ever-growing range of commercial services – or as he would say, the third industrial revolution has resulted in the offshoring of ever more service sector jobs. However, the US is also “insourcing” an ever-growing number of service sector jobs via its growing service exports. The startling fact is that not only is the trade not a one-way ticket to job destruction, the US is actually running a surplus.


None of this should be unexpected. The post-war liberalisation of global trade in manufactures created new opportunities and new challenges. To apply Blinder’s logic to, say, the European car industry in the early 1960s, one would have had to claim that since the German car industry (at the time) faced much lower productivity-adjusted wages, freer trade would make most French auto jobs “lose-able” to import competition. Of course, many jobs were lost when trade did open up, but many more were created. As it turned out, micro-level factors allowed some French firms to thrive while others floundered, and the same happened in Germany. Surely the same sort of thing will happen in services, as trade barriers in that sector fall with advancing information and communication technologies.

In short, what Blinders’ numbers tell us is that a great deal of trade will be created in services. Since services are highly differentiated products, and indivisibilities limit head-to-head competition, my guess is that we shall see a continuation of the trends in the chart. Lots more service jobs “offshored” and lots more “onshored”. What governments should be doing is helping their service exporters to compete, not wringing their hands about one-way competition from low-wage nations.


1 Full disclosure: Krugman was my PhD thesis supervisor and we have coauthored a half-dozen articles since 1986.


Amiti, M. and S.J. Wei (2005), “Fear of Service Outsourcing: Is it Justified?”, Economic Policy, 20, pp. 308-348.
Blinder, Alan (2006). “Offshoring: The Next Industrial Revolution?” Foreign Affairs, Volume 85, Number 2.
Blinder, Alan (2009). “How Many U.S. Jobs Might Be Offshorable,” World Economy, 2009, forthcoming.
Cooper, R. (1968). The Economics of Interdependence. New York: McGraw-Hill.
Grossman, G. and E. Rossi-Hansberg (2006a). “The Rise of Offshoring: It’s Not Wine for Cloth Anymore,” July 2006. Paper presented at Kansas Fed’s Jackson Hole conference for Central Bankers.
Krugman, Paul (1979). "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479,
Krugman, Paul (1980). "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, vol. 70(5), pages 950-59, December.
Krugman, Paul (1991), “Increasing Returns and Economic Geography”, Journal of Political Economy 99, 483-499.

The U.S. has been bringing soldiers home as soon as they get any experience

General McChrystal's New Way of War. By Max Boot
The U.S. has been bringing soldiers home as soon as they get any experience.
The Wall Street Journal, Jun 17, 2009, page A13

Gen. Stanley McChrystal was appointed commander in Afghanistan to shake up a troubled war effort. But one of his first initiatives could wind up changing how the entire military does business.

Gen. McChrystal's decision to set up a Pakistan Afghanistan Coordination Cell means creating a corps of roughly 400 officers who will spend years focused on Afghanistan, shuttling in and out of the country and working on those issues even while they are stateside.

Today, units typically spend six to 12 months in a war zone, and officers typically spend only a couple years in command before getting a new assignment. This undermines the continuity needed to prevail in complex environments like Afghanistan or Iraq. Too often, just when soldiers figure out what's going on they are shipped back home and neophytes arrive to take their place. Units suffer a disproportionate share of casualties when they first arrive because they don't have a grip on local conditions.

There was a saying that we didn't fight in Vietnam for 10 years; we fought there for one year, 10 times. The North Vietnamese, on the other hand, continued fighting until they were killed or immobilized. That gave their forces a huge advantage.

In Vietnam, units already in the field would get individual replacements from home, thus making it hard to maintain unit cohesion. Sometimes new soldiers were killed before anyone even knew their names.

The policy now is unit rotation -- an entire battalion or brigade (or a higher-level staff) trains together, deploys together, and leaves together. That makes for better cohesion, but makes it even harder to maintain continuity because there is little overlap between units.

In a tribal society like Afghanistan's, the key to effectiveness is having personal relationships with tribal elders, which argues for keeping troops in place much longer than currently is the case. But there are limits to the stress that soldiers can endure -- effectiveness degrades severely for anyone who spends too long in combat. And in an all-volunteer military, there is always the danger that if troops are forced to be away from their families too long they might not sign up for another hitch.

The U.S. Special Operations Command (the military command for all special operations units) has responded by creating a deployment cycle whereby units spend roughly six months deployed in a war zone and six months at home, keeping tabs on their area of operations while they're away and returning to the same area time after time. This arrangement, which has been in use for several years, allows personal relationships to be cultivated and continued while still giving troops some downtime.

It's an intriguing approach, and one that Gen. McChrystal, a veteran of special operations, is now migrating to the conventional military world. The new Pakistan Afghanistan Coordination Cell is an attempt to strike a balance between personnel needs and war-fighting needs, and it is a move in the right direction.

I would argue for going even further by extending staff deployments (which aren't as stressful as combat jobs). Volunteers should be allowed to spend years at a time in places like Afghanistan -- not only soldiers but also diplomats and intelligence officers.

Who would volunteer to live in such an inhospitable environment? Well Sarah Chayes, a former NPR reporter, has been living and working in Kandahar since 2001. While in Afghanistan recently, I also met a former Special Forces soldier, now working as a State Department counter-narcotics contractor, who said he has been in Afghanistan for four years. Such people are invaluable for their knowledge of the local landscape.

The British, from whose glory days we can still learn many lessons, recognized this. Gertrude Bell, Richard Francis Burton, T.E. Lawrence and numerous others made an outsize contribution to their empire by "going native." They may have been sneered at by typical army officers, who were primarily interested in polo, whist and gin, but the knowledge they acquired proved invaluable.

Consider the case of Col. Sir Robert Warburton, a 19th century artillery officer who was the offspring of a marriage between a British officer and an Afghan princess. He spent nearly 30 years on the Northwest Frontier of India working as a political officer, negotiating with tribesmen who were (and are) suspicious of all outsiders.

"It took me years to get through this thick crust of mistrust, but what was the after-result?" he wrote in his memoirs. "For upwards of fifteen years I went unarmed amongst these people. My camp, wherever it happened to be pitched, was always guarded and protected by them. The deadliest enemies of the Khyber Range, with a long record of blood-feuds, dropped those feuds for the time being when in my camp."

Warburton retired in May 1897. Within months the frontier was aflame with a great uprising that took tens of thousands of troops to suppress. (You can read all about it in Winston Churchill's first book, "The Story of the Malakand Field Force," which contains eerie echoes of current fighting on both sides of the Afghanistan-Pakistan border.) Warburton, who had been known as the "King of the Khyber," was convinced that if he were still on the job, the contacts he had cultivated would have allowed him to prevent the uprising. He may well have been right.

What Gen. McChrystal realizes, in effect, is that we need to create our own Robert Warburtons. If his experiment succeeds, future commanders can build on the precedent to provide the kind of cultural and linguistic skills that we will need to win the long war against Islamic extremists.

Mr. Boot is a senior fellow in national security studies at the Council on Foreign Relations. He is currently writing a history of guerrilla warfare.

Health Reform and Competitiveness

Health Reform and Competitiveness. WSJ Editorial
WSJ, Jun 17, 2009

Democrats have spent years arguing that corporate tax rates don't matter to U.S. competitiveness. But all of a sudden one of their favorite arguments for government-run health care has become . . . U.S. corporate competitiveness. Political conversions on this scale could use a little scrutiny.

"Businesses now recognize that if we don't get a handle on this stuff then they are going to continue to be operating at a competitive disadvantage with other countries," President Obama recently remarked. "And so they anxiously seek serious reform."

Sure enough, many business leaders who should know better have picked up the White House theme. "You won't fundamentally solve the problems in business until you solve the problem of spiraling health-care costs, which is driving everybody crazy," said Google CEO Eric Schmidt the other day.

Messrs. Obama and Schmidt need to brush up on their economics. Employers may write the checks to the insurance companies, but workers still pay for the coverage they get from those employers. The total cost of an employee is what matters to businesses, and fringe benefits are as much a part of compensation as cash wages. When health costs rise, firms don't become less competitive, as if insurance were lopped out of profits. Instead, nonhealth compensation drops. Or wages rise more slowly than they otherwise would.

A recent study from none other than the White House Council of Economic Advisers notes exactly this point: If medical spending continues to accelerate, it expects take-home pay to stagnate. According to the New York Times, White House economic aide Larry Summers pressured CEA chairman Christine Romer to make the competitiveness argument, "adding that it was among the political advisers' favorite 'talking points.'" Ms. Romer pointedly retorted, "I'm not going to put schlocky arguments in there." How the schlock gets into Mr. Obama's speeches is a different question.

It's certainly true that the U.S. employer-based insurance system can dampen entrepreneurial spirits. There's the "job lock" phenomenon, in which employees fear leaving a less productive job because they're afraid to lose their health benefits. Another problem is that insurance costs more for small groups than the large risk pools that big corporations assemble, meaning that it's harder to form new businesses that can offer policies. But all this is really an argument for developing the individual health insurance market, where policies would follow workers, not jobs.

As for the competitiveness line, it's nonsense for most companies. The exceptions are heavily unionized businesses like auto makers that have locked themselves in to gold-plated coverage, especially for retirees. They have a harder time adjusting health costs and wages. Other companies might get a bit more running room in the short run if government assumed all health costs a la the single-payer systems of Western Europe. But over time the market would clear -- compensation being determined by the demand for and supply of labor -- and wages would rise. Or they might not rise at all if health-care costs are merely replaced by the tax increases necessary to finance Mr. Obama's new multi-trillion-dollar entitlement.

This is where the real competitiveness argument is precisely the opposite of the one pitched by Messrs. Obama and Schmidt. Consider the European welfare states, where costly entitlements and regulations make it extremely expensive to hire new workers. The nearby table lays out the tax wedge, the share of labor costs that never reaches employees but instead goes straight to government. In Germany, France and Italy, the tax wedge hovers around 50%, in part to pay for state-provided health care.

By contrast, the U.S. tax wedge was around 30% in 2008, according to the OECD. In other words, the costs of providing insurance would merely be converted into a larger wedge, which would itself eat into compensation. This is why Europe has tended to have higher unemployment and slower economic growth over the past 30 years.

If Democrats really want to increase U.S. competitiveness, they could look at the corporate income tax, which is the second highest in the industrialized world and a major impediment to U.S. job creation when global capital is so fluid. Or drop their proposals to raise personal income-tax rates, which affect thousands of small- and medium-size businesses that have fled the corporate tax regime as limited liability companies or Subchapter S corporations. Or cut capital gains rates, which deter risk taking and investment. Or rethink their plans to rig the rules in favor of organized labor by doing away with secret ballots in union elections.

On all these issues and more, Democrats want to increase, not reduce, the burdens on U.S. business. Their health-care line is, per Ms. Romer, "schlocky" political spin.

WSJ Editorial Page on Federal President's Position on Iran's Elections

Obama's Iran Abdication. WSJ Editorial
Democracy interferes with his nuclear diplomacy script.
The Wall Street Journal, Jun 17, 2009, page A12

The President yesterday denounced the "extent of the fraud" and the "shocking" and "brutal" response of the Iranian regime to public demonstrations in Tehran these past four days.

"These elections are an atrocity," he said. "If [Mahmoud] Ahmadinejad had made such progress since the last elections, if he won two-thirds of the vote, why such violence?" The statement named the regime as the cause of the outrage in Iran and, without meddling or picking favorites, stood up for Iranian democracy.

The President who spoke those words was France's Nicolas Sarkozy.

The French are hardly known for their idealistic foreign policy and moral fortitude. Then again many global roles are reversing in the era of Obama. The American President didn't have anything to say the first two days after polls closed in Iran on Friday and an improbable landslide victory for Mr. Ahmadinejad sparked the protests. "I have deep concerns about the election," he said yesterday at the White House, when he finally did find his voice. "When I see violence directed at peaceful protestors, when I see peaceful dissent being suppressed, wherever that takes place, it is of concern to me and it's of concern to the American people."

Spoken like a good lawyer. Mr. Obama didn't call the vote fraudulent, though he did allow that Ayatollah Ali Khamenei "understands the Iranian people have deep concerns about the election." This is a generous interpretation of the Supreme Leader's effort to defuse public rage by mooting a possible recount of select precincts. "How that plays out," Mr. Obama said, "is ultimately for the Iranian people to decide." Sort of like the 2000 Florida recount, no doubt.

From the start of this Iranian election, Administration officials said the U.S. should avoid becoming an issue in the campaign that the regime might exploit. Before votes were cast, this hands-off strategy made sense in that the election didn't present a real choice for Iranians. Whether President Ahmadinejad or his chief challenger, Mir Hossein Mousavi, won wouldn't change the mullahs' ultimate political control. Mr. Mousavi had been Ayatollah Khomeini's Prime Minister, hardly the resume of a revolutionary.

But Friday's vote and aftermath have changed those facts on the ground. Like other authoritarians -- Ferdinand Marcos in 1986 or Slobodan Milosevic in 2000 -- Tehran misjudged its own people. Having put a democratic veneer around their theocracy, they attempted to steal an election in such a blatant way that it has become a new and profound challenge to their legitimacy. Especially in the cities, Iranians are fed up with the corruption and incompetence rampant in the Islamic Republic. This dissatisfaction was galvanized by the regime's contempt for their votes and found an accidental leader in Mr. Mousavi. The movement has now taken on a life of its own, with consequences no one can predict.

The Obama Administration came into office with a realpolitik script to goad the mullahs into a "grand bargain" on its nuclear program. But Team Obama isn't proving to be good at the improv. His foreign policy gurus drew up an agenda defined mainly in opposition to the perceived Bush legacy: The U.S. will sit down with the likes of Iran, North Korea or Russia and hash out deals. In a Journal story on Monday, a senior U.S. official bordered on enthusiastic about confirming an Ahmadinejad victory as soon as possible. "Had there been a transition to a new government, a new president wouldn't have emerged until August. In some respects, this might allow Iran to engage the international community quicker." The popular uprising in Iran is so inconvenient to this agenda.

President Obama elaborates on this point with his now-frequent moral equivalance. Yesterday he invoked the CIA's role in the 1953 coup against Iranian leader Mohammad Mossadeq to explain his reticence. "Now, it's not productive, given the history of the U.S.-Iranian relations, to be seen as meddling -- the U.S. President meddling in Iranian elections," Mr. Obama said.

As far as we can tell, the CIA or other government agencies aren't directing the protests or bankrolling Mr. Mousavi. Beyond token Congressional support for civil society groups and the brave reporting of the Persian-language and U.S.-funded Radio Farda, America's role here is limited. Less than a fortnight ago, in Cairo, Mr. Obama touted his commitment to "governments that reflect the will of the people." Now the President who likes to say that "words matter" refuses to utter a word of support to Iran's people. By that measure, the U.S. should never have supported Soviet dissidents because it would have interfered with nuclear arms control.

The Iranian rebellion, though too soon to call a revolution, is turning out to be that 3 a.m. phone call for Mr. Obama. As a French President shows up the American on moral clarity, Hillary Clinton's point about his inexperience and instincts in a crisis is turning out to be prescient.

Tuesday, June 16, 2009

The Group of Friends of the UN Secretary General on the UN Observer Mission in Georgia Resolution

Joint Statement by the Group of Friends of the UN Secretary General on the United Nations Observer Mission in Georgia Resolution
Bureau of Public Affairs, Office of the Spokesman
US State Dept, Washington, DC, Tue, 16 Jun 2009 17:35:10 -0500

Following is the text of a Joint Statement by the Spokespersons of the United Kingdom, the United States, Germany, and France as members of the Group of Friends of the UN Secretary General.

Begin Text:

We deeply regret Russia’s decision to veto a resolution on the United Nations Observer Mission in Georgia (UNOMIG), which has resulted in the termination of the Security Council mandate for the Mission after 15 years of valuable service providing military transparency on the ground, promoting the human rights of the local population, and seeking to create conditions for the voluntary, safe, and dignified return of internally displaced persons and refugees. We note that Russia had twice accepted a reference to UNSCR 1808 since the August conflict, in resolutions 1839 and 1866. The closure of the UN mission, like that of the OSCE mission, is a setback to international efforts to resolve this conflict.

We call on all parties with forces on the ground to exercise the utmost restraint and to abide by the August 12 and September 8 ceasefire agreements. We call on all participants in the Geneva talks to commit themselves to continuing efforts to find a peaceful and political resolution to the conflict and to alleviate the plight of refugees and IDPs. We reaffirm our firm support for the European Union Monitoring Mission.

We also reiterate our strong support for Georgia's independence, sovereignty and territorial integrity within its internationally recognized borders.

PRN: 2009/602

The Language of Macroeconomics: The National Income Accounts

Paraphrasing Macroeconomics: Understanding the Wealth of Nations. By David Miles, Imperial College, and Andrew Scott, London Business School. Chichester, UK: John Wiley & Sons, 2005

Chapter 2
The Language of Macroeconomics: The National Income Accounts

2.1 What Do Macroeconomists Measure?

At the foundation of macroeconomics is a concern with human welfare[, but it] is notoriously hard to calculate, particularly in macroeconomics where the relevant measure is the welfare of society as a whole. Even if we could accurately measure individual welfare, how can we compare levels of happiness across individuals and construct an aggregate measure?

Rather than try and directly measure welfare, macroeconomists take a short cut. They focus on the amount of goods and services—the “output”—produced within an economy. The justification for this is simple—if an economy produces more output, then it can meet more of the demands of society. Using output as a measure of welfare [now begs] many questions[, since there is no consensus on values and half of the population worries about the environment, inequality, etc.]

These questions suggest that output will only be an approximation to wider concepts of welfare ... But producing more output should enable a society to increase its standard of living.

2.2 How Do Macroeconomists Measure Output?

> Real vs Nominal output

Chained weights

GDP deflator = Nominal GDP/Real GDP

Real GDP focuses on how production in the economy changes by using constant prices. Nominal GDPchanges because of changes in production and changes in prices.

2.3 Output as Value Added

Value added is the difference between the value of the output sold and the cost of purchasing raw materials and intermediate goods needed to produce output.

2.4 National Income Accounts

Output, income and expenditure

AD: aggregate demand
AS: aggregate supply

AD = Y output + M imports = C + I + G + X, or Y = C + I + G + (X-M) (net exports)
I = Ik gross fixed capital formation (the new capital stock installed) + Iinventories (output not sold)

Is it true that AD = AS = Y? No:

Desired AD = C + Id + G + X, Id = Ik + Iidesired
Actual AD = C + Ia + G + X, Ia = Ik + Iiactual

---------> Actual AD = AS = Y

GDP can be measured either as value of output produced, the income earned in the economy by capital and labor, or the expenditure on final products.

> GDP or GNI?

GNI = GDP + remittances_nationalcompanies + remittances_nationals + Foreign aid you receive - remittances_foreigncompanies - remittances_foreignindividuals - Foreign aid you give to others

2.5 How Large Are Modern Economies?

Comparing countries' GDP via exchange rates

Comparing countries' GDP taking into account PPP

GDP per capita

2.6 Total Output and Total Happiness

GDP measures economic activity, but is a good measure of standard of living?

There are two separate issues lurking here. The first is a measurement one—is GDP correctly measured (which is not) and, if not, does this reduce its ability to approximate the standard of living? Some see corrections to make:

Families frequently have money earners and people that provide services (cooking, child caring, elderly caring, administration). Purchasing these services and goods in the market is a substantial amount. For 2000, the U.K. Office of National Statistics estimates that compared with GDP of £892bn, household production provided services that would have been worth £693bn if purchased through the market with childcare accounting for £220.5bn.

Another measurement problem for GDP is environmental pollution and the destruction of natural resources.

The second is a conceptual one—even if it is properly measured, does GDP really capture our concepts of welfare? For economists, measures of aggregate output are still the dominant indicators of the standard of living, but alternative measures have been suggested: Human Development Index (HDI).

Although there are these patterns of outliers, the overall correlation remains strong—GDP seems a useful approximation for even broader measures of welfare.


FAST ANWSERS, not checking the literature

1. (Section 2.2) “[An economist] is someone who knows the price of everything and the value of nothing.” (Adapted from George Bernard Shaw.)

Besides mediocre economists, who damage the profession with badly communicated opinions, there are truths (the state of knowledge at least) that are inconvenient for others to hear, and this knowledge seems too cold, rational and unsensitive to the needs of the poor. If 90 pct of the people had an economic education probably the number of bleeding hearts would diminish. Or not.

2. (2.3) Coffee beans cost only a few cents when imported. But to buy a coffee at a coffee bar costs far more. What does this tell you about value added?

3. (2.3/2.4) Try to explain to someone who had never thought about measuring the value of economic activity why the output, income, and expenditure ways of measuring national production should give the same answer. It helps to think of a simple economy producing only two or three different things.

4. (2.5) Would you expect that a country where the share of wages and salaries in GDP was falling, and the share of profits and interest was rising, to be one where consumption as a percent of national income was also shifting? Why? Would you expect the distribution of income to
become more unequal? Suppose the trends were due to demographic shifts, more specifically to a rapidly aging population. Would this change your answers?

5. (2.5) Do you think it is easier to evaluate the relative welfare of different generations of people in one country (by comparing per capita GDP over time), or to compare the relative standards of living in different countries at a point in time (by converting current per capita GDPs into a common currency)?

6. (2.5) How would you treat the activities of criminals in GDP accounting? What about the activities of the police force?

.1 Parasites
.2 A waste of resources, a tax on the economy.

7. (2.6) The Beatles claimed that “I don’t care too much for money, money can’t buy me love.” (Shortly after first making this claim they joined the ranks of the richest people in the world.) Does their claim undermine the use of GDP to measure welfare?


For another day.