The Pentagon wonders about China

Pentagon report warns of risk in China's military buildup:

China's years of double-digit growth in arms spending and new missiles, ships, and aircraft mean it could project power farther afield, the 2006 China Military Power Report said.

"The pace and scope of China's military build up already place regional military balances at risk," the report said.

China angrily rejects U.S. claims about military buildup:

China angrily rejected a U.S. Defence Department report Thursday that states Beijing is a potential military threat, insisting its multibillion-dollar buildup is defensive.

Beijing is "strongly resentful of and firmly opposed to" the comments in an annual Pentagon report on Chinese military power, Chinese media quoted Foreign Ministry spokesman Liu Jianchao saying.

Fred Kaplan tells us why the Pentagon keeps overestimating Beijing's military strength:

Every day and night, hundreds of Air Force generals and Navy admirals must thank their lucky stars for China. Without the specter of a rising Chinese military, there would be no rationale for such a large fleet of American nuclear submarines and aircraft carriers, or for a new generation of stealth combat fighters—no rationale for about a quarter of the Pentagon's budget.

Friction in the Chinese Labour Market

It's interesting to contrast these two views of the Chinese labour market.

China's Wage Increases on Labor Shortage:

With huge developments taking place in the country's agricultural industry, fewer farmers are willing to give up their land and make a living in the city.

"A decrease in the number of laborers will surely lead to an increase in labor costs," said the central bank. "Many enterprises in the coastal cities have to pay employees more to maintain its human resources."

Graduates find the going tough in big cities:

A decent post in big cities with a large income is the dream that has bolstered their dignity and ambition.

With their dreams shattered, they become less self-confident. The only expectation left is the hope of getting a piece of work that can free them from years-long subsidies from parents, make them financially independent and pay off the huge loans from the bank.

[...]

Since 1999, when China launched a nationwide enrolment expansion campaign, higher education has taken a big leap forward, with the number of graduates increasing by about 600,000 to 700,000 year-on-year.

It is expected that this year, more than 4.12 million graduates will pour into the job market, a dramatic increase from last year's 3.07 million. In addition many of those 2005 graduates have not found jobs, either.

Of course the markets for university graduates and low-wage labourers are distinct, and there's no reason to expect them to move together. Now the question: will the job market adjust to accomodate more highly skilled workers, or will the workers adjust to more low-skilled jobs?

Greetings from Beijing!

I arrived in China few hours ago and now I'm just waiting until I can check in to my room. Observations so far:

• The first thing you see when you leave customs is a Starbucks and a KFC. On the way downtown I saw a Baskin-Robbins, a Kodak Express, and a McDonalds. Fewer U.S. brands than I expected, actually.
• Landscaping. Lots of it. Most of the highway from the airport is lined with landscaped "forest". Traffic separators are covered in hedges. Fences are covered in flowers. I'm pretty sure this is a new thing, probably in preparation for the Olympics. When the Chinese government decides on a project they really go all out. I don't think I've every seen this much manicured greenspace.
• I can access blogger.com, so I can post this article, but I can't reach the blog itself. All the other *.blogspot.com domains I tried also failed. I assume I'm being blocked by the great firewall of China. I'll try using a proxy later and see if that works, but in the meantime I can't post comments on my own site. Your comments are e-mailed to me, however, so I am able to read them.

Off to China...

Just as the beautiful Finnish summer begins, I'm off to the heat of China. I'm starting to wish I had left in January and come back to spend the summer here.

But China has it's own charms, and it's time to explore while I have the time and the opportunity.

I'll try to report back on Saturday, but in the meantime use this as an open thread.

Open Letter on Immigration

Just in time for our immigration discussion, Alex Tabarrok writes an open letter on immigration. The letter is intended to be bi-partisan and addresses only those issues on which there is a broad consensus among economists. It looks pretty good to me, and he's already gotten some prominent economists from very different parts of the political spectrum to sign on:

America is a generous and open country and these qualities make America a beacon to the world. We should not let exaggerated fears dim that beacon.

Looks like maybe those Americans are catching on - Canada will have to increase its marketing effort.

Da Weaz on Bolivia

Da Weaz adds to his comments on Bolivia. I don't really know Weaz that well, but he's a pretty smart guy and certainly very opinionated. I appreciate his viewpoint, even if I disagree with many of his conclusions. For example:

These events represent a truly scary prospect of business relationships to the privileged capitalists: when poorer nations are able to effectively negotiate within the parameters of the global marketplace the consistent pattern of exploitation will effectively be broken, and the countries that consistently preach the gospel of free trade and competition will actually for the first time have to practice it, paying "fair market value" for the goods, services and inputs that they consume. And for a nation such as the United States that has profited quite lavishly through its ability to exploit poorer and weaker nations, particularly in Latin America, this will be a sea change from the parasitic position of privilege that it has enjoyed. And currently seeks to enjoy in its robber barron oil effort in Iraq.

Weaz rightly points out the mistakes of the past. But he seems to imply that economic principles are therefore incorrect and should be ignored. He doesn't demonstrate how nationalizing the oil industry will give Bolivians better return than simply, for example, increasing taxes. He does, however, link to a very intersting article on Norway's efforts to work with Bolivia and other emerging oil exporters. Norway has had a great deal of success by combining both private and public ownership:

"Even if they are not given preferential status, they often have access to data – such as seismic information – before their competition," said one senior executive at an oil company active in Africa. Indeed, a presentation by Norwegian officials highlights the state's partnership with the private sector, naming Statoil and Norsk Hydro, Norway's two biggest, partially state-owned, oil companies.

So Norway is pushing their model and hoping their own oil companies benefit from the relationship with Bolivia and others. I hope they succeed. But the question remains: how willing will Norway's oil companies be to make investments in Bolivia given the history of nationalization? If a future Bolivian government feels that they can get a better deal by nationalizing Norway's investments, will they do so?

Chopstick economics

The Globe and Mail reports that China is imposing an export tax on chopsticks. If the report is correct, the Chinese government is worried about deforestation, and chopstick exports to Japan are seen as a major cause:

The move is hitting hard at the Japanese, who go through a tremendous 25 billion sets of wooden chopsticks a year: about 200 pairs per person. Some 97 per cent of them come from China.

It's a stange story since the Chinese use chopsticks as well and there are a whole lot more Chinese than Japanese. If China's forests are suffering from deforestation then it's reasonable to assume that stumpage fees in China are too low, or that property rights in private forests aren't sufficiently secure.

It may make more sense for a country like China, with relatively few forests, to import from its neighbours. Russia has lots of wood. Thailand, Laos, Vietnam, and Cambodia have lots of bamboo. Increased prices for Chinese lumber would encourage imports and lead to less deforestation.

So if export duties on chopsticks aren't addressing the real problem, what are the Chinese officials thinking? Could it be that the long-standing animosity towards Japan is fueling a sort of chopstick nationalism? Do the Chinese think of chopsticks in the same way that Canadians think of water?

Open thread

As promised. Enjoy!

So much for starving the beast.

I've always thought it a little curious that the U.S. Republican party seems to consistently talk about small government, but implement big government. William A. Niskanen, the chairman of the libertarian Cato Institute, thinks he knows why. I'm not normally a fan of the Cato Institute, but I must admit that Niskanen's thesis is appealing and he's got some data to back it up.

Jonathan Rauch discusses Niskanen's theory in the June 2006 Atlantic Monthly:

Reagan and his supply-side vanguard saw a way to break the jam—or, more precisely, two ways. First, some argued that tax cuts would so energize the economy as to pay for themselves. That claim was widely controversial, even among Republicans (Reagan’s then-rival George H. W. Bush called it “voodoo economics”), and it proved mostly wrong. Less controversial, but in the end more important, was the claim Reagan lobbed at Anderson. Often called the Starve the Beast hypothesis, it held that tax cuts shrink the federal Leviathan by starving it of funds. Tax cuts need not await spending cuts because they would cause spending cuts.

[...]

Even during the Reagan years, Niskanen was suspicious of Starve the Beast. He thought it more likely that tax cuts, when unmatched with spending cuts, would reduce the apparent cost of government, thus stimulating rather than stunting Washington’s growth. “You make government look cheaper than it would otherwise be,” he said recently.

[...]

Niskanen recently analyzed data from 1981 to 2005 and found his hunch strongly confirmed. When he performed a statistical regression that controlled for unemployment (which independently influences spending and taxes), he found, he says, “no sign that deficits have ever acted as a constraint on spending.” To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.

[...]

By turning a limited-government movement into an anti-tax movement, conservatism has effectively gone into business with the Big Government that it claims to oppose. It is not starving the beast. It is fueling the beast’s appetite. And the beast has a credit card.

Russia to increase military spending in response to U.S.

The Sunday times reports on Putin's state-of-the-nation address:

Mr Putin pointed out that Russia’s military budget is 25 times less than that of the United States. "Their house is their fortress - good for them," he said. "But that means that we also must make our house strong and reliable."

For some reason this, and the discussion on a previous thread, reminded me of this quote:

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children...

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

- Dwight D. Eisenhower

Sweden: An Economy With Safety Features, Sort of Like a Volvo

Continuing on the topic of of Nordic model, The New York Times brings us this report by Alan Cowell (sorry, registration required):

The Swedish economy is set to grow by 3.7 percent this year — almost twice the rate forecast even for Germany, the only one of the big Continental European economies showing signs of confidence. Unemployment, though higher than the Social Democratic government admits, is still lower than the nearly double-digit joblessness of France or Germany.

Yet, defying conservative American beliefs, the economy prospers — even though taxes here remain high and big government administers cradle-to-grave social programs that absorb more than half of the national output.

It is called the Nordic model. The question some Europeans are asking is: Would it work farther south, in Germany or France, or even Italy?

Scientific American: Does Globalization Help or Hurt the World's Poor?

SciAm has an accessible and balanced article by Pranab Bardhan on the pros and cons of globalization. A few excerpts to give a you a feel, but it's worth reading the entire thing if this issue interests you:

In 1993, anticipating a U.S. ban on imports of products made using child labor, the garment industry in Bangladesh dismissed an estimated 50,000 children. UNICEF and local aid groups investigated what happened to them. About 10,000 children went back to school, but the rest ended up in much inferior occupations, including stone breaking and child prostitution. That does not excuse the appalling working conditions in the sweatshops, let alone the cases of forced or unsafe labor, but advocates must recognize the severely limited existing opportunities for the poor and the possible unintended consequences of "fair trade" policies.

[...]

Although the island economies of Mauritius and Jamaica had similar per capita incomes in the early 1980s, their economic performance since then has diverged dramatically, with the former having better participatory institutions and rule of law and the latter mired in crime and violence. South Korea and the Philippines had similar per capita incomes in the early 1960s, but the Philippines languished in terms of political and economic institutions (especially because power and wealth were concentrated in a few hands), so it remains a developing country, while South Korea has joined the ranks of the developed. Botswana and Angola are two diamond-exporting countries in southern Africa, the former democratic and fast-growing, the latter ravaged by civil war and plunder.

[...]

Simplistic antiglobalization slogans or sermons on the unqualified benefits of free trade do not serve the cause of alleviating world poverty. An appreciation of the complexity of the issues and an active interweaving of domestic and international policies would be decidedly more fruitful.

Every Breath You Take

Background for non-economics geeks: Glenn Hubbard, dean of the Columbia Business School, was in the running to succeed Greenspan as Fed Chair, but lost out to Ben Bernanke

Every Breath You Take
Dean Glenn Hubbard
Parody: Follies Student Comedy Revue

(Click to go to YouTube)

Jeffrey D. Sachs: Lessons From the North

Jeffrey Sachs praises the Nordic social welfare states:

American conservatives argue that a large public sector is subject to inefficiency and mismanagement, corruption, and bureaucratic abuse, while the taxation needed to support it blunts economic efficiency. But each of these propositions is refuted by the Nordic experience.

[...]

Several factors appear to explain the Nordic countries’ economic success. Taxation is broad-based and relatively non-distorting, while open international trade, market forces, and private ownership of industry are relied on to maintain incentives. The Nordic countries are not “socialist” economies, based on state ownership and planning, but “social welfare” economies, based on private ownership and markets, with public provision of social protection. Importantly, they invest heavily in higher education and in science and technology, so they remain at the cutting edge of high-technology industries.

As the reserve currency turns...

Recent talk about the the Canadian dollar reaching parity with the U.S. dollar got me thinking about the history of reserve currencies.

Avinash Persaud wrote in 2004 that the Renminbi will be the next global reserve currency. Regardless of whether or not you agree, it's an interesting and well-written article:

The United States today, as Britain before, has benefited greatly from having the world's reserve currency as its local currency. This has allowed America to spend 22% more than its income over the past five years. No other country could do that but having the reserve currency means you can write checks and nobody cashes them.

But reserve currencies come and go. They are determined largely by whoever is the biggest economic power of the day. Over the past two and a half thousand years there have been over a dozen reserve currencies that no longer exist. Sterling lost its status in the first half of the 20th century, the dollar will lose its status in the first half of this century. The beginning of the end for the dollar will be triggered by an inevitable decision by the Chinese to switch from a dollar peg to a free float - sometime in the next decade.

Losing reserve currency status will lead to a series of economic and political crises in the United States. The world's new reserve currency is an unlikely fellow. It is not the euro and today it is not even convertible.

Barry Eichengreen gives a historical perspective, comparing the dollar to sterling, the reserve currency that preceded it. But he disagrees that China can provide a successor:

Everyone’s favorite heir to the throne, China, will have to solve some very serious problems before its currency begins to become attractive as a repository for other countries’ foreign exchange reserves. Removing capital controls is the least of its problems, in my view. Its financial markets are not very liquid or transparent; indeed, most of the institutional infrastructure needed for Shanghai to become a true international financial center will take decades to install. The security of property rights is uncertain, and making investors feel secure will ultimately require a transition to democracy, the creation of credible political checks and balances, and the development of a creditor class with political sway. While the renminbi is everyone’s favorite candidate for the new reserve currency champion four or five decades from now, such hopes are, in my opinion, still highly premature.

Mish: Flipper Anomalies and a Flight from ARMs

Mish is bearish on the U.S. housing market and collects a lot of interesting stuff into one post.

He interviews Mike Morgan to learn why mortgage numbers can rise while sales drop:

A year ago most speculators did not have to close on homes. They could simply flip their contracts prior to closing. No need to apply for a mortgage. That was shut down starting about a year ago. So we actually have a double counting of mortgage applications being reported now. The flippers that never had to get a mortgage before now have to get a mortgage and close, even if they are flipping the property the same day and the new buyer has to get a mortgage. So not only are mortgage applications not realistically up, but they are substantially down. The Fed and MBA is double counting mortgage apps for those flippers that only need the mortgages to close.

And comments on the effect of the new 50-year mortgages:

A housing slump will put many people underwater. Anyone in that situation would not be able to sell unless they could bring cash to the table at closing. Those are the very same people now stretching to get into houses on these new 40 and 50 year loans. Will they be trapped or will they have cash to bring to the table?

Mish ends with:

The latest numbers prove that people are still trying to live off home equity in spite of rising rates and falling home prices. "The percentage of cash-out refinancings in the first quarter was the highest since the third quarter of 1990, about the time the real estate boom of the late 1980s ended".

The hangover from this party is going to be a doozie.

It's worth reading the whole post.

About time: China allows pension fund to invest overseas

China makes another small step towards the global financial system. It's pretty amazing that it's taken them this long.

Previously that money went into low-yielding bank deposits and made it's way into U.S. T-Bills via the central bank.

Now the question: will these funds continue to flow into the U.S., easing pressure on the central bank, or will they now flow into higher yielding assets in India and Eastern Europe, thus making it harder for the central bank to maintain the dollar peg?

Myths and Realities of American Political Geography

Via Mark Thoma comes Hal Varian's fascinating paper, "Myths and Realities of American Political Geography"

Abstract

The division of America into red states and blue states misleadingly suggests that states are split into two camps, but along most dimensions, like political orientation, states are on a continuum. By historical standards, the number of swing states is not particularly low, and America’s cultural divisions are not increasing. But despite the flaws of the red state/blue state framework, it does contain two profound truths. First, the heterogeneity of beliefs and attitudes across the United States is enormous and has always been so. Second, political divisions are becoming increasingly religious and cultural. The rise of religious politics is not without precedent, but rather returns us to the pre-New Deal norm. Religious political divisions are so common because religious groups provide politicians the opportunity to send targeted messages that excite their base.

And from the data...

Gallons of wine sold per capita in 2002

West Virginia	0.79
Mississippi	0.89
Oklahoma	1.01
Arkansas	1.05
Iowa	1.07
Massachusetts	4.18
Nevada	4.70
Idaho	4.94
New Hampshire	5.34
District of Columbia	6.49

Proportion who agree "it's ok for blacks and whites to date"

Kentucky	0.35
West Virginia	0.40
Tennessee	0.41
South Carolina	0.43
Alabama	0.46
Oregon	0.77
California	0.77
Delaware	0.79
Maine	0.81
District of Columbia	0.88

Serving the bottom of the pyramid in India

Neelakantan discusses efforts by Indian companies to reach the "unorganized sector".

The last time I was in India was five years ago. I wonder what I will discover on my next trip to rural India. Mobile phones? Pension funds?

As China ages, perhaps India will emerge as the next superpower after all.

A strong Gazprom is good for the world?

Bolivia isn't the only country trying to capitalize on high energy prices. Russian giant Gazprom is flexing its muscles:

On the BBC, Medvedev put it even more clearly: "There are two concepts available – a weak Russia or a strong Russia. There are still people who believe that weak Russia is good for the world. We completely disagree with this. A strong Gazprom is good for the world."

Morales overplaying his hand?

WP covers Bolivia's attempt to play tough.

During his victorious electoral campaign last year, Morales promised that he would force energy companies to give at least 50 percent of their revenue to the government's state energy company. The plan announced Monday called for a substantially higher percentage -- 82 percent -- to be surrendered by any company producing more than 100 million cubic feet of natural gas daily. He said that all companies have six months to agree to the terms or be kicked out of the country.

This is not the way to get more investment into Bolivia.

Good Ol' Japanese Know-how

So what explains the fall of the American "big three" automakers? Health care costs? Pensions? An undervalued Yen?

Kenneth Train and Cliff Wilson discover that the Japanese just make better cars:

We find that nearly all of the loss in market share for U.S. manufacturers can be explained by changes in basic vehicle attributes, namely: price, size, power, operating cost, transmission type, reliability, and body type. U.S. manufacturers have improved their vehicles’ attributes but not as much as Japanese and European manufacturers have improved the attributes of their vehicles.

The conventional wisdom of automobile marketing appears to be false:

Industry analysts stress that automakers benefit from having a "hot car" in their product line because it may draw attention to other vehicles that they produce. For many decades, a well-known axiom among the Big Three was: "bring them into the showroom with a convertible, and sell them a station wagon." Recently, GM tried to get buzz for the Pontiac G6 sedan that it hoped would spillover to its other products by giving away 276 of these vehicles on Oprah Winfrey’s television show.

It appears that consumers aren't so easily fooled.

So who's got dark matter now?

Benefits of trade coming to China's interior

The Christian Science Monitor discovers that China's internal migrants are finding more reasons to stay home, and less incentive to accept low wages in the coastal cities:

While workers once flocked to cities like Dongguan, rising rural incomes and rapid growth in inland cities have diminished the appeal of migration to coastal boomtowns - particularly among young, single women, whom factory bosses prefer to men as easier to manage. Staying close to home means access to healthcare and other benefits that migrants don't always receive. So job seekers are playing harder to get.