Tuesday Nov 13, 2007

Wars' Cost

Josh White of The Washington Post summarizes the findings of "The Hidden Costs of the Iraq War," a report issued by the Democratic staff of U.S. Congress's Joint Economic Committee. I do not believe the cost analysis takes account of the immeasurable human toll involved.

If, instead of a dogged focus on imperial goals powered by fear, people demanded that this money be spent, prudently, on making U.S. economy more competitive, i.e. if they demanded that government-driven investments be focused on people, institutions, facilities and technologies that help people get on with their lives, work and play, the U.S. would not be facing the economic problems it is facing now and will be in a much better economic, political and social position globally.


Monday Sep 17, 2007

UK Bank Run or the Advantage of Reading Two Papers

I subscribe to two papers that are delivered every morning at my doorstep: The Wall Street Journal and Financial Times

For three days now, Financial Times has carried stories and pictures of a bank run in the UK, involving Northern Rock, a financial institution focused on savings and loans geared to the mortgage market. (Some have argued that if there's only a single bank run, we do not have a bank run. However, financial crisis have their own way of diffusing to neighbors.) This morning, FT carries, above the fold, a 1/4 page picture of a crowd waiting to withdraw their savings from a Northern Rock branch. Cambridge - Customers of Northern Rock waiting patiently to withdraw their savings.

No two industrial economies or countries are as intertwined as the UK and the US. Yet, if you read The Wall Street Journal this morning, you would hardly notice anything going amiss in the UK. On the front page, the news of the bank run is reflected only in a two-sentence paragraph falling on the fold, making it hardly visible, with a jump to page 3 of section C ("Money & Investing"), a section which bills an educational piece on yield curves on top of its own fold. On page C3, two short columns summarize the least salient parts of story, with no mention of a bank run.

I should end this by noting that the electronic version of FT, accessible here in California, has no images like the ones in the print edition on its front "page" today. However, one can find relevant images on Flickr -- like the one I've posted here.

Monday Sep 10, 2007

"Core" Competence

Here, the experts remind us what the phrase "core competence" really stands for:

[T]here is a difference between "necessary" competencies and "differentiating" competencies. It makes little sense to define a competence as core if it is omnipresent or easily imitated by competitors ... A core competence is truly core when it forms the basis for entry into new product markets. In assessing a competency's extendability, senior management must work hard to escape a product-centric view of the firm's capabilities [and focus on a skill-centric view].

That should be a simple enough recipe to remember.

Tuesday Aug 21, 2007

Car Insurance and Game Theory

Car insurance companies seem to use a lot of game theory, and "safe guards,"  to set up the process of assessment and pay-backs in cases of actual accidents such that they can prevent many kinds of fraud and protect their assets and revenue stream. Of course, the process is not optimized for delivering any kind of justice but only to ensure that "rational" decision makers make decisions that are least damaging to the revenue accrued to the insurance companies as insurance bets are "auctioned" by the various parties involved. (The cooperative insurance models of 600 years ago are certainly not operative in the 20th and 21st centuries.)

Last week, my C230 Kompressor  was rear-ended by a 17-year-old who, apparently, is not listed as a named driver on his parents' insurance. While his parents' insurance adjuster is "investigating" whether he was driving his parents' Jeep Wrangler with their permission, I had to deal with my own lack of transportation, rent a car,  find a suitable body shop, have my car towed to that body shop, call the two adjusters multiple times, follow up on the work of the assessor at the body shop, and do all this, despite the fact that I carry a "comprehensive" insurance on my car, and despite the fact that I've been rear-ended by a car carrying a 17 and a 16 year-old. 

Finally, this  afternoon I was told that the car is totaled. Tomorrow, I will have to call my adjuster again to discover what my "comprehensive" coverage, which I've maintained since I bought the car, really means. The assessor says if I decide to fix the car, there will be a deduction equal to salvage price of the car, which is an encouragement to not fixt the car although its value to me is higher than the "bluebook" value. (The assessor might have been unaware of my comprehensive coverage, which I myself discovered after having read the fine print in my car insurance policy.)

It is funny how the set up of these various transaction limits, force "rational" agents to make choices that are irrational to them, from a judicial point of view, but that which are the only choices left from an "economic" point of view, and which end up protecting the insurance companies' assets and revenue stream from gaming by potential fraud.

Insurance at its bottom is not about protection against unpleasant accidents. Instead, it is merely about creating a new economics at the time of accident which force certain choices on the parties.

Tuesday Jun 19, 2007

Cooling Down A City

The Economist's Technology Quarterly (June 7, 2007) is worth a close read.

I particularly like the story about how Canada's largest city, Toronto, cools itself-- a cool concept, indeed --bringing together design, art, architecture, city planning, civil and thermo-fluid systems engineering in a most modern way.

Hundreds, if not thousands of years ago, the wind towers of Yazd accomplished much the same purpose using even less energy.

Wednesday Jun 13, 2007

Money Supply

Despite the recent correction to the falling prices and rising yields of U.S. treasuries, I've been wondering how the Federal Reserve might react in the coming months as the bond market remains jittery. The talk to beat inflation was tough when the new chair took his place. However, if money is tightened to reduce inflation, interest rates will have to rise even more, furthering the slump in the housing market already suffering from the recent subprime melt-down. This course of action will lead to serious unhappiness among those owning property. If the Fed decides on merely talking about beating the inflation while letting money loose, interest rates will remain less volatile and inflation will rise but perhaps at a slower rate than would cause a shock. If I were to bet, I would bet that the Fed will choose the latter coure of action. It is the politically "prudent" course although many who earn wages and have little property to own may suffer more than others.

Tuesday Jun 05, 2007


Coffee ... the world's second most widely sold commodity, after oil .... (Harvard Business Review, October 2006)

Wednesday May 23, 2007

Throwing 'Resources' at Problems

I wrote about strategizing vs. economizing attitudes in my first ever entry on this blog. The problems associated with variations in these attitudes keep surfacing again and again.

In short, there are two modes of thinking when it comes to organized group or individual activity: the strategizing one and the economizing one. 

Throwing troops, tanks and dollars into fighting unwinnable battles for ill-conceived aims, throwing resources into implementing badly conceived business propositions, and other such activities --- all stem from strategizing thinking.

Creating an environment that improves complementarity of people's activities engaged in commerce, improving broad and varied commerce in goods and services at all economic scales, and reducing transaction costs (including security costs, transportation costs, etc.) --- all stem from the economizing attitude.

The strategizing calculations end with calling for more resources to gain leverage against one's opponents.

The economizing attitude focuses on a strategy of greater resourcefulness to accomplish global aims geared towards mutually rewarding commerce.

Thursday May 17, 2007

Labels, The Internet and The Musician


Internet, as a giant copy and distribution machine, may and should continue to afford artists with greater autonomy well into the future. Reports of musicians' success in using this copy-and-distribution tool continue to pour in.

For example, Wall Street Journal's John Jurgensen writes about how musicians use the Internet to promote their work ("Singers Bypass Lables for Prime-Time Exposure," May 17, 2007, WSJ, B1). The report focuses on the case of singer and musician Ingrid Michaelson, "a 26-year-old Staten Island native who ... was discovered on MySpace by a management company that specializes in finding little-known acts and placing their works in soundtracks for TV shows, commercials, movies and videogames."

Many shows will only pay unsigned artists about $1,000 for the use of their music on TV, while artists on major labels might garner more than $30,000. Since she has been signed to Secret Road [Music Services, not a label], Ms. Michaelson has been paid up to $15,000 each time her music has been featured on a show or commercial, according to someone familiar with the deals. Secret Road says its cut of Ms. Michaelson's income is in keeping with industry standards of between 15% and 20%.

TV, of course, has become an increasingly powerful force for driving music sales. Apart from "American Idol" and "Saturday Night Live," possibly the most coveted TV slots for musicians are on "Grey's Anatomy," which has helped make songs like "How to Save a Life" by the Fray into top sellers on iTunes. A finale spot on "Grey's" is considered a particularly plum slot. Last year, the finale allowed Scottish band Snow Patrol to break through to a broad audience and played a role in making its featured song, "Chasing Cars," a hit.

Because Ms. Michaelson doesn't have a record-label contract, she stands to make substantially more from online sales of her music. For each 99-cent sale on iTunes, Ms. Michaelson grosses 63 cents, compared with perhaps 10 or 15 cents that typical major-label artists receives via their label. So far she has sold about 60,000 copies of her songs on iTunes and other digital stores. Ms. Michaelson is pouring most of her profits into pressing her own CDs and T-shirts, hiring a marketing company to produce promotional podcasts and setting up distribution for her CDS.

The fact that much good music today is discovered on the Internet before it ever makes it to the labels demonstrates that the labels need to reconsider their full "supply chain" and continue to review their policies and rules governing the protection and distribution of cultural content they come to license ("for a limited time").

On the same day as the report above, The Wall Street Journal also reported a significant move away from DRM which indicates the labels are recognizing the role of the Internet as a means to build networks of fans for artists through low-cost copy-and-distribution of content:

EMI Group PLC, the world's third-largest recorded-music company by sales (and the fourth-largest in the U.S. market) announced yesterday it would license its catalog to Amazon's DRM-free service. The three other major music companies haven't said publicly whether they expect to play ball with Amazon, but people close to all three companies said they don't expect to license content to Amazon in the near future. That means consumers shopping for downloads on Amazon will be able to buy tracks from EMI artists like Norah Jones and Coldplay, but are unlikely to be able to find music by most other major artists, including, for instance, each of the top-10 selling albums last week. Another complication: Apple's iTunes is moving toward offering music without copy protection, and also plans to release EMI's catalog in that format.

Much of the early use of DRM technologies has focused on limiting the power of digital copy and distribution of content.

Tuesday May 15, 2007

Transaction Cost Economics and Open Source Software

It is good to see someone who has a relatively good understanding of Transaction Cost Economics write about the topic of open source software or software in general:

There was a time when a single determined individual could write the core of a single operating system for a primitive computer. But given the demands of computer applications and the capabilities of hardware technology at present, that is no longer conceivable. The task needs to be divided somehow. This immediately raises a ... core political economy question, about coordination of a division of labor within a centralized, hierarchical structure--that is, a firm. Within the firm an authority can make decisions about the division of labor and set up systems that transfer needed information back and forth between the individuals or teams that are working on particular chunks of the project. The boundaries of the firm are determined by make-or-buy decisions that follow from the logic of transaction cost economics. The system manages complexity through formal organization and explicit authority to make decisions within the firm as well as price coordination within markets between firms.

That's from Steven Weber's The Success of Open Source.

Saturday May 12, 2007

Security Consequences of Urban Planning


Modern urban planning in the U.S., as it has been conceived and implemented in the urban sprawl since WWII, poses serious security concerns that arise from its economic vulnerabilities. The vulnerabilities are both explicit, in terms of direct transaction costs such as transportation to work, and more implicit, in terms of aggregate and individual worker productivity. Thus, did The Economist ("In a Jam," May 5, 2007, p. 38) describe the situation in the area where I live:

[The] Bay Area is not set up like a European metropolis. Most suburbanites have quite a drive just to get to an underground station, and must then win a vicious struggle for parking to make it onto a train.

The description fits well with my family's experience here.

In major American cities, workers have to drive long distances (of the order of 80 - 200 km / day) from home to work and back, and a significant increase in gas prices, without a similar increase in better communications technologies (that allow people to reduce trips to work to compensate for other losses) or a similar increase in energy efficiency of automobiles (at the same unit price) can cause perturbations towards lower growth rates.

Lack of adequate and efficient public transportation is not limited to major cities. One in eight who live in the U.S. live in California, just as I do. The state by itself has consistently accounted for one of the top 10 largest GDPs in the world for multiple decades, and it drives the U.S. economy with its vast consumption, tax base, farming and real estate, not to mention high technology. And yet, there are no super fast trains connecting any of its major metropolitan areas together: Los Angeles, Orange County, San Francisco Bay Area, Sacramento Valley, etc.

The economic inflexibility of urban sprawl leads not only to higher overall transaction costs throughout the economy but also to instabilities in various sectors. For example, The Wall Street Journal recently reported that 51 leading retail store chains have reported a collective 2.3% decline in same-store sales. Michael Niemira, chief economist of the New York-based International Council of Shopping Centers says this is the weakest showing since he began tracking the closely watched industry measure of performance in 1970. People have blamed this on a soft housing market, bad wheather in March, a fast Easter or fuel prices. Fuel prices and a soft housing market seem to be the most likely explanations for why this drop has been as large as it has been. While the real estate industry benefits from generally cheap gas prices (which lead to better possibilities for greater urban sprawl) and may be willing to go to war for it (observe how the representatives of American economic power offered almost universal support, in 2002-2003, for aggression against and occupation of Iraq), the spending for war might come back to bite the real-estate and other industries in the form of rampant deficits and inflation, higher interest rates, higher fuel prices and general asset attrition. One would expect that the economic elites and political leaders of a super power to comprehend that peace, justice, stability and truly open commerce (of course, not in commerce of aggressive war machinary) remain the solid base and the best guarantors of mutual understanding and development, economic vitality and growth. However, "stability" is often confused with the extension of imperial rule. In the meantime, a rampant political jargon and an infected moral language equates mass aggression with liberation, injustice with natural rights, murder with "collatoral damange," etc. Such infection of moral language, publicly spread, will always fog people's minds and provide a kind of self-belief among the elites to perpetuate the rule of what becomes a militaristic economy unashamedly pursuing its ends until it exhausts all resources at its disposal (and reaches its own end) at a huge toll in human life and well-being.

Tuesday Apr 17, 2007

The Kingdom of Content

Thomas Hazlett, professor of law and economics at George Mason university, writes about how "content" has become "king": 

In 1983, US cable operators paid an average of just $2 annually per subscriber in license fees – and over $238 in 2005. In aggregate, total payments to cable programmers from cable operators went from just $60m in 1983 to $16bn in 2005.

The advent of cable brought forth many legal questions: 

Where it all comes out is difficult to tell. In the early days of cable television, US law was a puzzle. Should cable systems be allowed to abscond with over-the-air signals of broadcast TV stations, re-transmitting them to subscribers? Or should cable operators – then called “Community Antenna Television” (CATV) systems – give broadcast TV stations a slice of the subscription fee pie?

This question went to the US Supreme Court in 1968 and again in 1974, an era when cable TV delivered only broadcast TV signals (ESPN, CNN, Discovery, A&E and the rest were to come years later). Both times the court held that cable operators retransmitting local signals owed nothing. In extending broadcast signals they improved reception for households, like a large antenna.

Now, we have a battle between the super copy-and-distribute machine and the "copyright-protected" content. As many have argued, in the case of the Internet, the increasingly more strict protections granted through copyrights can put stringent constraints on  cultural creativity.

Tuesday Apr 10, 2007

English and Business

English may be the language of business today but many know that there are no guarantees it will remain the language of business tomorrow. In fact, more business was conducted among nations (per capita) prior to World War I, when there was no uniform business language, than around the late 1990s, at the height of the .com boom and when English was the lingua franca of business. (See Robert Barro's Getting It Right: Markets and Choices in a Free Society.)

Tuesday Apr 03, 2007

Political Economy of Open Source Communities

Lots of people have said lots of things about open source communities.

Among the books I have seen on shelves and articles in books and online, I've been wanting to read Steven Weber's 2004 book The Success of Open Source but time has never allowed.

Finally, I've been able to start and finish the first 15 pages of Weber's book, and I can tell you that it has all the right elements and sources for its analysis of the political economy of open source communities. Mancur Olson's work, transaction cost economists', Chester Barnard's and others' are weaved together beautifully in those pages.

I look forward to reading more of it as time allows, and I'll be quoting from Weber, here.

Thursday Mar 29, 2007

Inducement and Growth

Douglass North, a Nobel Prize winning economist, writes: 

A stationary state will result when there is no inducement for individuals in a society to undertake those activities that lead to economic growth. Granted that individuals in the society may choose to ignore such positive incentives, and that in all societies some are content with their present situation; yet casual empiricism suggests that most people prefer more goods to fewer goods and act accordingly. Economic growth requires only that some part of the populace be acquisitive.

It seems to me that acquisitiveness does not embody the only sufficient condition for economic growth. Other models of growth involve social growth for social purposes which create a more living environment, leading to greater productivity and growth through the modified activities of members of a society. Here, no acquisition may have happened. Only changes in the environment of activity has transformed the quality and quantity of it.

Monday Mar 26, 2007

Open Source and Property Rights

Open Source development—whether it is OpenOffice, Apache, Open Solaris, Linux (Debian), Sun Studio, Open JDK, Apache Derby (Java DB), PostgreSQL, Glassfish or Netbeans—engages communities in production of value governed by a revolutionary model for property rights, emphasizing open distribution of software rather than the traditional "exclusive-rights" notion of property.

The new property model finds its grounding in the use of the Internet as the backbone for parallel development of relatively complex systems of value generated by (non-idyllic) communities of developers—large quantities of value being generated for little, direct financial compensation. 

In the exclusive-rights model of property ownership, the state uses force (or the threat of force) to prevent "unlawful" use, in order to "secure" those rights and encourage their development. 

In the open-source model of property ownership, the width of distribution and availability represents the only "security" that needs to be provided.

The state's role must be vastly different, and it must be focused on rights of distribution and use, and of mixing. Being a vastly different model of ownership, open source has often confronted a state which wants to apply its traditional understanding of property and its "security." We have witnessed this with property "rights" over content because general content in the digital-distribution world possesses many characteristics similar to software.

Saturday Mar 24, 2007

Risky Loans Story Surfaces more Fully

Several weeks earlier, in mid February 2007, The Wall Street Journal first reported on the risky subprime loans' defaults and subsequent mortgage-backed securities losses. The news gradually broke into the more popular press. A couple of weeks ago, BusinessWeek, carried a cover story about the subsequent volatility in the stock market, and now, The Economist carries a "briefing" on the subprime defaults. (Subscription may be required for viewing.) According to The Economist, of the $40 tillion debt market (including the $10 trillion mortage market), only $650 billion relates to the adjustable-rate subprime loans. This has some optimists believing that the economy will avoid a credit crunch. Others, like Stephen Roach of Morgan Stanley, have "called subprime mortgages the new dot coms," according to The Economist.

Of the $10 trillion mortgage loans, some 75% are repackaged as mortgage-backed securities (or bonds). Some two thirds of borrowers have good credit and fixed interest rates. However, a growing number have weak credit and adjustable rates, and "little, or no, cushion of home equity."

When the housing market began to slow, lenders pepped up the pace of sales by dramatically loosening credit standards, lending more against each property and cutting the need for documentation. Wall Street cheered them on. Investors were hungry for high-yielding assets and banks and brokers could earn fat fees by pooling and slicing the risks in these loans.

Standards fell furthest at the bottom of the credit ladder: subprime mortgages and those one rung higher, known as Alt-As. A recent report by analysts at Credit Suisse estimates that 80% of subprime loans made in 2006 included low “teaser” rates; almost eight out of ten Alt-A loans were “liar loans”, based on little or no documentation; loan-to-value ratios were often over 90% with a second piggy-bank loan routinely thrown in. America's weakest borrowers, in short, were often able to buy a house without handing over a penny.

... A new study by Christopher Cagan, an economist at First American CoreLogic, based on his firm's database of most American mortgages, calculates that 60% of all adjustable-rate loans made since 2004 will be reset to payments that will be 25% higher or more. A fifth will see monthly payments soar by 50% or more.

... Mr Cagan marries the statistics and concludes that—going by today's prices—some 1.1m mortgages (or 13% of all adjustable-rate mortgages originated between 2004 and 2006), worth $326 billion, are heading for repossession in the next few years. The suffering will be concentrated: only 7% of mainstream adjustable mortgages will be affected, whereas one in three of the recent “teaser” loans will end in default. The harshest year will be 2008, when many mortgages will be reset and few borrowers will have much equity.

Mr Cagan's study considers only the effect of higher payments (ignoring defaults from job loss, divorce, and so on).... Mr Cagan's work suggests that every percentage point drop in house prices would bring 70,000 extra repossessions.

The financial markets should be able to whether these losses, The Economist observes. Mr. Cagan's estimate of losses, $112 billion, compare with the $600 billion "wiped out on the stockmarkets as share prices fell on February 27th." However, loss of confidence will affect the collateralized debt orbligations (CDOs) markets and may lead to demand for higher spreads and a classic credit crunch.

Finally, a historical dictum: A loose monetary policy instituted to save the economy from the disasters of one bubble can only lead to another bubble, perhaps of a larger impact.

The bursting of the stock-market bubble in 2000 led to a plunge in investment at American firms. To stave off recession, the Federal Reserve loosened monetary policy. Short-term interest rates fell to historic lows, propping up consumer spending, but also fuelling the housing bubble and sowing the seeds of today's upheaval.

Only disciplined frugality, savings and attention to real assets, and not more legislated regulatory burdens, can help rein in break-neck speculative swings.

In the meantime ...

Nancy Trejos of The Washington Post reports the most recent housing statistics released by U.S. Department of Commerce on March 26. The statistics speaks of a sharp drop in new home sales in February and it has pulled down all three major indexes on the Wall Street on its release. There is quite a bit of regional variation, Trejos reports:

The supply of new homes for sale increased by 1.5 percent in February to 546,000. At the current sales pace, it would take 8.1 months to get through that supply, up from 7.3 months in January and 6.4 months a year ago.

By region, the Northeast had a 26.8 percent drop in home sales, the steepest decline in the country. The Midwest had a 20 percent drop. The South, which includes the Washington region, was down 7 percent.

The West was the only part of the country to have an increase in sales, up 24.6 percent from January.


Friday Mar 02, 2007

Protracted Wars and Asset Attrition

Much earlier, I've written about the use of war spending as a quick-and-dirty means to apply a consumptive forcing function in an economic cycle. (On the issue of economic time scales and the dynamics involved, I have also written an earlier note.)

When aggressive wars are waged with the purpose of acquiring resources (geopolitical bases, currency values, people, mines, energy resources, transportation resources, land, etc.), besides the moral bankruptcy of such a behaviour, the utilitarian calculation that takes the aggressor into war also stems from the "positive" consumptive impact on its economy. The "positive" nature of the impact shows up in the hope of the application and execution of war in a short time scale in order to solve a specific problem in a specific economic cycle. The impact of war spending on the cycle will always prove more dramatic than any long-term investment, whose impact will be faced and felt in a term longer than of interest to the executioners of "national interest."

However, matters of war and peace, and life and death, have always proved to be more complex than what simple utilitarian calculations tend to reveal.

Despites rosy predictions and enthusiastic promises pundits of the war party give, the aggressive war itself drags on when it faces resistance, which it often does. Note that historians have found it odd and unusual when an aggressive war has encountered no resistance. While the planners of aggression always do what they can to dismantle resistance, the aggressor should always bet on encountering resistance to its aggression. (Even little Melos resisted the Athenian armada.) Occasionally, the aggressor perpetrates extreme violence in order to prove resistance futile. As a consequence, those who resist fold temporarily but only as a means to survive for a better day.

So, as a historical experience, all aggressive wars in history have bred resistance in various forms, scales and stages. Often the aggressor is quite well-versed in history and knows this fact of history full well. So, the aggressor takes care only to attack those who cannot be expected to defend themselves or only targets which have been "softened" through years of brutal but calculated preparation. Of course, not always do such preparations and campaigns succeed. History is littered with their failures more than with their successes. However, the successes occur with enough frequency to salivate the aggressor's appetite.

With the stretching of the war beyond expected scope, larger chunks of hard-to-renew resources continue to be wasted on it. Even as such wasteful spending may be advocated to drive further consumption, in reality, it generates no added value to supplement existing asset values. Hence, a general asset attrition sets in, and by extension, inflation takes hold, and soft and hard landings beset various asset-based sectors of the economy. Note that all sectors of the economy ultimately prove to be asset-based if we are daring enough to include, also, non-physical assets in our utilitarian calculations. We can think of various types of assets -- for example, national currency value (determining the value of various forms of savings and investments), stock values, real-estate values, expertise, know-how, skills and knowledge -- these are all assets, the latter few examples of which, by themselves, are non-physical assets even if they may have physical representations. Note that the most important assets are the human beings. This makes a mockery of aggressive war as one waged "for the hearts and minds" of the targets of aggression.

As war drags on, a grinding attrition grips all national assets. Resources that should have been invested to improve such assets are wasted, and the negative long-term economic impact draws itself near. (I refer the reader to a note elsewhere which extracts one of Nobel Prize economist Joseph Stiglitz' relevant observations on the cost of war.)

In conclusion, we should note that asset attrition has a multiplicative effect at a macroeconomic level. The value of assets deployed in a value network depend on the value of other asssets. So, as a particular group of assets lose value due to a lack of proper and long-term investment, they depress value of other, related assets.

Thursday Feb 22, 2007

Commerce and Development

In his commentary, "Competitive Cooperation" written to honor the 50th anniversary of the Treaty of Rome, the 2004 Economics Nobelist Edward C. Prescott reminds the readers of the importance of commerce in mutual economic development and growth.  

Let's review some historical facts. With the signing of the Treaty of Rome in 1957, France, Italy, Belgium, West Germany, Luxembourg and the Netherlands formed what would eventually become the European Union. For six decades prior to the treaty, those countries were about 55% as productive as the U.S. But over the following 25 years, those countries essentially caught up to the U.S. in terms of productivity.

When that historic economic treaty was signed, three countries were roughly on par with those original six -- Denmark, Ireland and the United Kingdom. However, a funny thing happened in subsequent years -- those three countries started falling behind their former peers. So in 1973 they joined the original group and their economic fortunes improved. It took time, but the U.K. now is as productive as Germany.

...And what of Latin America? Unfortunately, the region provides a case study in the perils of protectionism. Recent research by my Minneapolis Fed colleagues, Lee Ohanian and Jim Schmitz, and two co-authors, shows that from 1950 to 2001, per capita GDP for Europe increased 68% relative to the U.S.; Asia increased by 244%, while Latin America decreased by 21%. This is all the more striking when we realize that Latin America's per capita GDP actually exceeded Asia's by 75% in 1950.

Perhaps, it is time for a Latin American Union.

Some nations use trade policies to punish others. Whether politically motivated or otherwise, policies that raise barriers to potentially beneficial trade or create trade zones or alliances that exclude others are ultimately doomed to lead both groups worse off. Of course, the exclusionists, when powerful, come to believe they represent the house with infinite resources in the trade gamble.

Note: In his Getting it Right: Markets and Choices in a Free Society, Robert J. Barro advances points similar to Dr. Prescott's.

Sunday Feb 18, 2007

CDOs and Default Risk

Elsewhere, I follow the recent instabilities in the collateralized debt obligations market, and in particular, the segment involving mortgage-backed securities.



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