New Economist

The power of ideas

Short but wide-ranging piece in Dave Pollard's blog yesterday on the power of ideas. I particularly liked Daniel Dennett's 'Law of Needy Readers':

On any important topic, we tend to have a rough idea of what we believe to be true, and when an author writes the words we want to read, we tend to fall for it, no matter how shoddy the arguments.

Carnival of the capitalists

This week's Carnival of the Capitalists is up at the Coyote Blog, and is the usual eclectic mix. There is also a permanent link for those wanting to check the archives...

Looking after baby

As foreshadowed in last November's Pre-Budget Report, the UK government today spelled out its proposals for helping employees balance their work and family life. The consultation document Work and Family: Choice and Flexibility outlines proposes:

• extending the period of statutory maternity pay, maternity allowance and adoption pay initially from 26 to 39 weeks and subsequently to 52 weeks by the end of the next parliament;
• improving dialogue between employers and employees during maternity leave, including extending the notice period mothers give when returning to work;
• allowing a mother to transfer some of her leave and pay entitlement to the father;
• extending the existing right for an employee to request flexible working arrangements to new groups of people, for example parents of older children and carers of sick and disabled adults;
• Consider extending the right to request flexible working hours to carers of adults and parents of older children;
• Simplify the administration of maternity leave and pay for employers, including whether the government should pay parents direct through the Inland Revenue.

Trade and Industry Minister Patricia Hewitt said today:

"We've already introduced the best ever package of family friendly working rights - and this goes even further. This consultation builds on our commitment to help working families give their children the best start in life."

Media reports have emphasised the extension of maternity leave from 6 to 9 months, and the lift in thhe rate of maternity pay. Of course not all were impressed. Blimpish described the mooted changes as "shameless bribes", though also "fairly minor stuff". Try saying that in a Sure Start or childcare centre!

Just because a policy is electorally appealing, doesn't make it automatically economic unsound. Policies to encourage women to return to work and help working parents juggle their work and family commitments should help achieve a happier workforce and a higher employment rate - potentially boosting tax revenue and labour productivity. There are also sound horizontal tax equity grounds for assisting working families with the costs of child-rearing.

Should we worry about the US current account?

A few blogs over the weekend by Stephen Kirchner and Calculated Risk about the US current account deficit set me thinking. A common view, well illustrated by The Overstretch Myth by David H Levy and Stuart S Brown in the March/April 2005 issue of Foreign Affairs, just published online, is that we should not be alarmed. (Thanks to Stephen for the link). Here is their key argument:

The United States' current account deficit and foreign debt are not dire threats to its global position, as would-be Cassandras warn. U.S. power is firmly grounded on economic superiority and financial stability that will not end soon.  ...The biggest threat to U.S. hegemony, accordingly, stems not from the sentiments of foreign investors, but from protectionism and isolationism at home.

Hmmm. I agree that current account deficits in themselves are not necessarily a bad thing - indeed, they are often the result of robust economic growth. It is their sustainability that matters.

But when I read phrases like "economic superiority" I reach for the bucket... tell that to the Irish, British, Australians, New Zealanders and others who all managed to avoid a recession after the stock market bubble burst!

A less hubristic point of view was put recently by Australian Treasury economists in their Winter 2004 Economic Roundup article. David Gruen and Jason Harris ask: Might the United States continue to run large current account deficits? They agree that "the United States could perhaps continue to run sizeable current account deficits for many years with no obvious harmful side-effects". But there is a catch: "provided the United States fiscal deficit is significantly reduced (or eliminated)."

Continued large fiscal deficits seem to pose a much more serious risk to the United States outlook than continued large current account deficits on their own. If government debt continues to rise inexorably, with no convincing signs that it will be brought under control, it makes sense for investors to demand a rising risk premium — or at some point, to rush for the exits.

On the one hand, investors may come to doubt the commitment to avoid inflation, since inflation would erode the real value of government debt. On the other hand, high public debt, in the absence of substantial inflation, eventually needs to be repaid, implying future surpluses and probably higher future taxes. Given that these taxes could be imposed on investment income earned in the United States — including interest and dividend payments on foreign owned United States assets — investors might at some point begin to demand an additional premium on United States assets.

Just how long the United States could continue to run fiscal deficits of their current size without a serious loss of confidence is a question we hope will not be answered.

On this issue, I side with the Aussies, especially as there is precious little sign that either President Bush or Congress are capable of significantly reducing the US federal deficit. In addition to the higher risk premium cited (which could trigger a Treasury bond sell-off), there is also the risk of a 'disorderly decline' of the US dollar in the coming year or two. Markets won't wait forever for politicians to sort things out. There may be less room to be sanguine than David H Levy and Stuart S Brown think.

UPDATE: Brad DeLong has a new post discussing the new paper by Blanchard, Giavazzi and Sa, The U.S. Current Account and the Dollar. Both are well worth a look.

UPDATE 2: For those in London, Francesco Giavazzi from Bocconi University will be presenting this paper at the CEP/LSE International Economics Seminar on Wednesday 16 March 2005, 12:30 - 14:00 R405,  CEP Conference Room, 4th Floor, Research Laboratory, entrance in 10 Portugal Street, London WC2A 2HD).

Regional differences still matter

A new IZA discussion paper by Nigel C. O'Leary, et al, Accounting for Differences in Labour Market Outcomes in Great Britain: A Regional Analysis Using the Labour Force Survey argues that although "regional unemployment rates in Great Britain have narrowed dramatically in recent years .. significant differences still remain in terms of both employment and economic inactivity rates, which may now better reflect relative labour market performance."

The paper examined these differences in labour market outcomes "using a unified empirical framework that decomposes regional differences in employment, economic inactivity and unemployment into components due to either structural or composition effects." The authors spell out the policy implications in their conclusion:

The policy implications of the analysis seem clear, albeit politically sensitive. Faced by the kind of inequalities in labour market performance that have been identified by this analysis, the government can choose between two options. Either it can sit back and do nothing, in which case regional differences in employment and inactivity rates are likely to persist and lead eventually to the ‘residualization’ of under-performing regions, or it can be pro-active and seek to equalise labour market performance across regions. If the government wishes to be pro-active, it must, as a matter of some urgency, seek to implement policies that address two of the most pressing problems faced by under performing regions.

First, under-performing Northern regions appear to be structurally disadvantaged relative to more prosperous Southern regions, as was the case in the 1980... As a result of these changes, individuals living in  under-performing regions are much less likely to be in employment...

Second, and no less importantly, under-performing regions tend to have much higher incidences of reported ill health, which are in turn associated with both lower employment propensities and higher inactivity propensities in all regions.

More currency reform from China

I missed this Reuters report China Says Will Move on Yuan in '05 on the weekend, but it is getting considerable media coverage in Monday's papers. China has committed itself to a package of measures to open up its capital account, in another step to ease pressure on the renminbi and prepare for a more flexible currency:

China will gradually open its capital account in 2005, another step in its plan to make the yuan currency fully convertible, state television  said on Saturday, quoting the country's foreign exchange chief.

..."We will gradually ease the amount of renminbi that can be exchanged under the capital account, taking another step toward achieving full convertibility of the renminbi," the television quoted Guo Shuqing, head of the State Administration of Foreign Exchange, as saying.

Guo also said China would support insurance companies, which took in 431.8 billion yuan ($52.2 billion) in premiums last year, to invest in stocks overseas, potentially increasing the outflow of currency to balance huge inflows. "China will support insurance companies to set up insurance  funds or carry out securities investments abroad," he said.

Other measures include easing foreign direct investment by local enterprises, and approving renminbi-denominated bond issuance by 'foreign development organisations' such as the Asian Development Bank. This is in addition to steps announced last week "to curb short-term foreign debt incurred by importers and let domestic firms retain more hard currency income". According to Richard McGregor in today's Financial Times:

The measures announced by Mr Guo have nearly all been already tried in small pilot programmes, or have been announced previously in a more low-key fashion. But, by bundling them into one single announcement, China has sent a clear signal about its commitment to currency reform to the foreign governments, led by the US, that have been pressuring it to revalue the currency.

Steve Hanke, writing in Forbes, thinks China Won't Revalue. I disagree. China has long been committed to replacing the US dollar peg with a more flexible exchange rate system, but they will do it in their own way and at their own pace. Rather than a straight revaluation, I expect them to shift towards fixing the renminbi against a basket of currencies that reflect trade and investment flows.

UPDATE: Macroblog has drawn my attention to a very useful two-page analysis (PDF) of the renminbi by the Cleveland Fed in their February 2005 Economic Trends.

British Blogs Roundup

It's early days yet, but I am sure BritBlog Roundup Number 2 will one day become bigger than Ben Hur.

There is also some controversy about the British Blogs Top 10, with Andrew Sullivan of course leading by a mile with 32,774 average daily visits... But feisty Jane Perrone of The Guardian disputes the metrics.

The Observor joins the blogosphere

Thanks to Ben and Tim and Norm and countlesss others for pointing out the new Observor weblog. So far, so dull, as some uncharitable readers have pointed out. it's sister newspaper The Guardian's NewsBlog is better, but then it has beeen around a lot longer. Watch this space...

Sunday papers economic wrap

Aside from David Smith's article, it is fairly slim pickings in the Sunday papers this week.

Heather Stewart writes in The Observer about Why Mr Brown went to China: He lobbied for Rover and promoted British innovation and education, with "a hint of electioneering".  Simon Caulkin argues that most mergers do not add up in The Observer, while Roger Bootle in the Sunday Telegraph asks Should the euro should be the reserve currency?

If Britain is doing so well, why doesn't it feel like it?

An interesting, albeit speculative piece by David Smith in today's Sunday Times. He seeks to explain why, when the UK economy is at its most prosperous for decades, consumer optimism about the economy is low. He suggests five possible factors:

The first is that economic progress in recent years has been incremental, the economy growing roughly in line with its trend rate. People only really notice a difference when there is a boom.

...Second, while consumer spending has been strong, it has shifted towards the kind of things we do not get pleasure from. Since 1996 (the base year for the consumer price index), insurance premiums are up by 67%, car-repair costs by 63%, and education, on which some spending is through gritted teeth, by 62%. Council-tax bills have risen 70%.

Third, and related to this, one reason why real incomes have not grown that rapidly is that taxes have gone up. ...The public is far from satisfied with the return on its taxes.

Fourth, and this is harder to prove, the job market has been healthy but the workplace has become tougher. Rising employment has been associated, in some surveys at least, with declining job satisfaction.

Finally, people will not feel warm about the economy if their quality of life is deteriorating. Whether or not it is the price of prosperity, many of Britain’s town centres have become no-go areas at night because of drunken yobs, while more general anti-social behaviour, such as graffiti, vandalism, burnt-out cars and casual violence, has soared.