Monthly Archives: February 2008

Why Do People Hate NAFTA?

Once again, economic nationalism is all the rage during an election cycle. Barack Obama and Hillary Clinton seem to have devoted much of the last week vociferously denouncing NAFTA and free trade in general. However, the true question is whether either of them actually believe what they are saying. For example, our friend Jimmy P. at U.S. News highlights a quote on globalization from Obama’s book:

We can try to slow globalization, but we can’t stop it. The U.S. economy is now so integrated with the rest of the world, and digital commerce so widespread, that it’s hard to imagine, much less enforce, an effective regime of protectionism. A tariff on imported steel may give temporary relief to U.S. steel producers, but it will make every U.S. manufacturer who uses steel in its products less competitive on the world market…. U.S. Border Patrol agents can’t interdict the services of a call center in India, or stop an electrical engineer in Prague from sending his work via email to a company in Dubuque. When it comes to trade, there are few borders left.

That hardly sounds like his rhetoric from the last several weeks. So either Obama doesn’t believe what he wrote or he doesn’t believe what he is saying. I think that it is the latter. He knows that by winning Ohio next week, he inches closer to pushing Hillary Clinton to the status of an also-ran and thus he is pandering to the economic unease of Ohioans. Additionally, economists of all stripes seem to agree that NAFTA is not the cause of Ohio’s economic woes (see, for example, Angry Bear and Mark Thoma) and there is no doubt that this group includes Obama’s economic advisor Austan Goolsbee.Meanwhile Steve Chapman highlights the myths about NAFTA:

What everyone forgets is that we got the best of that bargain, since our tariffs were very low to begin with.”Mexico had very good access to the U.S. market” already, says Charlene Barshefsky, who was U.S. Trade Representative in the Clinton administration. “What NAFTA did was level the playing field.” Critics complain that while exports to Mexico have risen, imports from Mexico have risen even faster.But that’s not because we embraced free trade. It’s because our economy has been more robust than theirs. Prosperous consumers buy more goods, from both home and abroad, than struggling consumers. Absent NAFTA, the trade imbalance with Mexico would not be smaller. It would be bigger.

Let’s hope that a President Obama’s views on trade would be more like those from his book and less like those in his recent speeches.

The Falling Dollar

Larry White writes:

Note that, using the year-over-year CPI as a measure of current inflation, the Fed funds rate is currently negative in real terms: 3.0 – 4.1 = -1.1. Not surprisingly foreign investors are dumping short-term dollar assets with the result that, as Forbes headlined, “Dollar slumps to new all-time euro low as Bernanke hints at rate cuts”.

Yeesh! Meanwhile, Barry Ritholtz provides the visual:

What Ended the Depression?

Paul Krugman writes:

The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression.

Of course, the evidence is quite to the contrary.

The Blessing of Globalization

The Financial Times reports:

Increased trade, outsourcing and offshoring do not create unemployment but boost the number of jobs in advanced economies, a study of European labour markets says on Tuesday.

The European Economic Advisory Group, a consortium of European academics organised by the Munich-based Ifo Institute, argues that although globalisation can lead to a fall in demand for certain types of skill, it also tends to sweep away job-destroying rigidities in labour markets.

The evidence from the group’s work suggests the positive effects of globalisation outweigh the negative effects.

A Federal Government Fix

Our friend James Pethokoukis of U.S. News and World Report recently asked me to provide my thoughts on a federal government bailout to “fix” the housing market and stabilize the economy. You can read my thoughts here (along with those of Russ Roberts, Dean Baker, Don Luskin, Craig Newmark, John Tamny, and Daniel Mitchell).

A Look At Inflation

Recall from the equation of exchange that:

MV = PY

where M is money, V is velocity, P is the price level, and Y is real output. Therefore, when written as growth rates (assuming velocity is constant):

Inflation = Money (M2) growth – Real GDP growth

Inflation is thus graphed below:

inflation.jpg

The graph begs the question, “where are the inflation hawks?”

Quote of the Day

“Actually, making things is not the road to prosperity. The road to prosperity for a nation is to use the skills of its citizens wisely. The wise use of those skills depends on the skills and desires of people in other nations.”

Russ Roberts

Stagflation?

James Hamilton discusses rising inflation.

Advice for the Candidates

John Stossel writes:

The economy is far too complex for any president — no matter how smart — to manage. How can politicians and bureaucrats possibly know what hundreds of millions of individuals know, want and aspire to? How can government employees fathom what trade-offs to make in a world of scarce resources?

They can’t. That’s why free people are more prosperous than unfree people.

Presidential candidates should promise to keep their hands off the economy.

Read the whole thing.

MV = Py

Tyler Cowen on Jared Bernstein’s new book:

There is a chapter called “Why do economists seem to fear inflation? And why do prices always go up, never down?”

Imagine trying to answer those questions without ever writing the two words: “money supply.”

Ouch!