Archive for October 2009


Please China, keep “beggaring your neighbors.”

The best thing that happened to the world economy in 1933 was that FDR sharply devalued the dollar against gold.  Prices and output started rising rapidly, and the US began to suck in a lot more imports from the rest of the world.  Our trade surplus got smaller.  Even better, this policy inspired other countries to devalue as well.  Paul Krugman knows all this, and often cites FDR’s actions with approval.

The best thing that happened to the world economy this year, indeed just about the only good thing, was the V-shaped recovery in Asia, almost certainly led by China.  This recovery was aided by the Chinese government’s decision to stop appreciating its currency.  The Asian growth spurt was also a major factor behind the recovery in the US, which began in asset markets in March and spread to the real economy a few months ago (although we need a much faster recovery.)  Paul Krugman does not seem to know this, indeed he is now arguing that the Chinese need to reverse the very policies that provided green shoots to the world economy in the dark days last winter.  Here is what Krugman has to say:

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar “” which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.
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Sorry Professor, I promise to mind my own business from now on

They say that in Hollywood any publicity is good publicity.  Thus I was delighted to see Brad DeLong paying attention to my random thoughts on the Krugman/Dubner dispute,  Indeed he officially declared that I had lost my mind.  But that is not all bad, because in America there are always second acts.  On the same day Brad DeLong formally announced that the little known blogger Andrew Sullivan would henceforth be welcomed back into polite society.  Someone may want to inform Andrew in case he hasn’t heard the wonderful news.  So I knew that there was still hope that a similar fate awaited me someday; when and if I adopted the “correct views” I too might be welcomed back, like a reformed mental patient in one of Stalin’s hospitals.  Or just as Fox News can expect to start get interviews again once they “shape up.”  Or just as the insurance industry can expect to get a better deal in the health care legislation once it stops saying those awful things.
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Global temperature pricing; reply to my critics

In a comment to my previous post, Statsguy raised a number of objections to geoengineering.  In principle, those objections should be included in the pricing scheme.  Thus if the sulfates approach has more nasty side effects that the cloud creation approach, then the (risk adjusted) estimated cost of those nasty side effects should be incorporated into the relative subsidies (or taxes) on various geoengineering-type strategies.  But I understand that not everyone will find this persuasive, so here I will try to answer my critics with some relatively pragmatic arguments.  Statsguy linked to an article with 20 objections to geoengineering.  How many of these are persuasive?  I’d say only the first one, and even that one is debatable.
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Response to Matt Yglesias’ challenge

A recent post by Matt Yglesias challenged the libertarian community on their seemingly anti-market approach to global warming:

For basically Popperian reasons I don’t think it makes sense for political pundits to spend a lot of time debating the relative difficulty of developing different hypothetical future technologies.  Instead, I would just say that the best way to find out whether human ingenuity is better at keeping atmospheric CO2 concentrations at a sustainable level by developing artificial trees or by developing better windmills is to . . . implement a binding emissions reduction scheme that puts a price on CO2 emissions.

This isn’t, in other words, an either/or choice. If you had a cap-and-trade system in place, that would put a range of modalities””better efficiency, more clean energy production, more trees & algae, and carbon-scrubbing machines””in a competitive framework. One assumes we’d be looking at some kind of mix. But defining the correct mix in advance seems very hard. Hence the appeal of a basically market-esque mechanism that creates incentives to work on these various ideas without unduly prejudging the appropriate level of investment in speculative technology.

What I think is remarkable is the extent to which people on the right, in their zeal to avoid a market mechanism that the business establishment happens to hate, have a tendency to talk up what instead amounts to a kind of Five Year Plan approach. Instead of regulating carbon, let’s just direct scientists of invent miracle trees! Let’s turn the sky red!

I like his argument, so I am going to take the challenge.  But first let’s diagnose the problem and come up with the right pricing policy.  I’m going wager that Matt’s friends in the environmental community won’t like the outcome. 
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Woolsey’s index futures convertibility: two paths converging

This post was inspired by Bill Woolsey’s recent post on a monetary constitution based on index convertibility.  I’d like to follow a similar procedure, but emphasize slightly different issues.  The goal is to show that we can get to the same place from several different directions, but also that Woolsey’s approach offers some conceptual advantages over the approach that I have been emphasizing.
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