The Democrats and Free Trade

I have been quite busy these days so I must apologize for being a couple of months late in noticing this, but I was amazed, AMAZED, when I watched the Clinton/Obama debate in Cleveland, Ohio that took place past February on MSNBC. In the debate, both candidates spoke out against NAFTA, threatening to pull out if the treaty wasn’t renegotiated. Just take a look at what Clinton and Obama had to say:

http://www.youtube.com/watch?v=5jO05Dd0Hd0

I find it amazing that the two key democratic candidates running for president refuse to be pragmatic enough to recognize the benefits of free trade. This is especially surprising when looking at Hillary Clinton since her husband is the one who came up with NAFTA in the first place. As the high-caliber politician that she is, she should know better. And as for Barack Obama, for a candidate who keeps talking about “hope” and keeps calling for “change”, this kind of rhetoric sure sounds a lot like same-old, same-old democrat populism.

In the debate, both candidates kept talking about the hardships that middle- and working-class workers in Ohio, Michigan, and up-state New York have to go through. That may be true, but I think both candidates are too preoccupied with wooing unemployed workers and are failing to see the big picture. In the 21st century it is absurd to deny that free trade and globalization is the future.

Globalization benefits everyone. It brings down prices and gives consumers a wider choice. It creates jobs and makes companies as dynamic as they have ever been. And this applies to America especially – America still has some of the most competitive and creative companies in the world and the standard of living of its workers is still arguably the best. Thanks to NAFTA, Mexico has seen its poverty rates fall and incomes have gone up remarkably. And policy-makers in both America and Canada are in favor of more integration. In this regard, the republican candidate John McCain is right on target when he tells unemployed workers from middle-America that “I can't look you in the eye and tell you that those steel mills are coming back"[1]. Instead he encourages them be innovative and adapt with the changing world: “I will commit to giving these workers a second chance. They need it, they deserve it."[2] NAFTA does not need to be renegotiated, if anything, there should be more trade liberalization with the rest of Latin America.

Hillary Clinton has even gone as far as to doubt the Doha round trade talks, talks which if successful, could mean a world of benefits for some of the world’s poorest countries. In a Financial Times interview she suggested that the US should take “time out” on all new trade agreements. How retrograde!

I am especially disappointed with Barack Obama. He was supposed to be the candidate of hope! He’s half Kenyan half American; he was meant to be the personification of global attitudes and global partnership. Instead, he has chosen a protectionist and populist attitude, making promises to desperate workers and playing on their fears. Obama has promised to improve America’s reputation worldwide, but how will protectionism help improve America’s reputation?

A lot of commentators have said that in reality both candidates are in favor of free trade but are just wooing their base in order to get elected. I truly hope that is the case, but if it is, it’s also sad to see that the democrats are incapable of talking to their voters as if they were adults. If Clinton and Obama are really in favor of free trade, they should take a lesson from McCain and tell it like it is. And if they are genuinely against free trade then they should pull out of the race and pick up an economics textbook, because the world cannot afford more protectionism.


[1]http://www.reuters.com/article/politicsNews/idUSN2247270520080422?pageNumber=2&virtualBrandChannel=10112
[2] Ibid.

Some interesting links...

A couple of links that some of you may find interesting:

1. Dani Rodrik writes once more about his programme: New Thinking in Development Studies.

2. NY Times argues that the legacy of Milton Friedman is not all gone in the times of turmoil.

3. Finally, Businessweek publishes the list of 50 most-innovative companies. See the shape of things still to come...

GOLD FEVER

According to expectations, the gold price, having followed a continuous upward movement, has indeed surpassed the $1000 mark in February 2008. Credit crunch, stock market crash, and inflation have been enticing people all over the world to invest in gold. The press comments that gold has become the world’s most powerful currency. In contrast to paper currencies, gold cannot be arbitrarily augmented.

Figure 1: Gold price in Dollar

Source: The Bullion Desk (2008)

While bonds and certificates of deposit depend on the creditworthiness of the issuer, gold investments are unbound to payment promises of firms or governments. Possessing physical gold represents an insurance against a devaluation of both currency and assets. Notwithstanding, this does not mean that the gold price cannot fall. Speculators also get in on gold and can contribute to overheating and fierce adjustments (the current gold price is below 1000 dollar). The rising gold price is also linked to excessive borrowing arrangements. Due to the lax monetary policy of central banks the share of credits in US GDP rose from 150% in 1969 to currently 340%. At the same time, investors’ risk awareness kept decreasing, as they could incur additional debts or pay debts with new debts without difficulty. Things are difficult when the “monetary fuel” runs short and the borrower is unable to repay his debts.

Hitherto the gold price often used to increase rapidly during phases of low or negative real rates (Fed fund real rates), i.e. whenever the inflation rate considerably exceeded interest rates (so that depositors could not make gains on their assets). In that case, the main disadvantages of gold investments, i.e. that one cannot earn interests or dividends, do not matter. Not only the fear of inflation but also the rising demand from newly industrialising countries inflates the gold price. More and more people from those countries can afford jewellery and gold bars. Accordingly, China’s demand has increased to nearly 300 tons per year since the gold market liberation in 2002 (private property and ownership of gold were forbidden before). With a demand of more than 700 tons per year India has the world’s largest gold market. Indian wives regard gold property as a form of life insurance and old-age provisions, while in the Western world gold is still regarded as something exotic.

Most of the gold is processed in the adornment industry. According to GFMS, jewellers processed 2407 tons of gold in 2007, which was 63% of the worldwide gold supply. The remainder dispersed among the industry, dental technicians, gold investors, and gold mines. Despite the rising gold price the worldwide gold mining remains stagnant. This can be explained by the ongoing increases in costs of material, energy, and logistics with respect to gold mining and the scarcity of new sources with high gold content. Moreover, there are hindrances such as institutional problems and time: The phase from gold discovery to commercial production takes at least seven years. Besides, projects drag on because of interminable licensing procedures and environmental protection amendments. Also, gold producers shrink away from investing in regions of political instability due to lacking legal security. Finally, investment opportunities deteriorated in light of the credit crunch and stock market crisis.

People who would like to purchase gold assets are advised to choose services offered by internationally famous and acknowledged bullion dealers. The prices of their products almost move together with the gold value. People who want to stock their bars and coins in bank safes should acquire sufficient information on insurance coverage; those who prefer to stock at home ought to make sure that the household insurance is adjusted. Also the home safe has to meet standards as required by the insurance. Alternatively, banks offer investments in gold (price) certificates, which are free of storage or insurance expenses. Moreover, they are more tradable compared to physical gold. However, gold certificates are bearer debentures and thus are receivables against the issuer. If the issuer’s credit standing deteriorates or if he becomes insolvent, the certificate owner also runs the risk of losing his stakes or parts of them.

Contrary to investment funds or Exchange Traded Funds (ETF), certificates do not represent separate assets which are protected in bankruptcy cases. An alternative to certificates are ETFs which purchase gold with investors’ money; the gold bars are then kept by a fiduciary. Investors who are only aimed at short-run gold price movements are not recommended to gamble with gold bars. Although the demand for gold has been increasing, the proportion of gold in investors’ portfolios is still very low, despite the fact that gold has been performing better than stocks for years, something that is expected to remain also for the next few years, according to the Dow-gold ratio. This ratio is calculated by dividing the average Dow Jones index level of a period by the gold price in US dollar of the same period. A decreasing ratio means that gold performs better than US stocks and vice versa. Even if this concept does not say much about the absolute price development, it proved to be a fairly good long-run indicator.

Figure 2: Dow-gold ratio

Source: www.chartoftheday.com (2008)

Central banks and IMF held 29955 tons of gold at the end of 2007, with a market value of 890 billion dollar. This gold largely stems from times when the issuance of paper-money had to be backed by gold. It is actually unknown which of this gold are still in the safes of central banks or has been already sold to the market. The USA possesses the largest hoard of gold with 8134 tons, followed by Germany (3417 tons) and IMF (3217 tons), but they strictly reject sales of gold so far. Theoretically, central banks and IMF are capable of flooding the gold market and, in this way, beating down the gold price which represents a crisis indicator to them.

Links and References:

• http://www.ft.com/cms/s/0/aa269476-0013-11dd-825a-000077b07658.html?nclick_check=1 (about speculators who cut bets on rising gold price)

• http://search.ft.com/ftArticle?queryText=gold+price&y=5&aje=true&x=15&id=080307000043&ct=0&page=3 (about rising gold and oil prices)

• http://search.ft.com/ftArticle?queryText=gold+price&y=5&aje=true&x=15&id=080117000508&ct=0&page=5 (about declining jewellery demand in the face of rising gold price)

• Doll, F. (February 18, 2008). Omas olle Klunker. Wirtschaftswoche, pp.126-137

The Japanese Labor Market - Integration into the Capitalist Global System

Our author Barbara Kits prepared an excellent analysis of the Japanese labour market.

“The [Japanese] economy experienced a major slowdown starting in the 1990s following three decades of unprecedented growth, but Japan still remains a major economic power, both in Asia and globally.” (CIA Factbook; Japan)

During the 20th century, Japan’s economic performance has been quite remarkable. First of all, there was the ‘economic miracle’ after the Second World War: post-war Japan was able to rebuild its economy in less then 2 decades. Second of all, Japan’s unemployment rate has been at approximately 2% for almost 3 decades, a very low average compared to other OECD countries, and thus often referred to as the ‘unemployment miracle’.

However, these miracles started fading away when Japan stepped into a ‘Lost Decade’ in the 1990s. The recession that prevailed took forms that had thus far been unseen anywhere in the industrialized world of capitalism. Interest rates, to name but one variable, fell to nearly 0%, while the ‘Unemployment Miracle’ seemed to end. The ‘Lost Decade’ of Japan was caused by the burst of a bubble in the stock market and the consequent fall into a liquidity trap. These developments also proved that the Japanese labor market system was not resistant to large negative shocks in output: as a consequence of the liquidity trap, Japan’s unemployment rate rose to a record high in comparison to the past 40 years, and only recovered once thorough restructuring of the labor market had taken place.

In the following, an analysis of the Japanese labor market restructuring following the ‘lost decade’ will be provided, with the aim of assessing the current stance of the Japanese economy in the capitalist world system. The policies currently in place will be examined in connection to this, and will be assessed in terms of their effect on the economy in the future. The conclusion of the report consists of an advisory note on the future use of macro-economic policies of Japan.

To read more: please click here.

Notice:

The paper is based on:
“The Japanese Economy: Problems and Policy Solutions” (unpublished),
by:
Zahra Biniaz, Petulia Fung, Barbara Kits, Delphine Maho, Hsieh Lea Tan

CITIZEN OF EUROPE: How exchange rates influence migration.

The accession to the EU spawned a large wave of CEE (Central Eastern European) migrants in the UK. The number of Poles in the UK went so high that some pundits termed the UK the 17th Polish province...

Nevertheless, the number of Polish immigrants has started going down.

Why? Financial Times explains:

The wave of migration began when about a fifth of Polish workers were without jobs and Polish salaries were far lower than in western Europe. Over the last couple of years, however, official unemployment has dropped to 11.5 per cent, while the true rate is probably much lower. Pay packets are fatter – salaries rose in February at an annual rate of 12.8 per cent. The zloty has also risen sharply against both the pound and the euro, while Poland’s economy is also expanding much more strongly, with growth of 5.5 per cent expected this year.

As we can see, fluctuating exchange rates may have an impact not only on financial markets and trade, but also on the movement of people...

It would be actually good to do some regression analyses on what actually the impact of the falling pound is. Apart from pound, one could include many other variables: GDP growth rates in the UK, Poland and other countries, unemployment levels and take into account culture variables (individualism, mobility etc.). Furthermore, to get better results one could also make a panel data study: take data from various CEE (Central Eastern Europe) countries whose citizens migrated to the West.

But is the impact of the pound considerable? The idea is not mine, but I believe it just works as a deciding factor: you don't come back to Poland because the pound went down. There are other reasons: family, loneliness, depression etc. Exchange rates act like a "switch" - when your pay goes down significantly, you go back because of all other reasons. Money doesn't keep in the UK anymore.

Is the return good for British economy? I don't think so - of course British workers will be happier (migration from CEE did have an impact on wages and, thus, on unemployment), but it will only add to inflation problems (negative supply shock), and make the work of Mervyn King more difficult in the times of rising prices and stagnating economy...

PS: The report of the Office of National Statistics does show that unemployment among Britons went down. How come if standard labour economics theory says that two views, "immigrants take jobs that nobody wants to take" and "immigrants take our jobs", are just simplistic views of reality? In general, all else equal, the impact of immigrants should make wages go down. Well, here it seems that young Brittons give up competing with immigrants because of their small wage demands...