Tag Archives: Paul Krugman

Why Iraq is America’s new Vietnam

From the Star

“If you break it, you own it,” warned U.S. Secretary of State Colin Powell to President George W. Bush just before the 2003 American invasion of Iraq.

Powell knew that the president had no clue what unpredictable forces he was about to unleash. Bush now knows. We all do.

As we witness the inexorable, slow-motion collapse of Iraq in the face of viciousIslamic State extremists, let’s remember Powell’s private caution to Bush: “You are going to be the proud owner of 25 million people. You will own all their hopes, aspirations and problems. You’ll own it all.”

This has been an awful week in the troubled history of Iraq. The stunning seizure last Sunday night of the pivotal provincial capital of Ramadi by Islamic State fighters took everyone by surprise.

Until last weekend, the United States and Iraqi view was that ISIS rebels were on the defensive and that Iraq’s questionable military had learned to hold its ground. But at Ramadi, even though they outnumbered the rebels, Iraqi soldiers abandoned the city in the face of the ferocious attack. Many of the ISIS fighters were equipped with American weapons captured earlier from fleeing Iraqi soldiers.

Once again, the debacle has called into question the country’s future as a unitary state. Not only is the Iraqi military’s will to win in doubt, but the Iraqi government is also showing itself to be divided and inept. As for the Americans, whose military intervention has been limited to largely ineffective air strikes, their strategy to “defeat” ISIS is floundering.

However, it is not as if these Islamic State jihadists, who are now roaming freely in Iraq and Syria, were invented out of thin air. They have a history.

They are largely the remnants of the Al Qaeda movement operating for years in Iraq, as well as veterans from Saddam Hussein’s Baath party. Shortly after the Americans deposed Hussein, the U.S. foolishly disbanded Iraq’s Baath army. It was a move that put more than 200,000 angry young men out of work. Is it a surprise that many of them are now are working for ISIS?

Paul Krugman says the invasion of Iraq was criminal.

Why did they want a war? That’s a harder question to answer. Some of the warmongers believed that deploying shock and awe in Iraq would enhance American power and influence around the world. Some saw Iraq as a sort of pilot project, preparation for a series of regime changes. And it’s hard to avoid the suspicion that there was a strong element of wagging the dog, of using military triumph to strengthen the Republican brand at home.

Whatever the precise motives, the result was a very dark chapter in American history. Once again: We were lied into war.

Now, you can understand why many political and media figures would prefer not to talk about any of this. Some of them, I suppose, may have been duped: may have fallen for the obvious lies, which doesn’t say much about their judgment. More, I suspect, were complicit: they realized that the official case for war was a pretext, but had their own reasons for wanting a war, or, alternatively, allowed themselves to be intimidated into going along. For there was a definite climate of fear among politicians and pundits in 2002 and 2003, one in which criticizing the push for war looked very much like a career killer.

On top of these personal motives, our news media in general have a hard time coping with policy dishonesty. Reporters are reluctant to call politicians on their lies, even when these involve mundane issues like budget numbers, for fear of seeming partisan. In fact, the bigger the lie, the clearer it is that major political figures are engaged in outright fraud, the more hesitant the reporting. And it doesn’t get much bigger — indeed, more or less criminal — than lying America into war.

But truth matters, and not just because those who refuse to learn from history are doomed in some general sense to repeat it. The campaign of lies that took us into Iraq was recent enough that it’s still important to hold the guilty individuals accountable. Never mind Jeb Bush’s verbal stumbles. Think, instead, about his foreign-policy team, led by people who were directly involved in concocting a false case for war.

So let’s get the Iraq story right. Yes, from a national point of view the invasion was a mistake. But (with apologies to Talleyrand) it was worse than a mistake, it was a crime.

The difference in worldviews between Mitt Romney and Barack Obama

Changes in tax rates under Romney and Obama

As Paul Krugman sees it.

Now, this is only for the specifics Romney has announced; he claims that he will make up for the large revenue losses under his plan (Obama gains revenue) by closing loopholes. But he refuses to say which, and the clear reality is that he’s talking through his hat. Meanwhile, Romney also proposes severe cuts in Medicaid, and his party wants big cuts in other safety-net programs.

So like it or not, we have an election in which one candidate is proposing a redistribution from the top — which is currently paying lower taxes than it has in 80 years — downward, mainly to lower-income workers, while the other is proposing a large redistribution from the poor and the middle class to the top.

So the next time someone tut-tuts about “class warfare”, remember that the class war is already happening, in real policy — with the top .01 percent on offense.

Column: Rent Control is Bad Policy

My column in today’s The StarPhoenix

On a cold day in February, the NDP breached the topic of rent controls in Saskatchewan, with party Leader Dwain Lingenfelter calling for "next generation" rent controls that cap increases or only come into effect when vacancy rates are extremely low.

Justice Minister Don Morgan gave what has become a pretty standard response from everyone who opposes rent controls: "We think it’s a disincentive to having developers put more property on the market."

Despite a lot of opposition to the idea, the NDP has kept talking about the idea, partly because many across Saskatchewan are overwhelmed by the rent they pay.

The Canada Mortgage and Housing Corporation points out that rent in Saskatoon increased 10 per cent annually from 2006 to 2010. This brought up the average rent for a two-bedroom apartment to $950 a month in 2011 and will slightly increase to $975 in 2012. While a lot of apartments have come on the market, CMHC forecasts a net migration of more than 5,000 people to Saskatoon in each of the next two years, which means that rents will remain high, driven by strong demand for both new houses and apartments.

Higher rents are not always a bad thing. For a long time, Saskatoon had rent that was well below the national average. Increasing rental rates gave property owners a chance to make some needed improvements to their properties.

The quality of apartments has increased dramatically since the boom started and we started to see rental increases. Those improvements did come with a price for those living in the rental units. Apartments that rented for $650 five years ago are now more than $1,000. Even CMHC points out that Saskatoon has become a much more expensive place to live, which hurts our competitiveness as a city.

Rent control is the quickest way to solve the problem, and versions of it have been used in growing cities across North America.

To promote investment in new apartments, rent control often exempts new construction. New York City exempts apartments built after 1974 from rent control. The idea is that landlords can recoup their investment long before the rent is capped. For buildings constructed after 1974, landlords can opt into the program in exchange for tax breaks.

The problem with this is that, at the point where a building needs reinvestment as well as new revenue to pay for it, it loses that option and older buildings often deteriorate quickly.

Another approach is rent stabilization. Landlords are free to set prices of empty suites at whatever rent they can get. Once an apartment is rented, future increases are capped at a set rate. The idea is that it gives some security for both tenants and landlords.

This protects renters from unrealistic and unexpected rental increases, and it benefits landlords by providing tenants an incentive to stay and be responsible. Rate equalization also serves as an incentive for improvements in many cities. Landlords in many cities can apply for rental increases above the equalized amount if they make improvements to buildings. This can cut both ways, as tenants can apply for rent reductions if their apartments are not kept up to code.

Sadly, it never works that way in the real world.

As has been documented in San Francisco and other booming American cities, landlords were holding formal interviews or demanding credit reports (something we now see in Saskatoon) before choosing tenants because there are never enough rent-controlled units to meet the demand. Those who are most likely to benefit from a rent-controlled apartment are often the last to get it. Economist Paul Krugman put it this way: "In uncontrolled housing markets, landlords don’t want grovelling. They would rather have money."

Even if you are lucky enough to get a rent-controlled apartment, you also have some landlords looking for ingenious ways to evict clients so the apartment can be rented out at a higher price.

In Saskatchewan, rent control may solve a shortterm political problem, but it doesn’t solve longer term housing and economic problems. With rental increases predicted to rise incrementally in 2012, it may not even be needed.

What is needed is a continuation of the programs that address the supply issue. Existing programs such as the capital grants for affordable rental units, tax abatements for multi-unit housing, and forgivable loans for the creation of secondary suites have paid off. The rental supplement helps meet the gap between high rents and lower income families.

Rent control may be good politics, and in the middle of an election campaign that is important. However, it remains poor economic policy. There are better alternatives for both renters and our cities.

jordon@jordoncooper.com

© Copyright (c) The StarPhoenix

The real cause of Spain and Italy’s debt problem

Paul Krugman in the New York Times.

So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions.

Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real — and interest rates on Spanish and Italian debt are more than twice the rate on British debt.

Which brings us back to the impeccable E.C.B.

What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.

The deficit we imagine vs. the deficit we have

The New York Times is reporting on the deficit and debt ceiling fight that is happening right now.

Eventually, the country will have to confront the deficit we have, rather than the deficit we imagine. The one we imagine is a deficit caused by waste, fraud, abuse, foreign aid, oil industry subsidies and vague out-of-control spending. The one we have is caused by the world’s highest health costs (by far), the world’s largest military (by far), a Social Security program built when most people died by 70 — and to pay for it all, the lowest tax rates in decades.

To put it in budgetary terms, the deficit we imagine comes largely from discretionary spending. The one we have comes partly from discretionary spending but mostly from everything else: tax rates, Medicare, Medicaid and Social Security.

It made me think of an article that Dave Hutton wrote this week while covering City Council’s executive committee meeting.  It starts with city manager Murray Totland appearing to give political direction to city council.

In a report to the city’s executive committee Monday, city manager Murray Totland said there is "growing sentiment" among residents that the city needs to refocus the programs and services it offers and "get back to the basics."

"We can sit back and reflect a bit about what programs and services matter most to us," Totland said. "It’s just to focus and maybe rethink our priorities. What matters most?"

It goes on with this.

Coun. Maurice Neault called for "zero-based budgeting" aimed at holding the line on taxes. "Once we get going, we’ll be amazed and surprised by the result," Neault said.

"Each of the things that we might want to give up has a role in the city," Coun. Charlie Clark said.

Saying it will be a "gut-wrenching" process, Coun. Myles Heidt said "something’s gotta go" to get to a two or three per cent hike. Council increased property taxes 3.99 per cent last year, but weren’t able to make fundamental changes some councillors called for during two nights of budget deliberations.

Taxes have risen an average of 3.7 per cent each year since 2005.

"Let’s not sugar-coat this," Heidt said. "It could be programs, it could be staff, it could be anything. We’ve got to make some decisions now."

Where to start.  First of all most of the spending that has generated controversy has been capital spending, sans curbside recycling which comes in at a little over $4 million per year.  It’s not an insignificant amount but this is a city of over $200,000 and things cost sometimes.  So as a response to increased capital spending, some on city council have decided that the best way to go is to cut operational spending… on the political advice of the city manager. 

Here is something that gets lost in these debates.  Sometimes its takes courage to spend money and you know what, sometimes it takes guts to say that things are important to us as a city, even if it increases the tax rate.  Somewhere around the time that George H. Bush said “no new taxes” and today spending on government programs has the ultimate evil and instead of being a just society, we have become a society that has adopted a narrative that says, I have it so I deserve it.   We saw it during the 2000 presidential campaign where Al Gore and George W. Bush fell over themselves to tell Americans that the surplus belonged to them and they knew best what to spend it on.  The American public spent the money on cheap consumer goods imported from China while at the same time the United States had to borrow heavily to find two wars and is faced with a massive infrastructure deficit on their own.

I was reminded of this Paul Krugman column from earlier this year.  It was written in the aftermath of the Gabrielle Gifford assassination attempt so the language is a little raw but he has some relevance to the debate over how the city spends it’s money.

One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.

The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft.That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty.

There’s no middle ground between these views. One side saw health reform, with its subsidized extension of coverage to the uninsured, as fulfilling a moral imperative: wealthy nations, it believed, have an obligation to provide all their citizens with essential care. The other side saw the same reform as a moral outrage, an assault on the right of Americans to spend their money as they choose.

This deep divide in American political morality — for that’s what it amounts to — is a relatively recent development. Commentators who pine for the days of civility and bipartisanship are, whether they realize it or not, pining for the days when the Republican Party accepted the legitimacy of the welfare state, and was even willing to contemplate expanding it. As many analysts have noted,the Obama health reform — whose passage was met with vandalism and death threats against members of Congress — was modeled on Republican plans from the 1990s.

Being Canadian, of course there is middle ground, we are all about the middle ground but there is a view that says that the smaller our civic responsibilities are, the better off we are as a city.  As former councillor Elaine Hnatyshyn writes,

In today’s SP (June 21/11) it is reported that council will take a ‘gut-wrenching’ review of services. Back to basics seems to be the coming theme for budget preparation for 2012, a civic election year. Would I rather have services necessary to my daily living over debt and debt repayment? Do I want my roads repaired? Street cleaning? Snow Removal? Or do I want pay to maintain River Landing, the Shaw Olympic Pool, Art Gallery of Saskatchewan . . . . .

In some ways Hnatyshyn’s comments make a lot of sense.  There is a pothole on Avenue E (between 34th and 33rd) that is so large that it will have it’s own MP in the next redrawing of electoral boundaries.  It has done some damage to quite a few vehicles when the shadows camouflage it’s true depth but I disagree when she talks about River Landing or a new pool and Art Gallery. 

Wendy and I are doing okay financially.  I work for the Salvation Army and they have treated me well.  Working for a non-profit organization is no way to get rich.  Wendy works for Safeway and is lucky to have been part of the old guard there where the salary is still livable.  We also own our home and pay around $600/month for mortgage and taxes (about $150 more a month in taxes than when we bought it).  Despite doing okay, some of the derided extra services the city provides, make a big difference in our standard of living.  Is Mayfair Pool an essential service the city should be providing?  No it’s not.  It’s a money pit but tell that to my sons who name it as one of the best things about their summer.  Like most people in Saskatoon, we don’t have a pool and so these public spaces serve as an important roll in giving those who don’t have the resources, access to important services.  Have you seen the mayhem at the waterpark at River Landing many days?  That’s not essential either but it provides a free public gathering spot for thousands of people everyday.  Starting tonight the city will be full of the sounds of the SaskTel Jazz Festival.  In addition to crown corporation sponsorship dollars going to subsidize the event, funding agencies include the City of Saskatoon and Canadian Heritage, money that goes to help subsidize the event, keeps ticket prices down and helps keep the free stages going.  You know, so more people can come down and enjoy it despite not being able to afford it.  This isn’t a new concept.  Years ago the citizens of Saskatoon decided to keep commercial and residential development away from the part of South Saskatchewan River valley and eventually decided to create the Meewasin Valley Authority, mostly because we realized that a riverbank that was open to all of us, was important.  That initiative was started by Saskatoon’s City Council in 1974 and has become one of Saskatoon’s crown jewels.

The Art Gallery of Saskatchewan Remai Art Gallery of Saskatchewan is not an essential service but what is the value of an art gallery to the citizens of Saskatoon.  As a kid growing up in Calgary, we very little money after my dad left but I remember being taken to the Glenbow Museum (which uses over $3 million in govt funding each year).  I still have vivid memories of models, displays, and information as we would wander through the galleries of history, politics, and art.  I had no idea at the time but that place started me off on a lifetime of learning and curiosity.   My son has a passion for design and architecture which started from seeing an exhibit of Clifford Weins at the Mendel Art Gallery a couple of years ago.

So what does a Saskatoon look like without the Meewasin Valley Trail, Harry Bailey Aquatic Centre, Mayfair Pool, or the architecture of University and Broadway bridges?  Does 20th Street look as hopeful today without the city redesigning and rebuilding sidewalks?  How much higher are rent rates without a city that invests heavily into affordable housing.  As Richard Florida writes in the Rise of the Creative Class, some of the cities in the United States that are struggling the most have the lowest tax rates.  No one wants to live there, no one wants to work there.  One of thing that many cities who are growing and vibrant have in common is that they do have higher taxes but it’s citizens believe that they are getting good value from living there and enjoy the extra services and amenities.   What’s crazy about this budget and spending debate is that Saskatoon has low taxes and is providing some extra value.  By deciding that we have to make “gut-wrenching” cuts and limit operational spending to 2% (or inflation), some councillors are saying that the city’s role in shaping the city is done.  I don’t agree.  There is a role for government to shape our city and provide a city that all of it’s citizens can enjoy.  Sometimes it takes money to spend money to make a city better and more liveable.  Yesterday I linked to a video about Helsinki, Finland and as a video said, they had the courage to take risks and make changes.  Hopefully city council will be able to find it.

There was no stimulus

i was just looking at Paul Krugman’s blog and points out that the stimulus never really happened.

What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending. Here’s total (all levels) government spending over the past 10 years:

Did the stimulus even happen?

Looking at this graph, if you didn’t know there had been a “massive” stimulus, would you even have suspected that there had been any stimulus at all?

And yet the failure of the stimulus that never happened has become conventional wisdom — which is what I feared would happen, two years ago, when I was tearing my hair out over the inadequacy of the original plan.

Yes, I know, it’s argued that Obama couldn’t have gotten anything more. I don’t really want to revisit all of that; my point here is simply that everyone is drawing the wrong lesson. Fiscal policy didn’t fail; it wasn’t tried.

Is China headed towards an economic crisis

Paul Krugman thinks so

With efforts to cool the economy falling short, China has been trying to limit inflation with price controls — a policy that rarely works. In particular, it’s a policy that failed dismally the last time it was tried here, during the Nixon administration. (And, yes, this means that right now China is going to Nixon.)

So what’s left? Well, China has turned to the blame game, accusing the Federal Reserve (wrongly) of creating the problem by printing too much money. But while blaming the Fed may make Chinese leaders feel better, it won’t change U.S. monetary policy, nor will it do anything to tame China’s inflation monster.

Could all of this really turn into a full-fledged crisis? If I didn’t know my economic history, I’d find the idea implausible. After all, the solution to China’s monetary muddle is both simple and obvious: just let the currency rise, already.

But I do know my economic history, which means that I know how often governments refuse, sometimes for many years, to do the obviously right thing — and especially when currency values are concerned. Usually they try to keep their currencies artificially strong rather than artificially weak; but it can be a big mess either way.

The Climate of Hate

Paul Krugmann writes,

It’s important to be clear here about the nature of our sickness. It’s not a general lack of “civility,” the favorite term of pundits who want to wish away fundamental policy disagreements. Politeness may be a virtue, but there’s a big difference between bad manners and calls, explicit or implicit, for violence; insults aren’t the same as incitement.

The point is that there’s room in a democracy for people who ridicule and denounce those who disagree with them; there isn’t any place for eliminationist rhetoric, for suggestions that those on the other side of a debate must be removed from that debate by whatever means necessary.

And it’s the saturation of our political discourse — and especially our airwaves — with eliminationist rhetoric that lies behind the rising tide of violence.

Where’s that toxic rhetoric coming from? Let’s not make a false pretense of balance: it’s coming, overwhelmingly, from the right. It’s hard to imagine a Democratic member of Congress urging constituents to be “armed and dangerous” without being ostracized; but Representative Michele Bachmann, who did just that, is a rising star in the G.O.P.

And there’s a huge contrast in the media. Listen to Rachel Maddow or Keith Olbermann, and you’ll hear a lot of caustic remarks and mockery aimed at Republicans. But you won’t hear jokes about shooting government officials or beheading a journalist at The Washington Post. Listen to Glenn Beck or Bill O’Reilly, and you will.

Of course, the likes of Mr. Beck and Mr. O’Reilly are responding to popular demand. Citizens of other democracies may marvel at the American psyche, at the way efforts by mildly liberal presidents to expand health coverage are met with cries of tyranny and talk of armed resistance. Still, that’s what happens whenever a Democrat occupies the White House, and there’s a market for anyone willing to stoke that anger.

But even if hate is what many want to hear, that doesn’t excuse those who pander to that desire. They should be shunned by all decent people.

He expands on the underlying fuel for the hatred in Friday’s column

One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.

The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft. That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty.

There’s no middle ground between these views. One side saw health reform, with its subsidized extension of coverage to the uninsured, as fulfilling a moral imperative: wealthy nations, it believed, have an obligation to provide all their citizens with essential care. The other side saw the same reform as a moral outrage, an assault on the right of Americans to spend their money as they choose.

This deep divide in American political morality — for that’s what it amounts to — is a relatively recent development. Commentators who pine for the days of civility and bipartisanship are, whether they realize it or not, pining for the days when the Republican Party accepted the legitimacy of the welfare state, and was even willing to contemplate expanding it. As many analysts have noted, the Obama health reform — whose passage was met with vandalism and death threats against members of Congress — was modeled on Republican plans from the 1990s.

But that was then. Today’s G.O.P. sees much of what the modern federal government does as illegitimate; today’s Democratic Party does not. When people talk about partisan differences, they often seem to be implying that these differences are petty, matters that could be resolved with a bit of good will. But what we’re talking about here is a fundamental disagreement about the proper role of government.

England of 2011 will like like England of 1931

Stinging critique of David Cameron’s deficit fighting by Paul Krugman

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.

Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.

Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

Who’s Your Daddy?

Apparently China is.  According to Paul Krugman

Last month a Chinese trawler operating in Japanese-controlled waters collided with two vessels of Japan’s Coast Guard. Japan detained the trawler’s captain; China responded by cutting off Japan’s access to crucial raw materials.

And there was nowhere else to turn: China accounts for 97 percent of the world’s supply of rare earths, minerals that play an essential role in many high-technology products, including military equipment. Sure enough, Japan soon let the captain go.

I don’t know about you, but I find this story deeply disturbing, both for what it says about China and what it says about us. On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.

Some background: The rare earths are elements whose unique properties play a crucial role in applications ranging from hybrid motors to fiber optics. Until the mid-1980s the United States dominated production, but then China moved in.

“There is oil in the Middle East; there is rare earth in China,” declared Deng Xiaoping, the architect of China’s economic transformation, in 1992. Indeed, China has about a third of the world’s rare earth deposits. This relative abundance, combined with low extraction and processing costs — reflecting both low wages and weak environmental standards — allowed China’s producers to undercut the U.S. industry.

You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policy makers simply stood by as the U.S. rare earth industry shut down. In at least one case, in 2003 — a time when, if you believed the Bush administration, considerations of national security governed every aspect of U.S. policy — the Chinese literally packed up all the equipment in a U.S. production facility and shipped it to China.

Paul Krugman

The New Yorker has a great profile on New York Times columnist and Nobel Prize winner, Paul Krugman

Paul Krugman Their apartment in New York is in the same neighborhood as both Jeffrey Sachs’s and Joseph Stiglitz’s, but since they bought it, a few years ago, they haven’t seen either of them. Krugman doesn’t get out much, socially. But he travels constantly, speaking at conferences, speaking for pay, promoting his books. “I’m not a very easygoing person one on one, but put me in front of five hundred people and I get very relaxed and conversational,” he says. Years ago, when he was just an economist, he did a lot of speaking at corporate events. “I wasn’t enjoying those so much,” he says. “One of them was held at a golf course, and I gave the luncheon talk and I was thinking to myself, I could just as well have been a magician. And then, at dinner, they did have a magician!” These days, the Times forbids him to do gigs like that, to avoid conflicts of interest, but his book publisher sends him all over the place. “I don’t sell as many books as Tom Friedman does,” Krugman says. “That’s O.K. Tom gives you this, you know, ‘I was talking to somebody in Bangalore and this is what I saw.’ That’s a skill I don’t have.” Perhaps this is fortunate, because he finds book tours exhausting.

“Twenty-five cities in forty days,” he says. “The mechanics of washing up in hotel sinks because you’re not in any hotel long enough to use their laundry.”

It’s not so much the washing as the drying that presents a problem. Years of experiments have failed to yield a satisfactory solution. Krugman has discovered that it is slow and quite risky to use a hair dryer with any item that involves elastic. Long ago, in Tel Aviv, his roommates found him attempting to dry his underwear in a frying pan.

“The trick with underwear is to wring it out and then press down—”

“I learned this from yoga workshops,” Wells says. “You get out as much excess water as you can, then you lay a dry towel flat on the floor, you lay the article of clothing on the towel, and roll it up like this—”

“And then it’s only slightly damp in the morning when you have to put it on.”

“No, it’s usually dry. We also do that on bike trips.”

“Because you can’t take forty pairs of underwear.”

“Not in carry-on.”

Krugman is not a keen traveller. After the fall of the Berlin Wall, many of his contemporaries set off for Eastern Europe—every economist wanted his own personal country to transition. Jeffrey Sachs, in particular, was all over the place, but Krugman was never tempted. “I know what Jeff does and I couldn’t do it,” he says. “Taking transport planes, living on yak meat for days—no. But I do write faster than anybody. You’ve got to figure out what you should be doing.”

How did economists miss the 2008 recession?

Paul Krugman asks what went wrong.

In recent, rueful economics discussions, an all-purpose punch line has become “nobody could have predicted. . . .” It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains.

Take, for example, the precipitous rise and fall of housing prices. Some economists, notably Robert Shiller, did identify the bubble and warn of painful consequences if it were to burst. Yet key policy makers failed to see the obvious. In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”

How did they miss the bubble? To be fair, interest rates were unusually low, possibly explaining part of the price rise. It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities.

But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that “the word ‘bubble’ drives me nuts,” and went on to explain why we can trust the housing market: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.”

Indeed, home buyers generally do carefully compare prices — that is, they compare the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It’s ketchup economics, again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right.

In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place.

More Stimulus?

Paul Krugman feels we need a bigger stimulus package.

Since the recession began, the U.S. economy has lost 6 ½ million jobs — and as that grim employment report confirmed, it’s continuing to lose jobs at a rapid pace. Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population, we’re about 8 ½ million jobs in the hole.

And the deeper the hole gets, the harder it will be to dig ourselves out. The job figures weren’t the only bad news in Thursday’s report, which also showed wages stalling and possibly on the verge of outright decline. That’s a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?

Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3 ½ million jobs by late next year. That’s much better than nothing, but it’s not remotely enough. And there doesn’t seem to be much else going on. Do you remember the administration’s plan to sharply reduce the rate of foreclosures, or its plan to get the banks lending again by taking toxic assets off their balance sheets? Neither do I.

I don’t know enough about macroeconomics to agree or disagree with him but I can’t help but wonder how much longer the United States can borrow and spend this amount of money without driving up interest rates.  I am assuming this will be a necessary evil but it does mean it will be a long and painful recovery. 

Related: Canadian Finance Minister Jim Flaherty says that Canada’s unemployment will continue rising until 2010.

The Long Weekend

I hope everyone is having a great Victoria Day long weekend.  My original plans involved flying to Hamilton to take in Cultivate Gathering.  At the same time we are short staffed at work and the reality was there was a really good chance I was going to have to work this weekend and we were out of people to cover.  With great reluctance I cancelled my flight on the probability that I would have to work.

B.C. Legislative Building The good news is after several calls to the airline and Airmiles, we changed the ticket to take Wendy, Mark, and I to Victoria for our anniversary in October.  Mark hasn’t seen the ocean and Victoria is such a great city with some good friends in close proximity.

Since I was planning to be out of town, Wendy decided to take off to the cabin for the weekend with some friends and the kids.  When the tickets were cancelled, we decided I would chill out at home with the dog and catch up on some sleep unless I have to work.  It means that Maggi and I get to hold down the fort by ourselves and I get to do some reading.  I finally picked up Michael Lewis’s book, Liar’s Poker and Paul Krugman’s book, The Return of Depression Economics and the Crisis of 2008 and so by Monday I will hopefully have learned something that I didn’t know today.  I am not sure what Maggi will be reading.

I am also planning to do some biking this weekend.  I am already a couple hundred kilometers behind Dave King.