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Saturday, October 28, 2006

How Economists Think

From Cafe Hayek:

Bruce, if all of us are better off by trading with China, where are the victims? Are you saying that at some time in the future, China is going to say "Okay, we now know how to make your products without you. Now go away and we will continue to sell into the US."? If they're going to steal IP, they don't really need anybody's help. Reverse-engineering is a fairly well-developed art. And if it's legal for China to sell something into the US, then it's legal for Iowa to sell it into New York. Are you going to suggest that New York needs to put up protectionist barriers against Iowa?

Posted by: Russell Nelson | Oct 28, 2006 1:59:24 AM

My response:

Russell,

I don't believe I ever made the case that we are all better off dealing with China... others have stated that as their belief.

My position is clear: China represents an economic threat to the U.S. because it is a wholly unethical trader.

If I steal something that you make and then sell it back to you for less than you can make it, does that make it a bargain for you? If you believe so, then we should do a lot of business. I can make you very pleased with those new economics.

The fact that China provides cheap labor in the short run does not offset the economic harm done to businesses that have their products and processes usurped by China. It does not make up for the costs of research and development that are lost as a result of counterfeiters not only destroying the market opportunities in China of those whose products or processes were taken, but also undermining those companies in the U.S. by becoming "competitors" as they sell their knock-offs in the U.S. You might actually read some of the examples I cited earlier rather than giving totally hypothetical examples of how we benefit by being undermined.

What you've basically said is that since the Chinese are going to steal from us, we might as well buy from them to make up for it. Wow, that is really obtuse! Just because a corrupt government in China looks the other way doesn't mean that we should. Or is all fair in economics and war?

I lose your analogy to Iowa and New York completely. Are the Iowa farmers ripping off the research and development and processes and products of the New York businessmen?

Posted by: Bruce Hall | Oct 28, 2006 10:46:14 AM

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Tracking Interest Rates

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FEDERAL RESERVE & HOUSING

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February 3, 2006 Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)