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1211. U.S. Slowdown: Self-Correcting or Self-Reinforcing?

Author:
John H. Makin
Publication Date:
11-2006
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The U.S. economy has slowed to a level below its trend growth rate during the second half of 2006. Trend growth, the rate that can be sustained over time without rising inflation, is probably about 3 percent, having been reduced by a quarter of a percentage point by weaker productivity data. As has often been the case over the past five years, the slowdown itself has set into motion market adjustments that may mitigate or even reverse it. Since August, interest rates on benchmark tenyear treasuries have dropped by about 60 basis points. That reduction, coupled with a stock market that is rising in part because of lower interest rates, has caused an easing of financial conditions equal to nearly 100 basis points since late June on the Goldman Sachs Financial Conditions Index. Meanwhile, since August, the price of oil has dropped by about $18 per barrel—which, if sustained, would be enough to add about 0.7 percentage points to U.S. growth over the next year.
Topic:
Development, Economics, and Markets
Political Geography:
United States and America

1212. Fed Uncertainty Means Market Uncertainty

Author:
John H. Makin
Publication Date:
05-2006
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The new Federal Reserve chairman, Ben Bernanke, is making what cynics would call a serious mistake: he is being honest with the markets. The Fed is uncertain about the future path of U.S. growth and inflation. The most basic tenet of the theory of economic policy is that in circumstances of elevated uncertainty, policymakers should do less. Therefore, in his April 27 testimony to the Joint Economic Committee of Congress, Bernanke suggested that the Fed might start doing less: Even if in the Committees judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook [emphasis added]. The new Federal Reserve chairman, Ben Bernanke, is making what cynics would call a serious mistake: he is being honest with the markets. The Fed is uncertain about the future path of U.S. growth and inflation. The most basic tenet of the theory of economic policy is that in circumstances of elevated uncertainty, policymakers should do less. Therefore, in his April 27 testimony to the Joint Economic Committee of Congress, Bernanke suggested that the Fed might start doing less: Even if in the Committees judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook [emphasis added]. After its May 10 meeting, the Feds Open Market Committee reinforced the message of more uncertainty about the direction of the economy, saying: The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information [emphasis added]. Chairman Bernanke and virtually all of his colleagues on the Open Market Committee have made it clear, most forcefully in their May 10 statement, that they view the Federal Reserves most important mandated objective as one of maintaining low and stable inflation. A glance at any long-run chart of U.S. growth and inflation data clearly demonstrates the basis for this view. Since the early 1980s, when inflation was reduced and held to low and stable levels, U.S. economic performance has improved markedly. Growth has been higher and steadier; productivity growth picked up especially after 1995 and has remained higher ever since. Virtually all macroeconomic data have stabilized in a way that has reduced the duration and severity of recessions, so that the last recession (in 2001) was barely detectable. The Great Moderation is an often-used term that describes policymakers pride and satisfaction with the beneficial results of bringing down inflation and holding it at low levels.
Topic:
Economics, Government, Markets, and Monetary Policy
Political Geography:
United States

1213. An Appreciation: Milton Friedman, 1912-2006

Author:
Allan H. Meltzer
Publication Date:
11-2006
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
On November 16, eminent economist Milton Friedman passed away. Friedman made unparalleled contributions to free-market economics, demonstrating in Capitalism and Freedom the close relationship of free enterprise to political liberty. His philosophy has been extraordinarily influential regarding social and economic policies in governments around the world.
Topic:
Development, Economics, Markets, and Politics

1214. The Case for Market‐​Based Regulation

Author:
Gerald P. O'Driscoll Jr.
Publication Date:
10-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
In this article, we reconsider the rationale for government regulation of markets. We begin by identifying markets as governed not only by prices but also by evolved institutions, rules, and standards. We then analyze how this complex order regulates human behavior, discuss the case for adding a layer of government regulation to the market’s own regulatory system, and present a number of case studies to clarify the issues. Our focus is not on the familiar public choice criticism of government regulation—namely, that regulation is more about the pursuit of economic rents than protecting the so-called public interest. While that criticism is correct and we make reference to it where appropriate, the thrust of our argument is that market self-regulation is often superior to government regulation, which frequently is a solution in search of a problem.
Topic:
Government, Markets, Regulation, and Economy
Political Geography:
Global Focus

1215. Science, Public Policy, and Global Warming: Rethinking the Market‐​Liberal Position

Author:
Edwin G. Dolan
Publication Date:
10-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
A survey of market-liberal or libertarian publications and websites finds a large and growing literature on the issue of global warming. Almost without exception, this literature conveys a comforting message: Our planet is in good health. The markets that regulate resource use are working well. The only real dangers come from ill-considered policy initiatives that, if implemented, would do more harm than good. It would seem that the message is well received by its audience—it is repeated, embellished, and applauded with little variation. In this article, I take a contrarian position, not so much with respect to the science of climate change as with respect to the arguments used by market liberals in support of their message of comfort and complacency. One problem area concerns the proper use of scientific evidence in reaching conclusions regarding public policy. It seems to me that market liberals are often reckless in the degree of certainty they professes regarding climatological hypotheses that are, in fact, still controversial and in early stages of development. A second problem concerns the use of cost-benefit analysis. Market-liberal writers are prone to make cost-benefit arguments regarding climate policy that they would never accept in other contexts. Third, the literature on global warming is often weakly rooted, if rooted at all, in the core principles of classical liberalism from which modern market liberalism has evolved. Instead, it is, for the most part, indistinguishable from what is said by conservatives. It might even be said that there is no market-liberal position on this issue—only an echo of arguments made by Republican patriots and the carbon lobby. In short, the whole issue of global warming policy, as viewed by market liberals, needs to be revisited. This can best be done by going back to some of the classical liberal sources, particularly Friedrich Hayek and John Locke, from which modern market-liberal thought is derived.
Topic:
Climate Change, Markets, Science and Technology, Public Policy, and Libertarianism
Political Geography:
Global Focus

1216. Sound Monetary Policy, Credibility, and Economic Performance

Author:
Mickey Levy
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
History is a constant reminder that sustainable healthy economic development requires sound and credible monetary policy. This is true of all nations, industrial and developing. Frequently, economic policy conferences focus on issues that elicit tirades about how everything is going wrong and radical reform is required. But recent trends in the conduct of global monetary policies have been highly favorable, helping to generate dramatic improvement in international inflation and economic performance. My focus in this article is on the key foundations for sound and credible monetary policy, the plusses and minuses of when simple principles are followed or violated, and suggestions for maintaining recent favorable trends. The bottom line is that well-understood principles—such as zero inflation and the importance of maintaining inflation-fighting credibility, transparency, central bank independence, reliance on market-based mechanisms to address undesired imbalances—apply to both developing and industrialized nations, and must be pursued independently of fiscal and regulatory policies. If such independence is impossible—primarily because of the lack of independence between the monetary authorities and the treasury—other institutional arrangements are required to ensure monetary soundness and credibility. A generation ago, around 1980, the circumstances and perceptions about central banks and monetary policy were far different than now. Inflation was very high and economic and financial market performance was poor in industrialized and developing nations alike. Central banks lacked credibility and inflationary expectations were high and volatile. Budget deficits were high and rising, and projections of soaring government debt-to-GDP ratios dominated the fiscal debate. The projected unsustainable rises in debt-to-GDP and the associated “unpleasant monetarist arithmetic” that pointed to eventual debt monetization suggested that monetary policy ultimately may be hostage to irresponsible fiscal policy. On top of the undesirable macroeconomic trends of the day, this perception undercut the implied independence and credibility of the monetary authorities. The potential for improvement seemed remote. Other aspects of monetary policy were also distinctly different, and weighed heavily on central bank credibility. Many monetary authorities— including the U.S. Federal Reserve—either did not have sound objectives that included zero inflation, did not articulate them effectively, or were not credible. Central bank opacity of policies and actions was the rule, as it long had been, with market participants and the public purposely left in the dark. Some misunderstood the rational expectations school to imply that policy surprises, theoretically necessary in order to affect real activity, were somehow desirable. In fact, the key implication, as Milton Friedman, Robert Lucas, and others were early to recognize, is that fine-tuning in order to achieve multiple objectives is ultimately counterproductive. It has not been a smooth ride by any means—there have been supply shocks, several “crises,” including financial upheavals in Mexico and other Latin American nations, the Russian default and Asian tumult of 1997, Long-Term Capital Management in 1998, and the stock market bubble of 1999–2000—but the conduct of monetary policy globally has been significantly transformed for the better, and macroeconomic performance has improved accordingly. By and large, most leading central banks now pursue low inflation objectives and have gained significant credibility. Importantly, most know that this hard-won credibility cannot be taken for granted and must be maintained through adherence to sound principles.
Topic:
Markets, Monetary Policy, Economic Policy, and Credibility
Political Geography:
Global Focus

1217. Context Matters - Rethinking the Resource Curse in Sub-Saharan Africa

Author:
Matthias Basedau
Publication Date:
06-2005
Content Type:
Working Paper
Institution:
German Institute of Global and Area Studies
Abstract:
Natural resources in sub-Saharan Africa suffer from a bad reputation. Oil and diamonds, particularly, have been blamed for a number of Africa's illnesses such as poverty, corruption, dictatorship and war. This paper outlines the different areas and transmission channels of how this so-called “resource curse” is said to materialize. By assessing empirical evidence on sub-Saharan Africa it concludes that the resource curse theory fails to sufficiently explain why and how several countries have not or only partly been affected by the “curse”. Theoretically, the paper argues that whether or not natural resources are detrimental to a country's socio-economic and political development depends on a number of contextual variables, divided into country-specific conditions and resource-specific conditions (type, degree/level of abundance and dependence, resource revenue management, involved companies etc.). Methodologically, a future research agenda needs to examine the complex interplay of these contextual variables by adding sophisticated comparative research designs, especially “small and medium N” comparisons, to the tool box which has been widely confined to the juxtaposition of “large N” and country case studies.
Topic:
Government, Markets, and Political Economy
Political Geography:
Africa

1218. Phases of Competition Policy in Europe

Author:
Andreas Resch
Publication Date:
04-2005
Content Type:
Working Paper
Institution:
Institute of European Studies (IES), UC Berkeley
Abstract:
In the process of globalization, international convergence of competition legislation has steadily gained importance. Yet, specific aspects of European history gave capital markets, corporate governance and competition policies a special flavor. Historically grown peculiarities have to be taken into account when it comes to evaluate actual policy decisions.
Topic:
International Relations, Globalization, and Markets
Political Geography:
United States and Europe

1219. The European Union Defence Industry and the Appeal of the Chinese Market

Author:
Eugene Kogan
Publication Date:
01-2005
Content Type:
Working Paper
Institution:
Austrian National Defence Academy
Abstract:
This report deals exclusively with the European Union and the People's Republic of China (PRC, also known as China) and not with a broader range of issues, such as, for instance, the impact of an embargo lift on the Asia-Pacific balance of power or on the Trans-Atlantic relations. The concerns of countries, such as Australia, Japan, South Korea and, undoubtedly, Taiwan are a very important issue. However, this report sets out to deal exclusively with the EU-China issue. Nevertheless, one can say that, for instance, the delivery of the airborne early-warning and control system (AWACS) to China would considerably change the balance of power in the Asia- Pacific region and exacerbate already strained Trans-Atlantic relations. The US will face the serious dilemma of how to deal with the EU over such deliveries to China, since the EU is their partner and not a subordinate as Israel is, for instance.
Topic:
Security and Markets
Political Geography:
Japan, China, Europe, Asia, South Korea, and Australia

1220. Journalism, Transparency and the Public Interest

Author:
Jon Ziomek
Publication Date:
01-2005
Content Type:
Working Paper
Institution:
Aspen Institute
Abstract:
The American media have always been intimately connected with American public life. The newspapers of the colonial era helped generate public support for the idea of separation from England and the creation of a democratic state. The newspapers of the 19th century fed the urbanized public life of a young industrializing nation. The media of the 20th century reflected the national and international political and social movements of their era.
Topic:
Civil Society and Markets
Political Geography:
United States