The Fall of the Berlin Wall: the Morning After

In my old job, I got up each weekday morning and put on the TV to catch the early news of whatever had transpired in foreign markets and politics overnight, so I'd be "tuned in" to the latest events when I arrived at work. So the morning of November 10, 1989, I put on the TV and shook my head at what I saw. The picture was live and it showed people dancing on top of the Berlin Wall. For some days, we'd seen and been amazed by video of trainloads of people going from East to West in other parts of Central Europe. But here was the crowning touch, the Fall of the Wall; it had happened Thursday evening, and by midday Friday, when I saw it in the New York morning, many people were still there partying.

Numerous news sources this week are commemorating the 20th Anniversary of these earth-shaking events. Rather than summarize them here, we would simply point you, in particular, to the current issue of The Economist magazine (November 7-13, 2009). This UK-Europe-centered publication features the event on its cover and has several informative articles. For bibliophiles like ourselves, the collection of book review-lets are fascinating; the first recommendation is not a new book at all, but Solzhenitsyn's In the First Circle, a strong, "dark" reminder of life under Communism – "at its Stalinist peak: all-pervasive, paranoid, oppressive, incompetent, lethal" (page 76). This has just been republished in a new edition, which includes additional text originally "self-censored" by Solzhenitsyn in 1968 in an unavailing effort to get the work published inside the Soviet Union. We also suggest the Economist's website, www.economist.com, and the Wall Street Journal's site, www.wsj.com, both of which reproduce articles they published in the moment in 1989.

One of the Wall Street Journal's current stories tells about a German restaurateur who then owned a McDonald's in Hof, West Germany, in Bavaria, just across from the East German province of Sachsen. People driving out of East Germany on November 10 stopped at his establishment, one of the prime symbols of western capitalism. He ran out of food in just a few hours. Mr. Rader realized at once that he could expand into the nearly virgin East German territory, where all those people were clearly hungry for McDonald's. He is now a partner in a chain of Italian eateries in a number of cities, including London and Washington.

Prosperity Lags in Former East Germany
This is an example of a western entrepreneur invading formerly Communist territory. But what about the people of those Communist regions? The evidence on their prosperity is, well, mixed. How are they doing, free of their Communist shackles? First, in sheer numbers, the trend in population has been uneven. At the end of 1988, there were 16,675,000 East Germans. By the end of 1989, there were 16,434,000, indicating that nearly a quarter of a million left as soon as the gates were opened. The population declined every single year through 2000, reaching 15,120,000 (excluding Berlin). Not surprisingly, the population of West Germany rose, and by even more than the decline in East Germany. Obviously, there were immigrants from other post-Communist regions as well. [All these data are from the German Federal Statistical Office. All references to "East" and "West" refer, of course, to the territories before 1990's formal Reunification.]

A declining population is not a particularly good sign. Neither is the amount of unemployment, which remains elevated in the former East territory. In 1990, according to the German Federal Employment Agency, unemployment in that region was 10.2%. As poorly run, noncompetitive companies closed there, unemployment surged immediately and continued climbing, peaking at 20.6% in 2005. By contrast, the 2005 rate in the West was 11.0%. Since then rates in both sectors have come down, but that in the East, 11.8%, remains notably higher than in the West, 6.6%.

Similarly, wage comparisons in the East continue to lag as well. Reported average wages and other income measures improved sharply compared to West German wages during the first few years after the Wall fell, but have stagnated since about 1996. East German workers earned about one-half of the hourly wage of West Germans in 1990-1992. This ratio rose quickly to 70-74% over the next five years, but the comparison has changed little since then. East Germans' relative welfare increased some, but it is far from converging with that of West Germans, making a major goal of reunification elusive.

Those Who Leave the East Do Better
This picture looks discouraging, but other factors come to bear and hearten our interpretation. A number of scholars[1] help us understand that, as we might think, labor and work were organized very differently in the two Germanys. East German workers were far less productive than those in the West, justifying the initial wage differential. The transition in the economic structures, which is clearly still in process, should be expected to be uneven and lengthy. As noted, non-competitive plants and companies in the East have closed, throwing huge numbers of people out of work. And many good workers left East Germany when the wall came down and they were able to go.

This last sentence is not meant as a throw-away line or excuse. Workers "left" the East German labor force in two ways. They actually moved to West Germany or they took jobs there and have been commuting. In both cases, their earning power has increased more than workers who stayed in the East zone. Indeed, some statisticians refer to these groups as "movers" and "stayers". The movers and commuters have done much better: they earn an average of 85% as much as West German "natives", with many of the movers reaching par, particularly when their age, educational and experiential backgrounds are similar.

Desire for Government Support Greater in East
What we are left with then in explaining differences in workers' prosperity is a cultural environment that still overhangs the Eastern region. The workers who have moved are notably younger than those who have stayed; in 2005, the age difference was almost five years, 37 versus 42, and 31% of the leavers are 30 years old or less, compared to 11-1/2% of the stayers and just under 10% of the West Germans. Many people who are likely among the most adaptable and energetic have left East Germany. Those who remain are older; just because of their age, they are more accustomed to the governance style of the Communist regime. Work by Harvard economists Alesina and Fuchs-Schundeln[2] highlights two manifestations of this mindset. People in the East tend to believe government should have more responsibility for individuals' financial security and they also believe that what happens in life is caused more by social conditions and less by one's own efforts.

Alesina and Fuchs-Schundeln examine survey results from the German Socioeconomic Panel (GSOEP), which is compiled annually by the German Institute for Economic Research. The term "panel" means that many of the same people participate year after year so changes in their life situations can be documented. Every five years, the survey includes questions about policies on "financial security". Who should be responsible for citizens' financial security in the event of unemployment, illness, etc? Should it be solely the government or solely private resources or some combination? Personal information is collected about the respondents: age, where they live, where they have lived before, what their income is and what their major sources of income are, and so on. These data make it straightforward to differentiate between people who are from the former West and East Germanys.

The GSOEP questions cover the desire for government support in response to conditions of unemployment, illness, family welfare in general, old age and "needing care". On average in 1997, 42% of West Germans believed government should be mainly responsible for "financial security" in these situations; this portion edged up to 43.7% in 2002. Only support for unemployment was favored by more than half the West Germans. East Germans, on the other hand, argued for government support 58.7% of the time in 1997; all the items except "family welfare" garnered well over half yes-votes and the family welfare number was just below half, at 49.1%. By 2002, however, this pattern had changed. The overall government-leaning decreased to 55.1%, and the decline showed in all five topics. So an attitudinal change was already evident in 2002. The authors extrapolate the size of the change over the five years and conclude that it would still take well over 20 years for East German readings to converge with those in the West.

Older Easterners Perceive a Rigid Class Structure
People's motivation in the East is hampered by a basic sense of society's structure. Seventy-two percent believed in 1997 that the possibilities one has in life are defined by social standing. The frequency of this response in West Germany is lower, but hardly "low", at 60.4%. [We wish we had a comparable number for the U.S.] In accompanying regression analysis, Alesina and Fuchs-Schundeln check this response by age-group and find that older East Germans have stronger feelings about the role of social conditions in determining one's fortunes than do younger people. In the West, there is no statistically distinguishable effect of age. So these analysts conclude that there is a strong, penetrating effect on one's psyche for having been subjected to 45 years of Communism, and the longer you lived that way, the deeper the feeling goes. Younger people have had an easier time figuring out how to lift themselves up in the world rather than expecting government to maintain their welfare.

[1]Analytical articles from the German Institute of Economic Research. If you are interested, contact Carol for references.

[2]Alberto Alesina and Nicola Fuchs-Schundeln. "Good Bye Lenin (Or Not?): The Effect of Communism on People's Preferences", Cambridge, MA: National Bureau of Economic Research Working Paper 11700, October 2005. http://www.nber.org/papers/w11700. Accessed November 7, 2009.

Financial Regulation, Prudential Behavior

Last week here, we expressed some concern that not much seemed to be happening with financial regulatory reform, and we thought that issue should be getting more attention. As it turned out, several developments on that front took place in subsequent days. These are important to all of us because in the last two years we've faced considerable danger in all our economic and financial dealings. Now that some of the dust has settled, we need to work at rationalizing the structure of markets and institutions to try to minimize the prospects that crashes and chaos could overtake us again. This work is done mainly through our government officials, but there's a role here for everyone, and we'll will come back to that at the conclusion.

This past week saw three initiatives: the House Financial Services Committee voted out a bill to establish a Consumer Financial Protection Agency, the Treasury and the Federal Reserve both announced rules governing the pay of senior officers of banks and financial firms that have received taxpayer assistance, and the Treasury prepared us for the introduction of new more concrete proposals for general financial regulatory reform.

The CFPA Passes the First Legislative Step
The Consumer Financial Protection Agency would have the power to write consumer protection rules for numerous credit, lending and deposit products and to ban those that it deems "unfair, deceptive or abusive". This authority would be centered on the product or service and not on the kind of institution. The bill gives CFPA authority to examine individual institutions, though, to evaluate their product offerings and practices. This examination would be in addition to any other regulatory examination, such as FDIC or state government bank examinations. A number of specifics have yet to be clearly defined, for instance, how to distinguish car dealer financing, which might be exempt, from financing provided by an auto company's financial affiliate, such as GMAC, which would be covered. The goal is to prevent predatory lending, deceptive practices especially regarding mortgages and to provide clearer information on consumer financial products in general. It has been a high priority of the Obama Administration, who believes that abusive tactics harmed consumers and contributed to the heightened risk that led to the collapse.

Treasury & Fed Come Down Hard on Executive Pay
The second development last week was the announcement of executive compensation caps for financial institutions that have received aid from the federal government and the Federal Reserve. The Treasury Department's "Special Master for TARP Executive Compensation" issued "determinations" on the amounts and forms of payment that can be paid to the five most senior executives and the next 20 most highly paid officers at the seven institutions that received "exceptional assistance" from the Treasury. These firms are AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial. The week before, the Special Master, Kenneth Feinberg, had recommended that the out-going chairman of Bank of America Kenneth Lewis receive no compensation at all for 2009; Mr. Lewis agreed to this. Lewis has already announced his resignation from BofA, effective December 31.

The caps limit cash pay for these 175 individuals to $500,000 and any kind of bonus award to restricted shares of stock that cannot be sold for three years. One of the objectives of the action is to shift the executives' viewpoints from short-term, "how can I boost business this quarter or this year", to a longer span that might encompass several cycles of activity or market conditions. Another objective is certainly to limit the liability of taxpayers to these officials whose companies are presently on the government dole.

Almost simultaneously, the Federal Reserve announced a broad initiative to examine compensation policies at two groups of banking institutions, one set of 28 "large, complex" firms and a second broad group of regional, community and other banking organizations. The sense of "examine" here is the technical, legal one applying to the regulatory process. The 28 large, complex firms will have their pay schemes examined all at once, a so-called "horizontal review", so they may be compared with each other at a given point in time. The firms will be told how to modify their pay structures, according to specific principles, and subsequent regular examinations will test for compliance. For the smaller, non-complex institutions, executive compensation will be added to the subject-matter for their regulatory examinations.

Here too, as with the Treasury's edict, a major goal is to lengthen the horizon for executive pay calculation, to shift the focus of the incentive structure over several fiscal periods instead of just "this one", however short that might be. The assumption in both the Fed and the Treasury is that this will help reduce the risk exposure of the firms, since there will be less perceived need to reach for greater risk or to hurry to cram in one more deal this week before the books close on the quarter.

"Living Wills" for Financial Institutions??
Lastly, later today, October 26, the Treasury will submit to the Congress a new plan intended to fix some of the major deficiencies of current regulation. Michael Barr, a Treasury Assistant Secretary testified before the House Judiciary Committee on October 22 to present some of the proposal. It concentrates on "large, inter-connected firms", that is, those widely thought to be "too big to fail". The plan includes new, strengthened capital requirements to undergird their business during downturns and prescriptions for holdings of truly liquid, marketable assets to cover short-term market gyrations. You might recall that during the most chaotic periods last year regular financial business dealings were disrupted when one firm's failure or weakness led to even magnified reactions in other companies and markets. One significant consequence was that government somewhat arbitrarily rescued some firms, but not others, and that only added to the chaos. Now that markets and conditions have settled out some, the Treasury, other officials and other observers – such as my professional economist colleagues who were gathered in St. Louis – want to try to set principles and enforceable rules that will govern such financial rescues. No one, Assistant Secretary Barr should ever conduct business under the presumption that they are "too big to fail". The new program even includes a mandate for specified firms to set up advance directives akin to a "living will" (his term) that set forth a way to shift management responsibilities and the firm's underlying financial structure in the event of some major failure.

Prudential Behavior for Everyone
If you are still with me, Good Reader, by this time you've read about potential fixes for messes arising from badly conceived consumer products and excessive executive pay, and you've read about predetermined ways to relieve management of their duties if their actions in the face of adverse market and business contingencies put their big firm, its associates and its customers, deep in hot water. This is indeed all very messy. We can make arguments both for and against each one of these proposals. Bankers and the Chamber of Commerce argue in one direction; consumer rights organizations in another. Democrats one way, Republicans another. However, we also want to make one more point that takes a step back and looks at these issues from outside. The need for all of them comes because people over-reached or were dishonest or behaved in bad faith or were disrespectful. Much of the trouble came not because consumers were cheated or had fees raised on their accounts, but because they borrowed too much to begin with. Further, other participants in these affairs didn't pay enough attention when there was a lot at stake, they didn't ask questions or they committed lots of their own assets to questionable enterprises or they presumed that their fancy mathematical formula would always work to produce a completely predictable outcome. Some of these people held or hold positions of public trust or quasi-public trust. We all – managers, government officials, consumers – need to be responsible.

Mr. Barr's testimony uses the word "prudential" several times; he wants the new regulations to highlight and encourage prudential behavior. Exactly. Back in February, we talked here about some scandals and we illustrated with the story from the Book of Acts about Ananias. There might be government officials, as well as private citizens, named Ananias. The best remedy for all of this is for all of us to be prudential and take care with our own affairs and treat others with respect. This sounds a bit like the Golden Rule, doesn't it? These are the kinds of issues, it occurs to me, that churches can work on, right with the people in their own pews. Long-term financial fixes can start right there, with a bunch of Christians thinking of themselves and their friends and colleagues in terms of Jesus' lessons.

The Budget Deficit: More Questions than Answers

Last time we wrote here, two weeks ago, we spoke to the current state of the economy and whether it might truly be growing again or about to sink into another recessionary phase. We opted for the former, though with the usual economist's disclaimers.

Since then, we traveled to St. Louis, where we attended the annual meeting of the National Association for Business Economics "NABE", the main professional organization in our business. Can you imagine 300 economists in one room? That means, of course, that there were at least 400 opinions on the way things are going and why. Nearly all of the speakers, who included Lawrence Summers of the White House National Economic Council, two senior Federal Reserve officials and a number of private sector business economists, did seem to agree, though, that the recession has ended. But beyond that, there were plenty of notions about how quickly and strongly an outright recovery might proceed. Skeptics think we may be in for "a lost decade", such as the Japanese economy slogged through in the 1990s. Others noted that economists frequently underestimate the vigor of the rebound in business activity; they expect an early bounce and a sustained uptrend. We want to side with this second group, but there are, of course, numerous questions in this extraordinary period.

Today, we will talk about one of these questions, a big one, the size and role of the Federal Government, especially the hot-button issue of the deficit. The other mega-question from the NABE sessions concerns the structure and regulation of financial markets, and we'll go over that one with you too, hopefully next week. You're not hearing enough about that in the media or from Washington officials, but in the wake of all the mess of the last two years, it's important to get some of it untangled and straightened out if the economy is indeed to move ahead on a sustained upward track.

How Big Are Those Numbers?
This past Friday, the Treasury and the Office of Management and Budget (OMB) reported that the budget deficit for fiscal year 2009 came to $1,417,121,000,000. GDP in the fiscal year came to an estimated $14,116,000,000,000. Thus, the budget deficit represents just over 10% of the economy's output of goods and services for the year. This figure is not just the largest since 1945 (the last year of World War II), but the largest by a considerable margin; in fiscal year (FY) 1983, coming out of a steep recession, it was 6.0%; otherwise over the past 35 years, it has ranged from 2% to 5% of GDP, including surpluses from 1998 to 2001. Projections from OMB and the Congressional Budget Office through 2019 envision another 10% in FY2010 and then a gradual reduction to 3.2% through 2018. However, at that point, the deficit begins to widen anew as demographics push up outlays for retirement-age folks on Social Security, Medicare and similar programs. We'll come back to this point shortly.

How did this latest year's deficit get SO bad? The poor economy pulled down tax receipts and raised spending. Taxes fell 16% from $2.52 trillion to $2.10 trillion, with individual income taxes (what you and I pay) off 20%, corporate income taxes 36% and social security taxes 1%. Spending increased 18% from $2.98 trillion to $3.52 trillion; the biggest percentage gains were in housing finance programs, energy research and so-called "income security", which includes unemployment insurance. The biggest dollar gains included the housing and income security programs, plus social security, Medicaid and Medicare, followed by defense.

How Much Did the Stimulus Programs Add?
The stimulus programs, including the Bush Administration actions, contributed to the gaping deficit, but actually not as much as might be imagined. For instance, as we've already noted here, the American Recovery and Reinvestment Act, passed in February, is putting out funds at a moderate pace, still just above $100 billion. This should pick up quickly as projects get farther along in their bureaucratic processing. The special unemployment insurance for people who exhaust their regular allotment has so far amounted to "just" $6.5 billion. The TARP program for banks, which the Bush Administration pushed through late in its tenure, has seen capital investments of taxpayer funds into banks totaling $205 billion, but also repayments of $71 billion, for a net cost during this fiscal year of $134 billion. In July 2008, Congress also passed a housing finance assistance program, and it has laid out $96 billion. These four items that we can easily identify total $341 billion, just under one-quarter of the entire deficit. Other business cycle-related spending comes in regular unemployment insurance, added Medicaid outlays and probably even extra Social Security as some people might be encouraged to collect if they're eligible rather than hunt for a new job. Even apart from this special spending and the recession-generated weakness in receipts, the deficit would still be sizable; our quick calculations here would still leave us about $700 billion, that is, about half the actual total. And this is still big. The whole deficit in FY2008 was $455 billion, compared with an average from 1991 through 2008 of $160 billion.

The Deficit in the [Very] Short Run Is OK
Is this big deficit helping the economy or hurting it? The answer to this question is "Yes". In the short run, "deficit spending" is providing a support to the economy, but the longer run is a different question. At the NABE meeting, Lawrence Summers was quite clear in his pronouncement that "the stimulus is working". All of the above programs have indeed helped brake the recessionary forces. Others argue – and did so at the meeting – that since the economy and unemployment have been worse than the Obama Administration had forecast, the stimulus has failed. But we became convinced that these federal government initiatives prevented much worse conditions from overtaking us. And the quick actions of the Bush people last year helped stem the panic in financial markets. So these are positive developments – at least right now.

But The Deficit Stays Big and Gets Bigger
There's a problem, though, and you probably already know it. In the paragraph above, we guessed that about $700 billion of the FY2009 deficit is more fundamental than just fighting the recession. Indeed, long-term budget projections from the OMB point to $700 billion deficits out for the next eight or nine years. And then, as we noted, the deficit is likely to widen more, both in absolute size and also relative to GDP. This is tough, and out in St. Louis I heard bigger numbers than this from some economists who advise Democratic policymakers. The current health care plans only make this greater.

"We will go line-by-line through the budget and identify programs that are wasteful and could be dropped," candidate Obama promised. He's hardly the first to make such a pronouncement. This has not happened, of course, but we need to consider seriously just what we want government to be doing and the most equitable way to pay for it. Bear in mind the rubric, "if you tax something, you get less of it" so simply hiking taxes to try to close the gap will, over the long haul, bring less of whatever it the tax applies to. This could be self-defeating, then, as higher tax rates sap strength from the revenue sources. Additionally, current polls show that the elderly are opposed to the health care bills because they would cut Medicare. We may not have much choice, and as has been said for a number of years now, social security, Medicare and Medicaid all need to be rationalized in the face of the onrush of Baby Boomer retirees. How much defense can we afford? Well, we have to keep the country safe – that's the primary duty of the federal government – and this is a time when what that means is really complicated. There are no good answers at present, but we really need to ponder these questions in a comprehensive way and not be afraid to act on them.

A chapter of the book Mother Crafton and I are starting together will go over some of these issues. I have views I will lay out there. If you have views on what functions you think government should really concentrate on, please do write to us. The long-term health of the economy, our currency and our children hang in the balance.

A "W"-Shaped Economic Cycle? We Like "V" Better

Weekend press reports highlighted the continuing decline in payroll jobs in September – at 263,000, more than economists had forecast – and the still higher unemployment rate, now 9.8%. Was this a sign of renewed economic contraction? Many had thought that things were getting better. Are we to be disappointed?

After this report from the Labor Department last Friday, some observers are thinking that we may be in for a "W"-shaped business cycle. That is, perhaps economic activity had started to head higher over the spring and summer, completing a "V", but now has started back down again, so that we face a "double-dip", producing a W, with the chance for even worse conditions still to come. Such fears have already prompted talk in Washington of further government "stimulus" action to support the economy.

Right at the moment, we wouldn't actually be so terribly concerned. We have three caveats to offer in this discussion which point to a more optimistic scenario. First, the employment numbers face a quirk of the calendar that may be holding them back. The Labor Department collects this information at the same time every month, during the calendar week that contains the 12th of the month. And as you remember, Labor Day was very late this year, coming on the 7th, and this was during the employment survey week. This combination hardly ever happens – the last time was in 1998. Activities that begin in the autumn, such as schools, had started in many locations, but with the late Labor Day, not everywhere. So before we panic over a renewed economic downturn, we probably should wait to see what happens with the October figures. In 1992, for instance, the economy was struggling to come up out of recession and the September 7 Labor Day coincided with a weakening of employment and an uptick in the unemployment rate. Then, in October, these reversed: employment strengthened and unemployment eased. Asking for a month's patience may not sit well at present; people want to see continuous progress toward recovery. We may in fact have that, but it just may not be showing up right now in this long-established data collection system.

Second, many people claim that the $787 billion stimulus program enacted back in the spring hasn't worked. Despite this huge amount of money, unemployment has continued to rise far beyond what the Obama Administration predicted. But in actuality, only a little of the money has been spent yet; the federal government's Recovery.gov website tells that only a little over $100 billion of the money has been paid out, just one-eighth. This is a considerable sum, but it still shows that only a fraction of the stimulus work projects have actually been started.

For the portion of the stimulus that takes the form of benefits to taxpayers, some analysts fret that these consumers are saving the money rather than boosting their spending; this was especially the case with the 2008 tax rebates and has remained with this year's version. What a complaint!! One reason we got into this mess is that people borrowed and spent too much. Paying down debt and increasing saving is a very beneficial use of any extra cash we get a hold of. These remedial actions by consumers obviously don't lift growth when they happen, but they'll support it more assuredly going forward.

Finally, the economy was restrained over the summer by a renewed increase in energy prices, especially for gasoline. In and around New York, we were paying nearly $3.00 a gallon; this isn't 2008's $4-and-change, but still takes a chunk of our income to pay for it, limiting what we can spend on other things. The encouraging news in recent weeks is a reversal of some of that price hike and the lowest gasoline prices since May, according to the US Department of Energy. The result is the freeing up of about 1-1/4% of our "take-home pay". Since the continuing cuts in employment are preventing any income growth, this cut, even though it sounds small, is really important in supporting consumer spending on non-energy "stuff". Coming just ahead of the Christmas shopping season, this is no small matter. Indeed, two weekly surveys of chain-store sales both show some improvement in September, an encouraging sign.

We don't want to overstate anything here. Nor do we want to argue against at least one stimulus-related proposal, that to further extend unemployment benefits. This would be just the wrong moment to let lapse the special extensions that are already in place. But the caveats to a bearish outlook which we have just mentioned – quirks in the measurement of the employment data, more stimulus spending already in the pipeline and lower gas prices right now – suggest that the economy may not weaken again. Indeed, after a sinking spell last week, stock markets seem to be coming around to the same notion, with a combined two-day gain yesterday and today of more than 240 points on the Dow Jones, which recoups a sizable amount of losses last week. So let's not throw in the towel yet. The "V" shape recovery may still prevail over the "W" and more definitive progress may become evident "soon".

Bigger Role for G-20 Elevates Emerging Market Nations

There was a major development at last week's G-20 meeting in Pittsburgh, and it wasn't the protests or pronouncements on climate change. Perhaps the most significant development to come from the meeting was the recognition that this group, the G-20, is now the most relevant forum in the world for coordinating world economic policy. This bigger group, including major "emerging market" countries, thus supplants the more restricted G-8 that covered only the biggest industrial nations.

Specifically, the G-8 consists of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States. The European Commission (EC) attends as well, but in an advisory capacity. In sharp contrast, the G-20 contains those countries, plus

Argentina
Australia
Brazil
China
India
Indonesia
Mexico
Saudi Arabia
South Africa
South Korea
Turkey

There are thus 19 countries, plus the EC. With the latter, a number of smaller European countries have representation. Now we have the most populous countries added to the discussions as well as several major resource producers. During the meeting, the group also decided to increase the role of these countries in the International Monetary Fund, the IMF, which provides financial support to needy nations. For a time during recent years, it appeared that the IMF might be fading, as it looked like fewer countries were subject to foreign exchange and other financial crises. Those conditions, of course, have changed dramatically and now the focus is on making the IMF's structure and work more responsive to the needs that are weighing on the world financial system.

It seems strange to congratulate a country. But this seems to us like a graduation of sorts, where the newly promoted countries are finally recognized for the stake they have in the world's welfare, as both recipients and providers of economic benefits. We're glad they're to be included in these deliberations.

William Safire

Perhaps all of you routinely check out the New York Times website of a morning, and you have already seen this today. In memory of their renowned columnist William Safire, who died yesterday at age 79, the Times today highlights one of his memorable columns, "How to Read a Column". If you have in fact not seen it, do take it in. You'll never look at such a feature in the same way again!
http://www.nytimes.com/2005/01/24/opinion/24safire1.html?_r=1&adxnnl=1&adxnnlx=1254139490-6+7pzC9qowzI+B/HDpNLew

Mr. Safire published his "On Language" column in the Times Magazine as recently as September 13, on the issue of bending the curve and using other such symbolic phrases. [We can't begin to choose the right words to describe this succinctly, a not inconsiderable irony in speaking of Mr. Safire.] Here it is: http://www.nytimes.com/2009/09/13/magazine/13FOB-OnLanguage-t.html.

We will miss this pundit, for whom, the Times' affectionate obituary asserts this morning, the word "pun-dit" was likely coined. May Mr. Safire rest in peace, knowing what pleasure he brought to reading about serious -- and pleasurable -- affairs of the day.

The Tariff on Tires

Just over a week ago, the Obama Administration announced a 35% tariff on certain car and truck tires imported from China. Apparently, the purpose of the tariff is to raise the price of imported tires so they won't be so attractive, thereby encouraging U.S. consumers who are shopping for new tires to choose some produced in the U.S. It's hard to know how savvy tire-shoppers are, but one of them, Debbie from Geranium Farm's Hodgepodge, saw an article the next day with the headline, "Tire Prices To Rise by 20-30%". Debbie thought to alert her relatives and friends who might be needing tires – as she herself does at the moment, she tells me – and she circulated the article to some 40 people, including me. They should buy their tires right away, she thought, before that huge price hike.

I responded to her note immediately, but as an economist, not a tire-buyer. The following poured out of my fingers into the computer in not more than ten minutes (the text here is a bit more elaborate than what I actually sent back to her).

Dear Debbie,

I guess you want a comment about this . . . .

I haven't read this specific piece, but I've kept up with the news in the last couple of days. It is truly disappointing. In a word, protectionism is bad. Raising tariffs in the 1930s was a major contributor to the length of the Depression. Because when we raise them, the other countries retaliate, as China has already threatened on chicken and car parts. So prices go up and jobs go down, everywhere. We've spent years and years since then trying to lower tariffs.

It is false that higher import tariffs will "protect" American jobs. Sometimes, very occasionally, you can make an argument in a very young industry that it deserves "protection" until it builds a customer base and momentum. But even there, they already have patent protection. There might also be national security reasons to discourage buying of products from certain countries.

But in the vast majority of these cases, in fact, the people get hurt who are the very people government officials think they're helping, the workers. These imported tires are cheaper, so they are bought heavily by lower income Americans, who can least afford these higher prices, especially now in the fragile, job-scarce economy.

China and India and Wal-Mart, with their ability to produce and sell at low-cost, are one of the main reasons that the Fed Chairman [last week could] say that he believes the recession now may have concluded and a recovery, however hesitant, begun.

My email ended here, but let me finish the thoughts. One of the saving graces in these dire times has been the availability of low-price options for many products. By shifting to shopping at Wal-Mart, for instance, people can make their limited dollars stretch farther. If they need new tires, they can find some they can afford. Further, the imposition of the tariff, by chopping demand from the exporters in China and India, will export our economic hurt to the people of those countries, who are just starting to enjoy the fruits of their own economic emergence. They, in turn, would buy less of the products we try to sell, hurting our exporting companies. The industries are different: the Chinese tend to make the consumer goods and the U.S. firms specialize more in capital equipment, but the mutual harm is the same.

The dollars here are not large – car tires are hardly our biggest import – but the pending action sends a very difficult message at a very sensitive time in the world economy, and it comes just days before the leaders of the G-20 nations are scheduled to meet together in Pittsburgh. The British-based magazine The Economist last week highlighted this issue on their cover: "Economic Vandalism", they called it. They have supported the President editorially on other issues, and they do tend to be on his side. But the language in their article is stronger than mine here.

It is true that trade relations with China need attention. But it would seem that joint examination and negotiation would be more appropriate ways to work on them. And we haven't even mentioned that China owns substantial assets in the U.S. and has recently become the largest creditor of the U.S. government. That position makes our unilateral tariff action problematic as well.

Thanks, Debbie – I think – for showing so clearly how important these policy decisions can be in our everyday lives.

Ted Kennedy's Liturgies

We watched the "Irish Wake" for Ted Kennedy and his funeral, fine pieces of liturgy both, each in its own way contributing to the commemoration of the Senator and to the needs of his family and friends -- and even us -- to express our emotions over his passing.

Among the tributes, we took special note of those by John McCain and Orrin Hatch. Senator Hatch is, of course, a right-wing conservative, and as he reminded us, he maintains a vastly different style of religious observance than the Kennedys. But they are great personal friends, respecting and enriching each other despite and perhaps because of these basic differences. In such relationships, there can be no presumption, nor can either party take the other for granted. Everything has to be on the table. Senator McCain, for his part, can be as rambunctious as Senator Kennedy, and he told the wonderful story about how he and Kennedy once staged a mock, but highly spirited, debate on the Senate floor, taking advantage of their inherent differences in a joint, mutual effort to give lessons in priorities and decorum to junior Members of the body.

Perhaps this has been said enough times in recent days, but we need to add our own sentiment. In such a sensitive time for the country as this, with the economy so very fragile, our troops suffering the most deadly month so far in Afghanistan, legislation pending that will reform a basic part of our lives, the incumbent ruling party in one of our staunchest allies, Japan, decisively turned out of office and numerous other issues looming, may these coming weeks be a time when our leaders can all take advantage of their inherent differences to forge stronger, richer relationships and to formulate joint, mutual efforts at accomplishing the tasks at hand.

Kennedy's casket was escorted out of the church Saturday to the strains of "America the Beautiful". The last verse, highlighting his own sentiment that “the dream will never die”, appeals:

O Beautiful for patriot dream

That sees beyond the years

Thine alabaster cities gleam,

Undimmed by human tears!

America! America! God shed His grace on thee,

And crown thy good with brotherhood

From sea to shining sea!