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422. Global Imbalances: A Source of Strength or Weakness?
- Author:
- Kristin J. Forbes
- Publication Date:
- 07-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- Gross capital flows into the United States totaled $1.8 trillion in 2006. When combined with the $1.0 trillion the United States sent abroad, these net capital inflows funded the U.S. current account deficit of about $800 billion.1 The source of a large proportion of these capital inflows was developing economies—especially China and major oil exporters. Why are foreigners willing to invest such massive amounts of money in the U.S. economy? And perhaps even more surprising—why are countries with low levels of investment willing to send this relatively scarce resource to a capital-abundant economy instead of investing in their own countries? Understanding the motivation behind the millions of individual decisions that drive these capital inflows is critically important to understanding if this massive net transfer of capital into the United States reflects a strength or weakness of the global economy.
- Topic:
- Economy, Investment, and Capital
- Political Geography:
- Global Focus and United States of America
423. The Welfare Implications of Global Financial Flows
- Author:
- Eswar Prasad
- Publication Date:
- 07-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- Any discussion of whether the global financial system has served the world well requires us to think about what it is that capital flows could achieve in the best of circumstances. The basic neoclassical model suggests that, with rising financial globalization, capital should flow from rich to poor countries, making people in both sets of countries better off by enabling a more efficient international allocation of capital from countries where capital is less productive to those where it ought to be more productive. In addition, financial flows should allow for more efficient sharing of risk across countries, thereby facilitating the smoothing of national consumption against countryspecific shocks to national output. These benefits are likely to be greater for developing countries as they have less capital and more volatile growth, implying that both the growth and risk sharing benefits would be larger for them.
- Topic:
- Economy, Welfare, Capital, and Financial Systems
- Political Geography:
- Global Focus
424. The Role of Monetary Policy in the Face of Crises
- Author:
- Anna J. Schwartz
- Publication Date:
- 07-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- In this article I first review the Greenspan Fed’s record of providing liquidity in response to its perception of shocks the economy is facing. It assumed that the shocks were likely to generate financial crises. No financial crises, however, have occurred. Yet the Fed was dilatory in draining the market of unneeded liquidity. Failure to do so meant that monetary policy remained accommodative. I next discuss whether there is a connection between the Fed’s accommodative policy and the depreciation since 2002 of the exchange value of the dollar as well as the twin deficits and growing global imbalances. In that discussion I refer to the need to raise the national saving rate, in part by eliminating the budget deficit as well as projected deficits from the unfunded liabilities of Social Security and Medicare. Monetary policy, however, must be independent of fiscal policy. I conclude with some observations on the advisability of adoption by the Fed of inflation targeting.
- Topic:
- Monetary Policy, Federal Reserve, and Economy
- Political Geography:
- North America and United States of America
425. The Conquest of Worldwide Inflation: Currency Competition and Its Implications for Interest Rates and the Yield Curve
- Author:
- Randall S. Kroszner
- Publication Date:
- 07-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- In the United States and in virtually every country around the world, inflation has declined, and in most countries dramatically so. In addition, the volatility of inflation and expectations of future inflation have also fallen significantly. I will call these changes experienced around the globe the conquest of worldwide inflation. I will begin by providing a few facts about the substantial improvement of inflation during roughly the past decade compared with the quarter century that preceded it. I will then try to understand why this remarkable decline in inflation has taken place. In particular, I argue that globalization, deregulation, and financial innovation, in part spurred by experiences of high inflation in the 1980s, have fostered currency competition that has led to improved central bank performance and, hence, the recent conquest of worldwide inflation. Friedrich Hayek (1976) had long ago advocated permitting greater competition among currencies, arguing that there would be a race to the top rather than a race to the bottom. Regardless of what one might think of Hayek’s policy proposals, technological change in a globalized and competitive marketplace, I believe, has increased competition among currencies issued by central banks.
- Topic:
- Economy, Inflation, Interest Rates, Currency, and Economic Competition
- Political Geography:
- Global Focus
426. Fair Trade Coffee Enthusiasts Should Confront Reality
- Author:
- Jeremy Weber
- Publication Date:
- 01-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- From university cafeterias to supermarkets in the developed world, people are buying Fair Trade (FT) coffee certified by the FLO-Cert, the certifying entity of Fairtrade Labelling Organizations International (FLO). The assumption is that such purchases will contribute to the welfare of marginalized producers in the developing world. While sales of FT coffee in Europe have stabilized, the North American and Japanese markets are growing rapidly. Total sales increased 40 percent from 2004 to 2005, to a total volume of 33,992 metric tons (MT) (FTO 2005). What is “Fair Trade”? According to FINE, the umbrella organization that comprises the four largest Fair Trade organizations (FLO, International Federation for Alternative Trade, Network of European World Shops, and the European Fair Trade Association), Fair Trade is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers—especially in the South [FINE 2001]. The FINE definition optimistically assumes that the trading partnerships and conditions promoted by Fair Trade necessarily “contribute to sustainable development.” It is true that the Fair Trade coffee system—the producers, exporters, importers, and retailers operating by the rules and standards of FLO—has improved living standards for many participating coffee growers (Bacon 2005, Raynolds 2004). Yet the system faces vexing issues such as a disconnect between promotional materials and reality, excess supply, and the marginalization of economically disadvantaged producers and groups. Those involved in Fair Trade coffee debates and governance must address these issues if Fair Trade is to be an effective mechanism for rural development in coffee producing regions.
- Topic:
- Development, Economy, Trade, Coffee, and Fair Trade
- Political Geography:
- Global Focus
427. The Columbian Exchange and the Reversal of Fortune
- Author:
- Thomas Grennes
- Publication Date:
- 01-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- It is difficult to think about modern American food without including hamburgers and hotdogs. It is also difficult to think about popular American history without cowboys mounted on horseback tending herds of cattle. However, before the arrival of Columbus in 1492 there were no cattle or pigs in America to provide beef and pork for hamburgers and hotdogs. There was no wheat to make hamburger and hotdog buns. There were no horses for cowboys or Indians to ride. The European settlers brought with them cattle, pigs, horses, wheat, and many other plants and animals that became the foundation for modern food and agriculture in the Western Hemisphere. It is also difficult to think about modern Mexican food without including rice, tacos filled with meat, refried beans in animal fat, cheese in enchiladas, and sugar, cinnamon, and milk in chocolate. However, Mexico in 1492 had none of these ingredients. The massive transplantation of plants and animals across the Atlantic Ocean in both directions has been called the Columbian Exchange (Crosby 1972). It has been described as the “greatest human intervention in nature since the invention of agriculture (Fernandez-Armesto 2002: 165), and it has had an enormous effect on the Americas and the entire world. The Columbian Exchange altered the kind of food Americans and Mexicans eat, the kind of agricultural products produced in both countries, and the entire pattern of world economic growth. This article will concentrate on the effects of the Columbian Exchange, but the exchange of plants and animals was part of a broader process of trade, migration, investment, colonization, and exchange of ideas that followed the voyages of discovery by Columbus and others. The same Old World plants and animals were introduced to the two regions that would become the United States and Mexico, but the effects in the two countries were substantially different.1 The United States was the poorer neighbor in 1492, but it became relatively richer. The purpose of this article is to show how differences in institutional development affected responses to the same opportunities. I shall concentrate on developments in the United States and Mexico, but the Canadian experience was similar to the U.S. response, and the response in the rest of Latin America was similar to the Mexican response (Cole et al. 2005).
- Topic:
- Migration, History, Food, Investment, Trade, and Columbian Exchange
- Political Geography:
- North America, Mexico, and United States of America
428. Remuneration vs. Reelection: A Senatorial Balancing Act
- Author:
- Jim F. Couch, Brett A. King, and Taylor P. Stevenson
- Publication Date:
- 01-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- Unique events often give rise to other unique events. Such was the case of Hurricane Katrina—the costliest and most destructive natural disaster in U.S. history. The resulting casualties and staggering damage estimates from the savage storm in late August 2005, led the U.S. Senate to vote overwhelmingly (92 to 6) against a Senate pay raise. Most senators apparently felt that voters would not look kindly on a Senate pay raise given the devastation caused by Katrina. The Senate vote was largely symbolic because the House of Representatives was not going to take a vote on rescinding a pay raise for members of Congress. Thus, senators voting against the raise knew their votes would resonate well with voters but have no impact on the annual congressional pay raise sanctioned by law. Of the six senators who did vote for the pay raise, five—James Jeffords (I-Vt.), Daniel Inouye (D-Hawaii), Jeff Bingaman (D-N.M.), Richard Lugar (RInd.), and Kit Bond (R-Mo.)—were long-time incumbents whose seats were not threatened, and one—Paul Sarbanes (D-Md.)—was about to retire. Typically, votes cast by members of Congress are relatively easy to predict. The empirical analysis of congressional voting patterns suggests that measures of ideology and party affiliation play a decisive role in explaining overall voting behavior. A vote on congressional pay, however, is not typical. It creates a dilemma for lawmakers by pitting two margins of self-interest against each other: pecuniary gains and reelection. Senators are clearly made better off by not opposing annual pay raises—salaries have increased from $98,400 in 1990 to $165,200 in 2006. Yet, those increases are likely to irritate voters and could harm a senator’s chances for reelection. In this article, we examine those conflicts of interest and how they affect voting behavior in the case of senatorial pay raises. It is often reported that cooperation among politicians, or bipartisanship, is a thing of the past. However, our results suggest that at least in the case of the Senate, when it comes to an issue as controversial as a pay increase, senators are fully capable of cooperating. More vulnerable senators (in terms of their probability of reelection) are allowed to vote against a pay raise, knowing that those in a more secure position can vote for the increase. The more vulnerable senators likely compensate senators who take the unpopular position of voting in favor of the pay increase with favorable votes on future legislation.
- Topic:
- Elections, Domestic Politics, Ideology, and Voting Behavior
- Political Geography:
- North America and United States of America
429. The Effect of Judicial Selection Processes on Judicial Quality: The Role of Partisan Politics
- Author:
- Russell S. Sobel and Joshua C. Hall
- Publication Date:
- 01-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- The quality of a state’s judicial system is an important determinant of economic growth and vitality. The decisions made within state judicial systems affect the degree to which private property rights are well-defined and enforced, which is an essential building block for entrepreneurial activity and economic growth. The key link between free-market institutions, such as secure property rights, and entrepreneurial activity has been demonstrated by Kreft and Sobel (2005) and Ovaska and Sobel (2005). Bad court decisions often infringe on the individual liberties and freedoms that are essential underpinnings for civil society and a well-functioning market economy (see Dorn 1985 and others in that special issue of the Cato Journal on this general topic). In addition, decisions made within state judicial systems also have important effects on the cost of doing business in a state. Poor liability rules reflected in state judicial decisions have been blamed for high medical malpractice rates, high workers’ compensation rates, and high automobile insurance rates in many states. Judicial decisions also impact the costliness of mandates and other regulations faced by businesses. Thus, it is clear that the judicial system is important for economic activity, and thus so is the selection mechanism that is used to determine the membership of state courts.
- Topic:
- Politics, Economic Growth, Judiciary, and Political Parties
- Political Geography:
- Global Focus
430. Global Imbalances: Do They Matter?
- Author:
- Miranda Xafa
- Publication Date:
- 01-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- This article reviews the recent literature on global imbalances and discusses the policy implications of the various theories that have been advanced to explain their unprecedented increase. Most of these theories fit the stylized facts, namely, the steady increase in the U.S. current account deficit, the shift to a surplus position of the developing countries, and the low nominal and real interest rates globally. The “low U.S. savings” theory—reflecting the increase in the fiscal deficit and in housing wealth—views the current account deficit as the result of fiscal and monetary policy decisions in the United States that need to be urgently reversed to prevent a crash landing. Other theories however, focusing on developments outside the United States, portfolio balance effects, or previously neglected benign factors, do not yield such a doomsday scenario. It is relevant to note that there is no historical precedent of disorderly exchange rate adjustment in industrial countries that keep inflation under control (Croke, Kamin, and Leduc 2005). Concerns over a disorderly unwinding of global imbalances therefore appear exaggerated. This view, prevalent among market participants and several prominent academics, has not been widely embraced by policymakers.
- Topic:
- Monetary Policy, Economy, Wealth, and Savings
- Political Geography:
- Global Focus and United States of America