The Great Debate

from Ian Bremmer:

America can’t afford complacency on China

In China, as we learned last month, there are Apple Stores and then there are “Apple Stores.” Both sell Apple computers, iPads, cable adaptors, etc. But while Apple’s official beachhead store in Shanghai Pudong attracts mega-sized crowds, about 900 miles west of Shanghai in the city of Chongqing, some entrepreneurial types brazenly knocked off the Apple store concept. Enter one of these stores and you’d find the familiar t-shirt clad friendly geek, the clean (though not as minimalist) Apple aesthetic, and a full stock of real-deal Apple computers. Employees in the store actually believed they were working for Apple and Steve Jobs until press accounts of the knock-off began appearing last month.

This story tells us two things: First, China isn’t yet on the cutting edge of innovation. But second, its imitations are improving and its people are learning fast. In other words, the gap between China and America remains wide, but the narrowing is beginning to gather speed. We won’t wake up tomorrow to discover that China surpassed America to become the world’s leading economy. But there’s a Great Rebalancing underway, one that will fundamentally reorder the relationship that these two economies have with one another and with the world.

For the Chinese leadership, the financial crisis and the resulting market meltdowns in America and Europe underscored the urgency of economic reform. An economy over-reliant on exports to Western consumers is an increasingly bad idea, because when Americans and Europeans stop spending, China starts hemorrhaging millions of jobs. That’s a threat to the country’s baseline social stability.

That’s why China’s latest five-year plan lays out a path toward rebalancing the Chinese economy away from over-reliance on exports and toward greater reliance on Chinese shoppers and their ability to buy more of the products that China makes. It also reflects an attempt by the leadership to reduce its overall political and economic dependency on the US.

It will be difficult for Beijing to accomplish this rebalancing in the short-term—as my colleagues on Eurasia Group’s China Team discuss in a new report. But there is no question that the Chinese government is trying to take real steps in that direction today. For example, on Chinese financial investments into US Treasury bonds, while Beijing won’t undermine its massive investment in the U.S. with any sudden moves to the exits, it is slowly working to redirect its new money elsewhere. China is already increasing its Euro-denominated holdings and investment more in hard commodities around the globe.

Merkel and Sarkozy are right about a Tobin tax

By Mark Thoma
All opinions expressed are his own.

The financial transactions tax is back in the news today. According to reports, French President Nicolas Sarkozy and German Chancellor Angela Merkel will propose a financial transactions tax in September.

Is this a good idea? It would certainly provide needed revenue to cash strapped governments, but at what cost? Governments must raise revenue somehow, but is this the best way to get the cash they need? Some taxes have a large distortionary effect on economic activity — with a financial transactions tax, the worry is that investment activity will be curtailed– and others have a much smaller effect. Some taxes can even make markets work better, e.g. taxes that force firms to internalize pollution costs and other externalities improves the decisions firms make. From society’s point of view, they are more, not less efficient. Thus, in designing a tax system, we should look for taxes that provide the most revenue at the least cost.

So is a financial transactions tax a highly distortionary, costly tax? The answer is no. The tax would discourage short-term speculative activity, but much of this activity provides little social value. It pushes money around among winners and losers, and traders like it for that reason, but if this activity is discouraged through taxation it would have little effect on long-term investment decisions by firms. For example, one thing this would discourage is high frequency computer trading to exploit minute differences in prices. Does it really matter for long-term investment if these differences persist for a few seconds or minutes more?

Breaking the government-stock market feedback loop

By Roger Martin
The opinions expressed are his own.

The markets’ jitters last week in the wake of Standard & Poor’s downgrading of US government debt from AAA to AA+ reinforced the degree to which shifts in expectations about future events as opposed to changes in real events now dominate the economy.  In this new world, governments need to both recognize the futility of attempting to reign in expectations and stop creating mechanisms that cause changes in expectations to ripple damagingly through the real economy.

Last week, the US stock markets experienced the greatest bout of volatility in history when in four consecutive trading days (Monday through Thursday) the Dow Jones Industrial Average moved more than 400 points – and amazingly rather than slide in one direction, it reversed course each of the four days.

What really changed with the S&P’s downgrade after the close of markets Friday, August 5, 2011 that caused the massive volatility? The economist’s classical answer is that the downgrading should have raised the cost of US government debt because a lower rating requires the provision of a higher yield to bond buyers.  But oops, US government bond prices rose and yields declined in the wake of the downgrading. So if anything real happened, it was positive – stronger prices for US bonds.

Does the administration really want defense spending cuts?

By Ben Adler
The opinions expressed are his own.

In the upcoming Super Committee deficit reduction negotiations, most Democrats believe they must order their priorities to reflect their values and stay on message. Their first choice for debt reduction should be increased tax revenues, second would be cuts to the Pentagon’s bloated budget, and third would be cuts to domestic spending, whether discretionary or mandatory (entitlements such as Social Security and Medicare.)

Theoretically, the threat of cuts to national security spending, which will go into effect if no Super Committee deal is reached, gives Democrats leverage over hawkish Republicans to agree to increased tax revenues. Give up that leverage by saying that you’d prefer cuts to entitlement spending over cuts to the Defense Department, and you’ve given Republicans cover to claim that cutting entitlements while achieving no Democratic priorities is a fair offer.

So why would any Democrat, particularly a prominent member of the Obama administration, undercut the Democrats’ bargaining position by saying entitlement cuts are preferable to Defense cuts? It’s unclear, but that is what Defense Secretary Leon Panetta is doing.

Germany must defend the euro

By George Soros
The opinions expressed are his own.

Financial markets abhor uncertainty; that is why they are now in crisis mode. The governments of the eurozone have taken some significant steps in the right direction to resolve the euro crisis but, obviously, they did not go far enough to reassure the markets.

At their meeting on July 21, the European authorities enacted a set of half-measures. They established the principle that their new fiscal agency, the European Financial Stability Fund (EFSF), should be responsible for solvency problems, but they failed to increase the EFSF’s size. This stopped short of establishing a credible fiscal authority for the eurozone. And the new mechanism will not be operative until September at the earliest. In the meantime, liquidity provision by the European Central Bank is the only way to prevent a collapse in the price of bonds issued by several European countries.

Likewise, Eurozone leaders extended the EFSF’s competence to deal with banks’ solvency, but stopped short of transferring banking supervision from national agencies to a European body. And they offered an extended aid package to Greece without building a convincing case that the rescue can succeed: they arranged for the participation of bondholders in the Greek rescue package, but the arrangement benefited the banks more than Greece.

Are capitalists happier?

By Ronald Rotunda, Vernon Smith and Bart Wilson
The opinions expressed are their own.

As many of the world economies seem to be collapsing simultaneously, it is a good time to step back, take a deep breath and look at the bigger picture. Which kind of economy ultimately works better in the long run — capitalism or socialism?

We have long known that workers are richer in capitalist countries than in socialist ones. But are they happier? Capitalism sounds much harsher, like Thomas Hobbes’ depiction of the state of nature — the war of all against all. Socialists see capitalism as a system where people unfeelingly compete by trying to drive out their opponents. Capitalists counter that free markets are really about voluntary exchange and trading for mutual benefit.

from Tales from the Trail:

The Tea Party’s “blue deal” for America

By John F. Wasik
The opinions expressed are his own.

Imagine being elected to government even though you're openly hostile to it.

Such is the perverse arrangement the Tea Party has with the electorate, which is foisting a "Blue Deal" on Americans. As opposed to a "New" deal or even "Square" deal, the Blue Deal and its prolonged pain will hurt most middle-class Americans through higher costs in retirement, health care and public health.

Tea Party affiliates' nonchalant posturing on the potential debt default influenced the Standard and Poor's decision to downgrade U.S. debt and the ensuing turmoil.

Now that the Congressional super-committee has been named to begin

cutting more government spending -- and hopefully raising revenues -- it's time to craft a balanced agenda that will preserve social programs while cutting government waste.

The myth of the rational education market

By Peg Tyre
The opinions expressed are her own. 

In this excerpt from “The Good School: How Smart Parents Get Their Kids the Education They Deserve,” author Peg Tyre explains how the educational “free market” created by the charter school system doesn’t guarantee parents will pick the best schools for their kids. In fact, with objective information hard to come by, even more pressure is on parents to gain — and exploit — data about school quality in order to outperform the educational market.

The idea that school choice is automatically better than no choice has recently been reinforced again, with the “Parent Trigger” in California. Under a law passed there last year, parents whose children attend underperforming public schools can get together, and if 51% of them sign a petition, they can demand their district change the school administrators or convert the school to a charter. So far, a parent group from Compton “pulled the trigger,” but parents from poor urban schools and well-funded suburban schools have been seeking information on how to use the Parent Trigger law to improve their schools.

Similar bills, which are supported by education reformers on both sides of the political aisle, have been passed in Connecticut, Ohio and Mississippi. About a half dozen state legislatures—including New York — are expected to consider Parent Trigger type bills this year.

Riots show us the fragility of law and order

By Nicholas Wapshott
All opinions expressed are his own.

The pictures from London of scorched double-deckers, burnt out stores, and hooded thugs hauling home flat screen TVs are deeply unsettling. Among those who have appeared in court so far are a postman, a school worker, a new father out shopping for diapers, the undergraduate daughter of a multi-millionaire, and an 11-year-old boy who posted on Facebook: “Let’s start a riot.” Something has profoundly changed in William Blake’s green and pleasant land. The honest, upright descendants of Londoners who met the Blitz with a shrug are now cowering in their homes to escape the marauding mob.

What has rattled Britain? What prompted this thuggery and thievery? The spark, as is often the case with civil unrest, was a controversial action by police who shot dead a robbery suspect. Indignant friends of the victim marched on the local precinct and before long, with police distracted and their forces stretched, looters took advantage of the mayhem and began pillaging stores. What has taken Britain by surprise is that the lawbreaking did not end. Night after night since, and even in broad daylight, the destruction has continued.

When social order breaks down in one of the world’s most firmly founded and best behaved civic societies, something alarming is afoot. There are no excuses for “mindless,” “senseless” criminality, but there must, surely, be an explanation for such widespread contempt for law and order. If civilization is more fragile than we would care to imagine in well mannered England, could it break down in the United States? Are there special circumstances that explain the anarchy in London that do not apply elsewhere?

from Reuters Money:

Tea Party downgrade? Here’s what S&P actually said

Was it a Tea Party downgrade?

Beltway media has offered the usual pox-on-both-political houses analysis of Standard & Poor's downgrade of U.S. debt and this week's market meltdown. The two parties spent Monday blaming one other side for the debacle. According to this narrative, both sides must bear equal guilt.

But what does S&P actually say in its downgrade report?

Politics: The downgrade analysis is very political. S&P issued the downgrade even though we avoided default -- and even after the Treasury pointed out S&P's $2 trillion math error. S&P went ahead with the downgrade due to its concerns about political dysfunction in Washington, which has created "greater policy uncertainty."

Which political party does S&P fault? Let's go to the memo (emphasis added):

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.