Wednesday, May 13, 2015

A Case Study in Natural Monopoly: China's Fading Dominance of Rare Earths

Rare earth elements (REEs) are a group of seventeen elements with exotic names like neodymium and yttrium that are key ingredients in many high-tech products, many important for national defense. Imagine the consternation of Western officials when they woke up one morning in September 2010 to learn that China held a near-monopoly in the production of these vital materials. In retaliation for the collision of a Chinese fishing boat with a Japanese Coast Guard vessel near a group of disputed islands in the East China Sea, China threatened an embargo. Prices of REEs soared.

How did China become the world’s leading producer of REEs? Did the 97 percent market share it held in 2010 represent a true natural monopoly? At the time, I wrote that its hold on the market was more fragile than it appeared. The erosion of China’s dominance of REEs holds important lessons for all supposed natural monopolies.

The first clue should have been that rare elements are not really rare. All seventeen rare earth elements are more abundant in the earth’s crust than gold, and some of them are as abundant as lead. The thing that makes them hard to mine is the fact that they do not occur in highly concentrated deposits like gold and lead. Even the best REE ores have very low concentrations. On the other hand, such ores exist widely throughout the world. Until the 1960s, India, Brazil, and South Africa were the leading producers. From the 1960s to the 1990s, the Mountain Pass Mine in California was the biggest source. China’s began to dominate of REE production only in the late 1990s. >>>Read more

Follow this link to view or download a classroom-ready slideshow version of this post

Thursday, April 16, 2015

Open Memo to Rand Paul: An Outline for a Libertarian Fiscal Policy

“As President,” says candidate Rand Paul, “I will work to authorize common sense solutions that will solve our nation's fiscal crisis.” He has floated a broad proposal for a constitutional amendment that would require the federal government to balance its budget. Soon he will need to start filling in the specifics. Here are some ideas that would combine common sense and fiscal prudence while remaining true to Paul’s libertarian principles.

Toward a Libertarian Fiscal Policy

Rand Paul is no anarcho-capitalist. He sees a legitimate, but limited, role for government in national defense, law enforcement, the justice system, and certain other areas. As Ralph Benko notes in a recent Forbes article, that places him in the classical liberal wing of the libertarian movement. With the option of zero government off the table, the remaining minimal state must raise revenue and spend it. A libertarian of classical liberal inclinations cannot get along without some kind of fiscal policy, so what should it look like?

The first principle should be, “Do no harm.” In a medical context, that precept will be familiar to a physician like Senator Paul.  In economics, “do no harm” means a policy of fiscal neutrality—one of managing both the revenue and spending sides of the budget in a way that disrupts the functioning of the market economy as little as possible.

Unfortunately, many past Republican proposals for budget balancing do not meet the standard of fiscal neutrality. Take, for example, the balanced budget amendment proposed not long ago by Utah Senators Orin Hatch and Mike Lee. As I discussed in an earlier post, that proposal, and others that would require  the federal budget to be exactly balanced each year, would be the opposite of neutral.

Because tax revenue falls when the economy contracts, a rule like Hatch-Lee would mandate sharp cuts in spending or increases in taxes each time the economy entered a recession. Those measures would deepen the slump and prolong the recovery. Even worse, from a libertarian perspective, they would provide little or no restraint on spending when tax revenues rose in good times. Lobbyists would descend on Washington like locusts, full of ideas on how to spend the surplus. In short, requiring strict annual balance for the current budget is anything but common sense. >>>Read more

Wednesday, April 8, 2015

UK Election: Did Austerity Work? This Chart Casts Doubt on the Claim

The general election campaign is in full swing in Britain, and it seems it’s all about austerity. From London, The New York Times reports that the campaign revolves around a single issue: the economy, and whether its rebound is the result of an austerity policy championed by the Conservative-led government of David Cameron, or in spite of it.

When in doubt, we should let the facts speak for themselves. This chart tells it all:

The points in the chart represent thirty of the high-income democracies that comprise the OECD. It covers the years 2010-2014, the Cameron government’s term in office. The vertical axis shows the average annual rate of growth during the period. The horizontal axis shows the degree of austerity, or fiscal consolidation, as economists prefer to call it, applied in each country. The UK is right in the middle, just slightly below average in terms both of austerity and growth. >>>Read more

Wednesday, April 1, 2015

What ShadowStats Gets Right and What it Gets Wrong

It is hard to think of a website so loved by its followers and so scorned by economists as John Williams' ShadowStats, a widely cited source of alternative economic data on inflation and other economic indicators. Any econ blogger who has ever written a line about inflation is familiar with ShadowStats. Time and again, readers cite it in comments, not infrequently paranoid in their tone and rude in their language.

Brief replies that cast doubt on some of more extreme claims made by ShadowStats fans don’t seem to have much effect. After a recent round of comments, I promised the editor of one website to undertake a thorough deconstruction of ShadownStats. Here is the result.


What ShadowStats Gets Right: The CPI is a Flawed Measure of the Cost of Living

ShadowStats is Williams’ attempt to provide an alternative to the official consumer price index (CPI), which he views as a flawed measure of what members of the general public have in mind when they think of the cost of living. Let me start by saying that although I share the skepticism of many economists about the specific numbers published on ShadowStats, I agree that the official data do not tell the whole story. I support Williams’ attempt to provide an alternative to the official consumer price index that more closely reflects pubic perceptions of inflation.  Here, in his own words, is how Williams explains his undertaking: >>>Read more

Wednesday, March 25, 2015

Does Putin's Proposed Eurasian Currency Area Make Sense?

At a meeting in Kazakhstan last week,  Russian  President Vladimir Putin proposed a currency union for the members of the Eurasian Economic Union (EAEU).  Russia, Kazakhstan, Belarus, and Armenia are the current members, and Kyrgyzstan is scheduled to join later this spring. Does a common currency for the EAEU make sense? Not in economic terms, but perhaps there is a political subtext that makes the proposal more understandable.

Some currency union basics

A currency union is simply a group of countries that share a common currency. The Eurozone (EZ) is the best-known example. The much smaller Common Monetary Area, based on the South African Rand, is another. The 50 states of the United States are sometimes viewed as a currency union for economic purposes, even though the members are not sovereign countries.

Currency unions have both advantages and drawbacks. On the plus side, currency unions facilitate trade and integration. They reduce the costs of currency exchange for travel and trade. They remove the risk that a change in exchange rates will render import-export deals or foreign investment projects unprofitable before they are completed. They eliminate costs of hedging against currency risks. The major disadvantage is that a currency union takes away exchange rate changes as an instrument for adjusting to external economic shocks, such as changes in the relative prices of a country’s imports and exports, or sudden surges in capital inflows or outflows.

There is a well-developed theory of optimum currency areas, growing out of a seminal 1961 article by Robert Mundell,  that explores the conditions under which the advantages of a union outweigh the disadvantages. Three of the most important conditions are structural similarities, flexible markets, and fiscal centralization. >>>Read more

Follow this link to view or download a related slideshow, "The Breakup of the Ruble Area."

Sunday, March 8, 2015

Job Surge Spooks Markets as Unemployment Approaches the NAIRU

The BLS announced Friday that the US economy added 295,000 jobs in February, bringing the unemployment rate to 5.5 percent, a new low for the recovery. The leading stock indexes immediately plunged. The Dow lost 1.5 percent, the S&P 500 1.4 percent, and the NASDAQ 1.1 percent. Why  the negative reaction to such good news?

The answer may lie in an obscure economic indicator known as the non-accelerating inflation rate of unemployment, or NAIRU. The NAIRU gets its name from the fact that when unemployment hits that level, the rate of inflation begins to accelerate. Market participants know that the Fed has a dual mandate to maintain full employment and price stability, and some of them interpret that to mean that it will begin to raise interest rates as soon as the unemployment rate hits the NAIRU. As the chart shows, that could happen any time now. The Congressional Budget Office estimates that the NAIRU is currently 5.39 percent, within easy reach of February’s current unemployment rate of 5.5 percent. >>>Read more

Follow this link to view or download a brief slideshow with additional charts of the latest US employment situation

Saturday, February 7, 2015

US Job Growth Fastest Since Dot-Com Boom of the 1990s

Strong upward revisions reported yesterday by the Bureau of Labor Statistics pushed US payroll job gains to levels not seen since the dot.com boom of the 1990s. According to preliminary data, the economy added 257,000 total payroll jobs in January 2015. The report revised gains for November upward from 353,000 to 423,000 and those from December from 252,000 to 329,000.

The government sector lost 10,000 jobs in January. The government sector had added jobs in November and December, but over the year since January 2014, government jobs were down by 17,000. All levels of government shed jobs in January, but the federal government showed the largest losses. All told, the government sector has lost 688,000 jobs, including a net loss of 55,000 at the federal level, since the inauguration of President Barak Obama six years ago, contrary to his opponents’ idea that his administration would give rise to an “explosive growth of government jobs.”

Meanwhile, private sector jobs have boomed. The economy added 3,127,000 private payroll jobs between January 2014 and January 2015. That easily eclipsed the peak rate of job creation during the housing bubble of the early 2000’s, and was the strongest 12-month showing since 1997, at the height of the dot.com boom. >>>Read more

Follow this link to view or download a slideshow with additional charts of the latest US employment situation