Wednesday, November 30, 2011

Martin Feldstein: Europe is Not the United States

Nov 30, 2011
CAMBRIDGE - Europe is now struggling with the inevitable adverse consequences of imposing a single currency on a very heterogeneous collection of countries. But the budget crisis in Greece and the risk of insolvency in Italy and Spain are just part of the problem caused by the single currency. The fragility of the major European banks, high unemployment rates, and the large intra-European trade imbalance (Germany's US$200 billion current-account surplus versus the combined US$300 billion current-account deficit in the rest of the eurozone) also reflect the use of the euro.

European politicians who insisted on introducing the euro in 1999 ignored the warnings of economists who predicted that a single currency for all of Europe would create serious problems. The euro's advocates were focused on the goal of European political integration, and saw the single currency as part of the process of creating a sense of political community in Europe. They rallied popular support with the slogan 'One Market, One Money,' arguing that the free-trade area created by the European Union would succeed only with a single currency.

Neither history nor economic logic supported that view. Indeed, EU trade functions well, despite the fact that only 17 of the Union's 27 members use the euro.

But the key argument made by European officials and other defenders of the euro has been that, because a single currency works well in the United States, it should also work well in Europe. After all, both are large, continental, and diverse economies. But that argument overlooks three important differences between the US and Europe.

First, the US is effectively a single labour market, with workers moving from areas of high and rising unemployment to places where jobs are more plentiful. In Europe, national labour markets are effectively separated by barriers of language, culture, religion, union membership, and social-insurance systems.

To be sure, some workers in Europe do migrate. In the absence of the high degree of mobility seen in the US, however, overall unemployment can be lowered only if high-unemployment countries can ease monetary policy, an option precluded by the single currency.

A second important difference is that the US has a centralised fiscal system. Individuals and businesses pay the majority of their taxes to the federal government in Washington, rather than to their state (or local) authorities.

When a US state's economic activity slows relative to the rest of the country, the taxes that its individuals and businesses pay to the federal government decline, and the funds that it receives from the federal government (for unemployment benefits and other transfer programs) increase. Roughly speaking, each dollar of GDP decline in a state like Massachusetts or Ohio triggers changes in taxes and transfers that offset about 40 cents of that drop, providing a substantial fiscal stimulus.

There is no comparable offset in Europe, where taxes are almost exclusively paid to, and transfers received from, national governments. The EU's Maastricht Treaty specifically reserves this tax-and-transfer authority to the member states, a reflection of Europeans' unwillingness to transfer funds to other countries' people in the way that Americans are willing to do among people in different states.

The third important difference is that all US states are required by their constitutions to balance their annual operating budgets. While 'rainy day' funds that accumulate in boom years are used to deal with temporary revenue shortfalls, the states' 'general obligation' borrowing is limited to capital projects like roads and schools. Even a state like California, seen by many as a poster child for fiscal profligacy, now has an annual budget deficit of just 1 per cent of its GDP and a general obligation debt of just 4 per cent of GDP.

These limits on state-level budget deficits are a logical implication of the fact that US states cannot create money to fill fiscal gaps. These constitutional rules prevent the kind of deficit and debt problems that have beset the eurozone, where capital markets ignored individual countries' lack of monetary independence.

None of these features of the US economy would develop in Europe even if the eurozone evolved into a more explicitly political union. Although the form of political union advocated by Germany and others remains vague, it would not involve centralised revenue collection, as in the US, because that would place a greater burden on German taxpayers to finance government programs in other countries. Nor would political union enhance labor mobility within the eurozone, overcome the problems caused by imposing a common monetary policy on countries with different cyclical conditions, or improve the trade performance of countries that cannot devalue their exchange rates to regain competitiveness.

The most likely effect of strengthening political union in the eurozone would be to give Germany the power to control the other members' budgets and prescribe changes in their taxes and spending. This formal transfer of sovereignty would only increase the tensions and conflicts that already exist between Germany and other EU countries.

Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan's Council of Economic Advisers and is former President of the National Bureau for Economic Research.

Tuesday, November 29, 2011

Traditional Chinese medicine face uphill battle in Western countries

Nov 29, 2011

(CHINA DAILY/ASIA NEWS NETWORK) - Ms Jiang Yuechun turned to traditional Chinese medicine (TCM) after Western treatments failed to remove dozens of flat warts coating the backs of her hands.

The 31-year-old university teacher in Beijing says the warts shriveled away without scarring after she ate a porridge of coix seeds - a tropical grain.

She is among many Chinese seeking TCM treatments in place of modern Western remedies at a time when her homeland is promoting the internationalisation of its traditional medicine - already regularly used in about 140 countries but part of the healthcare systems of only a few.

China's 12th Five-Year Plan (2011-2015) earmarks financial support for TCM's globalisation. It also outlines plans for TCM's development and industry regulation.

'Despite TCM's popularity overseas, only a handful of countries, such as Singapore, legally recognise it,' the Beijing University of Chinese Medicine's former president Mr Long Zhixian said.

'Few countries include TCM in their healthcare systems.'

Artemisinin - a southernwood extract used to treat malaria - is the only TCM widely accepted abroad, mostly in Africa, Beijing University of Chinese Medicine professor Mr Gao Xuemin said. The World Health Organisation lists it in its essential medicines catalogue.

Several other traditional remedies, including those for cardiovascular diseases, are undergoing clinical testing overseas and may soon be approved for international use.

But Mr Long believes there are many obstacles to TCM's expansion in the global market.

Perhaps the most challenging is that TCM is based on traditional Chinese culture and philosophy. These include such concepts as the balance of yin (the cool, calming side of the body) and yang (the hot, stimulating side of the body), and the relationship of the five elements that are said to constitute the universe - fire, earth, metal, water and wood.

'Western culture is totally different,' Mr Long said. 'It's not easy for them to believe in TCM if they don't understand these theories.'

He says another difficulty is difference in scientific views. 'Westerners value experimental data in medicine, while TCM is based on experience accumulated over the past 4,000 years,' he said.

'They always try to understand TCM according to the Western medical perspective. But that doesn't make any sense. In my opinion, as long as a medicine cures, it's a good one.'

[TCM has to be differentiated from their herbalogy/apocathery section and their diagnostic, and their acupunture/moxibustion/philosophy/cosmology section. Herbalogy or herb lore may have some pharmacological effects that are provable, and it can be used.

The science of medicine and the art of healing is not always an exact science. There is as much psychology as there is physiology and biology. Much of medicine is about dealing with the patient. And medicine's effectiveness is as much a matter of placebo effect and expectations as it is pharmacological effects.

In many ways, the treatment is as much about making the patient feel better as it is about make the patient better. Our bodies are mostly quite able to heal itself given time. For chronic ailments, if TCM can provide (placebo) relief, it can be chearp and less dangerous than western drugs which try to do the same.]

More than 9,000 TCM treatments were approved for sale in the market in 2008, according to the White Paper on Status Quo of Drug Supervision in China.

These TCM treatments have all passed clinical safety tests. Most have a history of several centuries, Mr Long said.

'Current technology can't detect the active ingredients in some TCM compounds, which are very complicated,' he said.

Mr Long says it's difficult to determine the numbers and ratios of ingredients in most TCM compounds. Determining which are active ingredients is even more challenging. Artemisinin is an exception, which is why it has been successfully globalised.

TCM doctor Zhou Chaofan says another challenge to internationalisation is medicine export standards vary around the world, and China's standards often can't meet foreign countries'.

'Some TCMs use heavy metals, such as cinnabar and realgar, which may not meet some foreign countries' criteria,' Mr Zhou said.

Mr Long agreed. 'Standards for heavy metals are different in countries,' he says.

'It's hard to establish a global standard for TCM because of its complicated ingredients lists.'

But Mr Long remains optimistic. 'It's just a matter of time for TCM to officially enter the global market,' he said.

'We first and foremost must promote Chinese culture, so foreigners can understand TCM's philosophy.'

The market will surely open up if TCM can cure diseases Western medicine can't, he believes. And more experiments will provide clinical evidence of TCM's usefulness and show how it works.

Dozens of Western pharmaceutical companies are currently undertaking such research in hopes of entering the Chinese market as foreign brands.

'This is a typical approach,' Mr Long said. 'They first take notice of a TCM treatment and then research and finally produce it. But the impact on the Chinese market is limited.'

But some don't view TCM's prospects for internationalisation as so promising.

Among their ranks is Mr Fang Zhouzi, an academic known for his opposition to 'pseudoscience' and TCM.

'TCM theories are not scientific,' Mr Fang said.

'They're just an amalgam of superstition, metaphysics, philosophy and witchcraft. They should be replaced by better medical science. Some theories aren't logical at all, such as eating bones to strengthen one's bones.'

But time, tests and international opinion will tell whether TCM will become a basement of parochial quackery or a lofty pillar of global healthcare's architecture.

Era of Western domination 'is ending'

Nov 29, 2011

Professor Kishore Mahbubani was ranked on Foreign Policy magazine's list of the world's top 100 thinkers this week. He believes the era of Asian domination is returning and that greater global governance is needed in a more interdependent world.


By Cheong Suk-Wai, Senior Writer

AT A gathering of thought leaders two years ago in Davos, Switzerland, someone tapped Professor Kishore Mahbubani on the shoulder. As Prof Mahbubani, 63, recalls: 'It was Mr Jan Peter Balkenende, who was then prime minister of the Netherlands, and he said, 'Aren't you Kishore Mahbubani?'

'I said, 'Yes, how do you know me?' and he said, 'My mother asked me to read your book.''

That book is The New Asian Hemisphere, Prof Mahbubani's third. Published in 2008, it is about the resurgence of Asia and also a caution to a complacent West to rev up its competitiveness.

This week, Foreign Policy (FP) magazine named this veteran diplomat one of the world's 100 top thinkers, alongside investing oracle Warren Buffett, Microsoft co-founder Bill Gates and United States President Barack Obama. This is the third time Prof Mahbubani, a married father of three, has been listed thus. The first was in 2005, when he was named one of FP's top 100 public intellectuals; the second was last year when he was ranked 92nd. He is in the same position this year.

After 33 years in diplomacy - including as ambassador to the United Nations, with a stint as president of the UN Security Council - he is now dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, and professor in the practice of public policy.

I sat down with him last week to learn more from him about the US' renewed interest in Asia, among other concerns:

What do you make of China-US ties today?

In the last year or so, China has been trying to rise quietly without waking up the sleeping tiger that is the United States. But the tiger has been woken up. For a long time, the US viewed China's rise with a certain degree of equanimity. But it has suddenly become - I won't say alarmed - but concerned about that rise. When Mr Bill Clinton was president of the US, he was very laidback about China, and his successor George W. Bush was actually very good for China because he had the US fighting wars in Afghanistan and Iraq, and gave China a geopolitical window of opportunity to focus on its development. We are finally seeing the entire Washington establishment focused on China in a way it never was.

Which is ironic given how insular China's focus is, rarely on geopolitical concerns that aren't in its economic interest?

I would not say it has been necessarily insular. In fact, the Chinese have been quite proactive; for example, it shocked the world in 2001 by proposing the Asean-China free trade agreement (FTA), which was a bolt out of the blue for the Japanese. But China has deliberately continued to follow its former leader Deng

Xiaoping's policy of keeping a low profile - except in 2009 and last year when it made lots of mistakes, including with the visit of US President Barack Obama to Beijing, and declining to condemn North Korea's shelling of a South Korean island. These mistakes alarmed many, but China has since been working very hard to calm waters again - and has, so far, done so successfully.

Its continued claims in the South China Sea can't be calming.

Yes. China needs to spell out its position on this sea more clearly, especially as to how it is consistent with, say, the principles of the UN Law of the Sea Convention. It has to put up a case on the sea that is defensible under international law and they should learn from countries such as Malaysia and Singapore that have referred their disputes to the International Court of Justice, which is a valuable mechanism for resolving maritime disputes.

What do you make of Chinese thinker Yang Xuetong's suggestion that China has to have moral authority to defeat the US?

I like it. As he wrote in the International Herald Tribune on Nov 21: 'It is the battle for people's hearts and minds that will determine who eventually prevails. And, as China's ancient philosophers predicted, the country that displays more humane authority will win.' This is the kind of competition we want to see in Asia. In theory, the US has more soft power than China but, at the same time, China has increased its trade in the region much faster than the US has in recent times. The biggest challenge for the US in Asia is that its deeds have to match its words. So it has to deliver on the Trans-Pacific Partnership (TPP - a regional trade agreement currently being negotiated between the US and eight other Asia-Pacific countries, including Singapore). And if the US Congress does not support the TPP, the US will go nowhere in Asia.

The Chinese are going to try very hard to demonstrate to the rest of the world that its rise is good for the world. I actually believe that, because China alone has rescued 600 million people from absolute poverty; no other country in human history has ever done so. And China is also really investing in green technology, so there are many positive things that China is doing that often go unrecognised.

But who wants to be pro-Chinese?

You do not have to be. In fact, we are going to move away from a world where we try to be more Chinese or more American and move into a world where we are more of ourselves.

Is that why you are now writing a book on global governance?

I am trying to persuade countries, especially the big powers, that their national interest is aligned with greater global governance. In the past, the world's 193 countries were in separate boats; you just needed rules to make sure that these boats did not collide. Now, we all live in 193 separate cabins on the same boat and would want a captain and crew taking care of all on the boat; that is global governance.

The challenge is to persuade the great global powers that we need greater global governance and stronger multilateral institutions, which they think constrain their powers. It can be done if you appeal to their national interests.

Why are the great powers slow to embrace such long-term benefits?

Quite often, governments know what is the right thing to do. The Singapore Government's big strength is that it knows what is right and has the capacity to make long-term decisions, compared to, say, France and Italy, which do not have such capacity because it is sometimes politically impossible to do the sensible thing in many developed countries.

Why so?

If you look at the problems that are happening in the world today, from continuing unemployment in the US to the struggles of Greece, Italy and now Spain to regain growth, the reason why they are struggling so is they have not educated their populations that, with the return of Asia, they now have to retool their societies and become competitive again. The great myth and illusion that American and European politicians have engendered in their populations is, 'Don't worry, things will bounce back naturally.' That is not true.

So what is the true picture?

I am working on three sets of big ideas about that. First, we have reached the end of the era of Western domination of world history. Related to the first idea is the second one, which is the return of Asia.

Which means the return of an economic miracle?

It is not a miracle at all; in fact, it is a completely normal thing to have happened. From the year AD1 to the year AD1820, the two largest economies in the world were always China and India. It was only in the last 200 years that Europe and North America have taken off. These last 200 years, against the backdrop of the last 2,000 years, have been a major historical aberration and if you have such an aberration, clearly it has to end.

What is your third big idea then?

That in our new, smaller and interdependent world, we need greater global governance. The world's big states have progressively weakened multilateral institutions because those constrain their powers, whereas multilateralism increases the influence of a small state. But my argument is that it is now in, say, the US' interest to strengthen multilateralism because the US is also becoming interdependent on the rest of the world. We are all now interconnected so we have to work together to solve problems.

Singapore can be intellectual capital of Asia

FIRM and precise, Professor Kishore Mahbubani has long been a passionate champion of Asia and he is now looking forward to a cultural renaissance in the region, riding on the bracing confidence of its youth. Here he is on:


'It has the opportunity to be the intellectual capital of Asia because of the quality of its ideas. As an American thinker told me recently, 'I come to Singapore to get my geopolitical fix.''

The view that Singapore is too repressive for ideas to flourish here

'I disagree completely with that. Singapore has opened its door to many foreign universities; that's a sign that it is strong and confident enough to allow the marketplace of ideas to decide what is right and what is wrong.'

Critics who say his latest book, The New Asian Hemisphere, is an anti-Western polemic

'How can that be when I say the reason why Asians are succeeding now is that they have finally understood, absorbed and implemented the seven pillars of Western wisdom? Any Asian reading my book should send a thank-you note to the West for sharing that wisdom with him.'

The West's view of China

'China has been run by a communist party in 1949, 1979 and 2009. But Westerners don't see the change, whereas I've been dealing with Chinese government officials for 30 years and am absolutely astonished at how the younger ones among them are far more thoughtful and aware of the changing world than their Western counterparts.'

The Arab Spring

'It's a wonderful phrase but it conveys a false sense of hope about the future because the Arab world hasn't got middle-class populations yet, so its transition to democracy won't be as easy as it was for Eastern Europe, which already had a large, well-educated middle class when communism fell there.'

The idea of an Asian century

'I actually call it the Asian Millennium; I'm far more excited about the next 20 years than I have been about any other period of my life.'


Sunday, November 27, 2011

Contain China?

Nov 26, 2011

The Obama Doctrine is dangerous
By Hugh White

SINCE 2009, China's challenge to American primacy in Asia has become too stark to ignore. Last week President Barack Obama gave his response. On his Asian journey, he enunciated what truly deserves to be called the Obama Doctrine. It is perfectly clear. The United States will resist China's challenge to its primacy in Asia, using all the instruments of its power to strengthen and perpetuate the preeminent leadership it has exercised in the region for decades.

Mr Obama also sketched plans to implement this doctrine by reorganising Asia under new US-led regional structures which exclude China. His Trans-Pacific Partnership creates a new economic framework for the Asia-Pacific without China, while an expanded defence presence in Australia signals his aim to build armed strength in Asia and draw friends and allies into a larger and tighter strategic coalition against China's growing military weight.

Of course, Mr Obama hopes that the resolve he has shown will persuade China to drop its challenge and accept US leadership once more. But his doctrine clearly implies that if China cannot be persuaded, it will be compelled. This is very ambitious. Indeed it is America's most ambitious new strategic doctrine since Truman committed America to contain the Soviet Union.

Some will dispute that comparison. They will say the policy is not containment, and the adversary is not the Soviet Union. But think about it. America's aim is to resist an expansion of China's influence in Asia by building an economic and strategic coalition of friends and allies around its geostrategic periphery. The Obama Doctrine lacks the ideological dimension of Cold War containment - but it mirrors the geostrategic and political essence of the Truman Doctrine. It walks like a duck and quacks like a duck.

And is China the Soviet Union? In many ways it is not. China is still much weaker militarily than the Soviets were, and less threatening. But relative to the US, China is much richer than the Soviets ever were, and that makes it in the long run a much more formidable adversary. Indeed it is the most formidable strategic competitor America has ever encountered, because it is the only one ever to approach the US so closely in sheer economic weight. And that has nothing to do with overblown doom-saying about American decline. It simply flows from China's remarkable growth.

These sobering reflections prompt two critical questions: Where does the Obama Doctrine lead? And what are the alternatives?

Where it leads depends first on the Chinese. The idea that they will simply cave in is just wishful thinking. That leaves only two possibilities. One is that China's economy stumbles. This seems to be what Mr Obama expects. He clearly had China in mind when his major speech in Canberra last week foreshadowed the failure of any country which is not a democracy. Maybe he'll be proved right. But people have been predicting the failure of China's Market-Leninist model for 30 years now, and for 30 years the model has delivered growth at 10 per cent per year. Americans would be unwise now to assume that China will fail any time soon.

If it doesn't, we can expect China to push back against the Obama Doctrine. And we can assume that America will then push back in turn. What follows then is steadily escalating strategic competition between two very powerful rivals, playing out in a setting that gives China big asymmetrical advantages. That will carry immense costs for America, and even bigger risks.

One risk is that escalating strategic competition will disrupt the vital economic relationship between the US and China. Many hope that the two countries' deep interdependence will prevent their rivalry getting out of hand. But that will happen only if both sides are willing to forgo strategic objectives to protect their economic cooperation. With the Obama Doctrine, the President has declared that he has no intention of doing that. Why should we expect the Chinese to act any different? So it is more likely that escalating rivalry will soon start to erode economic interdependence between the two nations, at great cost to both.

The other risk is the growing chance of conflict. A war with China over Taiwan or the Spratly Islands is simple to start but hard to end, and could very easily escalate. China is a nuclear-armed power capable of destroying American cities, and the threshold for nuclear exchanges in a US-China clash might be dangerously unclear and disastrously low.

So the Obama Doctrine seems to lead in some very dangerous directions. Those dangers might nonetheless be worth running, if the only alternative was to stand back and let China take over Asia. And many people see us facing this stark choice - a choice between re-asserting US primacy in Asia and abandoning the region to Chinese hegemony.

But these are not the only possibilities. We can imagine an Asian future dominated neither by America or China. Beijing and Washington could share power, each balancing and restraining the other. This would be much less congenial to most of us than the uncontested US primacy of the past 40 years. But it would be much better than the escalating rivalry that looms today, and much better too than unrestrained Chinese hegemony.

Of course this could work only if both China and the US agree to make it work. We cannot be sure that such an agreement has ever been possible. But it was always worth exploring. The window for doing that was never large, and is closing fast. The way things are going, the two countries will soon be so deeply entrenched in rivalry that a deal like this becomes impossible.

That's why the Obama Doctrine is a very serious mistake. It commits America to a strategic confrontation which will cost it dearly, which it might not win and which it could quite possibly avoid without sacrificing its vital interests in Asia. America should step back from the Obama Doctrine and explore the possibility of a deal with China to build a better basis for peace in the Asian Century.

That will not be as popular with today's American voters as the muscular resolve he showed in Asia last week. But it might earn him the gratitude of their grandchildren, which was how Bismarck defined the difference between a politician and a statesman.

The writer is professor of strategic studies at the Australian National University in Canberra and a visiting fellow at the Lowy Institute in Sydney.


Thursday, November 24, 2011

The lies economists tell us about money

Nov 24, 2011

Understand the 'money illusion' and how it confuses your brain

By Andy Mukherjee

ONE of the biggest frauds perpetrated by the economics profession on hapless mortals over the last 70 years is its insistence that there is no such thing as 'money illusion'.

New evidence suggests that money does create illusions: it not only muddles the thinking of individuals; en masse, it precipitates property and stock market bubbles. When these bubbles burst, as in many parts of the world in 2007-08, societies come under severe stress.

But what exactly is money illusion?

British thinker John Maynard Keynes was the first to use the term, and, in 1928, the great American economist Irving Fisher devoted an entire book to it.

Simply put, money illusion is the inability of the human mind to separate 'nominal' variables, such as wages, rents, mortgage payments and dividends, from 'real' variables, which factors in how inflation affects incomes and expenses. The purchasing power of money keeps getting altered without our fully realising it.

No other unit of measurement is like money. What we mean by a kilogramme of sugar, a metre of cloth or a kilowatt hour of electricity, remains constant. But what we mean by US$1 or €1, and the happiness we derive from owning it (or the unhappiness we suffer from losing it) keeps changing.

Take two girls - Ann and Barbara - who graduate one year apart and have the same starting pay. At the end of the first year, Ann gets a 2 per cent raise. At the end of Barbara's first year at work, during which the inflation rate is 4 per cent, her pay goes up by 5 per cent.

In economic terms, Ann is better off at the start of her second year at work. Her inflation-adjusted, or real pay increase is (2-0) = 2 per cent, while Barbara's real increment is (5-4) = 1 per cent.

But who, between the two, will be a happier employee? Who will be more likely to switch jobs in the second year?

Thanks to a sharp turn the economics profession took 67 years ago, it became illegitimate to even ask such questions.

This is how it happened: In 1944, John von Neumann, one of the greatest mathematicians of all time, teamed up with German-born economist Oskar Morgenstern, a colleague at Princeton University's Institute of Advanced Studies, where they were both contemporaries of Albert Einstein's, and decided to bring some mathematical rigour to economics.

von Neumann and Morgenstern developed a calculus of 'subjective expected utility', the personal happiness that we seek to maximise. The theory relied on four axioms. Any human behaviour that violated any of the axioms was deemed irrational, unlikely to persist and unworthy of further comment; if all four held, then it was stable and predictable. Economists declared that this latter type of rational, self-seeking, utility-maximising behaviour is what makes the world go around.

How wrong they were.

Cognitive psychologists Eldar Shafir and Amos Tversky, together with economist Peter Diamond, decided to test people's opinion about Ann and Barbara. While 71 per cent of those they surveyed agreed that the pay increase had left Ann better off than Barbara 'in economic terms', fully 64 per cent of the respondents believed that Barbara would be happier than Ann at the start of her second year at work and less likely to quit.

Published in 1997, the Shafir-Diamond-Tversky study showed that the von Neumann-Morgenstern model of rationality, the foundation stone of modern macroeconomics, was shaky. And that the hunch of Keynes and Fisher is right - that we suffer from money illusion and don't factor in how inflation changes the value of a dollar.

A decade later, researchers at the University of Bonn and California Institute of Technology did a more direct test. They ran MRI scans and found that a part of the brain's pre-frontal cortex, which decides our response to rewards and punishments, reacts more to nominal than real variables. (The same part of the brain derives greater satisfaction when we're drinking Pepsi that's labelled as Coke.)

But all that came later. Meanwhile, the theory of Rational Economic Man (and Woman) became so entrenched that there was total disdain for the notion that money confuses the mind. James Tobin, who would win a Nobel prize in economics in 1981, said: 'An economic theorist can, of course, commit no greater crime than to assume money illusion.'

The banishing of money illusion was a crucial victory for the finance profession because if there was widespread money illusion, there could never be such a thing as efficient markets.

And efficient markets was the lie that the financial industry wanted you, me and politicians everywhere to believe so that no one gets terribly nervous when asset prices reach the stratosphere.

Ask yourself, why is it that housing markets in the United States, United Kingdom, Canada, Australia and many other advanced economies saw spectacular run-ups, followed by dramatic crashes, starting in the 1980s, a theme that played repeatedly until the huge subprime mortgage collapse in 2007-08? One part of the answer is money illusion, say Princeton University economist Markus Brunnermeier and London School of Economics professor Christian Julliard.

After creating havoc in the 1970s, the inflation genie went back into the bottle in the early 1980s. Nominal interest rates declined, making mortgages appear attractive to home buyers. What they didn't understand was that inflation had collapsed more than interest rates. So the real interest rate had actually risen; mortgages had become more expensive, not less.

Banks that financed the gush of mortgages profited, while governments and central banks stood by and watched. They were powerless to act because mainstream economists had no advice on how to deal with irrational exuberance caused by money illusion. After all, no such mirage was supposed to exist.

With the world economy still reeling from the 2008 crash, let's hope something has been learnt. One lesson is that as long as we use a thing of no fixed value as money, we will continue to be confounded by it. Thus, asset bubbles are inevitable. But as prices start getting out of whack, policymakers have to step in and ask people to sober up. Parties that break up early are less painful the morning after. A second lesson is that when modern macroeconomists claim to describe or predict behaviour, ask them if they are assuming people to be rational. If they are, chances are they're wasting your time.

Monday, November 21, 2011

Medical magic

Nov 20, 2011

Three surgical procedures which went smoothly set me thinking about things one can learn from them
 By Ignatius Low

There are times in your life when you want to lift your skinny arms to the sky and thank the heavens for the gift of good pharmaceuticals.

Oh wait, the legal ones, I mean. No, no, it's not that sort of column.

Or is it?

The first time I took valium was for Lasik, a medical procedure that has become almost as cheap as a smartphone these days but no less life-transforming.

At the time, however, I paid the equivalent of several smartphones to engage one of the best surgeons in town. These are my eyes, I said to myself, as I emptied the bank account to sit in his swish office at Camden Medical Centre.

My nervousness must have been apparent at a sort of 'dry run' of the surgery we did. This is what paying top dollar buys you - the chance to lie down in the operating room before the event, with all the implements in your eye, while highly paid doctors and assistants talk you through every step of the way.

But, as I was to discover later, it was the promise of valium that would really make the difference.

'We find that it relaxes our more nervous patients and makes the procedure easier for both parties,' the surgeon said, smiling.

In the end, I wasn't just relaxed.

I went on a trip to outer space where an alien breed was conducting benign experiments on me. The whirr and click of the machines were soothing and the blinking lights - oh, the lights! - were so beautiful and captivating.

After it was all over, blurry people in surgical masks were fussing over my eye, smoothing it down with a brush and mumbling exciting-sounding commands. I half- expected them to call me Scully.

Today, my vision is perfect but my memory of the operation is tantalisingly hazy. By all accounts, Lasik was to have been a scary experience but the only word that really comes to mind for me is: Wow.

This is perhaps why I was so game to try another wonder drug when it was suggested for another common medical procedure.

This time, I was at my trusty dentist, an ex-classmate I have known literally half my life.

He has done very well and is also at the top of his game. In an interview, he once described himself as a 'humble mechanic' who removes and replaces the faulty bits in people's mouths.

For me, that faulty bit was a big molar that was so decayed it couldn't be saved. He suggested an implant, which put the fear of God in me right away.

If you don't already know, a dental implant is a titanium screw which they put into your jaw where the lost tooth used to be. Once it is in, and fused with the surrounding bone, you can put a crown (a sort of artificial tooth) on it and voila, it's as if the years of laziness and neglect never even happened.

But before we get to that happy conclusion, the patient has to endure an hour-long procedure that involves a fair bit of slicing and drilling.

'It goes better for you and me if you are relaxed,' he said, a by-now familiar refrain. 'And I've worked on your teeth long enough to know that you are not relaxed.'

'Valium?' I asked hopefully.

No, he replied. We will actually put you to sleep - with propofol.

My eyes widened. 'The drug that killed Michael Jackson?'

'Um, yes. But it's really very good,' he replied. 'It costs a bit more because a medical doctor trained as an anaesthetist will have to be there for the whole operation, but trust me, it's worth it.'

On the day of the operation, the anaesthetist came with a big suitcase and a big smile. He put an IV line in me, hooked everything up and pretty soon a milky white liquid was coursing through my veins.

'Like soya bean milk' was the last thing I remember him saying before I went to sleep and had a nice dream about planning for an overseas vacation. Then someone was shaking me awake.

After general anaesthesia, many patients report feeling nauseous and some throw up.

But I was in a wonderful mood. I remember telling another patient who was with me in the recovery room about my dream and soon we were chatting and laughing about our jobs and lives.

Later, I asked whether propofol always felt like this. They told me that patients are in such a good mood, they have actually ended up going on dates with strangers they met in the recovery room after surgery.

Again that word - Wow.

I confirmed my theories about propofol last week when I went for knee surgery to fix an old problem that had gotten worse with age and too many squats at the gym.

When I was told that I would be put to sleep for an hour or so, the first word out of my mouth was a hopeful one: 'Propofol?'

When they said yes, my heart skipped a beat. I felt that I had won another minor prize in the lottery of life.

This time, the anaesthetist likened it to a 'champagne buzz' before I went under, for a larger dose that meant that the medical team had to regulate my airways.

Again, I woke up feeling incredibly fine after what was a deep and satisfying nap. I checked my phone for messages five minutes after I was wheeled back into my room.

'Are you okay?' a colleague had asked.

'Yeah, I just came out. Good mood now!' I texted her, before wolfing down a three-course dinner of soup, shepherd's pie and cake.

The thing is, the three procedures I went through were common enough for there to be so many horror stories about pain and complications.

Yet my own experience was more than all right. Borderline pleasurable, even.

MJ certainly knew he was getting the best, and it's easy to see how he could become addicted.

Okay, so maybe it wasn't all just about the drugs.

All three doctors who attended to me were expert practitioners with many years of experience. They not only did very neat work that ensured quick healing, but each of them has also made an art out of post-op pain management.

What's my point in all of this?

I don't know really. Maybe it is just to point out that there are these little shortcuts in life that one can take and that it is perfectly okay to want them.

Or that one should never judge the rightness or wrongness of something until one has experienced it for himself.

That it pays to pay a little more for important medical procedures; or simply that happiness can be a chemically altered state of mind (legally procured, of course).

You decide.

Me? I'm just happy with these little bits of what was nothing less than medical magic.

[Happiness is a chemically-altered state of mind.]


Thursday, November 17, 2011

Leaders who will not lead

Afraid of their people, none in the US, India or Europe will take hard decisions needed to improve living standards

by Thomas L Friedman

Nov 17, 2011

Driving to the covered bazaar in the exotic western Indian town of Jodhpur last week, our Indian guide stopped to point out a modern landmark. "Do you see that stoplight?" he asked, pointing to a standard green-yellow-red stoplight in the busy intersection. "It's the only stoplight in Jodhpur. There are 1.2 million people living here."

The more you travel around India, the more you notice just how lightly the hand of government rests on this country. Somehow, it all sort of works. The traffic does move but for the first time in all my years visiting India, I've started to wonder whether India's "good enough" approach to government will really be good enough much longer.

Huge corruption scandals have stripped the government of billions of dollars of needed resources and, as much as I'm impressed by the innovative prowess of India's young technologists, without a government to enable them with the roads, ports, bandwidth, electricity, airports and smart regulations they need to thrive, they will never realise their full potential.

This isn't just a theoretical matter. The air in India's biggest cities is unhealthy. You rarely see a body of water here - a river, lake or pond - that is not polluted. The sheer crush of people - India will soon have more than China - on an unprotected environment really seems to be taking its toll.

Without better governance, how will India avoid becoming an ecological disaster area in 10 years? Eventually the law of large numbers - 1.2 billion people - just starts to devour every minimalist step forward that India makes. India doesn't need to become China, and isn't going to. But it still needs to prove that its democracy can make and implement big decisions with the same focus, authority and stick-to-itiveness as China's autocracy.

Mr Azim Premji, the chairman of Wipro, one of India's premier technology companies, did not mince words about the future when he announced his company's earnings two weeks ago: "There is a complete absence of decision-making among leaders in the government. If prompt action is not taken, the country will face a setback. You must appreciate how serious it is."

Sound familiar? Mr Premji could have been speaking about the European Union or the United States. No leaders want to take hard decisions anymore, except when forced to. Everyone - even China's leaders - seems more afraid of their own people than ever.

One wonders whether the Internet, blogging, Twitter, texting and micro-blogging, as in China's case, has made participatory democracy and autocracy so participatory and leaders so finely attuned to every nuance of public opinion, that they find it hard to make any big decision that requires sacrifice. They have too many voices in their heads other than their own.

Here we are in America again on the eve of a major budgetary decision by yet another bipartisan "supercommittee", and does anyone know what President Obama's preferred outcome is? Exactly which taxes does he want raised, and which spending does he want cut? The President's politics on this issue seems to be a bowl of poll-tested mush.

At a time when, from India to America, democracies have never had more big decisions to make, if they want to deliver better living standards for their people, this epidemic of not deciding is a troubling trend.

It means that we are abdicating more and more leadership to technocrats or supercommittees - or just letting the market and Mother Nature impose on us decisions that we cannot make ourselves. The latter rarely yields optimal outcomes.

The European Union has a particularly acute version of leaders-who-will-not-lead, which is why both Greece and Italy have now turned to unelected technocrats to run their governments. Writing in The Financial Times on Saturday, Mr Tony Barber noted, "In effect, euro zone policymakers have decided to suspend politics as normal in two countries because they judge it to be a mortal threat to Europe's monetary union. They have ruled that European unity, a project more than 50 years in the making, is of such overriding importance that politicians accountable to the people must give way to unelected experts who can keep the show on the road. "If so far there is little public outrage in Athens and Rome, it is surely because millions of Greeks and Italians hold their political classes in such contempt."

Yes, it's true that in the hyperconnected world, in the age of Facebook and Twitter, the people are more empowered and a lot more innovation and ideas will come from the bottom up, not just the top down. That's a good thing - in theory.

But at the end of the day - whether you are a President, Senator, Mayor or on the steering committee of your local Occupy Wall Street - someone needs to meld those ideas into a vision of how to move forward, sculpt them into policies that can make a difference in peoples' lives and then build a majority to deliver on them.

Those are called leaders. Leaders shape polls. They don't just read polls. And, today, across the globe and across all political systems, leaders are in dangerously short supply. The New York Times

Thomas L Friedman is a three-time Pulitzer Prize winner.

Wednesday, November 16, 2011

How Singapore uses behavioural economics

Nov 16, 2011

By Ravi Menon

SOME 15 years ago, Switzerland held a referendum about where to put nuclear waste dumps. Researchers went from door to door in two Swiss cantons and asked people if they would accept a dump in their communities. People thought that such dumps might pose a risk to their health or depress the value of their properties. But a surprisingly high 50 per cent of those who were asked said they would accept a nuclear waste dump in their communities. People felt responsibility as Swiss citizens.

But when people were asked if they would accept a nuclear waste dump if they were paid a substantial sum each year - equal to about six weeks of the median wage - a remarkable thing happened. Only about 25 per cent of the respondents agreed to have the dumps. The offer of cash undermined the motive to be a good citizen.

Monday, November 14, 2011

Beijing blew it; Washington shouldn't

Nov 14, 2011


 By David F. Gordon

ATTENDING the Asia-Pacific Economic Cooperation (Apec) summit in Honolulu over the weekend, US President Barack Obama would have realised that he confronts a changing game in Asia. During a recent visit to the region, a senior Asian policymaker told me: 'We used to ask what we could get from the Americans in return for their military personnel and basing rights. The new question is, what will we have to give them to get them to stay. And it's all because of China.'

Japanese, Australian and South-east Asian policymakers and business executives have made clear to me that China is misplaying its hand in Asia. Beijing has miscalculated its ability to cater to nationalist sentiment at home without alarming its neighbours and is inadvertently driving Asian states to build closer economic and strategic ties with the United States and each other. This misstep gives Washington an enormous opportunity.

For the past decade, Beijing wagered that its neighbours' reliance on its economy for trade and investment would buy goodwill, closer ties and space for occasional strategic posturing. In other words, China sought to provide the economic engine for the region while espousing a 'peaceful rise' principle that eased suspicion over its geopolitical intentions. And for its neighbours, an economically vibrant and diplomatically modest China provided the perfect partner.

Over the past 18 months, however, China has taken a more aggressive tone towards territorial disputes in the South China Sea and elsewhere. This is partially driven by the leadership transition in Beijing, as factions in the Communist Party seek to curry favour with hawks, hard-liners, the nationalistic press and business. Although a few Chinese policy-makers have begun to walk back some of the aggression, their hands are tied by the jockeying for power in Beijing.

Wariness of China is pervasive and increasing among the elites and general populations in Vietnam, the Philippines, South Korea, Japan and elsewhere. Meanwhile, economic sentiment regarding China is shifting from bullishness to caution.

Even without an economic 'hard landing', China may face years of slower growth and higher inflation, coupled with rising fears about bad debt. Its neighbours worry that a weakening in China's economic trajectory could have drastic effects on their economies. A more assertive but less economically dynamic China is the region's worst nightmare.

In response, China's neighbours seek a balance to Beijing. When Chinese Foreign Minister Yang Jiechi last year warned members of Asean to 'remember how much of your economic prosperity depends on us', he motivated not a strategic kowtow but increased efforts by regional nations to reduce their dependence on China.

These dynamics are not yet fully appreciated in Washington, but they present a strategic opportunity. We have already taken advantage in the military sphere, strengthening cooperation beyond defence agreements with Australia, Singapore, Taiwan and Vietnam since last year. In Japan and South Korea, alliances with the US remain extremely popular.

Washington has an even greater opportunity in the economic realm: to shape the emergent Asia-Pacific financial and commercial architecture, enabling the US to provide what will probably be necessary economic underpinnings for long-term US military and security commitments to the region. But Washington has been slow to pursue this opening, even with a path readily available. The Trans-Pacific Partnership (TPP) is a free trade agreement that includes Australia, New Zealand, four South-east Asian nations, Chile and Peru.

Japan is expected to announce its intention to join negotiations. US Secretary of State Hillary Clinton emphasised the TPP when speaking about economic diplomacy last month, but negotiations have proceeded slowly. While Washington cannot drive the TPP on its own, the Obama administration's approach to Asian trade and commercial issues has been tepid. The Apec summit is likely to bring only a skeletal outline of the pact's terms, rather than the full agreement as originally planned.

As Mrs Clinton said last month: 'America's economic strength and our global leadership are a package deal.' A vibrant TPP, complete with rules and reciprocity on investment, will ensconce the US firmly in the emerging economic and political architecture in East Asia. Although the US is still a leading trade partner of many Pacific Rim countries, its share of regional trade is declining. The TPP, especially if it includes Japan, would provide a strategic counterpoint to last year's China-Asean pact. It presents an alternative to Chinese economic and strategic domination that nations in the region are actively seeking, and offers economic and strategic benefits for the US in a region that has begun to define the international scene.

This opportunity will not last. After China's leadership transition is complete, there could be a more decisive shift in Beijing towards a more effective Asian policy. For now, though, driving the TPP to a successful conclusion would be an important step towards ensuring that the US has a secure place in the region's new dynamics.

The writer is head of research and director of global macro analysis at Eurasia Group, a global political risk consultancy. He was director of policy planning at the US State Department from 2007 to 2009.


2.05m Japanese on welfare - a post-war high

Nov 10, 2011

July's figure includes thousands hit by March 11 disaster

 By Kwan Weng Kin

TOKYO: Japan's prolonged recession has led to a record 2.05 million people living on welfare, narrowly surpassing the previous high posted during the post-World War II years.

In July, the number of people on welfare hit 2,050,495, almost 4,000 more than the previous record of 2,046,646 posted 60 years ago in 1951.

This number is expected to grow in the coming months, given Japan's rapidly ageing population.

Last year, almost one-quarter of the Japanese population - 23 per cent - were aged 65 and above. The figure is expected to reach nearly 30 per cent by 2020.

While the Health, Labour and Welfare Ministry's report did not give a breakdown of the types of welfare recipients, they included thousands who lost their jobs because of the March 11 earthquake- tsunami disaster and the nuclear crisis that it triggered.

Japan imposes stringent conditions on welfare applicants, who must show that they have exhausted all available personal assets and all avenues for employment, and must be living in poverty.

In practice, applicants are told to first live off their savings and sell any assets or property they have to support themselves. Welfare counsellors also advise applicants to find work.

An elderly applicant who is entitled to a pension or other allowances from the state is told to apply for those benefits first.

Japanese society also continues to uphold family ties. Welfare applicants are routinely told to seek financial support from close family members or relatives, rather than depend on the state.

Despite this, the number of people on welfare has been rising since it bottomed out in 1995 at 880,000 a month. After hitting two million in March this year, the number has grown by about 10,000 a month.

While the elderly comprised over half of all welfare recipients previously, the proportion of younger Japanese on welfare swelled in recent years, particularly after the 2008 global financial crisis.

Thousands of part-time workers have been left jobless since employers cut manpower costs to stay afloat three years ago.

Those in their 30s to 50s find it especially difficult to find a new job because of their age.

The persistently poor job situation in Japan is due to the sluggish economy. Government-funded skills retraining programmes have not helped much.

The government's expenditure on welfare benefits has gone up as the number of recipients continues to rise. The total payout topped 2 trillion yen (S$32.6 billion) in 2001 and reached 3 trillion yen in 2009.

For the fiscal year ending next March 31, the government has set aside 3.4 trillion yen.

But Japan is far from being like many Western countries, where young people are said to be able to live on the dole and not have to work.

A young couple with one infant living in the Tokyo area will receive about 175,000 yen - equivalent to the starting monthly pay of a college graduate. If they live in places where the cost of living is lower, the payout is about 20 per cent less.

Welfare recipients who need medical care will have their bills paid directly to the hospital.

[Much like Singapore.]

Time to give workers bigger slice of the pie

Nov 10, 2011

G-20 leaders must set figures for wage rises in order to boost growth

 By Andy Mukherjee

IN THE middle of yet another nerve-racking week in the markets, with the epicentre of the European crisis seemingly having shifted to Italy from Greece, it is legitimate for investors to ask what, if anything, politicians are doing.

Now, at least one politician did do something good this week - Italian Prime Minister Silvio Berlusconi promised to step down. That gave a faint glimmer of hope to investors yesterday, though it is not clear just how Rome - with or without Mr Berlusconi - will be able to make a dent in the country's staggering debt burden, which at €1.9 trillion (S$3.3 trillion) is 119 per cent of its gross domestic product.

As the world heads towards another 2008-type crisis, there is talk that the International Monetary Fund's (IMF) resources will be expanded - at a future date. There is also expectation that the European Financial Stability Facility, Europe's bailout fund, will be ramped up - at a future date.

Investors are justifiably angry with world leaders for not presenting a clear battle plan at the recently concluded Group of 20 (G-20) summit in Cannes, France.

Still, I would argue that it would be a mistake to view the shindig as a complete failure. Take, for instance, the Cannes Action Plan for Growth and Jobs, through which the leaders made a commitment to implement 'structural reforms to raise growth and enhance job creation across G-20 members'. The 'ultimate objective', they declared, 'is to provide more and better jobs for our citizens'.

Now, it is admittedly a vague commitment. The investor community, which has very little faith left in the ability of present-day politicians to do much good, will not get excited about what they see as yet another platitudinous statement. But then, most political commitments of far-reaching significance begin life this way - as nebulous ideas. It is now up to the technocrats in each country, and at multilateral agencies such as the IMF and the International Labour Organisation (ILO), to flesh out the political intent into specific, time-bound commitments.

One such commitment on which urgent political consensus is needed is wage-led growth.

The average real, or inflation-adjusted, annual wage growth in G-20 economies in 2006 and 2007, the two years preceding the global crisis, was a lacklustre 2.5 per cent and 2.8 per cent respectively. If you take China out of the picture, the reality was even grimmer. For G-20 excluding China, real wages rose just 1.6 per cent and 1.8 per cent in 2006 and 2007.

The 2008 crisis was a hard blow to taxpayers, who had to pony up the resources for the cleaning-up of the mess left by irresponsible bankers. But the crisis also delivered a knock-out punch to labour. Real wage growth in G-20 excluding China collapsed to just 0.5 per cent in 2008, and it rose no faster than that in 2009.

One does not have to be a card-carrying communist to share the rage of the Occupy Wall Street protesters against this assault on the working class.

In formulating its action plan on jobs, the G-20 has taken an important first step. The next step should be for the G-20 leaders to adopt - and announce - simple numerical targets for what the wage share in each of their economies should be by the end of the present decade. No one number will fit all. But the targets have to be worked out in a way that, on average, a large share of economic output of G-20 gets paid out to workers as wages.

A commitment to wage-led growth will be a powerful signal to consumers to start spending again.

Before the onset of the 2008 crisis, conventional economic wisdom de-emphasised wages and promoted profits. One of the central tenets of this orthodoxy was that policymakers must insist on wage moderation because if they did not, there would be too much inflation.

This view found ready acceptance among policymakers as the world was in no mood to relive the inflationary 1970s.

Promoting profits at the expense of wages, it was believed, was a much better growth strategy. The assumption was that higher corporate profits would lead to higher investments, which will, in turn, produce economic growth, create jobs, and bolster government revenue.

Consumption, the spin doctors said, would be supported not by current wage incomes, which were largely stagnant, but by wealth.

For a while, it was possible to do this. Household ownership of financial products was rising globally. So even a part of the middle class, which would have liked to see its wage income rise, got hoodwinked by bankers into accepting the notion that it could always consume a part of its illusory stock-market and real-estate riches. According to an ILO study, between 1980 and 2007, in 17 out of 24 of the world's richest nations that belong to the Organisation for Economic Cooperation and Development (OECD) and for which data is available, the share of wages in the economy fell.

Not that developing countries were spared. Between 2000 and 2009, real wages in China grew 12.6 per cent a year, but productivity grew faster at 13.7 per cent. As a result, the share of wages in gross domestic product fell 4 per cent annually. The yearly decline in wage share in India was 1.4 per cent.

The slavish pursuit of wealth-oriented growth sowed the seeds of the 2008 financial crisis, which brought the whole edifice crumbling down.

The wealth that was supposed to have paid for current consumption simply vanished into thin air. After governments were forced to assume the liabilities of a troubled banking sector to get credit flowing again, they discovered that their budgets were overstretched and no longer capable of supporting the vast social safety nets that they had put in place.

The folly of systematic suppression of wages became all too apparent.

It is time for course correction, which can only happen if G-20 leaders eschew the doctrine that got much of the world into this mess, and give a strong push towards wage-led growth.

Saturday, November 5, 2011

Greek crisis not as bad as 2008 - yet

Nov 5, 2011

Things could still get far worse as political will, policy options crumble
 By Robin Chan

GREEK politics this week may have seemed like a comedy of errors to some, but there is nothing funny about the global outlook if the long-simmering euro zone crisis is not addressed urgently.

So far, the crisis has not evolved to the magnitude of the global financial crisis of 2008 and 2009, which saw Wall Street giant Lehman Brothers collapse, global markets plunge, and economies around the world cascade into a sharp and broadbased economic recession.

But as events in Europe take improbable and dramatic twists and turns, the impact on the financial system and economies around the world is becoming more and more pronounced - and bleak.

Europe now appears headed for a recession, which could easily send the global economy deep into the doldrums.

And the longer Greece delays a decision on its euro zone future and reforms to its economy, the higher the risk of contagion spreading to Spain and especially Italy, which is in a precarious state.

As an HSBC report noted yesterday, far from ring-fencing Greece, the contagion and associated credit crunch risks appear to be intensifying. If this happens, the crisis could claim much more significant victims than the likes of Wall Street brokerage MF Global, which collapsed in the past week, and Europe's Dexia Bank, bailed out earlier this year. It could be 2008 all over again.

There are three reasons why things could still get much worse.

First, euro zone debt problems are widening. As it stands, Greece, Portugal and Ireland are rotten apples that must be contained to stop contagion from spreading.

The three economies are small, and combined they are still less than the size of Spain which has a gross domestic product (GDP) of US$1.4 trillion (S$1.8 trillion).

The amount of debt is relatively small. Greece has sold US$62 billion in debt - small beer compared with the credit default swap market which ballooned to a whopping US$62 trillion in 2007 in the lead-up to the last crisis. US home loan lenders Fannie Mae and Freddie Mac also held US$5.3 trillion in mortgage assets, which led to billions of dollars of write-offs, which led to the collapse or nationalisation of many a bank in Europe and the United States.

If the problems are confined to the peripheral economies of Portugal, Greece and Ireland, the world can live with that.

But contagion is spreading to Spain and Italy as well. The latter has an economy double the size of Spain and US$2.2 trillion in debt. The Spanish government's exposure to Greek debt totals US$502 million while Italy's totals US$2.4 billion, according to the Bank of International Settlements.

As German Chancellor Angela Merkel has remarked: If Italy's debt stays at 120 per cent of its GDP, it won't matter how high the protective wall is, it won't help win back market confidence.

Already, credit spreads on Italian government bonds have blown out relative to equivalent German debt - a sign of confidence flowing out of Italy - with fears it could follow in Greece's footsteps.

The second key reason that things could get worse is that governments' ammunition may be running out, with another crisis following so soon after the last.

Back in 2009, central banks around the globe slashed interest rates and splashed out more than US$6 trillion combined to resuscitate the economy.

Worryingly, Bank of America-Merrill Lynch economist Chua Hak Bin noted that the scope for policy responses is not as great as it was in 2008.

Monetary policy has its limits, as US interest rates are at record lows in the US, while Europe's are near zero, and have just been cut on Thursday.

The US may be about to launch a third round of quantitative easing, effectively printing more money, but the first two rounds have not boosted growth much or eased unemployment.

United Overseas Bank head of research Jimmy Koh said the easier solution would have been for the European Central Bank to write a blank cheque to bail out the troubled economies, as the US did for banks at the height of the last crisis.

[This was in effect what SG govt did when they guaranteed and backed local banks.]

But European leaders are not willing to do so and have chosen to use the expanded €1 trillion (S$1.7 trillion) European Financial Stability Fund, a rescue fund to limit contagion, hoping to tap global investors including from China and Singapore.

But with the Greek outlook gravely uncertain, investors are hardly keen to step into the fray. A US$3 billion bond sale has been delayed.

The third big worry is that strong and coordinated political leadership seen in 2009 appears to be lacking.

Mr Koh noted just a handful of key players including US Federal Reserve chairman Ben Bernanke made the big, urgent decisions to avert the US financial meltdown. But in the now two-year-old euro zone crisis, there are 17 national leaders, all with differing agendas, leading to a convoluted decision-making process.

[In a crisis, a coordinated  leadership is vital to effective action. Which is why armies are not led by committee. Or in the case of the US-Vietnam war, when it is led by committee, they are less effective.]

The shock referendum called, then withdrawn, this week, by Greek PM George Papandreou drew the ire of Dr Merkel and her European counterparts, as politics is increasingly clouding an already complex policy process in Europe. The bizarre turn of events also dominated the high-level G-20 meeting in Cannes which markets had looked to for hope.

There, Singapore Prime Minister Lee Hsien Loong warned the euro crisis is already on a bigger scale than the 2008 financial crisis and that the risk of a sudden and unpredictable global contagion has risen. His message that political leadership is critical to solving economic problems must not go unheard.

Hope is dimming. The US Federal Reserve has downgraded the US' long-term growth forecast, while Singapore is preparing for below trend growth.

Most now realise that even if Greece is bailed out, there will be a recession in the euro zone and a long road to recovery.

But that will be better than a collapse of banks and even states and a global recession - a scenario that while once far-fetched, has now become ever more likely as the crisis deepens.

It is not too late to avert that disaster. The prescription is clear, but the decisions are much harder to make.

Wednesday, November 2, 2011

7 Billion and the challenges

Nov 2, 2011


But there isn't enough water

THE world's population reached seven billion this week. The day, Monday, was marked with becoming happiness in countries that symbolically ushered in seven-billionth births. But it is the business of the United Nations Population Fund to inject realism into a statistical milestone few earthlings care about. It warns against over-consumption of resources: This was true before the fifth billion was crossed a generation ago. More optimistically, it says the crowded world could have thriving cities and productive labour that will grow economies, given the right planning and investment.

That is demanding a high threshold of proof. As 43 per cent of the seven billion are aged under 25, education and training obviously will make the difference between hope and despair.

It would have been nice if some of the increase of the past generation had been home-produced, in Singapore, for one. Or in Japan and South Korea. But what has been overlooked in the numbers lark is that falling fertility rates of the past half century - from six births per 1,000 to 2.5 - could see slower population growth than the addition of a billion every dozen years. It is possible the end-century number would be several billion short of 14-15 billion, at current rates of increase. Whatever the profile, competition for resources is the one constant that governments and the UN have to be watchful about. It is not food production. The world can feed itself. Such shortages that occur are mainly the result of questionable political choices and the machinations of food multinationals and futures markets. It is not about oil: Alternatives can be found or new industrial processes will emerge.

It is about water. Rivers cannot be transported to arid lands. 'Owners' of rich river sources and basins (China and Turkey are examples) will face increasing conflict with downstream nations as demand rises.

The World Resources Institute, a United States think-tank, calculates that water use will rise by 50 per cent in developing nations by 2025. Two representations highlight the challenges. The first: Only 2.5 per cent of the Earth's water is fresh, with two-thirds of that frozen. How soon can it be when oceans of salty water can be mined cheaply?

The second: It requires 100 litres of water to grow 1kg of potatoes, but to produce 1kg of beef takes 13,000 litres. There is scant chance of a change in eating habits when the middle-class multitudes of China and India are taking to meat-eating with gusto.

But if industry and governments would be as imaginative in seeking solutions as scientists are graphic in posing the challenge, Earth may not feel so overcrowded.

Over-population is a Myth!

Why reject the tech that puts food on plates of the poorest?

Now that we are 7 billion, let's feed the world

by Michael Hanlon

Todayonline Nov 02, 2011

Happy birthday, baby 7 billion, Danica May Camacho, born on Sunday night in Manila.

Since 1880, the world population has doubled and doubled again, and this has changed the face of the planet. We (hopefully) won't see a further doubling, but even the best-case projections see the human tide topping out at around 9 to 10 billion in the 2060s.

I am an optimist; I think we will cope, just - but it won't be easy. I know that to stand a chance of keeping an extra two or 3 billion people fed, watered and sheltered in the decades ahead without completely ruining our planet, we are going to have to abandon our bizarre, decadent aversion to "risky" new technologies and embrace a Brunellian programme of hyper-tech big engineering and innovation.

Today, we ignore the fact that the reason food is mostly affordable and famines are relatively rare is almost entirely down to the work of scientists few have even heard of - the plant breeders who forged the "green revolution" in the post-war years.

Nobel peace prizes have been awarded to some dodgy people, but if one man deserved it a thousand times over it was American scientist Norman Borlaug, whose work on dwarf and disease-resistant wheat varieties has been credited with saving a billion lives. His research proved wrong the doomsayers such as the US economist Paul Ehrlich, who in the '60s predicted global famines by the century's end.

But we may be getting close to the limits of conventional plant-breeding and we cannot take for granted its ability to feed an extra 1 to 2 billion mouths in future. Mr Ehrlich's predictions may yet come true - and food prices have been rising for some time.

There is fury among scientists at the reluctance of the world (outside the US and China) to embrace GM technology. In Britain, scientists have developed varieties of transgenic wheat that are resistant to a new strain of deadly stem-rust disease. Geneticists in the UK, the US, Switzerland and elsewhere have developed wheats, "golden" rices and barleys that require less expensive pesticides, less herbicides and far less water to grow, or which can even grow in brine.

Yet this technology is shunned not only in Europe but in Africa, where local green activists take their cue from decadent, well-fed Europeans who would presumably rather see the Third World starve than adopt "unnatural" technology.

If few have heard of Dr Borlaug, Ms Rachel Carson is a heroine to millions. Her 1962 book Silent Spring is credited with launching the modern green movement, and detailed the effects of chemicals such as DDT and pesticides on the food chain. Carson made "chemical" a dirty word. What her followers ignore (to her credit, she did not) is the fact that if it weren't for chemicals that kill insects, fungus and weeds, 2 billion people would be starving.

We are not just running out of food. The world faces an energy crisis of grotesque proportions. China's population has (more or less) stopped growing but India's hasn't, and if the subcontinent is to keep the lights on, it must invest in new energy technologies.

Again, we face a choice: Earth has plenty of coal and gas, but to power a world of 10 billion people using carbon-emitting, coal-fired steam turbines will invite consequences so dire that even the most diehard climate sceptics will be finally convinced, as the floodwaters come lapping round their ankles.

Again, there is an answer - the wholesale adoption of ultra-modern, clean, green nuclear-fission technology. Nuclear is not perfect. There are well-known dangers and costs associated with the atom. Like democracy, nuclear energy is the worst option there is - apart from all the alternatives.

Greens - not all, but too many - hate machines. We could go back, of course, to a world where food is grown "naturally" and our lives are powered by windmills and everything is sustainable and organic. Such a world would be a paradise if there were a billion humans. But there are not.

If the late-21st century is not to be remembered as the era of the giga-famine, we will have to stop pretending we live in a prelapsarian idyll and accept that only our ingenuity will allow Danica Comacho to live in anything approaching peace and prosperity.


Does Redistributing Income Reduce Poverty?

Nov 2, 2011

Jagdish Bhagwati

NEW YORK - Many on the left are suspicious of the idea that economic growth helps to reduce poverty in developing countries. They argue that growth-oriented policies seek to increase gross national product, not to ameliorate poverty, and that redistribution is the key to poverty reduction. These assertions, however, are not borne out by the evidence.

Since the 1950's, developmental economists have understood that growth in GNP is not synonymous with increased welfare. But, even prior to independence, India's leaders saw growth as essential for reducing poverty and increasing social welfare. In economic terms, growth was an instrument, not a target - the means by which the true targets, like poverty reduction and the social advancement of the masses, would be achieved.

A quarter-century ago, I pointed out the two distinct ways in which economic growth would have this effect. First, growth would pull the poor into gainful employment, thereby helping to lift them out of poverty. Higher incomes would enable them to increase their personal spending on education and health (as seems to have been happening in India during its recent period of accelerated growth).

Second, growth increases state revenues, which means that the government can potentially spend more on health and education for the poor. Of course, a country does not necessarily spend more on such items simply because it has increased revenue, and, even if it does, the programs it chooses to fund may not be effective.

In almost willful ignorance of the fact that the growth-centered model has proved itself time and again, skeptics advocate an alternative 'redistributive' developmental model, which they believe will have a greater impact on reducing poverty. Critics of the growth model argue that it is imperative to redistribute income and wealth as soon as possible. They claim that the Indian state of Kerala and the country of Bangladesh are examples where redistribution, rather than growth, has led to better outcomes for the poor than in the rest of India.

Yet, as Columbia University economist Arvind Panagariya's recent work shows, Kerala's social statistics were better than those in the rest of the country even before it instituted its current redistributive model. Moreover, Kerala has profited immensely from remittances sent home by its emigre workers in the Middle East, a factor unrelated to its redistributive policy. As for Bangladesh, the United Nations' Human Development Index, admittedly a problematic source, ranks it below India.

In impoverished countries where the poor exceed the rich by a huge margin, redistribution would increase the consumption of the poor only minimally - by, say, a chapati a day - and the increase would not be sustainable in a context of low income and high population growth. In short, for most developing countries, growth is the principal strategy for inclusive development - that is, development that consciously includes the marginal and poorest members of a society.

But the political sustainability of the growth-first model requires both symbolic and material efforts. While growth does benefit the poor, the rich often benefit disproportionately. So, to keep the poor committed to the system as their economic aspirations are aroused, the wealthy would be well advised to indulge less in conspicuous consumption.

At the same time - and more importantly - the poor need greater access to education in order to increase their economic opportunities and social mobility.

'Less excess and more access' must become the principle that guides development policy.

Jagdish Bhagwati is University Professor of Economics and Law at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations. Co-Chair with President Tarja Halonen of Finland of the UNCTAD Eminent Persons Group on Developing Countries in the World Economy.

Python Findings Shed Light on Human Heart Health

After feeding, snake blood has high levels of enzymes that protect the heart

October 27, 2011

THURSDAY, Oct. 27 (HealthDay News) -- Huge amounts of fatty acids that circulate in the bloodstreams of pythons when they feed promote healthy heart growth, a finding that may lead to new ways to treat heart disease in people, researchers report.

One day after eating, triglyceride levels in Burmese pythons increased by more than 50-fold. Triglycerides are the main component of natural fats and oils.

There was also an increase in the activity of an enzyme known to protect the heart from damage, the University of Colorado Boulder researchers found.

The team identified the chemical composition of blood plasma in pythons that had just fed. They injected fasting pythons with either "fed python" blood plasma or a fatty acid mixture they created to mimic such plasma.

Both types of injections led to increased heart growth and indicators of cardiac health in the fasting snakes.

The same results were seen in mice that were injected with either "fed python" blood plasma or the fatty acid mixture.

"We found that a combination of fatty acids can induce beneficial heart growth in living organisms," first author and postdoctoral researcher Cecilia Riquelme said in a university news release. "Now we are trying to understand the molecular mechanisms behind the process in hopes that the results might lead to new therapies to improve heart disease conditions in humans."

The study appears in the Oct. 28 issue of the journal Science.

The three key fatty acids in fed-python plasma are myristic acid, palmitic acid and palmitoleic acid. The enzyme that showed increased activity in the python hearts during feeding is called superoxide dismutase. It's a well-known enzyme that protects the heart in humans and many other living organisms, the researchers noted.

The Wrong Inequality

The New York Times
October 31, 2011


We live in a polarizing society, so perhaps it’s inevitable that our experience of inequality should be polarized, too.

In the first place, there is what you might call Blue Inequality. This is the kind experienced in New York City, Los Angeles, Boston, San Francisco, Seattle, Dallas, Houston and the District of Columbia. In these places, you see the top 1 percent of earners zooming upward, amassing more income and wealth. The economists Jon Bakija, Adam Cole and Bradley Heim have done the most authoritative research on who these top 1 percenters are.

Roughly 31 percent started or manage nonfinancial businesses. About 16 percent are doctors, 14 percent are in finance, 8 percent are lawyers, 5 percent are engineers and about 2 percent are in sports, entertainment or the media.

If you live in or around these big cities, you see stores and entire neighborhoods catering to the top 1 percent. You see a shift in social norms. Up until 1970 or so, a chief executive would have been embarrassed to take home more than $20 million. But now there is no shame, and top compensation zooms upward.

You also see the superstar effect that economists have noticed in the income data. Within each profession, the top performers are now paid much better than the merely good or average performers.

If you live in these big cities, you see people similar to yourself, who may have gone to the same college, who are earning much more while benefiting from low tax rates, wielding disproportionate political power, gaining in prestige and contributing seemingly little to the social good. That is the experience of Blue Inequality.

Then there is what you might call Red Inequality. This is the kind experienced in Scranton, Des Moines, Naperville, Macon, Fresno, and almost everywhere else. In these places, the crucial inequality is not between the top 1 percent and the bottom 99 percent. It’s between those with a college degree and those without. Over the past several decades, the economic benefits of education have steadily risen. In 1979, the average college graduate made 38 percent more than the average high school graduate, according to the Fed chairman, Ben Bernanke. Now the average college graduate makes more than 75 percent more.

Moreover, college graduates have become good at passing down advantages to their children. If you are born with parents who are college graduates, your odds of getting through college are excellent. If you are born to high school grads, your odds are terrible.

In fact, the income differentials understate the chasm between college and high school grads. In the 1970s, high school and college grads had very similar family structures. Today, college grads are much more likely to get married, they are much less likely to get divorced and they are much, much less likely to have a child out of wedlock.

Today, college grads are much less likely to smoke than high school grads, they are less likely to be obese, they are more likely to be active in their communities, they have much more social trust, they speak many more words to their children at home.

Some research suggests that college grads have much bigger friendship networks than high school grads. The social divide is even starker than the income divide.

These two forms of inequality exist in modern America. They are related but different. Over the past few months, attention has shifted almost exclusively to Blue Inequality.

That’s because the protesters and media people who cover them tend to live in or near the big cities, where the top 1 percent is so evident. That’s because the liberal arts majors like to express their disdain for the shallow business and finance majors who make all the money. That’s because it is easier to talk about the inequality of stock options than it is to talk about inequalities of family structure, child rearing patterns and educational attainment. That’s because many people are wedded to the notion that our problems are caused by an oppressive privileged class that perpetually keeps its boot stomped on the neck of the common man.

But the fact is that Red Inequality is much more important. The zooming wealth of the top 1 percent is a problem, but it’s not nearly as big a problem as the tens of millions of Americans who have dropped out of high school or college. It’s not nearly as big a problem as the 40 percent of children who are born out of wedlock. It’s not nearly as big a problem as the nation’s stagnant human capital, its stagnant social mobility and the disorganized social fabric for the bottom 50 percent.

If your ultimate goal is to reduce inequality, then you should be furious at the doctors, bankers and C.E.O.’s. If your goal is to expand opportunity, then you have a much bigger and different agenda.