Cuban-Virginian Relations…Hope for a More Open Future?

The United States is famous (or really, infamous) for its agricultural subsidies that support American farmers and in doing so prevent foreign farmers from entering the economy. Economists go crazy because of the economic inefficiency and American consumers are faced with higher prices for their run of the mill cantaloupe.

The Washington Post is reporting something different. In a surprising twist of events, one article documents the struggles of Henry Chiles, a nearby apple farmer in Charlottesville renowned for his produce but unable to expand his business to neighboring Cuba because of trade embargos placed on the communist country. The issue is an interesting dilemma—again, we have economic inefficiency, but in this instance the political ramifications for opening up borders with Cuba and expanding the same subsidized industry within the U.S. are too much to cash in upon the benefits of an increase in trade.

The article makes an interesting distinction within the context of a discussion about two countries and their political differences. While the United States as a whole has seen an enormous drop in exports to Cuba (the article cites a move from $711.5 million in 2008 to $363.3 million last year), Virginia as a state has grown in their exports. According to author Laura Vozzella, this increase in Virginian demand abroad is the result of good relations between companies in the state and the Cuban government. Vozzella includes the expertise of one consultant focused on trade in Cuba that explains that, “so many products are so competititve, and they’re priced by the world market anyway. It comes down to two suppliers at basically the same price – that’s where the personal contact becomes very important.” Ironically, despite the economic inefficiency of the national trade embargo, Virginia as a state has experienced economic benefit from an increase in efficiency.

Virginia’s opening of its borders with Cuba speaks to a hope for future national openness, albeit one that must begin with a better relationship between the two nations as a whole. Despite the fact that the trade embargo established by JFK during the Cold War has been reduced, borders between the two nations must be opened even further if economic efficiency is to be reached. The problem then becomes political: even though the Cold War ended more than twenty years ago, anti-Communist sentiment remains. The U.S. as a capitalist country must resist any vestiges of Communism, but ironically, the efficiency of free-market capitalism is being hindered by its own political concerns.

            The issues are thus more political than economic, and for now Virginia will wait, and continue to reap the rewards of a mutually-beneficial relationship. As the farmer Chiles explains, “we know sooner or later that Cuba will open back up again…it’s a market that’s close to us. It makes sense for us to export as close to home as we can.”

Here’s the article:

http://www.washingtonpost.com/local/va-politics/va-farmers-find-eager-trade-partner-cuba/2012/11/25/59834264-3018-11e2-ac4a-33b8b41fb531_story_1.html

Not a Surprise: More Problems in Italy

Reuters published an article this afternoon about manufacturing within Italy, and it immediately sparked my attention because I’m headed there in January for the semester. Not surprisingly considering it’s Italy, but the article talked about the heavy corruption that led to the demise of a steel plant within Taranto in southern Italy.

            As the article introduces, the closing of the plant is problematic because Italy has been plagued by a slow economy and most afflicted by incredibly high unemployment. The government had tried to spur economic activity by taking over the company that ran the plant, but the government in Italy is notoriously corrupt—hence the (alleged) problems with bribery and scandal at the highest levels of the company.

            The article doesn’t address the following issue, but I found it relevant given our IPE discussions. Italy has long been a developed country, and yet it has fallen behind in comparison to the US, China, and even other European countries such as Germany. The country, as the article documents, is dependent upon the manufacturing sector of its economy and represents a focus on a less-advanced industry in comparison to other developed countries.

            Furthermore, the article mentions the “shrinking number of major manufacturing employers in the poor and underdeveloped south.” The issue reminds me of China, where wealth has not been effectively distributed to the more underdeveloped villages in the nation in comparison to the wealthy cities. And yet, Italy does not have the same excuse of massive size in comparison to China—much less infrastructure is needed.

            The bottom line is that the government’s early actions to bail out one manufacturing plant seem to be an ineffective bandaid on a bevy of larger problems. Corruption, ineffective infrastructure, and inequality are plaguing the nation and don’t appear to be disappearing anytime soon. It’ll certainly be an interesting semester.

Here's the link to the article: http://www.reuters.com/article/2012/11/26/us-italy-ilva-idUSBRE8AP0Z520121126

Buying a plane ticket to Greece? Not quite yet.

Reuters posted an article tonight that reports that Greece has finally reached an agreement with the IMF in order to relieve some of its debt and hopefully spur its economy back into fruition. The article reminds me of a couple issues that we have discussed recently in class, not necessarily specific to Greece but relevant in light of their recent struggles.

The first of these is that we have talked in class about how the IMF is often painted as the ‘bad guy’ even after bailing out countries because of the austerity measures they force upon any country needing their assistance. And yet, the article seemed supportive of the organization, lauding their ability to effectively negotiate a deal with Greece that would both spark its economy and also keep other countries in the EU from facing financial difficulty after funding the efforts in Greece. Germany, for obvious reasons, receives special attention and goes so far as to suggest that “a debt cut was legally impossible, not just for Germany but for other euro zone countries, if it was linked to a new guarantee of loans.” Important to note is that news of the specifics of the debt relief wasn’t available, and so German resistance is to one option among a multiple of potentially viable debt relief.

Another element of the debt relief related to the portrayal of the IMF was the implicit debate over whether Greece has the necessary institutions in place in order to effectively use their debt relief in order to help their economy function. Just as with developing countries, foreign aid cannot be helpful without programs established within the country that spread money throughout the nation.

And given this insecurity, will foreign investors want to place their money in a country so dysfunctional even forced IMF sanctions may not be enough? Especially considering much of Greece’s economy is built upon tourism, its financial solvency depends on a positive impression of the country by foreigners around the globe.

These questions are not to discredit Greece or the IMF, but rather to suggest that the article’s celebration of new European success (the article mentions that “the euro strengthened against the dollar after news of a deal was reported by Reuters) should be taken with a grain of salt. Financial solvency for Greece and the EU might be on the way, but it’s not there quite yet.

Not Your Average Energy Island

Returning to my earlier focus on the news concerning U.S. oil production, I wondered what the international opinions of the development would be. From Saudi Arabia they are probably (and understandably) pessimistic—the US would be too if our largest resource might be rendered obsolete.

I found articles on the same subject from the UK (BBC News) and South Sudan (The New Nation), however, and they were surprisingly unconvinced that the US would succeed in fulfilling its announcement. Both articles recognized the danger of the new technology in terms of environmental concerns, while the New Nation article also highlighted the IEA’s warning that the technology “would not insulate the US from developments in international markets and remove its vulnerability to price spikes.” It discourages the popularization of the US as an “energy island,” and reinforced the lack of feasibility in creating a country independent of foreign influence.

The New Nation article made one more insight that I found somewhat disarming. From an international perspective, the author wonders whether the US will cease to patrol the world’s sea lanes it depends upon to transfer oil, and whether China will take over this role. Ironically, China is increasing its dependency on foreign oil while the US attempts to reduce it, further suggesting that China’s imminent dominance might not be the threat it appears.

New Nation article link: http://thenewnationbd.com/newsdetails.aspx?newsid=57255

BBC News article link: http://www.bbc.co.uk/news/business-20304848

Self-Sufficiency and U.S. Oil

Thomas Dietz’s article on the tragedy of the commons outlines a number of concerns that span not only IPE but also sociology, biology, etc. The depletion of natural resources common to the world is a legitimate concern; Dietz is quite convincing in that respect. However he focuses entirely on those resources which are common to the globe. This is the premise of his argument so that makes sense, but I found it hard to read an article about the political ramifications of environmental concerns without thinking about the world’s (specifically U.S.’s) dependency on oil.

In terms of foreign relations and international economies, oil seems to be second to no other concern. Perhaps Dietz’s common focus can be attributed to the fact that the article was written in 2003, because the Washington Post ran an article today in which foreign relations in the Middle East and oil production were at the forefront of the news. The article in the Post is actually much more optimistic than I expected when scanning over the words “U.S. oil” and “Saudi Arabia.”

The article cites new technology in extraction methods as reasoning behind why the U.S. will in the next decade become nearly self-reliant in oil production. The U.S. dependency on foreign oil based in the Middle East has dictated much of foreign policy in the past few decades, and the newfound self-sufficiency will help bolster national security.

The most disturbing piece of the article in my opinion was a small blurb that appeared somewhat out of context at the end of the essay. The author mentions that, “in emerging nations, government subsidies will continue to spur fossil fuels use, even as lower-carbon energy sources become more popular.”

Although the U.S. may strengthen its Middle Eastern relations by subsidizing its own eco-friendly energy sources, the move will also widen the gap between developing and developed countries. The article doesn’t go into enough detail to predict whether this will spawn new political energy turmoil in the future, but it seems unavoidable. By improving relations in one area of the world, the U.S. is worsening them in another.

Link to the Post article: http://www.washingtonpost.com/business/us-oil-output-to-overtake-saudi-arabias-by-2020-iea-says/2012/11/12/4b89c9ee-2cf3-11e2-b631-2aad9d9c73ac_story_1.html

The U.S. Election and IPE

The election is over, but coverage continues. The race between President Obama and Romney was exciting, but it hampered any discussion of IPE within the news as the candidates focused on social issues in the last few days despite largely economy-driven campaigns. In what may seem as if a bit of a stretch, I wondered how this Reuters article about the post-election fiscal cliff relates to our recent Krugman reading.

In criticizing the lack of banking regulation during the early 2000s, Krugman says that, “the Bush administration used federal power, including obscure powers of the Office of the Comptroller of the Currency, to block state-level efforts to impose some oversight on subprime lending” (164). Krugman advocates higher regulation rather than increased innovation in 2004, rejecting Alan Greenspan’s proclamation that the financial sector has “become more resilient.”

Given the danger of the fiscal cliff, would Krugman likewise suggest that we must continue to regulate banks and punish Wall Street for their role in the financial crisis? It seems as though he would be less willing to dismiss the need for financial innovation if he saw the trillion-dollar debt and $600-million dollar tax increases that the article addresses.

The fiscal cliff, as the article mentions, will also be affected by a vote in Greece’s parliament to approve an austerity package with international aid. Upon further digging through Reuters, the austerity package was in fact approved albeit by a narrow margin, but doubt for Greece’s future in the EU remains.

Doubt also exists in terms of Obama’s future and the market. After the election results emerged, the DOW dropped 312.95 points (as documented in the article). Despite Obama’s reelection, the threat of the fiscal cliff and the solvency of the American economy continue to haunt the financial sector. Is the regulation that Krugman lauds in 2004 still essential?

Sorry for the political underpinnings of this blog post, it’s the effect of the omnipresent election. There are vestiges of IPE within it, even if they are sometimes hard to find.

What Do Jimmy Stewart and Bruce Willis Have in Common?

If you’ve seen the most recent Die Hard, you’ll know the premise of the movie is for the most part violence as entertainment for its audience. When Bruce Willis pauses from destroying a helicopter with a runaway car, however, he learns from younger compatriot Justin Long about the danger of a fire-sale. In the context of the movie the term refers to the American perception that the government has lost all control of technology and telecommunications, and are facing imminent danger. The real danger, as Long insinuates, comes from the ensuing panic by the American people (which then leads to society’s downfall, etc.).

Although the concept of a fire-sale appears new to Bruce, it contains vestiges of the economic distress experienced by Jimmie Stewart’s character in “It’s a Wonderful Life.” Both storylines revolve around the problem of snowballing panic in society, a subject that Paul Krugman addresses in his discussion of bank runs. As Krugman explains, “bank runs became self-fulfilling prophecies: a bank might collapse, not because there was a rumor about its investments having gone bad, but simply because there was a rumor that it was about to suffer from a run” (154). Perception, in other words, largely governs the outcome of the U.S. banking sector.

Perhaps this argument appears outdated, for the threat of “Potterville” is supposedly destroyed with the policies following the Great Depression on bank regulation. And yet the most recent crisis could have used more regulation. The housing crisis in 2007 can largely be attributed to the use of subprime loans. Their abuse has been attributed to a number of factors, from disengaged, corrupt CEOs to dishonest ratings on the value of homes. While in this instance the frantic American public poured investment into the economy rather than taking it out of banks as in the Great Depression, this frenzied behavior nevertheless led to a subsequent bust as homeowners began to default on their loans. Although we may not have Potterville, we now have instead neighborhoods undeveloped past their foundations. 

The History of Panics: A Critical Summary of Michael Lewis's NYT Bestseller

            Michael Lewis’s Panic!: The Story of  Modern Financial Insanity (2009) misleads its readers to an extent: rather than consisting of journalism entirely by the editor himself, the anthology contains a series of individual articles by a variety of authors spanning from July 27, 1987 to January 15, 2008. Lewis pens a few of these, but his most important contribution is the arrangement of the articles from the 1987, 1997, and 2000 financial crises as preparation for the most recent economic downturn. Marked by the proliferation of subprime and adjustable rate mortgages in the housing market, the articles spanning the past three decades of American economics illustrate the circumstances that allowed for these economic structures. Each of these market failures contains within it a healthy economy experiencing the boom-and-bust structure of American free-market capitalism, but Lewis’s choice of articles also identifies the dangerous bubbles that emerge within these markets because of three interdependent factors. Speculation, technology and the dishonesty of power-hungry leaders all destroy investor confidence, and whether legitimate concerns or fallacies, rumors of their demise begin a pattern of panicked trading that inevitably leads to financial instability.

Lewis initially points to the danger of speculation in his coverage of the 1987 financial crash that “marked the beginning of something else too—a collapse brought on not by real or even perceived economic problems but the new complexity of financial markets” (4). On Black Monday in 1987, panic ensued after stock indexes diverged in price from their futures index. The problem, as Lester C. Thurow explains in one article, rests with the rise in popularity of portfolio insurance, a technique that automatically buys and sells stocks based upon movements in the market that trigger activity. Not surprisingly, many of the articles from this time period discuss the role of technology, as these automatic triggers within program trading software allow for more efficient trade but reduce the security of human judgment. Lewis acknowledges his own reckless behavior during early pre-journalism days at former Wall Street behemoth Salomon Brothers when he admits that, “it was striking how little control we had of events, particularly in view of how assiduously we cultivated the appearance of being in charge” (38).  Technology-led institutional failure does not limit itself to 1987, either. As later documentation supports, the early 2000’s saw the rise of a technology bubble because of the newfound Internet boom. Investors poured money into new technology such as Healtheon, a website that appeared as a foolproof new industry with its “Chart of Many Bubbles” (179). In effect, the 1980’s saw a trend of increasing individualism that continues into the early 2000’s: from the role of speculators to the small investors in 1987, Lewis outlines the extent to which the markets can be managed without the role of enormous Wall Street firms.

     A natural development that emerges from this argument concerns the role of individuals within these big Wall Street firms and their power to single-handedly harm the U.S. economy. In the 1990’s, for instance, John Meriwether’s Long Term Capital Management had to be bailed out by the U.S. government only weeks after the Dow’s 512-point drop. Further exacerbating the crisis is the panic ensuing in Asia following the implosion of the Thai baht; speculators shorted the currency and hastened the destruction of the markets in Thailand. And while Alan Greenspan does not avoid judgment, Lewis’ focus on Meriwether and others such as Jim Clark (see Healtheon, Netscape) and John Gutfeund (Salomon Brothers) implies a stronger critique of those he believes intentionally allowed for harm to come to the economy in order to further their own individual gains. Crony capitalism, briefly outlined in one article through a study of the Mexican tequila crisis, exists even in the democratic U.S. Lewis’ condemnation of some businessmen does not apply universally, as he documents the brilliance of George Soros and his commanding authority following the Russian central bank crisis. By Lewis’s design, what appears most alarming is the level to which a single individual can control the outcome of the country’s financial markets, a dangerous development that the country experiences again and again.

            Elements of the stock market crash in 1987, the 1997 implosion by Long-Term Capital that destroyed international capital flows, and the dot-com boom in 2000 combine to predict problems that contributed to the current economic stagnation. Jim Cramer’s brief endorsement of $30 shares of James Cayne’s Bear Stearns Cos. on theStreet.com, for instance, hints at the unpredictability of Wall Street firms present since the rise of Salomon Brothers in the 1980s while also illustrating the danger of the (formerly new) Internet technology (343). Furthermore, a widening wealth disparity demonstrates vestiges of crony capitalism when John Paulson bets against the housing market and makes $15 billion in 2007 while thousands of Americans lose their homes and livelihoods. In essence, Lewis provides a historical background for each of the elements of the current crisis, ultimately compiling evidence that illustrates the danger of a boom-and-bust economy destined for crisis in the late 2000s. While the current financial situation may not mimic each of the previous three crises, articles handpicked by Lewis demonstrate the extent to which the economic disaster today contains the vestiges of past problems.