China’s economic policymakers have to learn to let go if they want to establish credibility — Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From South China Morning Post

The ability of the Chinese government to control is undisputed and unparalleled compared with governments in other countries and, indeed, compared with the Chinese state during imperial times. If the stock market does not go up, then prevent it from going down by shutting it down. If too many investors want to cash out their positions at the same time, just charge them with “malicious intent to sell” and arrest them as proverbial chickens to scare off the monkeys.

The problem is that a government so focused on and obsessed with controls is not one that cares about or is particularly good at establishing credibility. A government needs credibility when it tries to convince others to do its bidding without the ability to dictate actions directly.

In his book, The Courage to Act, Ben Bernanke wrote about how US Federal Reserve officials debated and deliberated long and hard about particular words and phrases, and even about the usage of different punctuation marks, in their communiqués with the public.

The reason is that the effectiveness of the Fed does not depend on its ability to arrest people at will but on how it is perceived by market participants – whether it is perceived as being capable, deliberative and above all credible. If the Fed lost the confidence of the market, much of its influence and leverage would evaporate.

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Time for a new US budget process — Doug Criscitello

Executive Director of MIT’s Center for Finance and Policy

Executive Director of MIT’s Center for Finance and Policy

From The Hill

With the latest U.S. fiscal deadline looming – bringing with it the prospect of another government shutdown on Dec. 12 – it’s time for lawmakers and presidential candidates to begin thinking seriously about budget process reform. If history is any guide, the outcome of this round of budgetary brinkmanship between Congress and the president will go down to the wire. In the end, they will most likely agree to either extend temporary funding or put a budget in place for the remainder of the fiscal year. But neither of those outcomes addresses the fact they’re using an outdated budget process that is well past its prime.

Enacted in the 1970s, with basic tenets flowing from a commission appointed by LBJ in 1967, the process has completely broken down in recent years and certainly doesn’t reflect the world we live in today. Given the seismic demographic, fiscal and geopolitical shifts over the past 50 years, a strong case can be made for reconvening another commission to consider reforms.

·       Boomers are leaving, not joining, the workforce with significant fiscal consequences – not the least of which is skyrocketing entitlement spending.

·       Large peacetime deficits are being incurred, with interest on the national debt consuming a growing share of revenues and debt limit increases anathema politically.

·       The nation’s physical infrastructure is old and in desperate need of repair. Much of the infrastructure we now enjoy (and I use that word loosely given its condition) was either new or being planned in 1967. The improvement of our public assets is made challenging by a budget process favoring consumption spending at the expense of investment.

Read the full post at The Hill.

Doug Criscitello is the Executive Director of MIT’s Center for Finance and Policy.

What does nuclear power cost? Old plants dispel easy answers — John Parsons

ParsonsjpegFrom The Conversation

What is the economic cost of nuclear power? That turns out to be a very difficult question to answer.

The United States and other countries have plentiful experience building and operating nuclear power plants. Currently 438 nuclear reactors with a combined capacity of 379,000 megawatts generate more than 10% of the total electricity used worldwide.

The US has the largest fleet, with 99 reactors generating almost 20% of US electricity. France has the second-largest, with 58 reactors producing 77% of its electricity. The Chinese fleet of 27 reactors generates under 3% of its electricity.

Nevertheless, there is great uncertainty about the cost of building new plants. The existing fleet in the US and most developed countries is very old, dating back to a period of intense growth in the 1960s and 1970s. In the US, the most recent construction permit for an operating reactor was issued in 1978, although completion work on a couple of stalled projects and “uprates” – capital refurbishment that increases capacity – have occurred at a number of units.

New construction fell off in other developed countries, too. The few additions made since 1990 were mostly in Japan, Korea, Eastern Europe, Russia and China.

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Trade in the real world — Jared Bernstein and Simon Johnson

MIT Sloan Prof. Simon Johnson

MIT Sloan Prof. Simon Johnson

From The Washington Post

Supporters of the Trans-Pacific Partnership (TPP), a trade agreement under negotiation between the United States and 11 other countries, make this case: Trade between countries is always good, and more trade with more countries is even better. Harvard economist Greg Mankiw goes further in a recent New York Times piece, arguing that anyone opposed to trade deals does not understand elementary economics.

The arguments made by these advocates do not match the reality of the modern world and are not helpful for thinking about what is at stake in the TPP. It’s not a question of understanding economics. It’s a question of knowing precisely what we’re agreeing to when we sign the TPP.

In the simple models of introductory textbooks, countries improve their respective economic outcomes by specializing in their “comparative advantage” — the goods they produce more efficiently than their trade partners — thereby increasing the supply of goods and lowering prices. No government subsidy is involved, nobody cheats, everyone is well-informed about the nature of the deal, and pretty much all parties come out ahead. If anyone loses their job, in those models either they get another good job or they can be fairly compensated by the people who gain extra income.

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The end of China’s growth model — Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From The Boston Globe

Stock markets continue to respond strongly to China’s economic woes, fearing a crippling slowdown since China suddenly devalued its currency two weeks ago — a move widely interpreted as a desperate attempt to support growth.

But Chinese growth in the future will be limited until the government makes fairly substantive structural reforms.

China’s growth model is one in which the role of the state in the economy has become more intrusive. For years, many US observers hailed China’s government-led and investment-heavy model as a pillar of strength. Their favorite comparison is between the spunky new airports in Beijing and Shanghai and the supposedly dilapidated New York JFK and Los Angeles airports. While comparison has an element of convenience to it — you have to depart from a US airport and arrive at a Chinese airport when you visit China — the “airportology’’ is flawed, because it doesn’t take into account that China has clearly overbuilt, and at a considerable cost to its middle class.

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