TOPICS IN POLITICAL ECONOMY

DOES THE AARP RULE THE COUNTRY?

The dictionary defines gerontocracy as “government based on rule by elders.”  After studying recent trends in household income, I conclude we have arrived at that point. Furthermore, our “elders” are essentially the lobbyists for the 37 million members of the American Association of Retired Persons (AARP).

Consider the charts below, based on the Census Bureau’s well-regarded Current Population Survey (CPS).  I have emphasized median incomes, so that an equal number of households have lower and higher incomes than the median household in that particular age group.

Steady Growth in Income. Old folk, defined as those living in households headed by someone 65 years of age or older, typically draw on savings, in addition to income, to support themselves. They have seen their incomes increase at a remarkably steady pace throughout the last 30 years.  Not even the nasty recession of 2008-2010 made much of an impact on them.

 

 

If we wanted to include Federal government outlays on Medicare in old folks' income (which the CPS does not), that would have added 65% or $524 billion in 2010 to their household income of roughly $800 billion. A more complete accounting would also include the numerous housing, nutrition, homecare, energy assistance and transportation subsidies for the elderly.

Going Nowhere.  Meanwhile, the youngest households are going nowhere on the income scales, even while many try to pay off their staggering level of college loan debt. Despite the rise in mean (average) incomes, the median real income of such households, which numbered 6.1 million in 2010, has stagnated over the past several decades.  In fact it was lower in 2010 than in 1990, a sharp contrast to the 15% gain for the old folk.  Although not shown here, between 2000 and 2010 median real incomes fell for all income groups - except for the 65+ age group, which enjoyed a 7.5% increase.

 

 

These generational divergences are an unhealthy and worrisome trend. In effect, the older generation is squeezing younger generations via the iron fist of government via Medicare, overly generous pensions for its employees, and a multitude of elderly-oriented programs.

In short, the AARP, which stoutly defends every big and little government subsidy which benefits its members is doing a great job for its constituents.  Maybe the Occupy Wall Street crowd should take its show to AARP headquarters at 601 E Street, NW in Washington, DC and ask the old folks to exercise a bit of restraint.

 

 

 

 

 

 

 

 

 

 

 

 

The dictionary defines gerontocracy as “government based on rule by elders.”  After studying U.S. trends in household income, I conclude that not only have we arrived at that point, but that our “elders” are essentially the 37 million members of the American Association for the Advance of Retire Persons (AARP).

Consider the charts below, based on the Census Bureau’s well-regarded Current Population Survey (CPS).  I have emphasized median incomes, so that an equal number of households have lower and higher incomes than the median household in that particular age group.

Steady Growth in Income. Old folk, defined as those living in households headed by someone 65 years of age or older, have seen their incomes increase at a remarkably steady pace throughout the last 30 years.  Not even the nasty recession of 2008-2010 made much of an impact on them. 

 

If we wanted to include in old folks’ income Federal government outlays on Medicare (which the CPS does not), that would have added  65% or $524 billion in 2010 to their household income of roughly $800 billion. A more complete accounting would add in special housing, nutrition, energy assistance and transportation subsidies for the elderly.

Going Nowhere.  Meanwhile, younger folk are going nowhere on the income scales, even while they try to pay off their staggering level of college loan debt. The median real income of such households, which numbered 6.1 million in 2010, has stagnated over the past 20 and 30 year periods.  In fact it was lower in 2010 than in 1990, a sharp contrast to the 15% gain for the old folk.  Among the 45-54 age group, median real incomes fell 14% between 2000 and 2010.

These generational divergences are an unhealthy and worrisome trend. In effect, the older generation is squeezing younger generations via the iron fist of government via Medicare, overly generous pensions for its employees, or free public transportation.

In short, the AARP, which stoutly defends every big and little government program which benefits its members is doing a great job for its constituents.  Maybe the Occupy Wall Street crowd should take its show to AARP headquarters at 601 E Street, NW in Washington, DC and ask the old folks to exercise a bit of restraint.

 

IS THE U.S. IN DECLINE?

The best "big picture" economic historian today is Harvard Professor Niall Ferguson. The favorite big picture topic of the day, "decline of the U.S." is explored in a recent and extremely well-produced 22 minute video discussion between him and Wall Street Journal editor John Bussey.

Alternatively, you can read the post on his web site which contains a summary of his analysis.  Here is an excerpt which contains most of his prescription to rejuvenate public policy in this country:

What we need to do is to delete the viruses that have crept into our system: the anticompetitive quasi monopolies that blight everything from banking to public education; the politically correct pseudosciences and soft subjects that deflect good students away from hard science; the lobbyists who subvert the rule of law for the sake of the special interests they represent—to say nothing of our crazily dysfunctional system of health care, our overleveraged personal finances, and our newfound unemployment ethic.

I take particular note of his last citation, suggesting that the European "dole mentality" is creeping into American life.  Ferguson does not buy the pessimists' argument that we are in an "inexorable" absolute decline. And he is careful to point out that there is little basis for alarm over rising living standards in China. But he makes a strong case that we are currently on a track where an absolute decline in the U.S. is a distinct possibility.

The full exposition of Ferguson's analysis is contained in his latest book, "Civilization."

WHY THE HOUSING MARKET IS SUCH A DRAG ON THE ECONOMY

Although the U.S. economy has been on an upward trend for over 18 months, the recovery has been well below average.  Why?

Part of the reason is the uncertainty created in the minds of investors and consumers by massive new healthcare and financial market legislation plus concern over massive federal government deficits.  However, much of the explanation has to do with the failure of the housing sector to play its traditional role as the leading spark plug of an economic recovery. Why?

Renting v. Buying. The short but incomplete answer has been that the massive but burst bubble in homebuilding has left us with excess inventory.  But that explanation does not recognize a recent fundamental shift in the demand for housing on the part of consumers, probably a more significant factor in the long run.

Two realities are driving this shift: a more conservative attitude towards debt in general (and mortgage debt in particular), and a recognition that buying a house should not be looked on as an investment, as realtors, homebuilders, mortgage lenders and trendy investment advisers had been counseling for the past 15 years.  Instead, buying a house should be looked on like buying an automobile: you are purchasing a stream of services (transportation or shelter), not adding to your investment portfolio.

Why the MacMansions?  At the height of the housing boom, in addition to the number of units being built, the most obvious sign of "housing as an investment" behavior was the proliferation of the "MacMansion" - the outsized, five bathroom, three-car garage suburban dwelling for the working couple with two children, probably purchased with a minimal downpayment and a "teaser" interest rate for the first couple of years of borrowing. 

Census Bureau statistics show this trend clearly, with the average new home square footage rising 9% in the 1990s and a further 11% up to 2007.  The data also show the wrenching readjustment since that peak year - a 5.1% decline through 2010.

AVERAGE SQUARE FEET OF FLOOR AREA IN NEW SINGLE-FAMILY HOMES  Selected Years                                                                                                % change
1990	2,080	-
2000	2,266	+ 8.9%
2007	2,521	+11.2%
2010	2,392	- 5.1%
Source: Bureau of the Census, http://www.census.gov/const/C25Ann/sftot

Perhaps the most dramatic statistic is the fact that renter-occupied housing units increased 1.4 million over the past year compared to the decline of 600,000 in units of owner-occupied housing.

The Market at Work. The marked shift away from owner-occupied housing also shows up in the cost of renting v. buying.  Rents have remained firm, up 1.4% over the past year compared to the 4.5% decline in home prices as measured by the Case-Shiller Home Price Index. The market is responding: new construction starts, athough down overall, are heavily weighted towards multifamily housing: up 32% through July compared to 2010, compared to a fall of 15% for single-family starts.

Washington policymakers and politicians appear oblivious to the fundamental changes taking place in the housing market, as they continue to moan about the failure of single-family sales and homebuilding to surge ahead.  Maybe if they listened less to industry lobbyists and studied the data more carefully they could avoid creating even more problems for an under-performing economy.  

(Background note: my first job as a newly-minted PhD in economics in the late 1960s was to work as a clerk-researcher for the Governor at the Federal Reserve Board who was responsible for the housing and mortgage markets. The housing "cycle" was alive and well at that time, too.)

TOO BIG TO FAIL: THE ACADEMIC ESTABLISHMENT (PART IV)

 “I want us to produce 8 million more college graduates by 2020, because America has to have the highest share of graduates compared to every other nation."   President Obama, University of Texas,  August 9, 2010

"It's no longer true that having a college degree guarantees that you'll get a good job, and it's becoming less true with each passing generation."  Paul Krugman, New York Times, March 7, 2011

"Too many people are going to college."  Charles Murray, "Real Education," 2008

 

America's massive higher education establishment, with four million employees and an operating budget in excess of $330 billion, is on a collision course with reality. 

When Paul Krugman on "the left" and libertarian Charles Murray can come to essentially the same conclusion, the warning flags are flying high.  And when the newly-elected Governor of Pennsylvania's first budget calls for a $600 million reduction in next year's spending on higher education (a 50% cut in state aid) you know the first big wave has arrived.

In three earlier posts, I have documented the success of the higher education establishment in recruiting students, the majority of them unqualified to pass college entry level courses - and saddling them with debt.  Roughly 70% of high school graduates enter college; two-thirds of college graduates borrowed for their education and owe an average of $23,000 as they start looking for a job. I also argued that higher college entrance standards would put pressure on secondary education systems to perform better, benefiting all high school graduates.

Wasted Resources.  But it has taken massive current and prospective budget deficits at the federal and state level to focus attention on the vast amount of wasted resources that parents and taxpayers have been funneling into the higher education sector of the economy.

The best description of this waste, which fuels the ever-higher cost of college, can be found in the recent, widely-reviewed book,"Higher Education?" by liberal academic, Andrew Hacker and a New York Times columnist, Claudia Dreifus.  They decry, among other things, four year vocational programs (such as fashion merchandising and sports management), life tenure for teachers and the resulting publish-or-perish scholarly "compost," and multi-million dollar intercollegiate athletic programs. 

Hacker and Dreifus suggest that the purpose of higher education should be education, not vocational training.  This means college-wide courses in the liberal arts "designed to impart what an educated person should know." A truly revolutionary idea for today's academic administrators to consider.

College for Everyone? But if you think that Hacker and Dreifus are going in the same direction as Charles Murray, you are wrong.  They flatly declare (with no substantiation) that "we believe all Americans are capable of college work, so universal enrollment should be our ultimate goal. But for this to happen, professors will have to make an effort to reach their students."

In other words, in terms of destinations, President Obama and the authors of "Higher Education" are on the same dream boat.  Charles Murray, with considerably more substantive arguments and evidence, would argue that the only way for them to succeed would be to dumb down admission and graduation standards even more than has taken place in recent years.

Summing Up. In 1999, the Department of Education published an extremely helpful and thorough "research synthesis" with the title, "College for All?  Is There Too Much Emphasis on Getting a Four Year College Degree?"  The authors' answer to their question was a qualified "yes." A central conclusion of their survey was that "high school graduates of modest ability or uncertain motivation . . . would be well advised to consider attending 2-year [v. 4-year] colleges." 

Charles Murray believes that "modest ability" should be defined as any 18-year old with an I.Q. of less than 120, or about 80% of that age cohort. Others undoubtedly would argue for a more generous interpretation.

The evidence demonstrating an overgrown, overweight, inward-looking higher education Leviathan is overwhelming.  An increasing number of politicians are no longer scared of taking on the beast, thanks to that evidence - and massive current and prospective government deficits. 

It's too bad the President is still on a dream boat with an out-of-order compass. 

THE DRAMATIC DECLINE IN GLOBAL POVERTY

Three cheers for Brookings' scholars Laurence Chandy and Goeffrey Gertz. They have just documented the extraordinary progress made in recent years in reducing global poverty.

Their bottom line is that the UN's central "Millenium Development Goal" (MDG) of halving the rate of global poverty between 2005 and 2015 was probably achieved in 2008. They estimate that by 2015, extreme poverty could fall to under 600 million, "less than half the number regularly cited in describing the number of poor people in the world today."

Good News is Bad News for Some.  You won't get this kind of analysis from World Bank press releases and foreign aid lobbyists. They need to paint as grim a picture as possible to keep the appropriations coming.  The World Bank's "global monitoring report"  for 2009 direly proclaimed that "the global financial crisis is imperiling attainment of MDG goals and creating an emergency for development."  While it conceded that attainment of the poverty reduction goal by 2015 was possible, "risks abound."

Most close observers are aware that the number of people who have worked their away out of extreme poverty is dominated by developments in China and India (almost 400 million fewer between 2005 and 2010). However, significant gains have been made in Vietnam, Ethiopia and Bangladesh.  Even sub-Saharan Africa has seen the number of persons in poverty drop, despite high birth rates, with the overall rate falling below 50%.

Of course, now that the foreign aid community sees progress being made, they are raising the bar. Whereas "extreme poverty" used to be defined as $1 a day in income, it is now $1.25, and the trend line for $2 a day is creeping into their PowerPoint presentations. 

Why the Extraordinary Progress? In the case of both China and India the foreign aid lobby has had to concede they can't claim much credit.  It wasn't foreign aid money that sparked enterprise and accelerated development in these two populous nations.  The key decisions were (1) to let market prices, for the most part, guide investment decisions, and (2) to let individuals and firms (foreign as well as domestic) invest in a de-regulated economy and keep the lion's share of any resulting profits.

In both China and India, and to an important extent in Africa as well, the rapid deployment of cell phone technology (and now cloud computing) is playing an important role is facilitating rapid economic progress.  Both of these developments flow from permitting foreign investment in the telecommunications sector - and insisting on multiple licensees - e.g. a competitive marketplace.    

Foreign Aid and the Budget Deficit.  Surely, with the UN poverty reduction goal now achieved and the poverty of foreign aid itself in helping economic development glaringly apparent, the time has come to take the axe to most of the U.S.(and other donor countries) foreign assistance budgets.  

 

 Source: http://gbk.eads.usaidallnet.gov/

 

With total U.S. foreign aid and credits running at close to $50 billion a year (of which about $15 billion is military assistance), let's hope the Congressional budget cutters get out their axes and eliminate the bulk of these programs. Handouts encourage dependency, not development.  China, India, Turkey and others demonstrate that if sound policies are put in place, productive savings and investment will flow into the economy for the benefit of all, especially the poorest.

 
     

IRELAND: HOW TO MANAGE A BUSTED BOOM

If you think the United States is facing problems with the economy, spend a few minutes looking at Ireland. Here are some of the facts I was confronted with during a trip earlier this month to the Emerald Isle.

The economy (GDP) shrank by 7% in 2009. This year growth might average 1%+. The fiscal deficit is running at a rate of 12% of GDP. The unemployment rate averaged 12% in 2009 and is likely to be the same in 2010. There is no buzz on Grafton Street, Dublin's shopping thoroughfare.

Busted Banks. The government is putting up perhaps 40 billion euros ($54 billion) to take over 80 billion euros in bad loans originated by major Irish banks. Given the size of the Irish economy, that would be the equivalent of $2.7 trillion in the U.S. And that's just the first installment, according to close observers. 

The government will be lucky to get even 50% of its outlay back. All this is in addition to capital injections already made by the government into the banking system, e.g. 4 billion euros for Anglo-Irish Bank. Further capital injections and nationalization of all the major banks are a distinct possibility.

No Subprime Mortgages.  The Irish managed to get themselves into this box largely by themselves.  An orgy of real estate speculation by individuals of all walks, fueled by badly blinkered bankers and weak-kneed regulators was all that it took. Consider: a commercial site in Dublin sold for 412 million euros at the peak of the boom.  It was financed with 300 million euros in bank borrowings and today is estimated to be worth 50 million euros. The government's "bad bank" will be taking over loans on 200 hotel projects in a sector which is running a 25%+ room vacancy rate.

The Name of the Game is "Pain."  In sharp contrast to the United States, the Irish government is trying to put its house in order by spreading the pain, even to government employees (!!).  School teachers and civil servants are seeing a 10% reduction in their compensation.  Ministers and their staffs are seeing their pay cut even more. Reductions have been decreed in unemployment and child benefits. (The corporate tax rate, at 12.5% remains unchanged; maybe Irish politicians are among the few who believe correctly that ultimately people, not abstractions, pay taxes.)

There have been scattered protests and occasional "go-slow" actions by some civil servants. But nothing like the spoiled, ill-tempered Greeks with their disruptive strikes. 

What is extraordinary about the situation is that most adults concede that "they had it coming."  While the top bankers come in for plenty of brickbats (and, in the case of one major CEO, the likelihood of a jail term), there is genuine, widespread chagrin at the fact that so many people got caught up in the bubble. It's the Pogo scenario:  "We have met the enemy and it is us."

Some among the younger generation, with scant memory of an Ireland that could not employ more than a small fraction of high school graduates in the 1970s and early 1980s, sing a somewhat different tune. But the older generation's sentiments seem dominant.  And the economy is slowly recovering. 

Back in Good, Ole U.S.A. Meanwhile, back in the good, ole U.S.A., we have managed to pass a massive new spending bill in the guise of healthcare reform. And, yes, the White House acknowledges that "something must be done" about future massive budget deficits.

Maybe President Obama's "National Commission on Fiscal Responsibility and Reform" will come up with some interesting ideas. But do you really think that pay cuts for federal, state, and local employees would be one of them?

Clearly, confronting reality, like the Irish government and people appear to be doing today, does not appear to be part of our mindset. What kind of crisis will it take make it so?

 

WHAT TO DO ABOUT HAITI

If there was ever a case where U.S. intervention in another country was called for because of economic misery, it has been Haiti - for the past 50+ years. 

Haiti is the only dysfunctional, desperately poor country in our own backyard. But, outside foreign aid dollars and occasional pressure on its elective politics, we have officially ignored the country since 1941 (when U.S. control of the country's finances was handed back to the locals).

Because it doesn't harbor terrorists and (according to some) because of bizarre Black Caucus politics in the Congress, no U.S. administration wants to spend substantial political capital in creating a climate for economic growth in Haiti.

Paul Collier and Jean-Louis Warnholz have some very relevant suggestions about how to help devastated Haiti help itself in a New York Times recent op-ed.

They point out that, while Haiti is the poorest country in the Western Hemisphere, it has attractive potential for investment and employment: tourism, tropical agriculture, and now apparel manufacturing, thanks to recently-enacted duty-free access to the U.S. market.

Too Many NGOs?  By some press accounts, there are (or were) 25,000 Americans already in Haiti, the vast majority of them doing charity work in one form or another.  That's commendable, but it doesn't address the fundamental problems of investment and growth; indeed, it may have helped create a Haitian mindset of dependency on NGOs ("non-governmental organizations") and foreign aid.

The Inter-American Development Bank (IADB) and The World Bank might be helpful, although their success record to date looks pretty dismal: as of December 2009, before the earthquake, the IADB had over $700 million outstanding in loans and investments and has granted the country $511 million in debt relief in the past year. Over the course of years, The World Bank has dumped another $900 million into the country. Haitians know how to milk cash cows as well as anyone else.

The Case For the Private Sector.  Collier and Warnholz suggest that private businesses and venture capitalists should take a good look at organizing a "cluster" of investments in a particular sector, say apparel manufacturing, where economies of scale in training, suppliers, and transport could be achieved.  Some African countries have been relatively successful doing exactly this, thanks to the African Growth and Opportunity Act, which opened up the U.S. market to them. Free trade and the prospect of profitable investments, not charitable or taxpayer handouts, creates growth.

George Soros has apparently taken a $25 million investment initiative along these lines. Taiwanese and Korean apparel manufacturing entrepreneurs are probably scouting the terrain. 

By all accounts, several hundred million dollars in donations have already been made for earthquake relief.  It would be a decided step forward if more responsible individuals and organizations could divert just a modest percentage of this into investments that create productive jobs, not demeaning dependency. To the extent that the U.S. can foster a climate of investment security and coherent, less corruptible government, that would be a major attraction for private capital. 

Madam Secretary of State, Hillary Clinton, where are you?

 

"One Laptop Per Child" - A Case Study in Good Intentions Gone Awry

Good intentions towards poor countries, a neat idea and a favorable press launch a lot of projects - and garner many billions of dollars from donors, private and public.  That, of course, was the story of The World Bank in its first  several decades. 

But the refusal of well-intentioned politicians, academics, and otherwise intelligent people to  work with market forces to provide a better life for several billion souls is an unending, costly drama.  The latest example appears to be Nicolas Negroponte's "One Laptop Per Child" (OLPC) project . The objective has been to design and distribute $100 computers to children in developing countries so as to provide them with access to web-based knowledge.

As discussed recently in the New York Times and  by Steve Nussbaum in  Business Week, the project's directors suddenly realize that developing country governments are not terribly enthusiastic about the project.  And since they were expected to buy the laptops, Negroponte is now looking to the American public to "Give 1, Get 1" - buy two laptops for $399 and donate one to a child in a developing nation. 

Technology Isn't Everything. Negroponte seems to have been seduced by the rhetoric of "the digital divide" crowd.  Shortly after PCs and then the web burst on the scene, the usual foundations, non-governmental organizations and UN agencies started agitating for resources to distribute PCs to the developing world.

The OLPC project has been part of this movement.  But, until very recently, the project had precious little input from the intended users.  The main objective appears to have been a technology oriented push to get the cost of manufacturing a basic laptop down to $100. Very little serious thought has been given to (1) how the laptops are to be distributed and (2) once distributed, how to persuade children (and their parents) not to sell the laptop for something more immediately necessary (medicine?) in a societies where the per capita income might be under $1,000 a year.

Negroponte's answer to the first problem is that distribution will be "exclusively through national or government agencies of the countries involved." Clearly, he has never walked through an African market where bags of American corn labeled "A gift of the American people" are on sale at market prices.  Has Negroponte never been briefed on the distribution and corruption problems in getting hybrid seeds and pharmaceuticals distributed through developing country government agencies?

His answer to the second problem is to admit it exists and to handle it by designing the laptop to be "so distinctive that it is socially a stigma to be carrying one if you are not a child or a teacher."  I wonder how many village chiefs Negroponte's team interviewed to come up with that solution.

Is the Digital Divide Already Bridged? The deployment of cellphone technology is the relevant case to study. In developing countries the information revolution is already touching peoples' lives through cellphones, including those with web access.  The technology is being deployed wherever governments have permitted two or more companies to deploy the technology - and to charge prices that give those companies a reasonable return on their investment. 

Africa, collectively, is the fastest growing cell phone market in the world.  In many countries, individuals buy and then rent out cell phones by the minute so that merchants can place orders, sellers can determine market prices, and would-be workers can contact potential employers. 

Here's some reasonable advice: forget OLPC's distribution problem.  And instead of giving a single Taiwanese manufacturer (Quanta) monopoly manufacturing rights, why not make the technology freely available to all?  That would be a major public service.  If the market for the laptop is really as large as OLPC believes, it should be large enough for more than one manufacturer to enjoy the necessary economies of scale - and to figure out what improvements can be made, in conjunction with private distributors selling them for their highest-valued uses.

Just like Motorola's ill-fated Iridium satellite phone project (which cost the company's shareholders more than a billion dollars in losses - and has emerged from the ashes of bankruptcy a smaller and more focused company), the OLPC project may prove to be helpful in deploying technology, learning, and ideas. But it needs a market test, not public or private charity if it is to truly succeed.

WORLD STEEL: GLOBALIZATION RULES

On August first, Mittal Steel, a Dutch-registered, London-based, Indian-managed steel company that did not exist 25 years ago, took control of Arcelor, Europe’s largest producer. All of a sudden, a rank outsider, Lakshmi Mittal, has assembled the world’s largest steel company, with an annual capacity of more than 100 million tons of raw steel or 10% of the global market.

Mittal’s success is another manifestation of how the "Anglo-Saxon" market-based vision of economics continues to displace the statist "national champion" mindset in a world where the forces of globalization dominate.

When Mittal’s bold bid was announced in January, Arcelor tried to rally European politicians behind its campaign to stay independent. French President Jacques Chirac denounced Mittal’s bid as "purely financial, devoid of any industrial objective." Belgian and Luxembourg officials grumbled and talked about legal strategies to derail the bid. Arcelor tried to bring in a Russian "white knight," but found that control of the company was now being exercised by a multinational array of shareholders (including hedge funds) rather than managers or politicians. In the end, Mittal raised his offer to roughly $33 billion, a 40% improvement from the initial offer in January.

In recent decades, no manufacturing sector has been more influenced by political forces than the global steel industry, partly because of its traditional association with national defense. In many countries, governments owned the major producers; in most countries, trade barriers attempted to keep imported steel from putting inefficient domestic producers out of business. Government loans kept bankrupt firms in business long after they should have disappeared. As a result, compared to other major industrial sectors, the global steel industry was highly fragmented, burdened with overcapacity, and slow to adopt new technology and management processes.

Not all of the above impediments have disappeared: steel producers still have a tendency to run to government whenever imports threaten their profit margins. But the forces of globalization and the energy of individuals like Lakshmi Mittal and the American financier, Wilbur Ross (who helped to consolidate the U.S. industry) have finally brought the industry and most of the politicians into the modern age.

The drivers of globalization – the dismantling of barriers against international movement of goods, services, and finance, the collapse of the socialist model of production, and the deployment of radically new technologies in communications and transportation – continue to reshape patterns of production and ownership on a world scale. This reshaping has provided an extraordinary impetus to economic growth in many countries - and has helped to lift millions of individuals out of poverty, even as it has disrupted the livelihoods of many others.

In steel, as in every other industry, the reshaping process is far from over. The integration of Japanese, Korean, Russian and Chinese firms into a coherent global structure has just begun. It makes less and less sense to move vast amounts of iron ore and coal around the world to make hot metal in the United States and Europe instead of shipping steel slabs from Brazil or Russia to those destinations. So, more change is in prospect.

For as long as globalization rules and stimulates industry adjustments, the average person in the world is likely to enjoy gradually increasing living standards and longevity. But the economic growth that underlies these trends is "inherently a byproduct of change," as Rosenberg and Birdzell have pointed out in How the West Grew Rich. And the resistance to change, whether from anti-globalization protestors or entrenched commercial interests must never be underestimated.

(For more background on the globalization of the steel industry, see my 1999 paper, "American Steel and International Trade: The Challenge of Globalization.")

WHY THE WORLD BANK AND THE IMF WILL ALWAYS BE WITH US

It’s annual meeting time again for The World Bank and the International Monetary Fund.  More than 10,000 people are expected in Singapore this week to rub shoulders and listen to an endless stream of finance ministers reading from scripts prepared by dutiful subordinates. Reporters will be looking out for colorful and maybe violent protestors railing against globalization and other favorite causes. 

But, barring some al Quaida spectacular, it should be very much like most other years: speeches and communiqués will discuss trade, debt, and the plight of Africa; China and India may get a few more votes on the Board of the Fund; calls for fiscal responsibility and “appropriate” exchange rate adjustments will be heard. TV cameras will record some scruffy marchers with placards and pithy slogans. Considerable wining and dining will take place, much of it at the expense of private bankers.

No one on an official podium is likely to ask, “Didn’t the main rationale for these institutions disappear some time ago?” The IMF was established to facilitate “fixed but adjustable” exchange rates; The World Bank was envisioned to function as a lender of last resort to countries seeking to restructure their economies.  But the collapse of the fixed exchange rate system in the 1970s obviated the primary reason for the Fund’s existence.  And the re-opening of international capital markets to most developing countries in the 1980s did the same for The World Bank.  Today, both institutions devote the bulk of their time and all their frequently overlapping financial operations on developing countries.

And both are still increasing their staffs: fiscal 2006 administrative budgets for the two multilateral institutions (which exclude their lending and grant programs) totaled over $3 billion. The two institutions do perform some useful advisory work, and their research programs provide a wealth of data for what works and what doesn’t in developing countries. But these activities require a fraction of $3 billion (most of which is paid by the developing countries).

Nearly a decade ago, with a view towards trying to build support for merging the two institutions, I wrote, “No serious effort at substantive reform for either institution has ever been mounted.”  (The Washington Quarterly, Spring 1999). The Congressionally mandated Meltzer Commission in 2000 developed some worthwhile (but certainly not dramatic) proposals.  However, with one partial exception, they were never taken up.  Proposals for serious reform continue to be made by academics and think tank types, some of whom cite my earlier papers.

I have reluctantly concluded that we would-be reformers should move on to projects with greater possibilities of success. The reality is that the political capital required on the part of major shareholder governments is far too great. The need to coordinate such a project with at least half a dozen other governments, with their own competing agendas and bureaucracies, would be daunting.  The likelihood that some new crisis would intervene and derail the extended campaign is high. 

As former U.S. Treasury Secretary George Shultz once reported, after he had suggested a major restructuring, such as merging the two institutions, to a leading central banker, the reply was, “You are probably right . . . but I am tired just thinking about the effort involved.”

Probably the best that can be done is to make sure that neither institution engages in counter-productive financial operations, nor receives another general capital increase requiring taxpayer funds or commitments.  So, if you are in Singapore this week, enjoy the party – and not to worry – there will be plenty more in the years to come.