Thursday, January 20, 2011

Xie on Australia and Japan

From Between a Crutch and Walking Stick: Why the dollar has got to go as the world's reserve currency – and how the euro will replace it.

Australia

Some (developed economies) are behaving like nothing has happened. Australia stands out in that regard. Its household debt has surged by 20 percent since the Crisis hit and recently surpassed 100 percent of GDP. Its household debt to disposable income ratio, at 156 percent, is the highest among major economies in the world. Australia has had 4.5 percent of GDP in annual current account deficit for two decades, i.e., its household debt is funded by foreign capital inflow. Its property market is still booming. When you see rapidly rising household debt, a big current account deficit, and a booming property market, it is a credit-cum-property bubble for sure.

Australia's bubble has survived the 2008 crisis because commodity prices came on the back of the Fed's zero interest rate policy and China's massive credit growth. The Australian bubble is very likely to burst when commodity prices fall sharply. Either a substantial economic slowdown in China or spiking U.S. interest rates would trigger it.

Australia is an exception. The booming commodity market is giving it the choice not to adjust. Some economies must adjust and fast, because they depend on foreign capital for financing. Iceland, Greece, and Ireland are small economies that depend on foreign capital to fund their fiscal deficits, i.e., they run large current account deficits and don't have sufficient domestic savings to fund their government deficits.


Japan

Japan is another economy that hasn't decreased its leverage; the belt tightening in the private sector has been offset by the government's deficit spending. Japan's debt level is truly frightening. But, it has been that way for two decades. The reason for its stability is due to its high domestic savings rate. Japan has been consistently running large current account surplus, i.e., sending its savings surplus abroad, for decades. Japanese people have extremely high home bias in deploying their savings. Japan's government can borrow at extremely low interest rate. Hence, it has no incentive to change its behavior.

Only a sustained current deficit would change Japan's dynamics. An aging and declining population is slowly bringing down Japan's savings rate. But Japan's investment need is declining too. Hence, it is still running a significant current account surplus. The situation will change in a decade or so. Japan is unlikely to change without an external constraint. I suspect that Japan will look the same a decade from now.

Tuesday, January 18, 2011

Amy Chua is a Wimp

By DAVID BROOKS
January 17, 2011


Sometime early last week, a large slice of educated America decided that Amy Chua is a menace to society. Chua, as you probably know, is the Yale professor who has written a bracing critique of what she considers the weak, cuddling American parenting style.

Chua didn’t let her own girls go out on play dates or sleepovers. She didn’t let them watch TV or play video games or take part in garbage activities like crafts. Once, one of her daughters came in second to a Korean kid in a math competition, so Chua made the girl do 2,000 math problems a night until she regained her supremacy. Once, her daughters gave her birthday cards of insufficient quality. Chua rejected them and demanded new cards. Once, she threatened to burn all of one of her daughter’s stuffed animals unless she played a piece of music perfectly.

As a result, Chua’s daughters get straight As and have won a series of musical competitions.

In her book, “Battle Hymn of the Tiger Mother,” Chua delivers a broadside against American parenting even as she mocks herself for her own extreme “Chinese” style. She says American parents lack authority and produce entitled children who aren’t forced to live up to their abilities.

The furious denunciations began flooding my in-box a week ago. Chua plays into America’s fear of national decline. Here’s a Chinese parent working really hard (and, by the way, there are a billion more of her) and her kids are going to crush ours. Furthermore (and this Chua doesn’t appreciate), she is not really rebelling against American-style parenting; she is the logical extension of the prevailing elite practices. She does everything over-pressuring upper-middle-class parents are doing. She’s just hard core.

Her critics echoed the familiar themes. Her kids can’t possibly be happy or truly creative. They’ll grow up skilled and compliant but without the audacity to be great. She’s destroying their love for music. There’s a reason Asian-American women between the ages of 15 and 24 have such high suicide rates.

I have the opposite problem with Chua. I believe she’s coddling her children. She’s protecting them from the most intellectually demanding activities because she doesn’t understand what’s cognitively difficult and what isn’t.

Practicing a piece of music for four hours requires focused attention, but it is nowhere near as cognitively demanding as a sleepover with 14-year-old girls. Managing status rivalries, negotiating group dynamics, understanding social norms, navigating the distinction between self and group — these and other social tests impose cognitive demands that blow away any intense tutoring session or a class at Yale.

Yet mastering these arduous skills is at the very essence of achievement. Most people work in groups. We do this because groups are much more efficient at solving problems than individuals (swimmers are often motivated to have their best times as part of relay teams, not in individual events). Moreover, the performance of a group does not correlate well with the average I.Q. of the group or even with the I.Q.’s of the smartest members.

Researchers at the Massachusetts Institute of Technology and Carnegie Mellon have found that groups have a high collective intelligence when members of a group are good at reading each others’ emotions — when they take turns speaking, when the inputs from each member are managed fluidly, when they detect each others’ inclinations and strengths.

Participating in a well-functioning group is really hard. It requires the ability to trust people outside your kinship circle, read intonations and moods, understand how the psychological pieces each person brings to the room can and cannot fit together.

This skill set is not taught formally, but it is imparted through arduous experiences. These are exactly the kinds of difficult experiences Chua shelters her children from by making them rush home to hit the homework table.

Chua would do better to see the classroom as a cognitive break from the truly arduous tests of childhood. Where do they learn how to manage people? Where do they learn to construct and manipulate metaphors? Where do they learn to perceive details of a scene the way a hunter reads a landscape? Where do they learn how to detect their own shortcomings? Where do they learn how to put themselves in others’ minds and anticipate others’ reactions?

These and a million other skills are imparted by the informal maturity process and are not developed if formal learning monopolizes a child’s time.

So I’m not against the way Chua pushes her daughters. And I loved her book as a courageous and thought-provoking read. It’s also more supple than her critics let on. I just wish she wasn’t so soft and indulgent. I wish she recognized that in some important ways the school cafeteria is more intellectually demanding than the library. And I hope her daughters grow up to write their own books, and maybe learn the skills to better anticipate how theirs will be received.

The War on Logic

By PAUL KRUGMAN
January 16, 2011

My wife and I were thinking of going out for an inexpensive dinner tonight. But John Boehner, the speaker of the House, says that no matter how cheap the meal may seem, it will cost thousands of dollars once you take our monthly mortgage payments into account.

Wait a minute, you may say. How can our mortgage payments be a cost of going out to eat, when we’ll have to make the same payments even if we stay home? But Mr. Boehner is adamant: our mortgage is part of the cost of our meal, and to say otherwise is just a budget gimmick.

O.K., the speaker hasn’t actually weighed in on our plans for the evening. But he and his G.O.P. colleagues have lately been making exactly the nonsensical argument I’ve just described — not about tonight’s dinner, but about health care reform. And the nonsense wasn’t a slip of the tongue; it’s the official party position, laid out in charts and figures.

We are, I believe, witnessing something new in American politics. Last year, looking at claims that we can cut taxes, avoid cuts to any popular program and still balance the budget, I observed that Republicans seemed to have lost interest in the war on terror and shifted focus to the war on arithmetic. But now the G.O.P. has moved on to an even bigger project: the war on logic.

So, about that nonsense: this week the House is expected to pass H.R. 2, the Repealing the Job-Killing Health Care Law Act — its actual name. But Republicans have a small problem: they claim to care about budget deficits, yet the Congressional Budget Office says that repealing last year’s health reform would increase the deficit. So what, other than dismissing the nonpartisan budget office’s verdict as “their opinion” — as Mr. Boehner has — can the G.O.P. do?

The answer is contained in an analysis — or maybe that should be “analysis” — released by the speaker’s office, which purports to show that health care reform actually increases the deficit. Why? That’s where the war on logic comes in.

First of all, says the analysis, the true cost of reform includes the cost of the “doc fix.” What’s that?

Well, in 1997 Congress enacted a formula to determine Medicare payments to physicians. The formula was, however, flawed; it would lead to payments so low that doctors would stop accepting Medicare patients. Instead of changing the formula, however, Congress has consistently enacted one-year fixes. And Republicans claim that the estimated cost of future fixes, $208 billion over the next 10 years, should be considered a cost of health care reform.

But the same spending would still be necessary if we were to undo reform. So the G.O.P. argument here is exactly like claiming that my mortgage payments, which I’ll have to make no matter what we do tonight, are a cost of going out for dinner.

There’s more like that: the G.O.P. also claims that $115 billion of other health care spending should be charged to health reform, even though the budget office has tried to explain that most of this spending would have taken place even without reform.

To be sure, the Republican analysis doesn’t rely entirely on spurious attributions of cost — it also relies on using three-card monte tricks to make money disappear. Health reform, says the budget office, will increase Social Security revenues and reduce Medicare costs. But the G.O.P. analysis says that these sums don’t count, because some people have said that these savings would also extend the life of these programs’ trust funds, so counting these savings as deficit reduction would be “double-counting,” because — well, actually it doesn’t make any sense, but it sounds impressive.

So, is the Republican leadership unable to see through childish logical fallacies? No.

The key to understanding the G.O.P. analysis of health reform is that the party’s leaders are not, in fact, opposed to reform because they believe it will increase the deficit. Nor are they opposed because they seriously believe that it will be “job-killing” (which it won’t be). They’re against reform because it would cover the uninsured — and that’s something they just don’t want to do.

And it’s not about the money. As I tried to explain in my last column, the modern G.O.P. has been taken over by an ideology in which the suffering of the unfortunate isn’t a proper concern of government, and alleviating that suffering at taxpayer expense is immoral, never mind how little it costs.

Given that their minds were made up from the beginning, top Republicans weren’t interested in and didn’t need any real policy analysis — in fact, they’re basically contemptuous of such analysis, something that shines through in their health care report. All they ever needed or wanted were some numbers and charts to wave at the press, fooling some people into believing that we’re having some kind of rational discussion. We aren’t.