All through the presidential election campaign, Barack Obama blew hot and cold on trade. In tones reminiscent of Bill Clinton and the New Democrats, he often spoke persuasively about embracing globalisation and welcoming international competition. The US could not prosper by hiding from the world economy, he said. Yet he was second to none among the candidates in questioning specific trade pacts. He attacked the North American Free Trade Agreement and said it should be renegotiated. He threatened companies that invest abroad rather than “keeping jobs at home”. This equivocation has carried through to his trade policy appointments.

Mr Obama’s US trade representative (his chief international negotiator) will be Ron Kirk, a former mayor of Dallas, a leading proponent of Nafta and a long-time supporter of liberal trade. His appointment disappoints the president’s supporters on the left of the party. The new labour secretary has them applauding, however: she is Hilda Solis, an ally of the unions, a leader in Congress of opposition to the Central American Free Trade Agreement and a forthright critic of orthodox liberal trade.

The new commerce secretary, announced earlier, will be Bill Richardson. Running against Mr Obama for the Democratic nomination, the former governor of New Mexico expressed qualified support for Nafta, but called for “fair trade, not just unabashed free trade”, and underlined the need to address “wage disparities” between the US and its partners. Lawrence Summers, director of the National Economic Council, will doubtless also have a say: he will be the closest thing in Mr Obama’s circle to an outright free-trader.

The remainder of the article can be read here. Please post comments below.

Have a peaceful Christmas.

This essay by Stanford’s John Taylor is well worth reading.

In this paper I have provided empirical evidence that government actions and interventions caused, prolonged, and worsened the financial crisis. They caused it by deviating from historical precedents and principles for setting interest rates, which had worked well for 20 years. They prolonged it by misdiagnosing the problems in the bank credit markets and thereby responding inappropriately by focusing on liquidity rather than risk. They made it worse by providing support for certain financial institutions and their creditors but not others in an ad hoc way without a clear and understandable framework.  While other factors were certainly at play, these government actions should be first on the list of answers to the question of what went wrong.

What are the implications of this analysis for the future?  Most urgently it is important to reinstate or establish a set of principles to follow to prevent misguided actions and interventions in the future.  Though policy is now in a massive clean-up mode, setting a path to get back to these principles now should be part of the clean-up.  I would recommend the following:

First, return to the set of principles for setting interest rates that worked well during the Great Moderation.

Second, base any future government interventions on a clearly stated diagnosis of the problem and a rationale for the interventions.

Third, create a predictable exceptional access framework for providing financial assistance to existing financial institutions. The example of how the International Monetary Fund set up an exceptional access framework to guide its lending decisions to emerging market countries is a good one to follow.

This column for National Journal [link expires in a fortnight] looks at an international dimension of the economic emergency:

Even weeks ago, the orthodox and unorthodox measures that the Federal Reserve is now resorting to would have seemed scarcely thinkable. The same goes for the fiscal stimulus of $500 billion or more that the Obama administration is preparing. Whether these amazingly bold interventions succeed is another matter, but nobody can question the Fed’s or Treasury’s willingness to suspend the usual rules and think big.

This zeal for dramatic initiatives is notably absent in Europe.

The European Central Bank, which controls monetary policy in the 15 countries that are members of the euro currency zone, has cut interest rates more slowly and far more reluctantly than the Fed. Most European countries are planning a fiscal stimulus, but there is no meaningful Europe-wide initiative. The individual countries’ efforts are collectively very modest compared with what is intended in the U.S. This week the head of the ECB reminded the zone’s members of their commitments under the “stability and growth pact” — an agreement they reached when the euro was created. It forbids members to run fiscal deficits anywhere near as large (in relation to the size of their economies) as the one the U.S. is now contemplating for 2009.

Why is there such a marked difference in attitudes to this economic emergency in the United States compared with Europe — and what, if anything, does Europe’s reticence mean for the U.S. and the world economy as a whole?

You can read the rest here.

Yasheng Huang’s book on China’s economic miracle went on to my reading list when I saw it reviewed in The Economist earlier this year. I promptly forgot about it. This article [registration required] in the McKinsey Quarterly tells me to bump it to the top. (Above “Outliers”? Perish the thought.)

The credibility of American-style capitalism was among the earliest victims of the global financial crisis. With Lehman Brothers barely in its grave, pundits the world over rushed to perform the last rites for US economic ideals, including limited government, minimal regulation, and the free-market allocation of credit. In contemplating alternatives to the fallen American model, some looked to China, where markets are tightly regulated and financial institutions controlled by the state. In the aftermath of Wall Street’s meltdown, fretted Francis Fukuyama in Newsweek, China’s brand of state-led capitalism is “looking more and more attractive.” Washington Post columnist David Ignatius hailed the global advent of a Confucian-inspired “new interventionism”; invoking Richard Nixon’s backhanded tribute to John Maynard Keynes, Ignatius declared, “We are all Chinese now.”

But before proclaiming the dawn of a new Chinese Century, leaders and executives around the world would do well to reconsider the origins of China’s dynamism. The received wisdom on the country’s economic miracle—it was a triumph of technocracy, in which the Communist Party engineered a gradual transition to the market by relying on state-controlled businesses—gets all the important details wrong. This standard account holds that entrepreneurship, private-property rights, financial liberalization, and political reform played only a small role. Yet my research, based on a detailed analysis of the Chinese government’s survey data and government documents at the central and local levels, indicates that property rights and private entrepreneurship provided the dominant stimulus for high growth and lower levels of poverty.

By the way, you can download Chapter 1 of the book as an MIT Working Paper.

[This review ran in the FT earlier in the week and I forgot to post it here. Sorry.]

Robert Samuelson, who writes for Newsweek and the Washington Post, has for years been one of the most interesting economic commentators in the US. He stands for independence and lack of agitation, real or synthetic. He has no time for exaggerated alarms and enthusiasms. He is steady in a boom and steady in a crisis. Except that he writes too well, he might have been a good central banker.

His new book about the “Great Inflation” of the 1960s and 1970s and its far-reaching consequences has a lot to say about central banking, but it strives to put debates about monetary policy in a wider setting. It is an excellent subject and, as he says, a book that needed to be written.

Inflation in the US increased in those decades, he argues, because of good intentions combined with bad economics. After the second world war politicians had fresh memories of the Depression and were sensitive to the costs of unemployment. Maintaining full employment was the good intention. The bad economic idea was that monetary and fiscal policy could be fine-tuned to do this continuously.

Many economists then believed it was possible to exploit a stable trade-off between inflation and unemployment. Accepting a slightly higher rate of inflation would allow a permanently lower rate of joblessness: a small price to pay, many believed. In addition, estimates of how far down unemployment could be pushed were very optimistic: rates of less than 4 per cent were regarded as unambitious. A third ingredient was the view that inflation was not chiefly the result of monetary policy: if inflation crept up, it was because of “cost-push” factors (such as wage demands) which the central bank could not affect.

In the view of most economists, all those ideas now stand discredited. Accepting a higher rate of inflation does not yield a permanently lower rate of unemployment; the “natural rate” of unemployment (the amount consistent with inflation that is neither rising nor falling) is higher than 4 per cent; and expansionary monetary policy does indeed drive inflation up. The views prevailing in the 1960s and 1970s were a formula for policy erring always on the side of expansion, which ratcheted inflation ever higher.

Once US inflation had risen above 10 per cent, it took Paul Volcker at the Federal Reserve, Ronald Reagan in the White House (prepared to give Mr Volcker political cover), and an unexpectedly severe recession in 1981-82 to bring it back down. There followed more than two decades of the “Great Moderation”, as it is called: steady growth, low inflation, and muted business-cycle fluctuations. Discussing this in 2004, Ben Bernanke, now the Fed chairman, called the “substantial decline in macroeconomic volatility” over the previous 20 years “a striking development”. Was it due to structural economic change, better monetary policy, or good luck, he asked? His answer: monetary policy, mainly. The lessons had been learnt.

Four years on, with the roof falling in, Mr Bernanke’s verdict on the new-found wisdom of central bankers looks a little premature. Mr Samuelson’s book also feels overtaken by events and, in its last parts, thrown into confusion. He writes, “In many ways, the book’s publication - about two years later than I originally expected - is more timely now than if I had written faster and made my initial schedule.” I think not. The present crisis overhangs the narrative and demands to be properly integrated. Had the author known what was coming, this is not the book he would have published at the end of 2008. The Great Moderation is over. We are living new and unforeseen chapters, and the book does not have them.

Rather than simply stopping short, the book does attempt some discussion of the crisis. With less than full conviction, it suggests that the Great Moderation fell victim to an internal contradiction: low inflation fuelled reckless optimism which spilled over into speculative excess. No doubt there is something to that, but the idea cuts awkwardly across the theme that Samuelson presumably first had in mind, and which is stamped through the book - that a kind of social contract was struck after 1982, in which people accepted less fine-tuning of the economy in return for low inflation and steady growth. Was that a good deal, as the book seems to want to say? Or was it false advertising - as the view that the Great Moderation carried the seeds of its own destruction would imply?

Like everything Samuelson writes, this is an absorbing read. The main part of it, which deals with settled economic history, can be warmly recommended. But the history is not as settled as one supposed, and suddenly the aftermath of the great inflation seems less interesting, and less important, than the aftermath of the aftermath.

More rivals? It seems that Obama has chosen Ron Kirk as his USTR and Hilda Solis as his labour secretary. Kirk, a former mayor of Dallas, is said to be a supporter of NAFTA in particular and free trade in general. Solis is apparently a labour advocate and friend of the unions, and not so keen on liberal trade; read Harold Meyerson’s endorsement:

What does Rep. Hilda Solis, Barack Obama’s selection for secretary of labor, bring to the job? Only a record of passionate commitment to working people, a high level of political smarts, and some genuine displays of raw guts that could make her a star of American liberalism…

In the House, Solis has continued to champion labor causes, immigrants’ rights, women’s health and environmental protections. She also worked closely with Rahm Emanuel in recruiting Democratic House candidates from the Southwest and Latino-dominated districts, so she brings to her new job a strong relationship with Obama’s incoming chief-of-staff. Now, she’s in the key position to promote the Employee Free Choice Act, which seems likely to be the most contentious issue on Obama’s agenda. But Solis has never been deterred by controversy.

Assuming the appointments are confirmed, we will see how well they can work together. As I have said before, I question the wisdom of combining people with fundamental disagreements in executive (as opposed to advisory) roles. Widely divergent opinions are good in a seminar but not so good in a management setting, where the challenge is not to develop and polish an opinion but to get something done. Much as I admire the man and respect his appetite for countervailing opinion, I’m beginning to wonder if Obama understands this distinction. Dysfunctional quarreling is the obvious risk. A subtler problem is that if you appoint people who disagree with each other to run adjoining or overlapping spheres of policy, you, the boss, cannot delegate. Obama will always have to be there to adjudicate–and his time and energy are going to be very scarce resources.

I am steeling myself to approach “Outliers”, Malcolm Gladwell’s latest. I am not an admirer, but I can hardly complain about this further contribution to the culture–as I hope to in due course–without having read it.

Since the first chapter of “Tipping Point” I have been enduring Gladwell out of an increasingly weary sense of professional obligation. This is what they pay me to do, I tell myself. The man has a nose for interesting tales, I grant you, but his unfailing combination of intellectual parasitism, credulity, false modesty, and self-importance repels me. In “Tipping Point”, “Blink” and those of his New Yorker pieces I have read, the formula is always the same: find a scholarly opinion; sanctify said opinion with Gladwellian approval (transforming it from a disputed theory to something “we now know”); season with Madison Avenue terms of art; then deluge with anecdotes of questionable, if any, relevance. And let there be colour. Always, the colour. Please tell me about that man’s wry smile, interesting foreign accent, and cluttered desk (often, as studies show, the sign of a creative mind). I need to know all that.

Well, as I say, I will report back on “Outliers” in due course. For this premature outburst, blame David Brooks. “Outliers” is an “important” book, he says, in an excess of professional courtesy. (Important to whom?) Further compliments follow. In the end he criticises a little, but quite respectfully. I see no blood on the floor. It’s disappointing.

As Gladwell told Jason Zengerle of New York magazine: “The book’s saying, ‘Great people aren’t so great. Their own greatness is not the salient fact about them. It’s the kind of fortunate mix of opportunities they’ve been given.’ ”

Rather than nodding wisely at this, shouldn’t one just laugh? The “salient fact” about Newton was not his greatness but his “kind of fortunate mix of opportunities”? Einstein? Mozart? Does Gladwell actually know what “salient” means? As for the idea that nature and nurture are both involved in determining one’s success or failure–am I asked to believe that this is a new insight, for heaven’s sake? I learn from other reviews that Gladwell has also arrived, through the research for this book, at the discovery that “practice makes perfect”. Yes, I was surprised too; once again conventional wisdom is turned on its head. There is a rather important academic paper about it.

Brooks’s main point is to express concern at where these remarkable new findings might lead:

His book is being received by reviewers as a call to action for the Obama age. It could lead policy makers to finally reject policies built on the assumption that people are coldly rational utility-maximising individuals. It could cause them to focus more on policies that foster relationships, social bonds and cultures of achievement.

Interesting. What might those policies be, I wonder? Are the policies supportive of mixed-economy capitalism–the ones we already have, which policy makers might finally reject–so inimical to relationships, social bonds and cultures of achievement? I mean, as compared to the alternatives, whatever those might be.

I know. None of this changes the fact that I will have to read that damn book.