On the Soapbox

Welcome to McDonaldΓÇÖs; would you like some mangling with your encoding?

Saturday, May 7, 2011
Keywords: Technology

As a programmer, I see the world a bit differently, which is why the error on this McDonald's receipt caught my attention:

This, of course, is what happens when U+2019 (the right single quotation mark) is encoded in UTF-8 and then decoded using the IBM "OEM" code page (CP437). My guess is that the machine used to print the receipt is too simple (and/or old) to recognize UTF-8. However, if you look at the receipt's date, it does print apostrophes correctly, with the desired directionality. Which brings us to their second mistake: the right single quotation mark is semantically incorrect*: for possessives, the correct punctuation is an apostrophe (U+0027). Since the apostrophe falls within the 7-bit ASCII range, it is encoded identically in UTF-8 and CP437 (and many other encodings) and is generally immune to encoding mangling. This is why the apostrophe prints correctly, but not the right single quotation mark.

So first, McDonald's used a semantically incorrect* punctuation mark (quotation instead of apostrophe) and then they sent that character, encoded in UTF-8, to a machine that apparently only understands CP437. You would think that one of the biggest companies in the world would be more technically competent than this.

I suspect, however, that another major company may share in part of this blame: Microsoft. Specifically, their word processor auto-"corrects" apostrophes into single quotes. While this "correction" is semantically correct if the apostrophes were being used as quotes, it is not* when the apostrophes are actually used as, well, apostrophes. It is plausible that someone could have used Word to draft possible greeting texts for use on receipts and then copied-and-pasted them into the receipt system.

________________
* Yes, I know that the Unicode Consortium sanctions the use of U+2019 as an apostrophe. No, I do not agree with their position on that.

This entry was edited on 2011/05/07 at 02:06:11 GMT -0500.

The reality of debts and deficits

Saturday, July 17, 2010
Keywords: Economics

"Reagan proved deficits don't matter." --Dick Cheney

Let us look at some numbers. The Greek public debt is around 130% of their GDP. As we all know, their government was in danger of insolvency, and as a result, Greece became the focus of an European sovereign debt crisis. The United States public debt is projected to reach 100% of our GDP next year. In light of what happened in Iceland and Greece, this sounds rather ominous, does it not? But let us look at one more figure: the Japanese public debt is around 230% of their GDP, and it has been well over 100% of GDP for many years. Yet, there is no danger of Japanese insolvency. There is no Greek-style crisis in Japan, despite the Japanese public debt dwarfing that of Greece. As another example, the United States public debt following the Second World War was 130% of our GDP, yet, aside from a brief economic dip as troops demobilized, the post-war economy was strong and robust; that huge public debt, which was larger than our current debt load, did not adversely affect our economy.

So how are Japan and post-war America different from Greece? Let us look at another number: 94% of Japanese public debt is held by the Japanese. Essentially, Japan owes Japan money. As long as the vast majority of the Japanese government's borrowing is domestic, deficits do not pose a threat of insolvency for the Japanese government (there are, to be sure, other problems with chronic deficits of this sort, but insolvency is not one of them). Likewise, virtually all of the debt that the United States accumulated during the Great Depression and World War II was held by Americans. Greece, however, is in a different situation, as most of their debt is held by foreigners, such as the German and French banks that purchased Greek bonds, and this is why Greece was in danger of insolvency.

What about our current debt load? What about the trillion dollars worth of our debt held by the Chinese? The vast majority—over 70%—of our debt is held by us. Investment portfolios, pension funds, university endowments, etc. all hold treasury bonds. This means that we are not really "leaving our children in (much) debt" because, in the future, to pay off the debt, Americans will have to (mostly) pay back Americans. While the news media seems very fixated on large-sounding numbers such as one trillion dollars of Chinese-held debt, they neglect to point out that one trillion dollars represents less than 7% of our GDP. Treasury bonds have been and are still considered one of the safest investments on the planet, making it attractive to foreigners and may partly explain why our foreign share of debt is higher than that of Japan's: because foreigners want to buy our debt, not because we need them to buy our debt.

Much is also made about the Chinese government's stash of treasury bonds and the notion that the Chinese government can use the threat of a pullout to dictate terms to our government. This is ridiculous because the reason why China holds so many treasuries is because this is their way of illegally manipulating the currency markets and keeping their currency, the RMB, grossly undervalued (using the spread between the nominal and PPP GDP per-capita as a rough estimate, the RMB is valued at nearly half of its true value). The undervalued RMB is how China maintains chronic trade surpluses, and as such, we neither need nor want them to hold so many treasuries. If they pull out, the RMB will rise against the dollar (something that Americans have long been calling for), and manufacturing would flow from China back to the United States (something that Americans have been longing for). In short, a Chinese abandonment of treasury bonds would hurt the Chinese government much more than it would hurt us, which is why there is no risk of that happening. That, of course, does not stop the Chinese government from loudly beating its chest and making thinly veiled threats, but in reality, those threats are empty and it is actually the United States who holds the greater leverage.

Finally, like the Japanese, our debt is denominated in our own currency, which, for reasons that are beyond the scope of this discussion, makes insolvency even more unlikely. Yet, despite all this, there are many people who are calling for immediate deficit reductions. While chronic deficits are indeed undesirable, they are necessary in the short term when faced with a deflationary, demand-slack recession (which is the polar opposite of an inflationary, supply-shortage economic crisis like that of Zimbabwe's, though that does not seem to deter some people from comparing them to us). We have been down this path before: Hoover's attempts at deficit reduction in the middle of a demand-slack recession drove us deeper into the Great Depression, and it took an enormous binge of deficit spending (the New Deal and the war, but mostly the war) to create the demand to pull us out of our downward spiral. For some, the problem is one of understanding: after all, it is easy to look at Iceland and Greece and, without any understanding of what fundamentally sets them apart from us or the Japanese, think that we could very well fall into the same trap as them. For others, unfortunately, the problem is one of politics. Whether it is to advance one's agenda or to discredit the current administration, many are making use of unfounded deficit scares. To borrow Upton Sinclair, "It is difficult to get a man to understand something, when his political advancement depends upon his not understanding it!"

I will discuss the current crisis in general in my next post, when I get around to it.

This entry was edited on 2010/07/22 at 22:18:17 GMT -0500.

Two tales of "smart" software gone awry

Friday, July 3, 2009
Keywords: Technology

Don't mess with my data

In an era when our lives are increasingly defined by and stored as data, it's important to keep that data safe. Backups are not always enough, because before you can use a backup to recover when something goes wrong, you first need to know that something has gone wrong. While the catastrophic death of a hard drive is hard to miss, subtler forms of corruption can be much more difficult to detect.

A couple of years ago, one of the sticks of memory in my desktop computer developed a defect. It was a very, very small defect: a single bit (not even a full byte) that had gone bad. While one bit does not sound like much, it can still be problematic, especially when dealing with compressed data in which even one bit of corruption has the potential to ruin all of the data that comes after that it. But since this was just one bit that had gone bad, it was not readily apparent that there was a problem. The effect of a bit of bad memory depends on what that section of memory is currently being used for, which means that the effect of this bad bit can potentially vary frequently, as memory gets shuffled around and reallocated to various tasks. Most of the time, there was no discernible effect. Sometimes, there might be minor glitches in software that could be easily misattributed to a programming bug. And sometimes, such as when that piece of memory is used as a part of a file buffer, it could corrupt a file on the disk, which, depending on the type of the file, could easily go unnoticed.

Fortunately, I had a habit of hashing important files and periodically checking those hashes, as a sort of a trip wire to alert me to potential problems with data integrity. When I started getting hash mismatches, I knew that something was wrong. I had originally suspected a faulty disk, but when I considered that I had also ran into a small handful of minor, but odd software glitches, I decided to test my memory, which was how I discovered the defect. Without my practice of hashing important files, it would have almost certainly taken me months longer to realize that there was a problem.

This afternoon, when I checked the hashes of my music files, I was a little alarmed to see 20 hash mismatches. I quickly noticed that only two folders were affected: every file within those two folders failed the check, while every file outside of those two folders were fine; this obviously did not look like random data corruption. I recalled that, while testing Windows 7 RC on my desktop computer, I had played these two folders of music (which were located on my laptop; this was done over the network) using Windows Media Player (I usually use Winamp to play my music). Comparing the altered files with my backup revealed that WMP had altered the files' metadata (stuff like tags, ratings, etc.).

Now, I understand that WMP is just trying to be "smart" and "help" me organize my music, but I already have my music organized just the way I want it using the file system hierarchy, thank you very much. And most importantly, I didn't ask for its help. I didn't tag the music, I didn't click any of those silly rating stars, I didn't do anything beyond dropping a couple of folders into WMP and hitting the play button. The expectation should be that when a user opens/reads/plays some file, it should be a read-only operation: in other words, "don't mess with my data!" Only when the user is explicitly editing the file or its associated metadata should programs open a file in anything other than read-only mode.

Among the many problems raised by this "smart" behavior is excess disk activity. The metadata that WMP altered was located at the start of each file, which meant that any alteration of the data that changes the size of the metadata would require rereading and rewriting the entire file to disk, which is an expensive operation when done locally, and is a downright idiotic thing to unnecessarily do over a network where, aside from incurring an expensive disk cost, you will also incur an even more expensive cost to shoot the entire file over the network and back again.* This "smart" behavior also altered the timestamp of the file, which ruins the ability to search for and identify files based on timestamps. And, of course, this erodes my ability to detect file integrity problems by altering files and thus raising false alarms.

An unwanted wake-up call

While testing Windows 7 RC on my old desktop, I ran into a problem where the system would not stay in hibernation. I would hibernate the system, and within minutes, it would boot itself back up. I quickly discovered that this was a problem with the Wake-on-LAN (WOL). The default settings for the network driver in Windows XP was to wake only on a magic packet, while the default settings for the driver in Windows 7 was to wake on any directed packet, which was problematic since the brain-dead router provided by the ISP was probing machines on the network every few minutes. This problem was easily diagnosed and fixed by setting the WOL to respond only to magic packets.

That night, shortly after I had gone to bed, my desktop booted itself up. I crawled out of bed, disabled the WOL completely, and hibernated the system again; having just dealt with the system inappropriately waking from WOL, I had incorrectly assumed that this was somehow related to that. Then it happened again the next night. Increasingly frustrated at the system waking up, I disconnected the network cable the third night and double-checked to make sure that I did not have any system wakeups scheduled in the system BIOS and that Windows Update was indeed set to my usual setting of manual. I also checked the operating system's logs, which did log the wakeup, but unhelpfully noted that the source of the wakeup was "Unknown". Still, it happened again the next night. This time, I noticed my bedside clock when the system woke up: it was half past the hour. That's an unusually round time for the system to be waking up randomly, I thought. I examined the operating system's logs, and while they unhelpfully indicated that the source was "Unknown", they did contain one very important piece of information: the system woke up at exactly half past the hour (well, it was off by 0.3 seconds, but that's close enough). These wakeups are almost certainly scheduled.

Having already ruled out Windows Update and BIOS-scheduled wakeups, I turned to the Task Scheduler service, which I always have disabled on Windows XP (in Windows 7, it is not possible to disable it, in part because it now plays a far more prominent role than it did back in the days of NT 5.x). I was shocked to see the enormous list of items in the task scheduler; it took a long time for me to wade through all of them. Some were triggered events along the lines of "do A if B happens", and some were scheduled events along the lines of "do A at 10 AM every day". Almost every one of the scheduled events were instances of Windows trying to be "smart" and "helpful" and performing periodic self-diagnostics, checks, updates, etc. I got trigger-happy and purged well over half of the items in the task scheduler, including virtually all of the scheduled events; almost none of the items in the task scheduler were necessary or even particularly useful. Among those purged were two events (or was it just one? I don't recall the specifics) that were scheduled for the time when the computer was waking up. After purging the task scheduler, I never experienced the late-night wakeup problem again.

It should be noted, however, that Microsoft did not intend for the system to be woken up for these mundane tasks: while events have the option of waking the computer from sleep or hibernation, none of these events were configured to exercise that option: they were configured to fire only if the computer was awake. So I had encountered what appears to be a bug with the task scheduler (well, this is pre-release software, after all). Nevertheless, this highlights the pitfalls of a "smart" system that operates on autopilot. I can understand the usefulness for the average computer user who would appreciate the system looking after itself, but I have always preferred keeping the reins in my hands.

________________
* Some readers may wonder why WMP simply does not make use of file system streams. After all, storing metadata is one of the purposes of file system streams. The problem with out-of-file storage is that it requires file system support, which means that such metadata would be lost if a file is transmitted over the Internet, burned to a CD, or copied to a USB drive that uses FAT (many devices can't afford the overhead of anything but the simplest of file systems, which is why is still so common).

ABC's earth2100

Tuesday, June 2, 2009
Keywords: Politics, Economics

So I watched ABC's earth2100 tonight. I did not have very high hopes for this show (I often avoid TV in general), but I was pleasantly surprised, though I think their projections were still too optimistic.

First, I think that everyone must read Garrett Hardin's The Tragedy of the Commons, in which he famously declared that "[the] freedom to breed is intolerable." I should add that the amount of moral value that we accord human life is dependent on the quality of life. Historically, even as recently as the early 20th century, we have treated human life with relatively little value; in a country where the euthanasia of one person in a vegetative state could cause an uproar, it is hard to imagine that this same country had embarked on a civilian construction project, the Panama Canal, in which tens of thousands of Americans died. Historically, the amount of value that we accord to life has not been a function of religious awareness or moral advancement, but rather to the quality of life and the amount of capital and resources available per capita. It is no coincidence that the Black Death also marked the start of Western advancement and political reform. Of course, most people are oblivious to history and are thus not aware of this relationship. Perhaps this ignorance of history is why the Catholic Church smugly declares birth control as evil even though such a claim depends on a level of life value that cannot be sustained without population control.

Second, I like that ABC brought up the fall of Rome because most people have the faulty notion that Rome fell because of external invasion. And while external invasion may have been the proximate cause, the Rome's fall was really the result of a breakdown in the economy and trade and the collapse of various regions into autarky. By the time the city of Rome fell, Rome had already long collapsed from within. The result were the Dark Ages in which much of civilization and accumulated knowledge was lost for centuries. Civilization is very fragile, and the sort of collapse imagined by ABC is actually quite possible and had already happened to the civilization that most resembles our own.

Third, I liked the analogy that our problem is that we are drawing from our bank account and that we will soon realize that the account is empty. By consuming at unsustainable levels, we are effectively borrowing from the future, but because that borrowing is covering up for the current shortfall, many people will not recognize that there is a shortfall until the futures starts to collect on those debts.

Finally, our society loves to look for a technical solution to problems, because technical solutions are non-disruptive. But there are limits to what we can achieve with science and technology, and technical solutions can only serve as a catalyst. For example, over the past two or three decades, engine efficiency has steadily increased by 30%, but instead of converting that increase in engine efficiency into energy savings, we have squandered it on larger, heavier vehicles. Across the board, cars today are heavier than comparable models of the same class three decades ago, and compounded with more people driving cars of a larger class (e.g., SUVs), our average aggregate fuel efficiency has actually decreased despite our technical advancements. In another example, instead of ensuring food security, the world has squandered advanced in agriculture by growing in population. As Hardin noted in The Tragedy of the Commons, there is no technical solution. And as such, I think that earth2100 is far too optimistic, because it glosses over the need for a fundamental rethinking of the problem of externalities.

This entry was edited on 2009/06/03 at 00:08:20 GMT -0400.

Why Google's Chrome Ads are Worrisome

Saturday, May 9, 2009
Keywords: Technology

Google has announced that they will begin airing TV ads for their Chrome web browser. I think that this is the first time since the original Netscape-IE browser wars a decade ago that there has been a browser TV ad.

And all this coming from a company that prided itself on having grown by word-of-mouth; unlike Yahoo!, Excite or MSN, Google did not advertise itself until it had already become established, and even then, its use of advertisements has been very limited. So Google's aggressive marketing of Chrome stands out, both because it has been so long since browsers were advertised on TV and because it is in such stark contrast to how Google normally operates.

So what happened to the viral word-of-mouth of a truly great an exciting product? What happened to the grassroots nature of the so-called "Web 2.0"? A TV ad for an Internet product is blatant astroturfing. When Mozilla took out a full page ad in the New York Times for the Firefox 1.0 release, it was funded by user donations—it was as grassroots as you could get. Could it be that Chrome is not living up to Google's hype?

Chrome's multi-process model was supposed to eliminate the problems of memory leakage and instability, but it only served as a poor cover-up for Chrome's high resource usage and instability. Despite the initial statements otherwise, Chrome never actually had per-tab processes, and tabs would often get grouped into the same process, and processes would often get reused. The end result was a leaky Chrome whose multi-process model did very little except contribute to the already-high resource footprint. Aside from the fancy UI effects, Chrome turned out to be all looks and no substance. After having seen just how poorly Chrome performed on my old 800 MHz laptop (I use it as a tool to stress-test application performance; Firefox 3, BTW, passed with flying colors), I can't help but wonder if these campaigns are an attempt to compensate for Chrome's lack of shine. When I was a gullible, naïve little kid, I was told that companies that advertise are those who need to compensate for poor products; while this is, of course, not true in many cases, I can't help but wonder if Chrome fits this profile.

PS: Another, more conspiratorial possibility is that Google is simply desperate to dominate the browser market so that it can tighten its grip on how people access the Internet. In that case, this is particularly worrying because, of Google's competitors, only IE and Safari (which shares the same layout engine as Chrome) are independently funded. Both Mozilla and Opera depend on Google for funding, and Google's attempts to muscle Chrome into the market not bode well for them or for the browser market as a whole.

PPS: Performance issues aside, another reason why Chrome has had trouble catching on is the lack of extensibility and an extensibility community. I could not live without the QuickDrag extension, for example, and while Mozilla's own stats indicate that many users do not use addons, among the people who matter—the tech-savvy people who strongly influence the product choices of their less tech-literate family and friends—addons are very important, and the loss of even a single favorite addon can be a deal-breaker.

This entry was edited on 2009/05/09 at 03:32:15 GMT -0400.

The Language of Public Opinion

Monday, April 6, 2009
Keywords: Politics, Economics

A sad and unfortunate fact of politics is that the choice of language can have a large influence over public opinion. As defenders of the estate tax learned in the 90's, once the language of "death tax" became common, the battle was lost, as the new terminology obfuscated the debate and led many voters to unwittingly support a measure that ran counter to their own self-interests.

And so it is with great disappointment that I see the widespread use of the word "nationalization" in the policy debates surrounding the financial crisis. Nationalization is a term tinged with statism, evoking images of bureaucratic morass and fears of government-run banks that offer customer service comparable to that of the local DMV. The use of such a word with so many negative connotations in our mostly libertarian society rallies opposition and all but guarantees the failure of whatever plan that has been associated with it.

But aside from the emotional and political obfuscations of the word itself, there is also a significant amount of substantive obfuscation, to the point that the use of "nationalization" in the debate is, quite simply, inaccurate and misleading. The proponents of "nationalization" solutions are adamant that they do not want government to run the financial institutions and that their plans are temporary: government would take control, wipe out the shareholders, replace the management, sell the healthy parts of the institution back to the private market, and hold onto the unhealthy parts, doing damage control and shouldering the losses. The government would hold onto the firm for only as long as it is needed to complete the process. For smaller institutions, this process can literally take place overnight—the government would have "nationalized" the firm for only a matter of hours before it would be privatized again (for huge firms, this could take a few months, which is still a short amount of time). One must keep in mind that, without the string of government financial interventions, the shareholders would have already been wiped out months ago and that these institutions would have ended up in a bankruptcy court. Effectively, a "nationalization" of this sort would not be very different, in principle, from the bankruptcy that would have been dealt to these firms by the free market—anything seized by the government would probably have been forfeited if it were not for the government interventions. As Simon Johnson, one of the most vocal proponents of this approach noted recently, the plan is really just a "managed bankruptcy." A former banking regulator who worked on the savings and loan crisis recently noted, "Ronald Reagan did receiverships. Nobody called it nationalization."

These managed bankruptcies do exactly what needs to be done: it punishes those who deserve to be punished (owners of the troubled firms), and it flushes out the toxic assets so that the financial sector can finally return to health. In fact, these managed bankruptcy plans do what the free market would have done, except in a less chaotic, less destructive, more orderly, and more expedient manner. Economists generally agree that the financial market's return to health is a necessary prerequisite for an economic recovery, and that the fiscal stimulus can work only if the financial sector works as well. Despite the recent string of hopeful news, the financial sector is still far from recovering. The recent increase in credit and lowering of mortgage rates was made possible only by radical, unprecedented actions taken by the Federal Reserve to fill the void left by the financial institutions. While I applaud Bernanke for taking these bold steps, the Fed's involvement cannot be sustained indefinitely and should be seen only as a temporary stopgap measure to buy us time—time that the Obama Administration so far seems intent on squandering.

The managed bankruptcy solution is not radical, either. This is a process that, under the moniker of a "FDIC intervention", is regularly used to deal with small and medium institutions. This was the process used to resolve the savings and loan crisis two decades ago. This was the process that the IMF and the United States government have recommended and prescribed time and time again when financial crises hit other countries. This is a solution that will soothe the anti-bailout sentiment in this country. This is a solution that will please Democrats who want to see Wall Street firms punished. This is a solution that will please Republicans who have been calling for bankruptcy and for the government to stop shielding the financial sector from the judgment of the market.

Opponents of this plan—the Obama Administration under Geithner and Summers—claim that "nationalization" does not work because markets work best. But the proponents of "nationalization" are not suggesting anything that remotely resembles what most people associate with "nationalization"; in fact, it is the "nationalization" plans of managed bankruptcies that are the most faithful to the market—the Obama Administration's plan is nothing more than a dressed-up version of crony capitalism.

Although it is understandable that opponents to managed bankruptcies would seek to smear such plans as "nationalization," it is strange to see its proponents, such as Paul Krugman and Simon Johnson, use that same terminology. Perhaps it is because they are not seasoned political players, but it seems clear to me that the first step to selling this plan is to regain control of the message. So let us take one small step in the right direction and stop talking about "nationalization" and start talking about "receiverships" and "managed bankruptcies" instead.

This entry was edited on 2009/04/06 at 22:05:38 GMT -0400.

Bernanke on 60 Minutes

Sunday, March 15, 2009
Keywords: Economics

The Ben Bernanke interview on 60 Minutes tonight was enjoyable, in part because it's one of those rare instances where the media coverage of the current crisis is actually accurate and decent. There were four points in particular that I found delightful.

First, in a very subtle and coded way, he said that he was opposed to letting Lehman go, and that the fault for that lay with Hank Paulson. He did this by noting that the Fed did not act because the Fed did not have the power to act, the subtle implication of which was that the ball was in Treasury's court (for the dissolution of Bear Stearns, the Fed had a very ad hoc approach that involved acting through an intermediary). Many have attributed the Lehman misjudgment to Paulson's ideology, and it's comforting to know that at least the Fed was on the right track.

Second, Bernanke spoke of the need to stabilize and recapitalize the financial system as a prerequisite for recovery. This is a point that far too many people, especially those in the media, miss. It's reassuring to know that the Fed Chairman recognizes the importance of this, especially given how pitiful the Obama administration's plans on this front have been (I suspect in part due to political considerations, as Republicans seem to be even more blind to this).

Third, Bernanke spoke of the need to grant the Fed more powers, and he also spoke of the need for an easier way for the government to "wind down" financial institutions. Although Bernanke does not say this in the interview, the Fed, being an independent institution immune to political bickering, has done the most in this crisis, often finding creative ways to step beyond its normal boundaries. When this history of this crisis is written years down the road, I doubt many will find fault with the Fed's response. But it still has its limits: it did not have the authority to stop Lehman's collapse, for example. And asking for an easier way to "wind down" bad institutions is just a subtle way of saying, "in the future, we need a way to temporarily 'nationalize' and clean up institutions without having to subject the economy to the uninformed and idiotic bickering of politics"--basically, to expand the ability to do FDIC-like interventions.

Finally, when asked about the causes of this, Bernanke homed in on what I have long thought to be the true root cause of the crisis: a savings glut. Too many people focus on the housing bubble, on derivatives, on Wall Street greed, etc. But while all of these things are relevant and have contributed to the formation of the crisis, they are not the root causes. The problem, as Bernanke puts it, is the massive inflow of capital ("savings") from "China, East Asia, and oil-producing countries" over the past decade or so. An excess of capital without a good place to go is how we form bubbles. This is what happened with the stock market bubble of the 1920's, with Japan's real estate bubble of the 1980's, and with the global real estate asset bubble. If we had tougher mortgage regulations and better bankers, we may have avoided a mortgage bubble, but with all that capital sloshing around, if it wasn't going to be a mortgage bubble, it would have been some other bubble that would have formed and bust, which is why I put the primary blame on the savings glut.

Not only is this one of those extremely rare situations where the large capital inflow is mentioned in the media, it's also a rare situation where China is singled out by name. If there is any single entity that deserves the most blame, it would be China. Normally, when there is a trade imbalance, the exporting country's currency will appreciate in value, making it cheaper for them to import and more expensive for them to export, and this is the market's way of naturally correcting trade imbalances. But the Chinese government manipulates its currency by sending Dollars back to the US (and Euros back to Europe). This keeps the RMB undervalued (which, BTW, hurts the average Chinese citizen) and ensures that Chinese exports are artificially cheap, thus sustaining the trade imbalance. One devastating side effect of this is that by trying to hold down the RMB and prop up the Dollar and Euro, China was also helping create an imbalance of capital flows, which is the cause of the excess bubble-forming savings that flooded Europe and the US. Of course, China was not the only country at fault, but it was probably the biggest. I can only hope that when this is all over, the West will take a harder stance on China's undervalued currency (by the IMF's purchasing power parity estimates, the RMB is nominally valued at half of its true value).

Edit: Fixed link... again.

This entry was edited on 2009/03/15 at 23:05:42 GMT -0400.

Hoover, version 2

Sunday, March 8, 2009
Keywords: Politics, Economics

The words of John Boehner, leader of the House Republicans:

American families are tightening their belts. But they don't see government tightening its belt.

The very reason why people are being forced to "tighten their belts" is because everyone is trying to do some belt-tightening. I find it incredible--stunning, even--that these Republicans cannot grasp the concept that Alice cannot save money unless Alice gets money to save (i.e., Bob needs to buy goods and services from Alice), which is not going to happen if Bob is trying to save money at the same time (which is also a doomed endeavor since Alice is also trying to stockpile money and will not buy from Bob). It is like the economic equivalent of the conservation of momentum: any amount of savings (consider it a "surplus" budget) must necessarily be balanced by an equivalent amount of "deficit" elsewhere, and because everyone has been spooked into saving, the government must embark on deficit spending to counteract this, or else we will be repeating the mistakes that another Republican made 80 years ago.

Boehner has gone as far as push a vote to freeze government spending for the year (the measure failed, but it did get the vote of every House Republican). I sincerely hope that the Republicans are merely engaging in political theatrics, knowing that their destructive policies cannot be passed, since the alternative--that they actually believe that freezing spending will help--is a terrifying prospect.

Another common Republican refrain is that public spending will crowd out private investment and thus worsen the problem. In a recent (and very popular) op-ed in the Wall Street Journal, we hear this tired old line:

[Taxes will] reduce incentives for our most productive citizens and small businesses to work, save and invest ...

I doubt very much that there is any shortage of an incentive to work in this recession; the labor market is very much a buyer's market right now. As for saving and investing, while this argument may hold some water during good times when the economy is running at capacity, the problem of a recession is that we are underutilizing capital due to slackening demand. Both physical and human capital--e.g., factories and talent--are being idled, and the very notion that the solution to underused capacity and idled capital stock is to increase capacity and capital stock is absolutely ridiculous.

Finally, Republicans are fond of raising fears about the effects of high government debt. What they (and the media) fail to mention is that, while our public debt is at historically high levels in nominal terms, our public debt as a percent of GDP is very low: approximately 40%. In contrast, following the Second World War, our public debt as a percent of GDP was nearly 110% and yet we experienced a long post-war economic boom. For further perspective, consider that Canadian, German and French public debt currently exceed 60% of their GDPs, Italian public debt exceeds 100% of their GDP, and Japanese public debt is currently at 170% of their GDP. Aside from a failure to put things into perspective, people also confuse private debt (mortgages, credit card debt, etc.) and public debt (government borrowing). Our problem now (and our problem at the start of the Great Depression) is that private debt had grown to unhealthy levels. While we can all agree that a high level of public debt is undesirable, it is less undesirable than high levels of private debt. Increasing public debt through government spending is an effective way to reduce private debt (think of it as a transfer from private debt to public debt: government spending creates the paychecks necessary for people to pay down their debt), which is the way to dig out of this crisis. This is how we dug out of the Great Depression--the "high" levels of public debt following the war was matched by substantially lower private debt--and this is what needs to be done again today.

The Republican opposition--driven by ideology instead of a pragmatic application of basic economic principles--is harmful in two ways: first, this high amount of political pushback makes it difficult for government to do what needs to be done, and second, the Republicans are destroying themselves, and as much as liberals may rejoice at the spectacle of the latter, a one-party system is not healthy in the long-run.

This entry was edited on 2009/03/08 at 22:45:39 GMT -0400.