Matt Yglesias

Nov 25th, 2010 at 6:26 pm

De-Euroizing Spain

Corcoran310 tweets “I really think u should do what u can to get Spain to ditch the euro. a weak Spanish currency would be awesome, I love madrid.”

I love Madrid, too. Barcelona is of course excellent but everyone knows that. Madrid is both excellent and underrated. And with currency devaluation, it could be cheap as well. But how to get there? The simplest resolution is to go rogue—quit the Euro, in effect default on debts, suffer the bank runs, and then when the economy’s moving assume it’ll be possible to work some stuff out.

Another path would be this. The Spanish government has two kinds of accounts payable. One is interest and principle on bonds it’s issued in international capital markets. The other is things like salaries, pensions, and transfer payments. Right now, all of this is denominated in Euros. Spain could take its Category 2 obligations and announce that henceforth 50% of all salaries, pensions, transfers, etc. will be paid in Euros and 50% will be paid in newly-issued Españos and also that 1 Españo is equal to 1 Euro in value. Concurrently, the government announces that everyone can now pay 33% of their taxes in Españos and that the minimum wage of €633.30 per month is now 633.3 Españos per month.

So now a bunch of Spanish pensioners, transfer recipients, and public employees are going to have a bunch of worthless Españos in their pockets that they’ll be eager to dump. But firms will be eager to accumulate some Españos in order to pay off their tax bill. So the market will establish some kind of exchange rate between the dear Euro and the cheap Españo, and it’ll make sense for firms and workers to start accepting Españos as payment for this or that. The government is basically simultaneously engaging in monetary expansion, currency depreciation, austerity budgeting, and minimum wage cuts which I think is about as close as a “all the prescriptions from all the schools of thought” solution as Spain is capable of mustering. Since Spain’s heavily indebted private sector has its outstanding debts denominated in Euros, you’ll still have a very nasty problem of unbalanced debt deflation but I don’t see any way around that.

The cheap money should lead to an influx of Northern European tourists, a crash in Spanish consumer purchases of imported goods, and booming exports of Spanish wine. To steal some charts from Martin Wolf the main thing for Spain to recognize is this:

Right now in sovereign debt terms Spain is in okay shape, especially compared to Ireland, Greece, and Portugal. But on the underlying question of labor costs, Spain is in as bad a shape as anyone. Forget the question of whose “fault” the current situation is. Just note that Spain and Germany have seen their labor costs diverge a lot. That means a European Central Bank policy that’s appropriate for Germany won’t be appropriate for Spain. And yet the ECB will make policy that’s deemed appropriate for Germany. So Spain has a big economic problem. And as we’ve been seeing in Ireland, round after round of austerity budgeting if not paired with monetary expansion will (superficially) forestall debt-repayment issues at the price of making the economic problem even worse.

Long story short the voters in Sweden and the UK owe a debt to the politicians who kept them out of the Euro.




Nov 25th, 2010 at 2:30 pm

Green Bean Casserole

In my family (and I think in NYC more broadly) people casseroles aren’t really traditional food, unless you count Italian-American dishes like baked ziti or lasagna or whatever. So for a while now I’ve been grimly fascinated with old-school midwestern casseroles and last weekend for “Friends Thanksgiving” I undertook to try to cook a non-disgusting version of green bean casserole that wouldn’t rely on canned goods.

Fortunately, Alton Brown turned out to have a good recipe. I found it kind of challenging to make the fried onions come out evenly, but they’re pretty tasty. And the cream of mushroom soup from scratch is delicious. At the end of the day, I think I would have preferred to just eat the soup and maybe sautée some green beans with onions. But the combination is pretty good, and apparently considered de rigeur at some holiday gatherings.




Nov 25th, 2010 at 12:31 pm

Waiting Room

Richard Phillips observes that one of the best mashups on the new Girl Talk album is Rihanna’s “Rude Boy” plus Fugazi’s “Waiting Room” at around 5:37 on “Let it Out”.

I would only add to this that one of my favorite full track mashups is Fugazi vs Destiny’s Child, melding “Waiting Room” with “Independent Woman.” The fact of the matter is that “Waiting Room” was just born to be a fun song, and it’s hopelessly sabotaged by Fugazi’s fundamentally anti-fun ideology. It takes the mash-up era to unleash the lurking genius in this tune.




Nov 25th, 2010 at 10:28 am

Reality Check

Something I find incredibly puzzling is the strange determination many progressive have to diagnose what the “problem” is with Democrats that makes them so “bad” at electoral politics. They actually seem to me to be fine. Look at the 30 year span from 1980 to 2010. The Democratic candidate won the popular vote in 1992, 1996, 2000, and 2008 (4 times) whereas the Republican candidate won in 1980, 1984, 1988, and 2004. It’s true that in the real world the poor ballot design in Palm Beach County, the Supreme Court, and the Electoral College put George W Bush in the White House but none of that is the fault of Democratic Party messaging tactics.

Democrats controlled the House for 18 out of those 30 years, and controlled the Senate for 14 out of 30 years. In the new year, they’ll control two out of the three branches of government. None of that sounds to me like a political party that’s having trouble persuading people to vote for it.

What’s more, you need some kind of baseline against which to judge this. Over the 60 year lifespan of the Federal Republic of Germany, Social Democrats have run the government for 20 years. Over the 50 year life of the 5th Republic in France, the Socialist Party has held the presidency for 14 years. The basic idea of a center-right party is that it represents a coalition of the business establishment with the socio-cultural mainstream. That tends to give you a dominant position in politics.




Nov 25th, 2010 at 8:31 am

Thanksgiving

Thanks for reading! Enjoy turkey.




Nov 24th, 2010 at 6:14 pm

Endgame

Yeah! Big Apple!

— More on profits.

— Walmart seems to be winning over my neighborhood blog commenters.

— Another win for JournoList.

— How come no Tea Partiers want to repeal the 2003 Medicare prescription drug benefit.

— Negotiating with North Korea should start with low expectations.

— Key thing to remember about Korea is that ROK victory in a war over DPRK would leave them with the unsolvable problem of running the former DPRK.

Heading up to NYC for the Thanksgiving holiday, so it’s the Yeah Yeah Yeahs’ “Yeah! New York.”




Nov 24th, 2010 at 5:28 pm

Understanding Too Well

Richard Cohen did a good yesterday about Sarah Palin, Michelle Obama, and race:

It is Sarah Palin who brings back these memories. In her new book, she reportedly takes Michelle Obama to task for her supposedly infamous remark from the 2008 campaign: “For the first time in my adult life, I am proud of my country because it feels like hope is finally making a comeback.” [...]

It’s appalling that Palin and too many others fail to understand that fact – indeed so many facts of American history. They don’t offer the slightest hint that they can appreciate the history of the Obama family and that in Michelle’s case, her ancestors were slaves – Jim Robinson of South Carolina, her paternal great-great grandfather, being one. Even after they were freed they were consigned to peonage, second-class citizens, forbidden to vote in much of the South, dissuaded from doing so in some of the North, relegated to separate schools, restaurants, churches, hotels, waiting rooms of train stations, the back of the bus, the other side of the tracks, the mortuary, the cemetery and, if whites could manage it, heaven itself.

It was the government that oppressed blacks, enforcing the laws that imprisoned them and hanged them for crimes grave and trivial, whipped them if they bolted for freedom and, in the Civil War, massacred them if they were captured fighting for the North. And yet if African Americans hesitate in embracing the mythical wonderfulness of America, they are accused of racism – of having the gall to know more about their own experience and history than Palin and others think they should.

The one twist I would give here is that I suspect Palin and her ilk actually understand this all too well. And that’s precisely the issue with all the various insinuations that the Obamas are somehow insufficiently American. This is a polite way of saying that they’re too black. White people understand perfectly well that black people’s understanding of America isn’t the same as white people’s understanding of it, but they prefer the white understanding. In general, Americans and foreigners alike prefer nationalist mythology to real history. They know the mythology is inaccurate, but they still like. And they worry about the idea of people whose ethnic background foregrounds the ugly truth.




Nov 24th, 2010 at 4:28 pm

IMF vs ECB: Who’s More Austere?

I’m going to agree with Henry Farrell against James Vreeland and say that whatever problems you may have with the IMF’s “conditionality” vis-à-vis an Ireland bailout, their prescriptions are going to be a good deal less austere than what the European Central Bank would prescribe. IMF professional staffers are quite aware of the theory that they pushed austerity too hard in the 1990s and believe they’ve turned over a new leaf*; the conventional wisdom in Frankfurt by contrast seems to be that the problem with the Stability and Growth Pact is that it wasn’t severe enough.** There’s also just the matter of Germans. As Farrell says:

Jim is right to point to the differences between the Strauss-Kahn/Blanchard crowd and the IMF’s Executive Board. And it may be that the dynamics he points to are going to come into play during the monitoring process. But if the IMF is going up mano a mano against the ECB in a fight to see who can out-austere the other, I’d put my money on the ECB. The IMF may be indirectly responsible to Germany, the United Kingdom and France, but the US – which has been quietly expressing its displeasure with the EU’s hairshirts-for-everyone approach to fiscal retrenchment will have some say too, even if it is going to be reluctant to wade too obviously into intra-European fights. And the ECB, whatever the nominal voting system might suggest, is in practice beholden only to Germany, Germany and Germany.

Specifically, though the IMF has a very complicated governance structure the biggest says go to the United States and Japan, neither of which are super-invested in the idea of budget austerity. Germany (and the politically similar Belgian-, Dutch-, and Danish-led voting blocs) still has a lot of influence at the IMF but it’s less than they have at the ECB. Managing Director Dominique Strauss-Kahn (putting the international financial system under the authority of a French Jewish Socialist is like a hilarious joke by the way) also gets a vote on the board.

But this all seems irrelevant in many ways. Ireland doesn’t have enough output to pay off the bad debts of Irish banks and no conceivable budget will change that. Either they need to default, or else there has to be a real bailout where non-Irish actually pay off the debts instead of just loaning money to the Irish government. You can’t make the sums add up.

More »




Nov 24th, 2010 at 3:29 pm

A Better View of Corporate Profits

Catherine Rampell offers a better view of the profits question which shows they’re high but not the highest ever:

This is all just to say that insofar as business has a problem right now it’s the same as everyone else’s problem. Nominal output (or nominal expenditure or aggregate demand) is way below its trend level, so many of our best-laid plans have gone to ruin. But the Kenyan Socialism era certainly isn’t hammering the business community in any particular way.




Nov 24th, 2010 at 2:28 pm

The Art of Masterful Inaction

Greg Sargent wants progressives to weigh in on how the White House should respond to the expected ferocious opposition from the GOP in congress:

I got an expert to lay out a roadmap the other day. Former White House chief of staff John Podesta has also sketched out an extensive game plan. The gist of their advice: He should go full throttle on his own where possible — executive orders, rulemaking powers, and so forth. Meanwhile, he should lay down a clear vision and agenda in the full expectation that Republicans will oppose it, and use the presidential bully pulpit to wage a massive communications offensive hammering them relentlessly for their opposition and intransigence.

This is meant in the spirit of provoking debate more than anything else. It would be interesting to hear from some of our sharpest online voices: How should Obama proceed?

It should surprise anyone to learn that I largely agree with my boss and, indeed, CAP’s team of policy experts has produced a detailed examination of things the President can do in terms of what I’ve called “governing from the White House.”

Something slightly distinctive from these ideas that I would emphasize are the President’s myriad opportunities to not do anything. Scott Brown and Ron Wyden have an interesting idea about state waivers under the Affordable Care Act, and I think it’d be brilliant of the White House to do . . . absolutely nothing about this. Let Senator Brown try to build Republican support for it. Maybe he’ll succeed, maybe he’ll fail, maybe it’ll be an interesting intra-caucus fight, maybe nobody will care. Either way, the President will be doing something else and it’s someone else who’ll be associated with the legislative sausage making or the failure of the sausage to get made. Similarly, Senators Coburn and DeMint seem to be interested in provoking a fight over ethanol subsidies. The White House should . . . ignore this. With luck, they’ll succeed. Without luck, they’ll fail. But either way, the President shouldn’t get sucked into a political debate for or against ethanol subsidies.

The important thing is to understand that even though a certain number of Washington DC political professionals regard it warmly, the United States Congress is a widely (and in my view, appropriately) despised institution. The only way to get an ambitious legislative agenda passed is for the President to deeply engage with Congress, but deeply engaging with Congress is politically toxic. With John Boehner as Speaker of the House, no “ambitious legislative agenda” is ever going to pass so the White House should simply check out. Tell reporters to ask members of congress the questions about congress. Keep busy doing other stuff. Give wannabe congressional dealmakers space to make deals. Let congressional jerks go be jerks. If something terrible passes, veto it. Don’t negotiate. If you don’t want rich people’s taxes cut, don’t sign a bill that cuts don’t. Don’t hold meetings. Then go back to working on all the stuff in CAP’s report.




Nov 24th, 2010 at 1:30 pm

The Irrelevance of the Dual Mandate

I was glad to see Ron Paul tell Tim Fernholz that the recent conservative crusade to end the Federal Reserve’s dual mandate is “a little bit of grandstanding.”

One thing that the media really ought to ask of the folks pushing this idea is what difference they think it would make in the current circumstances. Just run back the tape of 2008-2010 with a single mandate for price stability. What’s happened during this period is that inflation has been unusually low. And in the Fed’s latest round of economic forecasts they went from predicting future inflation that would be at the low end of the normal range to inflation that would be below the normal range. So given an inflation-only mandate, the right solution would be expansionary monetary policy. And given an inflation-and-unemployment mandate, the right solution is expansionary monetary policy.

The only policy judgment that would make a difference is if you decided that in the 1984-2006 period America was suffering from ruinously high inflation and therefore the Fed should deliberately seek to have a lower inflation rate in the future. My objection to that would be that such a policy would lead to needlessly high unemployment and elevated risks of deflation. But this isn’t a debate about the nature of the Fed’s mandate, it’s a debate about whether or not we had ruinous inflation in the 1984-2006 period. Does Jim DeMint think we did?




Nov 24th, 2010 at 12:28 pm

Small Business Bias

Lydia DePillis has an interesting piece explaining how the new IHOP in Columbia Heights managed to qualify as a small business for the purposes of a small business set-aside rule in the development where it’s located. Basically even though common sense says IHOP is a national chain, it’s in fact organized as franchises, such that the actual business renting the space is a locally owned small business that subcontracts with national IHOP.

So good for them. But the ability of an IHOP franchise to qualify as a locally owned small business highlights the fact that this distinction is somewhat arbitrary—a person musing that she’s like to see more locally owned small businesses in her neighborhood would probably be disappointed to see a McDonald’s, franchise ownership structure notwithstanding. And the widespread bias in favor of small businesses in American discourse makes little sense to me. You often hear this in terms of the fact that small businesses account for the bulk of job creation. But that’s simply because the small business sector is more unstable. Basically if you look at gross figures you see that small businesses account for most of the new jobs and most of the layoffs. It’s neither here nor there.

The other way to look at this is that growth comes primarily from new businesses which are, by definition, small when they start. But the point here is that it’s the process of becoming big that creates the growth and it’s not clear that pro-small bias actually helps this happen. What’s more, with any business you’ve got some consumer surplus and some producer surplus. With a big business, there’s the possibility that unionization can force owners to share a larger slice of the consumer surplus with the workers.

I suspect two things are going on. The main one is a belief that regulatory subsidies to small businesses come mainly at the expense of big businesses. Nobody’s going to cry for the owners and managers of large successful firms. But this is an analytical error. The majority of business income goes to salary and benefits not to profits. So the cost is borne primarily by the hypothetical extra employees of disfavored large firms, not by their owners. The other is the idea that small business profits “stay in the community” whereas a big firm vacuums them up to somewhere. This, however, is obsolete. The whole point of having established large nationwide banks is that it’s now possible to channel capital from anywhere to anywhere very quickly. The location of the financial input is irrelevant.

I know some commenters here seem to think that since libertarianism is a false doctrine it therefore follows that all instances of government regulation are good. A sounder view is that since wealthy special interests are politically powerful, we should always be on guard against efforts by the politically powerful to enrich themselves at the expense of the public. Local business owners are powerful in local politics, and seem to be gaming the system in a way that’s detrimental to working people.

Filed under: DC, Economics



Nov 24th, 2010 at 11:28 am

Countries Don’t Compete

There are some worthy points in today’s Thomas Friedman column, but his concept of international economic competition is dead wrong. He thinks this is a partial explanation for high US unemployment:

Global competition is stiffer. Just think about two of our most elite colleges. When Harvard and Yale were all male, applicants had to compete only against a pool of white males to get in. But when Harvard and Yale admitted women and more minorities, white males had to step up their game. But when the cold war ended, globalization took hold. As Harvard and Yale started to admit more Chinese, Indians, Singaporeans, Poles and Vietnamese, both American men and women had to step up their games to get in. And as the education systems of China, India, Singapore, Poland and Vietnam continue to improve, and more of their cream rises to the top and more of their young people apply to Ivy League schools, it is only going to get more competitive for American men and women at every school.

To stand up for the old New England WASP establishment for a moment, let’s note that Harvard’s first African-American student graduated in 1870 and Yale’s graduated in 1874. But it’s of course true that if the quantity of people in the world capable of getting high SAT scores goes up faster than the number of spaces at Harvard and Yale then it will get harder to get into Harvard and Yale. This is a problem that’s historically been solved by founding Stanford, but if the rich people of the world collective refuse to launch new institutions of higher education then there’s going to be a problem here.

But this has nothing to do with unemployment in the United States. If you look at countries that are doing well economically right now—Germany, Australia, Norway—what you’ll see is that these places haven’t “out-competed” China, they sell stuff that China imports. Specifically Chinese growth is increasing global demand for natural resources and for Germany’s heavy industrial equipment. The competition paradigm implies that if China were struck tomorrow by a horrifying disease that led to its rapid economic collapse, that we’d somehow benefit. In fact, there’d be a global economic disaster.

It would of course be better for America to have a healthier, better-educated population and better infrastructure. But this is true no matter what happens in China or any other country.

Filed under: China, education



Nov 24th, 2010 at 10:27 am

Trust in Government

Matt Bai muses:

In this way, the “Don’t touch my junk” fiasco raises, yet again, what has become the central theme of Mr. Obama’s presidency: America’s faltering confidence in the ability of government to make things work. From stimulus spending and the health care law to the federal response to oil in the Gulf of Mexico, Mr. Obama has continually stumbled — blindly, it seems — into some version of the same debate, which is about whether we can trust federal bureaucracies to expand their reach without harming citizens or industry.

That broad-based skepticism of government is, of course, why the Obama Era has also witnessed a broad-based public backlash against unrestrained government surveillance powers, the closure of the Guantanamo Bay detention facility, public demands that Obama cut Medicare benefits more sharply. That’s why a ballot initiative to legalize marijuana passed easily in California, and public momentum is growing to get Big Government off our southern borders and let people travel back and forth more easily.

I would say the main story of the Obama years has to do with people’s trust in other people. Most Americans are white, most Americans have health insurance, most Americans are native-born citizens, most Americans aren’t Muslims, and over the course of the Great Recession most Americans have become more suspicious that they live in a zero-sum world where any effort to improve the condition of other people will come at their expense.

Filed under: Ideology, Public Opinion



Nov 24th, 2010 at 9:31 am

Admission by Lottery

(cc photo by J. Gresham)

Dylan Matthews is quite right that there’s a good case to be made that elite schools should do admissions by lottery rather than hand-picking their classes. But he kind of welds together two different ideas. This is the very strong claim:

By virtue of being the kind of students Harvard admits, people who go here already have a huge leg-up in life. A student admitted because of her preternatural brilliance would have been rewarded for that anyway. So, too, for a student with an extraordinary work ethic or an exceptional talent for the arts. Given that these students have so much going for them already, why should Harvard devote its resources to helping them even more?

This is why, as I’ve said on many occasions, people should not donate money to rich elite American colleges. Their students are the ones least in need of the resources your money can help provide. But Matthews’ specific proposal doesn’t really get at this issue:

High school seniors would apply to a single admissions body and list their school preferences in order. Schools would set a minimum SAT score and high school GPA so that they do not admit students who truly cannot handle the work, but, otherwise, schools are randomly matched with students who list them as a preference.

Harvard probably has enough sway to launch such a system, but barring that it should set its own minimum threshold and then randomly cull from that vast majority of applicants who meet it. William R. Fitzsimmons ’67, Harvard’s long-time dean of admissions and financial aid, has said that 80 to 90 percent of Harvard applicants are qualified to be here. Harvard should identify that 80 to 90 percent, and then randomly accept 1600-1700 of them.

A system like that would still maintain the backwards allocation of resources where the richest schools have the best students.

But I think even this weaker version of the proposal would have an important beneficial impact, namely it would make the sorting/selection factor of higher education much more transparent. If “I was smart enough to get into School X” was exactly equivalent to “I got blah blah score on my SAT and then won a lottery” then suddenly School X is under fairly intense pressure to show it’s delivering actually educational value. The United States currently spends a lot of money on higher education and young people spend a lot of time getting higher educated, and we’re reasonably sure there’s some value created by all this, but we have no idea how much and there’s almost no competitive pressure on schools to increase value. Randomizing admissions, even with a cut-off point, would change the game in this regard.




Nov 24th, 2010 at 8:28 am

Affordability: Resources, Not Money

Probably the biggest thing that trips people up when thinking about countercyclical public policy is a misleading over-emphasis on accounting ledger books as the right measure of what can and can’t be afforded. Making sums add up is important, of course, but it’s more helpful to start by thinking about real resources. People’s time, capital goods, raw materials, etc.

Think about the mayor of a mid-sized city presiding over good economic times. Tax revenues are going up, and demands on social services are relatively low. Suddenly the budgetary picture looks very bright and it seems easy to “afford” longer library hours, more frequent bus service, and tax cuts. This, however, is close to backwards. You can’t manufacture librarians or bus drivers. It’s when times are good that it’s most costly to pull human beings out of whatever else they’re doing and have them drive buses. Similarly, it’s when people are flush that extra money in their pockets is going to go to enterprises with low marginal utility.

Then along comes the crash and suddenly the budget looks bleak. Now we “can’t afford” those extra social services and we need higher taxes. But with household budgets tight, the taxes are much more burdensome than they would have been in good times. And the real social cost of having someone work in a library rather than sit at home unemployed is probably below zero.

What you actually ought to be doing is setting the quantity of social services at some level that makes sense across the business cycle. Then during periods of economic growth, taxes should raise more money than you spend. That way thanks to your stockpile you never need to cut services in the face of a recession and in fact can shower your city with tax cuts during a downturn to families can get by. But of course almost no jurisdiction in America actually does engage in this sort of responsible budgeting, and the Reagan and W Bush administrations took the federal government on a wildly different course. This has bad economic consequences on its own terms, and I also think tends to distort the political dialogue. Since budget deficits are “bad,” it’s unintuitive to say that bigger deficits will help in a recession. By contrast I think it’d be easy for people to see why a surplus-accumulating government shouldn’t try to horde even more money at a time when people are struggling. The reality is that nothing magical happens at zero, and what we “can afford” is ultimately determined by how many resources are available not by accountants.




Nov 23rd, 2010 at 6:14 pm

Endgame

Give your reasons:

— 4 October 2006, “In our opinion Twttr, which competes with Google owned Dodgeball for attention, should be the next to go as the company focuses on the basics.”

Belief and behavior.

Winning climate messages combine dire science with a vision for justice.

— Cool kinect stuff.

— All you ever wanted to know about DickFlash.com.

New Robyn “Call Your Girlfriend”.




Nov 23rd, 2010 at 5:27 pm

The 2012 Forecast

If you’re wondering whether Barack Obama will be re-elected in 2012, there’s no better place to look at this point than the latest Federal Reserve projections detailed in the newly released minutes (PDF) of their most recent meeting:

What does that mean? Well, it means he should win if the numbers come in on the high end of the range but he has a very realistic chance of losing. How seriously should we take these forecasts? My sense is that we shouldn’t take them that seriously—modelers do their best but their best isn’t very good. As I kept saying in 2008, election outcomes are hard to predict in advance. But getting a bunch of political reports together in a room to speculate on it doesn’t get at the real source of the uncertainty, which is the fact that our economic projections are fairly uncertain.




Nov 23rd, 2010 at 4:27 pm

Meanwhile, in Korea…

As best I can tell the actually important news story of the day concerns the continued provocations of the Democratic People’s Republic of Korea. I suppose it’s actually good that cable news doesn’t seem very interested in this story, since coverage would likely be hysterical and counterproductive. Still it matters. And Dan Nexon has some smart things to say about it:

What makes this interesting (and dangerous), is that ROK forces–even without U.S. help–are more than a match for anything that the North Koreans can field. This means that the South Korean leadership has any number of plausible military options; if the South Koreans begin to significantly alter their assessment of current trends, these military options will likely appear increasingly attractive.

Still, none of this suggests an alteration in the basic factors that restrain Seoul:

- Before they collapse, North Korean forces will kill a lot of South Koreans and do a lot of damage to South Korea’s economy;

- The United States has no appetite for taking part in an additional large-scale military conflict;

- Uncertainty surrounding Beijing’s likely actions in the event of a conflict; and

- The significant challenges that would come from assuming control of North Korean territory if the conflict leads to ROK victory in a full-blown war.

These four factors–two of which aren’t particularly manipulable–make significant escalation unlikely. But with the developments of the last two days, I’m less sanguine than I was even after the sinking of the Cheonan–especially about the long-term prospects for a peaceful Korean peninsula.

To me the issue for American policymakers is that it’s really not clear why our troops need to be in the middle of this mess. We have no way of mitigating 1 and 3, and no intention I can see of mitigating 4, so at this point our efforts to help South Korea create problems for the United States without offering any clear benefits to our client. Of course we should avoid disengaging in a way that looks like we’re somehow selling the ROK out in the face of DPRK aggression, but we ought to be looking to involve ourselves less and less in this.

Filed under: Korea, National Security



Nov 23rd, 2010 at 3:34 pm

Corporate Profits Not Actually At Record High

I saw a lot of commentary yesterday about how corporate profits are now at a record high. I think it’s worth noting that this is true if and only if you don’t adjust for inflation. And I have no idea why you would think adjusting for inflation is a bad idea in this context. A helpful chart the Commerce Department emailed out yesterday illustrates what’s actually happening:

The major takeaways from this chart are twofold. One, corporate profits aren’t really at a record high. Two, corporate profits hit new highs all the time in an expanding economy. The real story here isn’t that nominal profits are at a record high, it’s that real profits are still below-peak. Which is just to say that corporate profits, like most everything else, reflect incomplete recovery from the recession. The good news here is that the trends are in the right direction. Profits are rising. Capital expenditures are rising. And the non-financial sector is beginning to back away from stockpiling liquid assets:

This all points to things being better 12 months from now than they are today.




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