U.S. Treasury Holdings by Foreign Entity

Who owns U.S. Treasuries?  Below, Corrections depicts holdings of U.S. Treasuries by Foreign Entity (non-US), from the Treasury International Capital System (click to enlarge).

While Chinese holdings of U.S. Treasuries have leveled off, the holdings of other countries have more than picked up the slack.  This can also be seen by normalizing each period to 100% and seeing the proportion of foreign-owned U.S. Treasuries owned by each actor (click to enlarge).

Trading Away the Stimulus

New York Times OpEd "Trading Away the Stimulus" (September 9th, 2010) presents a foolish analysis of trade, completely neglecting the notion of opportunity cost.

Also essential is a border tax to counter foreign export rebates. In countries with value-added taxes, those levies are returned to producers when they export their goods — which allows them to lower their products’ prices in our market. In response, we can ensure fair competition in our home market by applying a tax equal to the rebate upon a product’s entry to the American market.

COnsumers in the US are made unambiguously worse off by a tax on foreign imports. We show this in a graph depicting the US market for some good both before and after a border tax meant to counter a Chinese export subsidy. An analysis of the market in the US requires that we consider the total supply of goods, both Chinese and U.S.-made. Then, the total supply in the US market is found by adding US supply and Chinese supply. It may be that, due to a Chinese government subsidy of s per unit, Chinese suppliers are able to produce every unit more cheaply than US suppliers. This means that even with the same technology, their supply curve could lie below that of US producers. We depict the equilibrium in such a market below (click here to enlarge).

If the US counteracts the Chinese subsidy of s dollars with an import tax of t=s dollars, then the Chinese supply becomes identical to US supply, and we have a new equilibrium. We depict this market below (click here to enlarge).



Now consumer surplus (the green shaded area) is smaller than before, while US producer surplus (the red shaded area) is larger. Nonetheless, because the equilibrium price is higher in this regime, and quantity is lower, we as a country are worse off than we were without the tax. The gray shaded area shows the total loss to the US from a tax that would benefit a few marginal (high cost) producers. This again gives our rule of thumb for politics: whenever a group is pushing for more taxes or regulation, it is because they and government officials they fund are "putting one over" on consumers, taking their surplus and dividing it between them.

Who Should Provide Anesthesia Care?

New York Times article "Who Should Provide Anesthesia Care?" (September 6th, 2010) discusses the ability of a nurse to deliver anesthesia without supervision. It brings in the American Society of Anesthesiologists without properly discussing their stake in government regulation requiring anesthesiologists to supervise nurses.

The two studies — hotly disputed by the American Society of Anesthesiologists — essentially concluded that there is no significant difference in the quality of care when the anesthetic is delivered by a certified registered nurse anesthetist or by an anesthesiologist. The studies were paid for by the professional association for the nurses, a potential conflict of interest, but were conducted by researchers at respected organizations.

The Times notes the conflict of interest of nurses, but not of anesthesiologists.  As Corrections sees it, anesthesiologists have a readily identifiable conflict of interest, while it isn't immediately clear that nurses do, upon further inspection.

The American Society of Anesthesiologists has motivation to artificially constrict supply of anesthesiologists to raise their own wages.  It may do so by raising the quality of new anesthesiologists (more than patients would prefer), reducing the number of residents trained in anesthesiology, or encouraging a general suppression in the number of doctors through the American Medical Association. Their strategy is depicted graphically below (click to enlarge).  They price as monopolists, reducing quantity and increasing price.

One might say nurses have a similar motivation--if nurses can do more, demand for nurses rises, and nurses are paid more.  However, Corrections posits that unlike doctors, there is a vast reservoir of possible nurses; nurses are elastically supplied.  If their wage increased, new nurses would train and bring their wage back down.  Corrections depicts this possibility graphically below (click to enlarge).

Economic grounding gives Corrections reason to believe that while anesthesiologists have a conflict of interest influencing their argument, nurses do not.  This grounding offers a re-statement of a rule of thumb: when an organized group is pushing for governmental regulation, they're likely to be "pulling one over" on consumers.  

Some interesting economic side notes are that it would be possible for anesthesiologists wages to increase because of this (for the same reason that if a law that requiring them to build their own cars, or walk to work, was abolished, they'd have more free time to do the things they are paid a large amount for).  This counterintuitive result, that anesthesiologist wages could increase, while the wages of nurses would not is an interesting curiosity, but not likely given opposition by the American Society of Anesthesiologists.

Second, we note that either way, consumers should be better off (even were nurses and anesthesiologists were worse off).  The reason behind this is that they may prefer a different cost-quality combination for anesthesiology than they can get being constrained by government regulation--unconstrained maximization is always greater than or equal to constrained maximization.  

Fostering trade with South Korea

Denver Post editorial "Fostering trade with South Korea" (November 23rd, 2009), while citing the "so-called Law of Comparative Advantage", appears to completely misunderstand the principle. In fact, when two nations trade, both benefit in real terms. The relative benefits of trade have nothing whatsoever to do with the question of whether or not a nation should engage in trade: a country should engage in trade when it benefits from doing so. The article does not correct the misunderstanding that relative gains to trade are irrelevant in the decision to engage in trade.

Obama insists that the trade agreement would not benefit Korea more than the U.S., and he seems to have the better case. [Emphasis added]. Still, the anti-trade bias within his party and in Congress will make it difficult for Obama to make good on his promise.

The trade appears to be something positive, or nothing. Even if the people he is trying to convince only care about relative wealth, it would take a herculean feat to think that we would be benefitting South Koreans 140 times what the United States would be gaining, approximately the amount that would be required to oppose the bill on relative wealth grounds.

As a side issue, the article offers no backing for its conclusion that:

Estimates are that the South Korea free-trade pact would boost the $80 billion in annual trade between our countries by as much as $20 billion a year within five years.

What's more, the expectation is that American farmers and automakers would benefit most, because their products face the toughest Korean trade barriers.

The amount of trade depends on each nation's comparative advantage. It is certainly not clear that American companies like General Motors, Ford, or Chrysler have a comparative advantage over Hyundai and Kia.

U.S. Signals Shift on Asia-Pacific Trade

The Wall Street Journal's editorial "U.S. Signals Shift on Asia-Pacific Trade" (November 14th, 2009) is mistaken and slightly misleading in its dismissal of the Trans-Pacific Strategic Economic Partnership Agreement,

Although touted by free trade advocates, the combined size of the four economies [Singapore, Chile, New Zealand and Brunei] in the pact is smaller than Belgium's economy.

A more apt comparison might be to say that the nominal GDP of the four countries exceeds that of Taiwan, which often finds itself as the United States 10th largest trading power, by approximately 25%. Or that their GDP measured by purchasing power parity (PPP) exceeds that of Belgium by 58%.

GDP can be misleading--production prices can matter much more. If another country, very large, has exactly the same prices and technologies as us, then we are, in most cases, indifferent to trade, as are they. The more different the production prices, the larger the gains to trade. We should note that the ratio of PPP to GDP is a crude measurement of the difference in prices between countries. As the countries in question have relatively high PPP to nominal GDP ratios, they are to be seen as more attractive trade partners than a similarly-sized economy with PPP to nominal GDP ratio close to one.

Furthermore, GDP is not a good measure of gains to trade for a country. To use the classic example, when a secretary trades with a doctor to save him 2 hours of administrative work, she does not save him the $15/hour he pays her--his gain from trade is the $485/hour he now makes doing what his comparative advantage is (doctoring for $500/hour). Her "GDP" may be $30, but her worth in trade was $875.