EC239 Chapter Notes - Chapter 1: North American Free Trade Agreement

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12 Aug 2018

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Ec239- week 2 supplementary notes: the size of a(cid:374) eco(cid:374)o(cid:373)y is directly related to its trade; it"s (cid:449)hy larger cou(cid:374)tries te(cid:374)d to produce more so they have more to sell in the export market. Another reason is so that they can import more: gravity model, the gravity model assumes that size and distance are important for trade in the following way, where: /dij a x yj c: although the gravity model fits perfectly with the us and its trade with most. European countries, it makes no sense regarding some countries like. In 1994, the u. s. signed a trade agreement with mexico and canada. The north american free trade agreement: because of nafta and because mexico and canada are close to the. While the uk was engaged in having over 75% of their total exports being manufactured goods, this (cid:449)as(cid:374)"t the case for all cou(cid:374)tries.

Related Questions

Too Late to Compensate Free Tradeâs Losers

CAMBRIDGE â It appears that a new consensus has taken hold these days among the worldâs business and policy elites about how to address the antiÂglobalization backlash that populists such as Donald Trump have so ably exploited. Gone are the confident assertions that globalization benefits everyone: we must, the elites now concede, accept that globalization produces both winners and losers. But the correct response is not to halt or reverse globalization; it is to ensure that the losers are compensated.

The new consensus is stated succinctly by Nouriel Roubini: the backlash against globalization âcan be contained and managed through policies that compensate workers for its collateral damage and costs,â he argues. âOnly by enacting such policies will globalizationâs losers begin to think that they may eventually join the ranks of its winners.â

This argument seems to make eminent sense, both economically and politically. Economists have long known that trade liberalization causes income redistribution

and absolute losses for some groups, even as it enlarges a countryâs overall economic pie. Therefore, trade deals unambiguously enhance national wellbeing only to the extent that winners compensate losers. Compensation also ensures support for trade openness from broader constituencies and should be good politics.

Prior to the welfare state, the tension between openness and redistribution was resolved either by largeÂscale emigration of workers or by reÂimposing trade protection, especially in agriculture. With the rise of the welfare state, the constraint became less binding, allowing for more trade liberalization. Today the advanced countries that are the most exposed to the international economy are also those where safety nets and social insurance programs â welfare states â are the most extensive. Research in Europe has shown that losers from globalization within countries tend to favor more active social programs and laborÂmarket interventions.

If opposition to trade has not become politically salient in Europe today, it is partly because such social protections remain strong there, despite having weakened in recent years. It is not an exaggeration to say that the welfare state and the open economy have been flip sides of the same coin during much of the twentieth century.

Compared to most European countries, the United States was a latecomer to globalization. Until recently, its large domestic market and relative geographical insulation provided considerable protection from imports, especially from lowÂwage countries. It also traditionally had a weak welfare state.

When the US began opening itself up to imports from Mexico, China, and other developing countries in the 1980s, one might have expected it to go the European route. Instead, under the sway of Reaganite and marketÂfundamentalist ideas, the US went in an opposite direction. As Larry Mishel, president of the Economic Policy Institute, puts it, âignoring the losers was deliberate.â In 1981, the âtrade adjustment assistance (TAA) program was one of the first things Reagan attacked, cutting its weekly compensation payments.â

The damage continued under subsequent, Democratic administrations. In Mishelâs words, âif freeÂtraders had actually cared about the working class, they could have supported a full range of policies to support robust wage growth: full employment,

collective bargaining, high labor standards, a robust minimum wage, and so on.â And all of this could have been done âbefore administering âshocksâ by expanding trade with lowÂwage countries.â

Could the US now reverse course, and follow the newly emergent conventional wisdom? Back in 2007, political scientist Ken Scheve and economist Matt Slaughter called for âa New Deal for globalizationâ in the US, one that would link âengagement with the world economy to a substantial redistribution of income.â In the US, they argued, this would mean adopting a much more progressive federal tax system.

Slaughter had served in a Republican administration, under President George W. Bush. It is an indication of how polarized the US political climate has become that it is impossible to imagine similar proposals coming out of Republican circles these days. The effort by Trump and his Congressional allies to emasculate former President Barack Obamaâs signature healthÂinsurance program reflected Republicansâ commitment to scaling back, not expanding, social protections.

Todayâs consensus concerning the need to compensate globalizationâs losers presumes that the winners are motivated by enlightened selfÂinterest â that they believe buyÂin from the losers is essential to maintain economic openness. Trumpâs presidency has revealed an alternative perspective: globalization, at least as currently construed, tilts the balance of political power toward those with the skills and assets to benefit from openness, undermining whatever organized influence the losers might have had in the first place. Inchoate discontent about globalization, Trump has shown, can easily be channeled to serve an altogether different agenda, more in line with elitesâ interests.

The politics of compensation is always subject to a problem that economists call âtime inconsistency.â Before a new policy â say, a trade agreement â is adopted, beneficiaries have an incentive to promise compensation. Once the policy is in place, they have little interest in following through, either because reversal is costly all around or because the underlying balance of power shifts toward them.

The time for compensation has come and gone. Even if compensation was a viable approach two decades ago, it no longer serves as a practical response to

globalizationâs adverse effects. To bring the losers along, we will need to consider changing the rules of globalization itself.

QUESTIONS:

a. According to Rodrik, why is it that "trade deals unambiguously enhance national wellbeing only to the extend that winners compensate losers?" Explain completely.

b. Rodrik draws a historical link between globalization and the "welfare state." Explain this link.

c. Rodrik mentions a previous proposal by Scheve and Slaughter called "A New Deal for Globalization." What was the essence of this proposal? What has become of it?

d. What is the "time inconsistency" problem and why is it relevant for Rodrik's argument?

e. In your opinion, what is one weakness in Rodrik's argument? Explain.

maroonporpoise564

QUESTION 1

_____ refer to the forces of change whose direction and sometimes timing can be predicted.

		Uncertainties
		Trends
		Occurrences
		Scenarios
		Forecasts

2 points

QUESTION 2

Management institutes, certification agencies, and headhunting firms are examples of specialized intermediaries for:

		financial markets.
		markets for managerial talent.
		markets for products.
		auction markets.
		labor market.

2 points

QUESTION 3

_____ involves analyzing markets for their potential size, accessibility, cost of operations, and buyer needs and practices to aid the company in deciding whether to invest in entering that market.

		Search retargeting
		Unique selling proposition
		Rebranding
		First-mover advantage
		Market due diligence

2 points

QUESTION 4

Consumer safari refers to the initiatives taken by Unilever executives to spend a day with consumers in their homes to:

		understand how they use products.
		convince them to use more Unilever products.
		train them to make multiple use of their products.
		estimate how many products they use.
		help them set up cottage industries for their products.

2 points

QUESTION 5

_____ refer to the forces of change whose direction and pace is largely unknown.

		Uncertainties
		Trends
		Occurrences
		Scenarios
		Forecasts

2 points

QUESTION 6

_____ are straight-line, one-factor projections from present to future.

		Estimates
		Opportunities
		Scenarios
		Forecasts
		Plans

2 points

QUESTION 7

The United States is separated from Nigeria by 5,840 miles and the Atlantic Ocean. According to the CAGE framework this is a case of:

		emotional distance.
		economic distance.
		cultural distance.
		geographic distance.
		administrative distance.

2 points

QUESTION 8

The GDP of France is 2.113 trillion USD whereas Sierra Leone's GDP is approximately 4.812 billion USD. According to the CAGE framework, this is a case of:

		emotional distance.
		economic distance.
		cultural distance.
		geographic distance.
		administrative distance.

2 points

QUESTION 9

_____ occurs when a function is taken out of one's country of residence to be performed in another country, generally at a lower cost.

		Open sourcing
		Offshoring
		Exporting
		Importing
		Licensing

2 points

QUESTION 10

Which of the following is true of acquisitions?

		The acquiring company will be eligible for any financial help from the company whose shares it is trying to acquire.
		It affords the firm maximum control and has the most potential to provide above-average returns.
		The acquiring company enters into an agreement with the target business to pursue a set of agreed-upon goals while remaining independent organizations.
		The acquiring firm avoids the expense of establishing operations in the new country.
		The acquiring company gains control of another firm by purchasing its stock.

2 points

QUESTION 11

Which of the following statements holds true for the ISO 9001:2008 certification?

		Organizations which supply raw materials are barred from applying for the ISO 9001:2008 certification.
		Companies which meet the criteria of a minimum financial turnover can apply for the ISO 9001:2008 certification.
		The ISO 9001:2008 certification is a mark that a company's products and services have met quality standards.
		Companies that had achieved ISO 9001:2000 certification were exempt from being recertified to meet ISO 9001:2008 standards.
		ISO 9001:2008 certification specifically focuses on the environment.

2 points

QUESTION 12

_____ refers to buying goods and services from foreign sources and bringing them back into the home country.

		Open sourcing
		Offshoring
		Exporting
		Importing
		Farmshoring

2 points

QUESTION 13

The _____ is the contract between the exporter and the carrier, authorizing the carrier to transport the goods to the buyer's destination.

		letter of credit
		bill of lading
		customs invoice
		export declaration
		license

2 points

QUESTION 14

_____ is the document by which the exporter tells the importer to pay a specified amount at a specified time.

		Letter of credit
		Bill of lading
		Customs invoice
		Insurance certificate
		Bill of exchange

2 points

QUESTION 15

Which of the following can also function as collateral against loans?

		Certificate of origin
		Export declaration
		License
		Customs invoice
		Bill of lading

2 points

QUESTION 16

_____ refers to the financing granted against collateral, which can be the imported/exported goods.

		Angel funding
		Purchase Order Financing
		Secured financing
		Overdraft
		Cash advance

2 points

QUESTION 17

Which of the following is a contractual mode of entry into a foreign market?

		Greenfield ventures
		Licensing
		Joint ventures
		Acquisition
		Merger

2 points

QUESTION 18

_____ refers to an organization that assists foreign companies in exporting their products to Japan by providing free-market entry information and business-partner matching as well as some subsidies.

		Japan Bank for International Cooperation
		Japan External Trade Organization
		Development Bank of Japan
		Master Trust Bank of Japan
		Japan Post Bank Company

2 points

QUESTION 19

Which of the following statements holds true for a nonentity joint venture?

		In a nonentity joint venture, the partner with the smaller capital investment loses control over the joint venture after a period of two months.
		In a nonentity joint venture, each of the partners contributes capital and resources in exchange for an equity stake and share in any resulting profits.
		In a nonentity joint venture, the control of the joint venture is in the hands of the party which makes the larger capital investment.
		In a nonentity joint venture, there is no contribution of capital to form a new entity.
		In a nonentity joint venture the benefit gained is in the form of collective profits rather than individual profits.

2 points

QUESTION 20

The _____ is a legal document issued by a bank at the importer's (or buyer's) request wherein the importer promises to pay a specified amount of money when the bank receives documents about the shipment.

		export declaration
		license
		letter of credit
		bill of lading
		customs invoice

2 points

QUESTION 21

_____ refers to the constellation of business, corporate, and international strategy elements, which managers must consider when making decisions.

		Five Forces Analysis
		Cluster model
		Strategy diamond
		Porter's four corners model
		Strategic grouping

2 points

QUESTION 22

Strategy implementation is the process of:

		deciding which strategies to follow in order to diversify.
		performing all the activities necessary to do what has been planned.
		deciding the businesses in which an organization would compete.
		addressing the issue of the kind of strategies an organization would follow.
		devising plans to add value to the existing line of business.

2 points

QUESTION 23

The _____ function requires monitoring performance so that it meets the performance standards established by the organization.

		controlling
		leading
		planning
		organizing
		job design

2 points

QUESTION 24

_____ refers to the sequence of activities that include the various steps of the supply chain as well as additional activities, such as marketing, sales, and service.

		Value chain
		Differentiation
		Cost leadership
		Scope
		Homesourcing

2 points

QUESTION 25

Outsourcing involves:

		diversifying into a new business.
		the sale of products or services in one country that are sourced in another country.
		the company delegating an entire process to the outsource vendor.
		guiding the choice of markets that a firm competes in.
		performing a service by staff from within an organization and also by an external service provider.

2 points

QUESTION 26

The U.S. fast-food chain Sonic will only open new outlets in states that are adjacent to states where it already has stores. This is an example of:

		differentiation.
		increasing vertical scope.
		diversification.
		offshoring.
		increasing geographic scope.

2 points

QUESTION 27

_____, which are a part of the SWOT analysis, assess the external attractive factors that represent the reason for a business to exist and prosper.

		Strengths
		Weaknesses
		Threats
		Opportunities
		Strategies

2 points

QUESTION 28

_____ refers to the number of different topographical markets in which an organization participates.

		Geographic scope
		Value chain
		Differentiation
		Cost leadership
		Offshoring

2 points

QUESTION 29

The first step in the planning process is:

		establishing organizational objectives.
		formulating and ensuring the effective implementation of plans.
		the SWOT analysis.
		identifying multiple ways of achieving organizational objectives.
		monitoring the progress and evaluating the success of the plans.

2 points

QUESTION 30

In Holland, KFC makes a potato-and-onion croquette, while in France it sells pastries alongside chicken. KFC:

		has centralized its business processes to enable it to provide the services mentioned.
		assumes that consumer needs and desires vary by country.
		assumes that the world is flat.
		sells the same products in the same way in every country.
		is following the cost-leadership strategy.

2 points

QUESTION 31

An automobile giant headquartered in the United States sells high-end bikes across the world. It wants to enter an emerging market. Customers in the market cannot afford the types of accessories used in the bikes. Thus the regional branch of the organization makes an autonomous decision to remove the accessories and to offer a toned-down version of the bikes to compete in the emerging market. This decision is accepted by the headquarters on the principle that the man on the ground is the best judge of local conditions. The above serves as an example of a(n):

		decentralized organizational structure.
		reverse engineering.
		centralized organizational structure.
		reverse innovation.
		open sourcing.

2 points

QUESTION 32

Nike products are manufactured in factories in countries such as China, Vietnam, Indonesia, and Mexico. Wholesalers, retailers, agents, and brokers are intermediaries who help in bringing the products to the consumer. These intermediaries bring the products from the factories to the consumers. They serve as an example of:

		product branding.
		market positioning.
		market segmentation.
		channel of distribution.
		social marketing.

2 points

QUESTION 33

Which of the following statements holds true for a global brand?

		It refers to the brand name of a product that has worldwide recognition.
		It refers to the marketing strategy in which a firm marketing a product with a well-developed image uses the same brand name in a different product category.
		It refers to products that make the world less flat because of lack of recognition across countries.
		It refers to the product that is distributed nationally under a brand name owned by the producer or distributor.
		It refers to the changing the identity of a product, relative to the identity of competing products, in the collective minds of the target market.

2 points

QUESTION 34

An organization that manufactures readymade cotton shirts sources the raw material from all over the world. It does this as a precaution against the failure of one or more companies to deliver the raw materials. The above serves as an example of:

		open-sourcing.
		multisourcing.
		sole-sourcing.
		home sourcing.
		outsourcing.

2 points

QUESTION 35

Which of the following holds true for product adaptation?

		It refers to the company strategy of modifying an existing product in a way that makes it better fit local needs.
		It refers to the total composite of products offered by a particular organization.
		It refers to the strategy of taking the company's current products and selling them in other countries without making changes to the product.
		It refers to the creation of a new name, term, symbol, design, or a combination of them for an established brand with the intention of developing a differentiated position in the mind of stakeholders and competitors.
		It refers to the strategy of creating an entirely new product for a given local market.

2 points

QUESTION 36

In marketing, market segmentation refers to the:

		process of dividing a larger market into smaller markets that share a common characteristic, such as age, gender, income level, or lifestyle.
		combination of the four Ps of marketing that can be customized for different countries.
		commerce areas where because of price differences across countries, consumers are able to cross international borders to legally purchase products at lower prices than in their home country.
		commerce areas where vendors purposely deceive buyers by altering products and then selling them as branded products at a bargain cost.
		set of expectations, memories, stories and relationships that-taken together-account for a consumer's decision to choose one product or service over another.

2 points

QUESTION 37

In marketing, which of the following holds true for counterfeit markets?

		It refers to the process of dividing a larger market into smaller markets that share a common characteristic, such as age, gender, income level, or lifestyle.
		It refers to the trade of goods and services that are illegal in themselves and/or distributed through illegal channels.
		It refers to the commerce areas where, because of price differences across countries, consumers are able to cross international borders to legally purchase products at lower prices than in their home country.
		It refers to the commerce areas where vendors purposely deceive buyers by altering products and then sell them as branded products at a bargain cost.
		It refers to the secretive, unregulated (though often technically legal) trading in commodity futures.

2 points

QUESTION 38

_____ refers to buying raw materials, components, or services from one supplier exclusively, rather than buying from two or more suppliers.

		Open-sourcing
		Multisourcing
		Sole-sourcing
		Home-sourcing
		Outsourcing

2 points

QUESTION 39

_____ refers to a situation which means that there is no more stock of the company's product.

		Stock of record
		Stock-check
		Safety stock
		Stock call
		Stock-out

2 points

QUESTION 40

Which of the following statements holds true for the indirect channel of distribution?

		It refers to the shortest channel of distribution, consisting of just the producer and the end consumer.
		It refers to the combination of the four Ps of marketing that can be customized for different countries.
		It refers to a channel of distribution which contains one or more intermediaries between the consumer and the producer.
		It refers to a channel of distribution where the customer is the first and not the last link in the distribution chain.
		It refers to the channel of distribution where the company sells its products to the consumers in other countries via the internet without using local retailers.

Can you summarize this article and wrtite down some important points regarding GDP?

NEW YORK â Striving to revive the world economy while simultaneously responding to the global climate crisis has raised a knotty question: are statistics giving us the right âsignalsâ about what to do? In our performance-oriented world, measurement issues have taken on increased importance: what we measure affects what we do. If we have poor measures, what we strive to do (say, increase GDP) may actually contribute to a worsening of living standards. We may also be confronted with false choices, seeing trade-offs between output and environmental protection that donât exist. By contrast, a better measure of economic performance might show that steps taken to improve the environment are good for the economy. Eighteen months ago, French President Nicolas Sarkozy established an international Commission on the Measurement of Economic Performance and Social Progress, owing to his dissatisfaction â and that of many others â with the current state of statistical information about the economy and society. On September 14, the Commission will issue its long-awaited report. The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizensâ own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximize it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth â all of which might lower GDP growth. The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognized. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics. For example, while GDP is supposed to measure the value of output of goods and services, in one key sector â government â we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more â even if inefficiently â output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the United Kingdom, and from 30.4% to 44.0% in Germany. So what was a relatively minor problem has now become a major one. Likewise, quality improvements â say, better cars rather than just more cars â account for much of the increase in GDP nowadays. But assessing quality improvements is difficult. Health care exemplifies this problem: much of medicine is publicly provided, and much of the advances are in quality. The same problems in making comparisons over time apply to comparisons across countries. The United States spends more on health care than any other country (both per capita and as a percentage of income), but gets poorer outcomes. Part of the difference between GDP per capita in the US and some European countries may thus be a result of the way we measure things. Another marked change in most societies is an increase in inequality. This means that there is increasing disparity between average (mean) income and the median income (that of the âtypicalâ person, whose income lies in the middle of the distribution of all incomes). If a few bankers get much richer, average income can go up, even as most individualsâ incomes are declining. So GDP per capita statistics may not reflect what is happening to most citizens. We use market prices to value goods and services. But now, even those with the most faith in markets question reliance on market prices, as they argue against mark-to-market valuations. The pre-crisis profits of banks â onethird of all corporate profits â appear to have been a mirage. This realization casts a new light not only on our measures of performance, but also on the inferences we make. Before the crisis, when US growth (using standard GDP measures) seemed so much stronger than that of Europe, many Europeans argued that Europe should adopt US-style capitalism. Of course, anyone who wanted to could have seen American householdsâ growing indebtedness, which would have gone a long way toward correcting the false impression of success given by the GDP statistic. Recent methodological advances have enabled us to assess better what contributes to citizensâ sense of well-being, and to gather the data needed to make such assessments on a regular basis. These studies, for instance, verify and quantify what should be obvious: the loss of a job has a greater impact than can be accounted for just by the loss of income. They also demonstrate the importance of social connectedness. Any good measure of how well we are doing must also take account of sustainability. Just as a firm needs to measure the depreciation of its capital, so, too, our national accounts need to reflect the depletion of natural resources and the degradation of our environment. Statistical frameworks are intended to summarize what is going on in our complex society in a few easily interpretable numbers. It should have been obvious that one couldnât reduce everything to a single number, GDP. The report by the Commission on the Measurement of Economic Performance and Social Progress will, one hopes, lead to a better understanding of the uses, and abuses, of that statistic. GDP Fetishism - Project Syndicate 2/8/10 4:05 PM http://www.project-syndicate.org/commentary/stiglitz116/English Page 2 of 3 The report should also provide guidance for creating a broader set of indicators that more accurately capture both well-being and sustainability; and it should provide impetus for improving the ability of GDP and related statistics to assess the performance of the economy and society. Such reforms will help us direct our efforts (and resources) in ways that lead to improvement in both. Copyright: Project Syndicate, 2009. www.project-syndicate.org Reprinting material from this website without written consent from Project Syndicate is a violation of international copyright law. To secure permission, please contact [email protected]. tvselvakumaran 05:30 30 Sep 09 The official consensus Professor Martin Feldstein's latest article, "The G-20's Empty Promises" on Project Syndicate needs careful consideration. In his article, Professor Feldstein essentially adopts the "official consensus" of the economics profession on the current economic crisis. This official consensus, in its various mainfestations, has also been elaborated on by other famous economists, notably Professor Robert Lucas in his article in the Economist in early August, and by Professor Paul Krugman in his recent article in the New York Times Magazine. One characterizing feature of this official consensus is a confidence (a.k.a. triumphalism) in the certainty of outcomes predicted by modern economic theory. The main precepts of this official consensus are (i) Professor Ben Bernanke, the Chairman of the Board of Governors of the Federal Reserve, has at his disposal all the theoretical tools of economics that are necessary and sufficient to deal with the current economic crisis. As Professor Lucas explains it in his Economist article, if one were able to predict in advance exactly when a market crash would occur, it would imply that the market entertains arbritrage opportunities. Hence, it is not possible to predict financial crises in advance. However, except for the precise timing of the occurrence of financial crises, macroeconomic theory could explain the workings of the economy completely. In particular, to avert the recurrence of the Great Depression, certain actions were needed to be taken by the Fed -- the specifics of these actions were all clearly understood by the economics profession. However, it was politically untenable to take these actions before there was a financial crisis. Once the financial crisis occurred though, Professor Bernanke could intervene in the markets and take the necessary actions (in the Fall of 2008). These actions include the injection of several trillion dollars into the economy and making the availability of credit the cheapest possible. The actions taken by the Fed have now resulted in the economy avoiding a recurrence of the Great Depression. This is, in brief, what Professor Lucas has stated in his Economist article. (ii) Thus in Professor Lucas' interpretation of things, the collapse of Lehman Brothers, for example, was necessary, in order to justify the intervention of the Federal Reserve in the functioning of the markets. The collapse of Lehman Brothers was, although regrettable, an unavoidable event. But, on the whole, monetary policy, even if it is a profligate one, would be necessary and sufficient to prevent the recurrence of the Great Depression, in Professor Lucas' view. Furthermore, the old wisdom of the Chicago School that government should be kept minimal at all times continues to hold, even in light of the current economic crisis. The Keynesians led by Professor Krugman, on the other hand, believe that Lehman Brothers should never have been allowed to fail. In their view, when the Fed's fund rate is at zero, monetary policy is largely ineffective for sustaining and stimulating economic activity. This is because of liquidity traps caused by businessmen who don't see economic opportunities that would induce them to borrow the cheap money available from the banks. Hence the government should step in to provide massive fiscal assistance to the economy by taking on spending directly, even if it means assuming trillions of dollars of public debt. (iii) Professor Krugman scored a lot of points by pointing out that the current state of economic theory, highly influenced as it is by the efficient market hypothesis of the Chicago School, indicated that a crisis of such magnitude as the current economic crisis could not happen at all. This fundamental failure to recognize that an enormous crisis could indeed happen, calls for the overthrow of the policy that markets provide the best social gain when they are completely free from government interference. From first impressions, it might seem that the views of the monetarists and Keynesians are vastly different. However, it is important to note that in the view of the Keynesians too, once large scale government spending as prescribed by the Keynesians is instituted, there is again enough assurance that modern economic theory (although with a heavy Keynesian tilt) would be sufficient to deal with the current economic crisis. (iv) In this regard, perhaps it is relevant to refer here to Professor Robert Shiller's latest article, "Re-inventing Economics" on Project Syndicate. Professor Shiller points out that the free market ideology fails to identify bubbles. Because of the belief that markets know best on all occasions, bubbles cannot occur according to the free market ideology. Professor Shiller's approach pursues a different branch of the Keynesian school of thought than the big spenders. Rather than advocate large government spending to avert a depression, Professor Shiller proposes using techniques from behavioral psychology to predict bubbles in advance. In this way, the socially harmful effects of massive misallocations of capital that arose in the case of the housing bubble or the tech bubble could be prevented in the future. In his other recent article, "Echo Chamber of Boom and Bust" in the New York Times, Professor Shiller elaborates further on the techniques that one could use for studying bubbles. Briefly, the process by which confidence or panic spreads in markets is very similar to the process by which diseases spread among populations. This outlook allows for introducing methods that scientists use to study epidemics into the study of bubbles. (v) The Keynesians have also managed to re-write the conventional wisdom on the advantages of a strong dollar. Through the works of Professors Barry Eichengreen, Jeffrey Sachs and Ben Bernnake, a consensus has developed that attempting to support the gold standard was a major cause for the prolongation of the Great Depression. This has resulted in a viewpoint among economists that a devaluation of the dollar at present would help to reduce global imbalances by restoring the American manufacturing industry. The implications of this viewpoint were analyzed by Professor Feldstein in his July 2009 article "America's Saving Rate and the Dollar's Future" on Project Syndicate, with the conclusion that devaluation of the dollar would necessarily lead to a better future for GDP Fetishism - Project Syndicate 2/8/10 4:05 PM http://www.project-syndicate.org/commentary/stiglitz116/English Page 3 of 3 America. Lost in this new interpretation is the fact that a stable dollar provides many economic benefits for America. The equity premium for American companies taking more risks globally, the transaction charges for providing market making facilities in global markets, and the provisions of liquidity for the currency of international trade are major drivers of economic growth for America, which derive from the dollar being the global reserve currency. (vi) Some other Keynesians have gone beyond questioning just the free market ideology. For example, in his latest article, "GDP Fetishism" on Project Syndicate, Professor Joseph Stiglitz proposes a broad set of economic indicators like health, well-being and sustainability rather than a narrow focus on GDP growth. Yet other developments imply that the rest of the world is steadily moving away from using the dollar as the main reserve currency. To finance this new global reserve system, the IMF has created $250 billion worth of Special Drawing Rights (SDR), and the IMF has indicated its intention to triple this allocation of $250 billion in the future. It would need a strong commitment from the policy-makers in America to re-claim for the dollar its position as the predominant global reserve currency. However, judging from the writings of American economists like Professor Feldstein, it appears that the consensus among professional economists favors devaluing the dollar instead. (vii) The official consensus is a result of a grand compromise between the Chicago School economists and the Keynesians.The conservative economists of the Chicago School would like to avoid the embarassment of getting publicly criticized for the failures of the efficient market hypothesis that this current economics crisis has severely exposed. So famous conservative economists like Professor Lucas have reached out for a consensus by indicating their willingness for a compromise. This compromise involves among other things, (a) foregoing raising concerns about the government's mismanagement of Fanie Mae and Freddie Mac, and (b) lending support to the Fed and the Treasury in their efforts to stabilize the economy, even if the methods that the Fed and the Treasury employ are highly inefficient. What are the Keynesians compromising on? Well, the Western liberal tradition has been intellectually bankrupt ever since the late 1960s. It is only the free market ideology of the Chicago School that has served as the driver of wealth creation in the advanced countries during the last four decades. Hence, the official consensus is a convenient compromise for the Keynesians to avoid asking difficult questions about the future of the Western liberal tradition. Instead, they would like to enact much drama in the media about the resurrection of their hero, John Maynard Keynes. (viii) One other characterizing feature of the official consensus in the economics profession is a collective tendency to "Blame It All On Obama". The conservative economists blame President Obama for not focusing adequately on America's ballooning national debt. The liberals, led by Professor Krugman, fault President Obama for getting distracted from the left's free spending ways by concerns on the size of the fiscal deficit. In the confusion that has ensued, President Obama's own team of economics advisors has fallen back on the official consensus in the economics profession. Availing themselves of the security provided by this official consensus, President Obama's economics team has misled the President thoroughly in economic matters. To begin with, the President is only empowered to administer the nation's affairs for a four year term. The projections put out by the Congressional Budget Office (CBO) for the deficits in the next decade are only a non-authoritative guidance for where the nation's finances would be, if current policies hold for the next decade. Instead, the democrats have been behaving as if the $9 trillion of additional public debt that the CBO projects for the next decade is already a given certainty. In particular, they have not been careful to mention clearly in public discussions how much of this extra spending can be attributed to the President's own spending plans in his current four-year term. Neither have they shown any concerns for taking the Fed and the Treasury to taks for their highly inefficient methods to stabilize the economy. Because of these instances of neglect, the public is not willing to trust the government in financial matters. President Obama has rapidly lost his approval ratings. Professor Lawrence Summers, Professor Christina Romer, Professor Austan Goolsbee and Professor Peter Orszag are directly responsible for this abuse of public trust. (ix) The official consensus has also prevented economists from recognizing that President Obama's universal message of tolerance and justice, which has been received very favorably all around the world, actually opens up vast areas of economic opportunity for America. Unfortunately, it does not matter, for the economists, whether George W. Bush or Barack Obama is in office. The most they can do is re-work their models to favor Keynesian policies, and to argue that the policies they propose arise directly from their number-crunching methods. One might be tempted to attribute this widespread consensus among economists to stick to a narrow theoretical interpretation of the current economic crisis, to the certainty afforded by the mathematical models, which have become indispensible through the course of the 20th century, for the development of economic theory. However, this would be a big mistake. The official consensus in the economics profession is primarily a result of undue influences of power and money. It is much less a result of mathematically based economic theory. In the longterm, this attitude among economists of sticking to an official consensus is going to do serious damage to the American economy. Some other aspects of the official consensus have been explained very well by Professor Kenneth Rogoff in his recent article, "The Confidence Game" on Project Syndicate. I recommend that the reader go through that article. The official consensus is the single largest threat to a robust recovery in the global economy. The official consensus also gravely misinterprets the events of the Great Depression. The implications of this misinterpretation bear directly on the economic health of America.

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