We should have listened to Keynes

I meant to blog about Keynes' idea of the bancor and taxing surpluses, but Felix Salmon beat me to it.
He borrows "George Monbiot’s lucid summary of John Maynard Keynes’ proposal":

He proposed a global bank, which he called the International Clearing Union. The bank would issue its own currency – the bancor – which was exchangeable with national currencies at fixed rates of exchange. The bancor would become the unit of account between nations, which means it would be used to measure a country’s trade deficit or trade surplus.

Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over a five-year period. To make the system work, the members of the union would need a powerful incentive to clear their bancor accounts by the end of the year: to end up with neither a trade deficit nor a trade surplus. But what would the incentive be?

Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But – and this was the key to his system – he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10%. It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations’ deficits.

Would have been a hell of a good idea. The whole problem with global economic adjustment is the asymmetry between surplus and deficit countries.

Reform of Financial Architecture

Simon Johnson has a very good column on the problems of the international financial system. His point is that the currency wars that are attracting so much attention are just a prelude to a bigger problem:

The “currency wars” themselves are merely a skirmish. The big problem is that the core of the world’s financial system has become unstable, and reckless risk-taking will once again lead to great collateral damage.

The key problem is that the international financial system has not been reformed significantly since 1944, but the global pattern of current account surpluses and deficits have changed dramatically. In addition to the risk aversion on the part of emerging market economies that Johnson talks about we also have the surpluses of the petro states. Meanwhile, the industrialized countries are net borrowers owing to political equilibria that make it difficult to pay for their spending.

The system needs reform. Attention has to be paid to the structural changes that have occurred. This is actually one of the key research areas of our CRIFES center at PSU.

Elizabeth Warren's Fallacy

The title says it all.

Democratizing Development Research?

A brawl has broken out over the call by World Bank President Robert Zoellick to democratize development research.

World Bank President Robert Zoellick challenged economists to take on tougher challenges in development economics and to consult a wider range of professionals in developing countries, opening a debate about how effectively economists have attacked problems in global poverty.

Dani Rodrik is happy but Bill Easterly is not:

"The speech hits all the right notes: the need for economists to demonstrate humility, eschew blueprints...and focus on evaluation but not at the expense of the big questions," Mr. Rodrik said.

But the reaction wasn't unanimous. New York University economist William Easterly, a former World Bank economist who is skeptical about the value of foreign aid, called Mr. Zoellick's comments "amazingly presumptuous." He says the current system of economic research, where ideas are picked apart by other economists, works well. If anything, he says World Bank economists are often the exception because their bosses pressure them "to reach the 'right' conclusions," Mr. Easterly said—meaning that World Bank loans are useful and foreign aid is productive.

This has led to a debate between Bill Easterly and World Bank Chief Economist Martin Ravallion on Bank censorship of research. The debate is kind of unfair. How can you really be taken seriously in a defense of bank propriety if you are employed currently by the Bank?

The Cost of Health Care

This is an important series on the cost of health care by Aaron Caroll. It is especially good at debunking conventional wisdom on why our health care is so expensive.