China – Here for Now and Later

July 27th, 2005

The Brooking’s institute is very concerned about China, enough to throw up benchmarks on testing the water for new American policies. All of this fallout from the CNOOC bid. Two pertinent analogies are made worth remembering, Japan in the 1980′s and they hold all our debt.
A Test of American Independence
Financial Times, July 26, 2005

Lael Brainard, Vice President, Global Economy and Development Center
Michael E. O’Hanlon, Senior Fellow, Foreign Policy Studies

A Chinese company’s interest in buying Unocal has raised a big question for the US: how much of our country do we want to sell to a potential adversary? Put more diplomatically, given that the US and China are not allies, and that China is the world’s fastest growing economy: what rules should govern how we invest and trade with it?

Whatever the merits of the Unocal deal, this should be a wake-up call. During the cold war, we developed criteria for determining when to worry if a key global resource or technology was found primarily behind the Iron Curtain. We do not have similar principles to guide relations with China. The proposed Unocal sale to CNOOC should push us to begin this debate.

We propose four benchmarks to assess how much economic dependence on China is too much. The first concerns critical technologies. If China became the world leader in a major strategic technology, we would have to try to limit this trend. Crucial areas include high-energy lasers, advanced optics, submarine quieting equipment, stealth technologies and, perhaps of greatest concern in China’s case, high-performance computers. While not trying to disrupt China’s own legitimate advances, we should oppose transfers of advanced strategic western technologies to its ownership.

The second benchmark relates specifically to computer technology. Even if China does not become a leader in supercomputer development soon, it could easily become the dominant world producer of chips, computers or software. It is already the leading exporter of computers, with nearly 20 per cent of the global market last year, although China’s expertise is primarily in inexpensive production of lower-end machines. The world needs several suppliers of computer capabilities so that others can increase production if China cuts the US off in a future crisis; thankfully, we still have them. However, should the Chinese share of global computer trade increase by 50 to 100 per cent, more assertive policy measures could be required.

Meanwhile, preserving US leadership in the critical technology field demands more proactive domestic policies encouraging research and development, science and engineering education, and workforce training.

The third point relates to important natural resources. This is where oil and Unocal come in. The situation with essential energy sources can be more nettlesome than for a product such as computers, where others could increase production quickly if China ever threatened to cut its own off during a security crisis. China’s share of global oil production is modest and well below what it needs for its own consumption—a useful benchmark for assessing potentially troublesome dominance. Unocal accounts for much less than 1 per cent of global oil production (China’s total assets account for well under 10 per cent). Rather than seeking domination of world oil markets, Chinese leaders probably want assurances over their energy supplies given their economy’s extreme dependence on the resource. Moreover, given the amount of dollars we are putting in China’s pockets through our enormous appetite for imports, we should not be surprised that Beijing would seek higher yielding investments than Treasury bonds.

The final benchmark is the question of overall economic dependence. Leaving aside the specifics about what trade the US carries out with China, it is not prudent to allow a huge share of the US economy to depend on favourable future political relations with one of the world’s last great autocratic states. Although overall imports from China account for just 2 per cent of US gross domestic product, the nation depends heavily on China to finance its deficit. China’s recent loosening of the renminbi is not likely to change the situation dramatically. An old-fashioned mercantilist perspective would decry American dependence on a rival state to finance its fiscal profligacy and shore up the dollar. More sanguine observers find reassurance in double jeopardy: China would be exposed to hefty capital losses if it offloaded its dollar assets impetuously.

The best way to address this problem is through fiscal policy and further exchange rate realignment, not trade or investment policy. As for owning US companies, China is a long way from buying up America. Its direct investment in the US is less than $1bn (about $2bn counting investments from Hong Kong), compared with US investment in China of over $15bn ($60bn including Hong Kong)—and a fraction of the $1,500bn of total foreign investment in the US. One should remember that when Japan went on a US buying spree two decades ago, a sharp fall in the dollar and real estate valuations turned it into a bonanza for American sellers.

The Unocal bid has sparked a sobering debate on how much of the US—and the world—we can safely see controlled by a communist regime with a claim on Taiwan that the US is not prepared to concede and could well fight to oppose. Few issues will be as important or intellectually challenging for American policymakers in the ­decades ahead.

© Copyright 2005 Financial Times

New to town

July 18th, 2005

So, I’ve finally showed up in Evanston. This is home during the next 4-5 years. However, my home, hopefully will be changed sooner. I would never recommend signing up for a 2 year lease. Espically next to a house of sixteen 20 yr olds.

one less candle

February 11th, 2005

Everybody likes a kidder, but nobody lends him money.
–Arthur Miller

What do you know?

January 19th, 2005

I think the first person to talk of this was my game theory professor, S. Kariv. One of the nice contributions economic theory has given is that game playing results in discrete and patterened signals across a wide samples of individuals. As opposed to telling someone to think about ‘love’ and the brain images light up like a fireworks display, having them play a cooperation game or the prisoners dillema gives some tangible results – that the neuralscientists are pretty much still grapling with. Though we are still very much a black box when it comes to understanding thought and decisions, this article from the Economist sheds light into the dark.

Mind games
Jan 13th 2005
From The Economist print edition

Can studying the human brain revolutionise economics?

ALTHOUGH Plato compared the human soul to a chariot pulled by the two horses of reason and emotion, modern economics has mostly been a one-horse show. It has been obsessed with reason. In decisions from how much to produce to whether to save and invest, humans have been assumed to be coolly rational calculators of their own self-interest. Over the past few years, however, evidence from psychology has persuaded many economists that reason does not always have its way. Now, judging from a series of presentations at the American Economic Association meetings in Philadelphia last weekend, a burgeoning new field dubbed “neuroeconomics” seems poised to provide fresh insights on how the two horses together produce economic behaviour.

The current bout of research is made possible by the arrival of new technologies such as functional magnetic-resonance imaging, which allows second-by-second observation of brain activity. At several American universities, economists and their collaborators in the neurosciences have been placing human subjects in such brain scanners and asking them to perform a variety of economic tasks and games.

For example, the idea that humans compute the “expected value” of future events is central to many economic models. Whether people will invest in shares or buy insurance depends on how they estimate the odds of future events weighted by the gains and losses in each case. Your pension, for example, might have a very low expected value if there is a large probability that bonds and shares will plunge just before you retire.

Brian Knutson, of Stanford University, carried out one recent brain-scan experiment to understand how humans compute such things. Subjects were asked to perform a task, in this case pressing a button during a short interval in which a certain shape was flashed on to a screen. In some trials, the subjects could win up to $5 if successful, while in others they would have to defend against a $5 loss. Before presenting the target, the researchers signalled to subjects which kind of trial they were in.

Brain activity in certain neural systems seemed to reveal a strong correlation with the amount of money at stake. Moreover, the prospects of gains and losses activated different parts of the brain. Traditional economists had long thought—or assumed—that the prospect of a $1,000 gain could compensate you for an equally likely loss of the same size. In subsequent trials, subjects were given another signal: one that provided an estimate of the odds of success. That allowed the researchers to identify the regions of the brain used for recognising an amount of money and for estimating the probability of winning (or losing) it. Having identified these regions, the hope is that future work can measure how the brain performs in situations such as share selection, gambling or deciding to participate in a pension scheme.

David Laibson, an economist at Harvard University, thinks that such experiments underscore the big role that expectations play in a person’s well-being. Economists have usually assumed that people’s well-being, or “utility”, depends on their level of consumption, but it might be that changes in consumption, especially unexpected downward ones, as in these experiments, can be especially unpleasant.

Mr Laibson’s own work tries to solve a different riddle: why people seem to apply vastly different discount rates to immediate and short-term rewards compared with rewards occurring well into the future. People tend much to prefer, say, $100 now to $115 next week, but they are indifferent between $100 a year from now and $115 in a year and a week. In one recent experiment, noted in our science section on October 30th, Mr Laibson and others found that the brain’s response to short-term riches (in this case, gift certificates of $15 or $20) occurs largely in the limbic system, a region that governs emotion. By contrast, the prospect of rewards farther into the future triggers the prefrontal cortex, which is often associated with reason and calculation. Thus, choosing immediate economic gratification, by spending excessively on credit cards or not saving enough even though you “know better”, could be a sign that the limbic system is in charge. Government policies, such as forced savings or “cooling off” periods for buying property or cars, may be one remedy.

And then there is trust and deception. Colin Camerer, of the California Institute of Technology, has conducted experiments in which brain-scanned participants play strategic games with anonymous partners. In these, a subject chooses his own actions and also tries to anticipate the choices of the other player. When players are doing the best that they can to “win” the game by anticipating their opponents’ moves, their brains tend to show a high degree of co-ordination between the “thinking” and the “feeling” regions. Economic equilibrium, by this measure, is an identifiable “state of mind”.

Don’t let it go to your head

Some neuroeconomists claim that such brain-scanning experiments are the start of a revolution in economics. No longer will economists rely on crude statistical models of how people behave in response to a policy change, such as an interest-rate rise or a tax increase. Instead, they will be able to peer directly into the brain to predict behaviour.

One day, perhaps; but much work remains. Identifying the parts of the brain that control economic actions is one thing. Harder tasks include determining how neural systems work together to create behaviour, and how wide is the variation in brain patterns between different people. Then there are age-old questions of free will: is your failure to save for old age simply a lifestyle choice, or is it down to faulty brain circuits? Neuroeconomics is already providing fascinating conclusions. But Plato’s chariot will remain an alluring explanation for a while yet.

comments are out of the question

January 19th, 2005

With a heavy heart, the comments have been turned off indefinately. There was no way possible to deal with the amt. of spam we were getting, and so the simplest and most restrictive solution was put into effect. Perhaps Google should not be indexing blogs, but for all I’ve seen they plan to continue so like the BBS, this is a losing battle.

We all learn the limbo

December 30th, 2004

And the dollar continues on down. The Economist scratches its head and figures ‘well, it had too’…
Plumbing the depths
Dec 29th 2004

The dollar has hit another record low against the euro. It is set for further falls against major currencies in the coming year, even though American interest rates will rise
Read the rest of this entry »

Development and the Environment (part IV)

December 18th, 2004

development externalities, what can be done about them?
Invisible Export
A Hidden Cost
Of China’s Growth:
Mercury Migration
Turning to Coal, Nation Sends
Toxic Metal Around Globe;
Buildup in the Great Lakes
Conveyor Belt of Bad Air

December 17, 2004; Page A1

On a recent hazy morning in eastern China , the Wuhu Shaoda power company revved up its production of electricity, burning a ton and a half of coal per minute to satisfy more than half the demand of Wuhu, an industrial city of two million people. AES Corp., an American energy company, owns 25% of the 250-megawatt facility, which local officials call an “economically advanced enterprise.”

The Chinese plant is outfitted with devices that prevent soot from billowing into the sky. But other pollutants, such as nitrogen oxides, sulfur dioxide and a gaseous form of mercury, swirl freely from the smokestacks. Rather than install more sophisticated and costly antipollution equipment, the plant, which is majority owned by state-controlled entities, has chosen to pay an annual fee, which it estimates will be about $500,000 this year. That option meets Chinese standards but wouldn’t be allowed in the U.S.

The airborne output of Chinese power plants like Wuhu Shaoda was once considered the price of China’s economic growth, and a mostly local problem. But just as China’s industrial might is integrating the country into the global economy, its pollution is also becoming a global concern. Among the biggest worries: the impact of China’s vast and growing power industry, mostly fueled by coal, on the buildup of mercury in the world’s water and food supply.

Scientists long assumed mercury settled into the ground or water soon after it spewed forth as a gas from smokestacks. But using satellites, airplanes and supercomputers, scientists are now tracking air pollution with unprecedented precision, discovering plumes of soot, ozone, sulfates and mercury that drift eastward across oceans and continents.

Mercury and other pollutants from China’s more than 2,000 coal-fired power plants soar high into the atmosphere and around the globe on what has become a transcontinental conveyor belt of bad air. North America and Europe add their own dirty loads to the belt. But Asia, pulsating with the economic rebirth of China and India, is the largest contributor.

“We’re all breathing each other’s air,” says Daniel J. Jacob, a Harvard professor of atmospheric chemistry and one of the chief researchers in a recent multinational study of transcontinental air pollution. He traced a plume of dirty air from Asia to a point over New England, where samples revealed that chemicals in it had come from China .

One reason China’s power industry spews out so much pollution is that under the nation’s rules, many plants have the option of paying the government annual fees rather than installing antipollution equipment. Moreover, Beijing officials concede they lack the authority to shut down heavily polluting plants. And local inspectors, who don’t report to Beijing, are reluctant to crack down on power companies that generate jobs.

In the U.S., the consequences are being detected not just in the air people breathe but in the food they eat. The U.S. Environmental Protection Agency recently reported that a third of the country’s lakes and nearly a quarter of its rivers are now so polluted with mercury that children and pregnant women are advised to limit or avoid eating fish caught there. Warnings about mercury, a highly toxic metal used in things ranging from dental fillings to watch batteries, have been issued by 45 states and cover four of the five Great Lakes. Some scientists now say 30% or more of the mercury settling into U.S. ground soil and waterways comes from other countries — in particular, China .

The increasingly global nature of the problem is rendering local solutions inadequate. Officials in some countries are using the presence of pollution from abroad “as an argument to do nothing [at] home,” says Klaus Toepfer, executive director of the United Nations Environment Program in Nairobi, Kenya.

Yet global remedies — primarily treaties — are even harder to achieve. The last such initiative, the Kyoto Protocol, aimed at limiting emissions related to global warming, was rejected by the U.S., the largest contributor of such emissions — and doesn’t apply to China , the second-largest emitter. The best shot at a treaty for transcontinental pollution, Mr. Toepfer believes, would be to regulate a single pollutant that everyone agrees is hazardous. He recommends starting with mercury.

China is already believed to be the world’s largest source of nonnatural emissions of mercury. Jozef Pacyna, director of the Center for Ecological Economics at the Norwegian Institute for Air Research, calculates that China , largely because of its coal combustion, spews 600 tons of mercury into the air each year, accounting for nearly a quarter of the world’s nonnatural emissions. And the volume is rising at a time when North American and European mercury pollution is dropping. The U.S. emitted about 120 tons of mercury into the air in 1999 from manmade sources. Chinese power plants currently under construction — the majority fueled by coal — will alone have more than twice the entire electricity-generating capacity of the U.K.

The overwhelming majority of China’s power plants are built, owned and operated by Chinese companies. Speaking about the Wuhu Shaoda power plant, Robin Pence, a spokeswoman for AES, says the Arlington, Va., company “is a minority partner in Wuhu. As such, we neither operate nor control the plant.” She adds that AES didn’t build the plant and that its world-wide policy for plants that it does design and build is to meet emission standards set either by the local country or the World Bank, whichever are more stringent. The Wuhu plant’s manager declined to comment.

Natural Sources

EPA scientists estimate that a third of the mercury in the atmosphere gets there naturally. Traces of the silvery liquid in the earth’s crust make their way into the sky through volcanic eruptions and evaporation from the earth’s surface. It took the industrial age to turn mercury into a public-health concern. Mining, waste incineration and coal combustion emit the metal in the form of an invisible gas. After it rains down and seeps into wetlands, rivers and lakes, microbes convert it into methylmercury, a compound that works its way up the food chain into fish and eventually people.

The dangers of significant methylmercury exposure to the nervous system are well documented, particularly in fetuses and children. Permanent harm to children can range from subtle deficits in memory and attention span to mental retardation. In January, EPA scientists released research indicating that 630,000 U.S. babies born during a 12-month period in 1999-2000 had potentially unsafe levels of mercury in their blood — about twice as many babies as previously estimated.

Adults aren’t immune, either. Joel Bouchard, a National Hockey League defenseman who spent the past two seasons with the New York Rangers, says that last December he began suffering dizziness, headaches, insomnia and blurred vision — forcing him to miss around 25 games. “It was, honestly, like I was in the Twilight Zone,” he says. A team doctor discovered Mr. Bouchard had abnormally high levels of mercury in his bloodstream. The suspected cause: the tuna and other fish he’d been eating almost daily as part of what he thought was a healthy diet. He says his blood levels have since returned to normal and the symptoms have disappeared.

Few places more starkly illustrate the threat from mercury, and the obstacles to containing it, than China .

In Qingzhen, a town in the poor mountainous province of Guizhou about 800 miles southwest of Wuhu, a 53-year-old female rice grower who goes by the single name of Zhang and thousands of other farmers are surrounded by mercury pollution. Dark smoke surges from the local power plant, staining crops a drab gray. The plant flushes eight million cubic meters, or about 10 million cubic yards, of ash and water each year into an area adjacent to a major drinking-water reservoir. Some fish near the plant have levels of mercury 18 times what the EPA and the Chinese government consider safe, according to the Guizhou Provincial Environmental Science and Research Institute, which recently did a seven-year study of the province’s mercury pollution.

The plots of land that Ms. Zhang and her neighbors tend are especially poorly situated. Nearby is the Guizhou Crystal Organic Chemical factory, which over the years released up to 100 tons of mercury into a stream that runs through her village, according to the study. An official in the factory’s environment and safety department calls the report’s estimate “too high,” and says the factory stopped dumping mercury by 1998. But the stream still runs black and reeks so strongly of chemicals that people unaccustomed to the smell struggle not to gag when standing downwind.

Ms. Zhang and her neighbors are used to the smell. With no other choice, they pump water from the poisoned stream onto dozens of acres of rice paddies each planting season. Rice from the fields tastes sour, she says. “When you wash it, the water in the pot turns the same color as the river.” Grain from these fields contains nearly 40 times as much mercury as rice from Shanghai, according to the study. Laboratory mice fed the rice became hyperactive and their nervous systems began deteriorating within a month, the study says.

Farmers in the village complain of periodic fits of shaking. Ms. Zhang suspects the pollution is the reason she and some neighbors have stomach cancer.

Once airborne, by drifting as an invisible gas or clinging to particles of dust, mercury begins to wander. Last April, an instrument-laden U.S. surveillance aircraft near the California-Oregon border hit a plume of dirty air inbound from China . Among the pollutants: black carbon, sulfur dioxide and mercury. “Storms didn’t wash it away,” marvels Veerabhadran Ramanathan of the Scripps Institution of Oceanography in La Jolla, Calif.

Dr. Ramanathan, who helped pioneer the field of tracking international air pollution, says such plumes shed some of the noxious load over the ocean. But their bulk continues to drift across the U.S. at the leisurely speed of a blimp, polluting lakes and rivers as it goes.

The density of Chinese pollution has amazed researchers. Hans Friedli, a chemist at the National Center for Atmospheric Research in Boulder, Colo., recalls flying through plumes off the Chinese coast near Shanghai two years ago that contained pollutants in the “highest concentration that I have ever seen from an aircraft, except when I’ve flown into forest fires.”

And it is going to get worse. By 2020, China will have nearly 1,000 gigawatts of total electricity-generating capacity, more than twice the current amount, according to the State Power Economic Research Center. The majority of new plants will burn coal. Coal-fired plants today produce three-quarters of the country’s electricity, compared with around 50% in the U.S. China will this year burn about 1.9 billion tons of coal, a 12% increase from last year, and consumption is expected to keep rising.

China is phasing in several measures to tackle air pollution. But soot plus sulfur dioxide and nitrogen oxides — often referred to as “SOx and NOx” — are understandably taking priority over mercury. Even with the existence of poisoned villages like Ms. Zhang’s, other pollutants affect even more Chinese people. Airborne particulates are a suspected leading cause of respiratory disease around the country. Acid rain from sulfur dioxide now pelts a third of China’s territory, a ratio that is “expanding, not shrinking,” says Pan Yue, the deputy director of China’s State Environmental Protection Administration, or SEPA.

Mr. Pan, an outspoken champion of stricter environmental standards, says there currently aren’t any rules being drafted to address mercury. Asked if he is aware of recent studies linking Chinese emissions to mercury in American lakes and rivers, he nods.

“As for China’s impact on surrounding countries, I’m first to admit the problem. But let’s talk about this in the context of international fairness,” he says, before firing rhetorical questions aimed at Washington: “Whose development model are we emulating? Who has been shifting all of its pollution-heavy factories to China ? … And who bears an even greater international responsibility than China — but has yet to shoulder it — on matters like greenhouse-gas emissions?”

Environmentalists say U.S. action to control its own mercury emissions from power plants has been sluggish. James Connaughton, head of the White House Council on Environmental Quality, counters that the Bush administration has promised by next March to announce regulations aimed specifically at restricting mercury emissions from coal plants, which he calls a “world first.” The plan, which follows years of delays and lawsuits, is expected to include market-based trading of pollution credits among utilities and won’t be implemented fully until 2018. Other technologies, such as flue gas desulfurisation, that remove some mercury while scrubbing other pollutants from coal have helped cut mercury emissions in Europe and North America.

Weak Incentive

On the face of it, China’s new rules on sulfur dioxide should help combat emissions of mercury, too. Beijing is requiring many power plants approved after 1995 to install equipment that reduces sulfur dioxide, and such equipment often has a bonus effect of filtering out some mercury. China this summer also increased the fees that power plants must pay for each ton of sulfur dioxide they emit, hoping the change will give all coal-fired power plants an incentive to buy such equipment.

But the reality is that sheer increases in Chinese coal consumption, together with difficulty policing polluters, will more than offset whatever reductions in sulfur dioxide and mercury are achieved by the rules, experts say. For China , the economics of coal remain irresistible.

It’s cheaper, and “with current global reserves, it probably wouldn’t be a stretch to keep using coal another 200 years,” says Fan Weitang, president of the China National Coal Association. Sitting in his Beijing headquarters at Coal Tower, a sleek new 22-story building, Mr. Fan is caught off guard by questions about mercury pollution. “It is hard for me to discuss that in depth,” he says. Other pollutants like airborne particulates, and SOx and NOx, receive more attention, and “won’t be much of a problem” in the near future, he promises.

That view isn’t shared by Chinese scientists. ” ‘No problem’? Big problem,” says Tang Dagang, head of atmospheric research at the Academy of Environmental Sciences, which is funded in part by SEPA. By the end of last year, only 5% of the installed capacity of coal-fired plants in China had technology to reduce sulfur dioxide, according to official statistics. While new rules will require the retrofitting of many plants with such technology, Mr. Tang says older plants that account for half of existing power-making capacity are exempt.

What’s more, there is little economic incentive for power plants like Wuhu Shaoda, the company partly owned by AES, to further clean up its act.

Next year, Wuhu Shaoda will pay an estimated fee of $400,000 for the several thousand tons it is expected to emit of sulfur dioxide alone, according to an official with knowledge of the plant’s emissions. That’s much less than the $14.5 million engineers at the plant say it would cost to buy sulfur-dioxide-removal equipment.

—- Cui Rong contributed to this article

Write to Matt Pottinger at, Steve Stecklow at and John J. Fialka at

Iowa gets it again

November 4th, 2004

Though alot of sources were coming up with numbers close to this, I’m always happy to see the predictive powers of the Iowa markets. Numbers are a % of vote share:
Symbol Bid Ask Last Low High Average
KERR 0.482 0.486 0.485 — — —
BU|KERR 0.513 0.515 0.513 0.513 0.513 0.513

Wessel on Jobs and the Election

October 21st, 2004

Finally some intelligent insight into jobs and the economy.


Better Answer to Tough Question on Jobs
Wall Street Journal, October 21, 2004; Page A2

In the final Bush-Kerry debate, moderator Bob Schieffer asked, “What do you say to someone … who has lost his job to someone overseas who’s being paid a fraction of what that job paid here?”

President Bush promised “policies to continue to grow our economy and create the jobs of the 21st century,” and then talked about improving public schools. Sen. John Kerry pledged “a fair trade playing field” and a tax code that doesn’t have “workers subsidizing the loss of their own job.” Neither looked into the camera and connected with that worker as Ronald Reagan or Bill Clinton might have.

A better answer would have gone like this:

“All over America, there are people who played by the rules yet are losing their jobs — some because workers elsewhere do the same work for less, others because computers do things that once only humans did.

“It is small comfort to tell them, though it’s true, that we’re richer today than our grandparents imagined because we haven’t walled ourselves off from the rest of the world nor sought to restrain the advance of technology. It is small comfort, though true, that today’s puzzle isn’t that we’re losing jobs — we’re always losing jobs — but that for reasons even experts can’t explain we aren’t creating enough new ones.

“Those of us who benefit from low-cost imports — or who have well-paid export jobs that wouldn’t exist if we didn’t allow imports and outsourcing — must not ask those who lose jobs to go it alone. But Bill Clinton had it right 10 years ago: ‘The resentment of people who keep working harder and falling further behind, and feel like they’ve played by the rules and have gotten the shaft, will play out in different and unpredictable ways. But our responsibility is to do what is right for those people over the long run. And the only way to do that is to open other markets to American products and services even as we open our markets to them.’”

What does this mean in practice?

Candidates need to confront those who offer slogans, not solutions. Protectionists would block imports of factory goods or outsourcing of service jobs, ignoring the likelihood that interfering with the forces of trade and technology will prevent the creation of more jobs than it will save. Free traders with secure jobs proclaim that the only way to get the benefits from open markets is to tolerate the pain of people they’ll never meet. Gene Sperling, a former Clinton adviser, offers this pithy put-down: “Protectionists have nothing to say to the future. Free traders have nothing to say to the present.”

If trade and technology make us richer, then we can afford to help pay for health insurance and protect pensions forced to bear the cost. The hodge-podge of tax credits and “adjustment assistance” for workers who can link their job loss to imports isn’t working; it needs an overhaul. And there is merit in what wonks call “wage insurance” that temporarily makes up some, though not all, of the gap between the wages of a lost job and those of a new one.

This will be expensive, and needs to be designed to avoid turning healthy workers into taxpayer-supported couch potatoes. But the alternatives are costly too — able-bodied but unskilled workers finagling their way onto disability rolls, families falling out of the middle class, cheering audiences for misguided politicians who shout that the only way for Americans to prosper is to keep Indians and Chinese in poverty.

Such programs are derided as “Band-Aids,” and they are. The U.S. government also has to get the big things right. That means pushing China and others to stop bending trade rules or manipulating currencies and pressing Europe and Japan to get their people spending so the U.S. isn’t always the consumer of last resort. It means setting U.S. taxes so they cover government spending at least in good times, rewriting perverse tax laws that encourage companies to invest elsewhere and managing the unquenchable American thirst for health care without giving employers new excuses not to hire.

And, finally, comes education. Americans will earn more than foreign workers only if they’re more productive, and they can be more productive only with ever-better education and skills. Education can be oversold: A college degree isn’t a guarantee against losing a job to trade or technology.

But education remains, as Mr. Sperling puts it, “the best insurance policy for succeeding in the existing and future economy.” That means streamlining the creaky system for getting vulnerable workers the skills still in demand in the U.S. and doing better at fixing public schools so the next generation of Americans can compete with what surely will be better-educated workers elsewhere in the world.

Write to David Wessel at capital@wsj.com4

Poverty and Disability

September 9th, 2004

The World Bank is beginning to increase its focus on the nature of Disabilities, and how addressing them is crutial to economic development; specifically the Millenium Development Goals cannot be met without adressing how 1 in 5 people in developing nations has a catagorical disability. These efforts are to be applauded for personal and humanitarian reasons.