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Relevant to the News: Economics

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Doing Business with Latin America

Colombian currency with coffee beans, that country's chief export.

iStockphoto / Levent Abdurrahman Cagin

Contentious issues in Latin America are bursting into the U.S. presidential campaign this week as John McCain visits Colombia and Mexico. The U.S.-Colombian free trade agreement, strongly supported by Colombian president Alvaro Uribe, has been held up by Congress over concerns about antilabor violence in that country, even though Uribe has made striking progress in pacifying the drug-fueled conflict there--including a stunningly successful hostage rescue mission just hours after McCain's visit. Drug-related violence also affects the U.S.-Mexican relationship. In our southern neighbor, more than 1,500 deaths have been attributed to violent drug cartels. To combat these, the Senate has approved the Merida Initiative, a proposal to provide equipment and training in support of law enforcement operations in Mexico and Central America. Trade issues illuminate a sharp contrast between McCain, who champions free trade in general and the North American Free Trade Agreement (NAFTA) in particular, and Barack Obama, who opposes the Colombian trade pact and thinks NAFTA should be amended.

Last fall, AEI hosted an event on the Merida Initiative featuring Representative Henry Cuellar (D-Texas). The speakers' remarks were published as a Latin American Outlook. Roger F. Noriega wrote another Outlook about the importance of helping Mexico win the drug war.
AEI authors--including Noriega, Norman J. Ornstein, and Duncan Currie--have addressed congressional foot-dragging on the Colombian trade pact. Recent AEI events have focused on the Latin American economy and the Brazilian economy in particular.
A recently updated AEI Public Opinion Study explores what Americans think about NAFTA and free trade in general. Philip I. Levy has explored NAFTA's role in the 2008 election.

The Bottom of the Housing Market?

iStockphoto/Tony Casanova

iStockphoto/Tony Casanova

The Commerce Department reported that housing starts declined 3.3 percent after an unexpected jump in April. The new figures were the lowest total starts since March 1991, indicating that this key sector of the economy is still suffering. Unsold housing inventories are at record levels, foreclosures are sharply on the rise, and housing prices are now declining at an accelerating pace. AEI's Desmond Lachman has argued that "the prospects for the U.S. housing market hold the key" to the economy's future direction, particularly at a time when the economy is being hit by a major oil price shock. A continued slump in housing construction activity, he says, could directly subtract a full percentage point from GDP growth in 2008, just as it did in 2007, while further declines in home values could also materially affect consumers' willingness to spend. AEI scholars have been monitoring economic indicators closely and bring a variety of perspectives to the meaning of current economic data.

In March, Alex J. Pollock moderated the latest event in AEI's conference series on the deflating housing bubble.
Six AEI economists with widely divergent assessments of current economic conditions addressed the extent to which housing is dragging down the economy and the credit markets at an April forum.
In the Harvard College Economics Review, Pollock pins the housing bubble on "economic enthusiasm."

A Healthier America

The National Center for Health Statistics reported last week that death rates declined significantly between 2005 and 2006 and that life expectancy hit another high, reaching 78.1 years. The preliminary statistics also showed that death rates for eight of the ten leading causes of death dropped significantly. The age-adjusted death rate from AIDS also declined. Although there were disparities between blacks and whites, life expectancy for white and black males and females hit record highs. The data provide additional evidence of the "Hispanic paradox," showing that Hispanics as a group are healthier than their income or educational status would suggest. AEI scholars have written about these trends and their implications.

Sally Satel, M.D., and Jonathan Klick have examined health disparities along racial lines in The Health Disparities Myth: Diagnosing the Treatment Gap.
Nicholas Eberstadt tracks life expectancy here and abroad. His latest book examined Europe's Coming Demographic Challenge, and his work on Russia describes prospective depopulation due to deteriorating health conditions.
Newt Gingrich and John E. Calfee have been looking at health innovations and their contributions to a healthier population.
Alex J. Pollock and Andrew G. Biggs are examining the implications of population aging for a variety of social programs, including Social Security and Medicare.

Geoengineering: Thinking Outside the Climate Change Box

Democrats in the U.S. Senate have pulled the climate bill sponsored by Senators Joe Lieberman (I-D-Conn.) and John Warner (R-Va.). It is unlikely that the legislation can be revived this year. AEI scholars have raised serious questions about the cap-and-trade system the legislation includes, arguing that it is unlikely to work and excessively costly. Given the poor prospects for a successful global emissions reduction effort, many scholars are wondering whether other approaches to controlling global warming might be feasible. A new project at AEI is examining the merits of geoengineering, a method of changing features of the earth's environment to offset the warming effect of greenhouse gases. Geoengineering is not a panacea, but many scientists agree that it may buy time until we can reduce our reliance on fossil fuels and should be studied further. At a conference at AEI this week, Samuel Thernstrom and Lee Lane, who direct the project at AEI, urged the administration to explore the feasibility and desirability of geoengineering and support further scientific research into its risks and rewards.

In Strategic Options for Bush Administration Climate Policy, Lane explores climate change options that policymakers might consider, as well as the costs and benefits of current policies.

The Tenth Anniversary of the Microsoft Lawsuit

Ten years ago this week, the Justice Department and twenty state attorneys general filed suit against Microsoft, charging it with illegally thwarting competition to protect and extend its monopoly on software. The tortured history of antitrust policy has occupied AEI scholars since the 1960s, when the Institute published The Federal Antitrust Laws, a primer for businessmen on "why these laws are and probably will continue to be, an irrational thorn in his commercial flesh." In 1977, legal scholar Robert Bork came to AEI to finish writing The Antitrust Paradox, one of the most influential books in this area. In a new essay, Robert W. Hahn, director of AEI's Reg-Markets Center, and the Milken Institute's Peter Passell note the European Competition Commission's recent decision to fine Microsoft $1.35 billion in a long-running antitrust dispute. They argue that the "ever-briefer period in which companies with clear leads in technology and marketing seem able to sustain the advantages" make treating Microsoft, Google, and their successors like the monopolists of the past a real loss to advanced industrial economies, a boon to lawyers who try antitrust cases built around traditional tests of market power, and a significant barrier to productive change.

The "Threatened" Polar Bear?

Polar Bears On April 29, a federal judge gave the Bush administration two weeks to make a final determination about whether the polar bear should be protected under the Endangered Species Act (ESA). On May 14, the administration announced its decision to list the bear as "threatened" under the act. Interior Secretary Dirk Kempthorne said that "[t]he ESA is not the right tool to set U.S. climate policy" and that the decision "should not open the door to use of the Endangered Species Act to regulate greenhouse gas emissions," something Kenneth P. Green expressed concern about in a recent Environmental Policy Outlook. In the Outlook, Green examines what we know about the nineteen subpopulations of these charismatic megafauna. Green, an environmental scientist, then looks at the evidence that global warming has caused--and will cause--a reduction in sea ice and that the bear populations will dwindle because they are dependent on sea ice to hunt for prey.

Barely Growing

AEI's Charles W. Calomiris and Desmond Lachman assess the condition of the economy at an April 28 conference.

AEI's Charles W. Calomiris and Desmond Lachman assess the condition of the economy at an April 28 conference.

Newly released figures show that the U.S. economy grew by 0.6 percent in the first quarter of 2008, identical to the final quarter of 2007. The official figures do not meet the classic criteria for a recession--two or more quarters of negative GDP growth--but they make it clear that the economy is slumping. In other worrying news, wages and compensation grew by 0.7 percent in the first quarter, less than expected, and consumer spending grew by its lowest rate since 2001. The Federal Reserve, battling the twin specters of recession and inflation, cut interest rates by a quarter of a point while promising to watch inflation closely. Although "economic stimulus" payments began flowing to taxpayers this week, they are unlikely to provide much of a boost to the economy. At a Monday conference, AEI economists were divided about the economy's prospects. Desmond Lachman said he expects "several quarters of negative growth going forward." Charles W. Calomiris, along with other economists on the panel, was more optimistic, saying that we are not in a recession and that should one occur, it would be "short and shallow."

John H. Makin writes in the April issue of Economic Outlook that the financial markets crisis is "a reflection of a crisis in the underlying real economy."
Vincent R. Reinhart offers lessons in The American for financial market participants that have been operating with a "Never-Never-Land attitude."

Our Environmental Condition

On April 22, 1970, the first Earth Day gave a boost to the nascent environmental movement. Since then, as Steven F. Hayward has demonstrated in his yearly Index of Leading Environmental Indicators, the United States has made great and largely unheralded progress in addressing environmental problems. The drivers of the improvement, according to Hayward, are economic growth, increasing resource efficiency, innovation, and deepening popular environmental values. Government regulation, he says, has often been needlessly costly. In a recent AEI Environmental Policy Outlook, Hayward compares U.S. environmental progress to that of other nations, arguing that the United States will likely continue as the world's environmental leader. In assessing greenhouse gas emissions, he details consistent U.S. improvements in energy efficiency.

Joel M. Schwartz and Hayward document dramatic progress in reducing air pollution in Air Quality in America (AEI Press, 2007). Hayward writes in a recent article that with such progress on the environment in recent years, the public may soon tire of the issue.
Kenneth P. Green believes that debates over global warming will be about stringency and means.
Robert W. Hahn, who has studied the costs and benefits of biofuels, believes that grotesquely expensive renewable fuels may gain a permanent place at the subsidy trough.
Samuel Thernstrom writes that President Bush's recent speech on U.S. climate policy offered neither justification for nor a plan to achieve his new environmental goals.

Congress versus Colombia?

On Monday, President Bush sent Congress the free trade pact with Colombia under "fast track" provisions that would require Congress to approve or reject the measure within ninety days. On Thursday, Speaker Nancy Pelosi orchestrated a procedural vote that will now delay the vote indefinitely. In an interview with the Wall Street Journal last week, Colombian president Alvaro Uribe described the possible failure to pass it as "very serious," noting that he could not understand why Congress would balk given the historic ties between his country and the United States and Colombia's cooperation in fighting terrorism. AEI scholars agree. Norman J. Ornstein urged passage, arguing that it was time for the Democratic leadership in Congress and the Democratic presidential candidates to step up to the plate. Ornstein believes that passage of the FTA will be a "test of whether the Democratic Congress is ready to accept the responsibilities of the majority." Philip I. Levy has written that the impact of the treaty on domestic employment would be muted in part because Colombia is a small country (its economy is less than 3 percent the size of the U.S. economy, he says) and also because the United States is already open to trade with Colombia, with 92 percent of U.S. imports from Colombia entering duty free. Roger F. Noriega argues that "Uribe's record of rescuing the rule of law along with the rights and security of Colombia's citizens speaks for itself." Uribe's administration, he says, has "more than pulled its weight" in the global struggle against illegal drugs.

The Treasury's New Financial Services Blueprint

On March 31, Treasury Secretary Henry M. Paulson unveiled a major overhaul of U.S. financial regulation. His report, which began as an effort to respond to concerns about the competitiveness of U.S. companies, has become a far more ambitious blueprint for change. In an interview with the Wall Street Journal describing the effort, the secretary said that everywhere he looked, the "plumbing hasn't changed to meet the realities." How much attention the plan will receive in an election year with a deeply divided Congress and adminstration remains to be seen, but the debate is long overdue. AEI scholars are steeped in the issues the report addresses.

Peter J. Wallison has written about regulatory and litigation burdens facing Americans firms and has urged an optional federal charter for insurance companies, all components of the Treasury plan. Wallison has been particularly critical of the weakness of the Securities and Exchange Commission, an agency slated in the Treasury plan to be merged with the Commodity Futures Trading Commission. In two recent Financial Services Outlooks, he responded directly to one of Paulson's questions in taking on the reform effort: "If you could start over, what regulatory model makes sense?"
AEI scholars, including Desmond Lachman, John H. Makin, Alex J. Pollock, and Vincent R. Reinhart, have been watching the housing market's turmoils and thinking how best regulatory agencies and the Fed should respond.
R. Glenn Hubbard and Allan H. Meltzer have cautioned about how a crisis mentality can produce adverse regulation.

Getting Life-Saving Drugs from Lab to Bedside

FDA commissioner Andrew C. von Eschenbach, M.D.

More than half a million people in the United States are expected to die of cancer this year. Beginning on March 13, AEI held a two-day conference on the Food and Drug Administration's (FDA) role in the development and commercialization of innovative kinds of new drug treatments for cancer and other illnesses. Moving these new drugs from the lab to the bedside is taking longer than expected, given advancements in molecular biology, new thinking about clinical trials, and statistical analysis that have made faster development possible. At the conference, FDA commissioner Andrew C. von Eschenbach, M.D., gave the keynote address. The commissioner has said that "the FDA of the 20th century is not adequate to the food and drugs of the 21th century," arguing that the agency needs to be "recreated." Former FDA commissioners Mark B. McClellan, M.D., and David Kessler, M.D., spoke at the conference, as did AEI scholars John E. Calfee and Scott Gottlieb, M.D.--himself a former FDA deputy commissioner. All are deeply involved in researching the FDA's structure and performance, particularly FDA oversight of oncology drug development.

Scott Gottlieb, M.D., has written about the FDA's efforts to "manage" drug risks.
Claude Barfield and John E. Calfee have advocated patent protection for pharmaceutical companies.
John E. Calfee has examined the FDA's drug safety oversight process.

Beginning the 2009 Budget Process

On Monday, the Bush administration released its budget for 2009, with an eye-popping $3 trillion bottom line. The budget comes amid deepening concerns about the nation's economy. In a speech last week, President Bush described "troubling signs," including a new Bureau of Labor Statistics report that shows the economy shed jobs last month--the first monthly loss since 2003. President Bush urged Senate action on the stimulus plan that Democrats and Republicans in the House have passed. The administration's budget reduces entitlement spending by more than $200 billion over the next five years, but Democrats in Congress are already balking at some of the cuts, particularly in Medicare spending. Government spending grows during wartime, and the budgets during Bush's tenure reflect that reality. The deficit as a percentage of GDP reached 3.6 percent in 2004, and the new budget projects a deficit of about 2.8 percent in 2009. AEI scholars have examined budget and fiscal policy issues in the Institute's Tax Policy Outlook and Economic Outlook series.

Stimulus Response

Although U.S. markets were closed on Monday, worldwide stocks fell sharply--in some cases the biggest drops since 9/11. The drops came on the first day of trading after President Bush announced a $140 billion economic stimulus package, including temporary but broad-based tax relief, that he will send to Congress. Investors fear that the president's plan is too little, too late, especially with several economic indicators suggesting that a recession is at hand. The Commerce Department reported Thursday that new home construction last year was at its lowest level in twenty-seven years and nearly 25 percent lower than in 2006. Losses related to the mortgage meltdown at large institutional banks, now topping $40 billion, have sent the Dow reeling in recent weeks. In congressional testimony this week, Fed chairman Ben Bernanke cautioned Congress not to use the stimulus package to put into place long-term policies that would harm the economy in the long run. Both President Bush and House leaders have indicated their willingness to move quickly. House leaders suggested that they could have a plan to the president before the January 28 State of the Union message.

In a Wall Street Journal article, Bill Thomas and Alex Brill explore the principles of sound economic stimulus.
Lawrence B. Lindsey addresses the state of the stimulus debate.
Although the proposed stimulus could be effective, Kevin A. Hassett writes on Bloomberg.com, it would be very costly. He recommends reforming the tax code.
In his most recent Economic Outlook, John H. Makin suggests proposals that could contribute to economic improvement in 2009.

The "R" Word

A slew of economic indicators are pointing south, and President Bush is expected to announce an economic stimulus package to address deepening concerns. The stimulus, currently being negotiated by Congress and the White House, might be as large as $150 billion. The package would be aimed at alleviating the fallout of the credit crunch, housing market collapse, and rise in oil prices. Two weeks ago, the markets took a dive after a rise in the unemployment rate and a small increase in jobs. The Institute for Supply Management reported that its index of factory activity--a key measure of U.S. manufacturing health--dropped to its lowest reading since April 2003, suggesting a contraction in manufacturing activity. The housing market's volatility continues as home prices fall and foreclosures rise. Residential construction spending is down 17.5 percent from a year ago. To the subprime problems we can add concerns about prime-credit solvency. Oil flirted briefly with $100 per barrel. The rise in the core inflation rate was larger than expected, and consumers are feeling the pinch. Gasoline prices have been high, and a new report from the Department of Labor shows the biggest jump in food prices in seventeen years. The cost of a dozen eggs has risen 38 percent since last December, and milk 30 percent.

Not all the indicators are negative, as Kevin A. Hassett noted in a year-end roundup of economic statistics.
In his most recent Economic Outlook, John H. Makin suggests proposals that could contribute to economic improvement in 2009.
In 2007, AEI's Economic Outlook series has touched on financial firms and risk, the credit crunch, rising interest rates, rebalancing in the global economy, U.S. consumer spending, the odds of a recession, and other topics, with an eye toward economic developments in '08.

A Bali Hai Note on Climate Change

Delegates have descended upon Bali for the 2007 United Nations Climate Change conference, where they will attempt to craft a successor to the Kyoto Protocol, which will expire in 2012. The United States signed the Protocol in 1997 but did not ratify it. Countries such as India and China, the latter of which now produces more greenhouse gas emissions than the United States, were signatories but were not required to limit their emissions. The scope of any successor agreement, and the distribution of emissions obligations and costs, will be major challenges for delegates to discuss. The White House insists that any binding emissions caps incorporate all major emitters, while also noting that developing countries have legitimate economic needs that cannot be addressed without adequate and affordable energy supplies. AEI hosted a major conference on climate policy in November at which several distinguished experts discussed approaches for thinking through the climate change problem in light of the coming important decisions the United States will make.

The Bali conference will also address the question of whether wealthy nations will fund the developing world's efforts to adapt to climate change. Kenneth P. Green looks at these issues in a 2006 Environmental Policy Outlook, arguing that it is time to pursue adaptive policies.
Samuel Thernstrom writes how George W. Bush will handle climate policy post-Kyoto.

Singing the Housing Market Blues

U.S. home sales dropped by 8 percent in September, the biggest fall since the National Association of Realtors began tracking the data in 1999. Median home prices dropped 4.2 percent over last year, and unsold inventory rose--increasing concerns about a recession. For more than a year, AEI scholars have been warning about problems in the housing market. In March and October, AEI convened sessions with Desmond Lachman, Alex J. Pollock, and John H. Makin on the housing bubble, the credit crunch, and subprime lending. Last week, Lachman wrote that "[a]t the heart of the credit crunch are fears about mortgage lending losses that are embedded in complex financial structures. Surely one should expect those fears to be intensified as it becomes increasingly apparent that home prices will not be stabilizing anytime soon and that financial-system losses from mortgage lending are likely to be at least double the Federal Reserve's present $100 billion estimate." Fed chairman Ben Bernanke continues to argue that the economy is holding up well given the strains in the housing sector, but other economic reports last week suggest that housing market stress is spreading to other parts of the economy.

AEI scholars' research on the housing market and the subprime downturn is available here.
Makin's Economic Outlook has examined the relationship between housing downturns and U.S. recessions.

Flinching on Free Trade

U.S. Trade Representative Susan C. Schwab

U.S. Trade Representative Susan C. Schwab speaks at an AEI conference on the future of the Doha round.

British historian and free trade proponent Lord Macaulay once observed that "free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular." In an interview last week, President George W. Bush acknowledged skepticism about free trade, saying that "the United States has been through these trends in the past. . . . This country has got to make sure that we don't isolate ourselves or try to wall ourselves off from the world." AEI adjunct scholar Jagdish Bhagwati recently addressed some alarming rhetoric about free trade as the Doha death knell sounded once again, reminding us that "free trade is alive and well among economists." The president travelled to Miami on October 12 to talk up the benefits of free trade as part of a push to promote his trade agenda, at the top of which are recently signed bilateral agreements with Colombia, Panama, Peru, and South Korea.

Philip I. Levy argues that these agreements are of immense importance in foreign policy and will have relatively little impact on U.S. workers or the U.S. economy. Roger F. Noriega shares Levy's concern about more active collaboration with Latin American allies in the face of Hugo Chavez's activism in the region.
Former ambassador to South Korea James R. Lilley urges passage of the Korea trade pact.
Claude Barfield, who also addresses the U.S.-South Korean agreement, hosted a conference on this spring's bipartisan trade deal.

Climate Policy beyond Kyoto

Steven F. Hayward in a scene from his documentary, <em>An Inconvenient Truth . . . or Convenient Fiction?</em>. Photo courtesy of Pacific Research Institute.

Steven F. Hayward in a scene from his documentary, An Inconvenient Truth . . . or Convenient Fiction? Photo courtesy of the Pacific Research Institute.

On September 27, 2007, the Bush administration convened a meeting of global leaders on the challenge of climate change. The Bush gathering follows on earlier meetings this week at the United Nations General Assembly, where world leaders urged the replacement of the Kyoto Protocol, due to expire in 2012. The United States never ratified the Protocol, and developing countries--including industrial powerhouses China, India, and Brazil--are exempt from it. At the State Department conference, the Bush administration aims to engage key developing countries in climate change action and move participants toward a new post-Kyoto framework. While European leaders favor binding multilateral commitments, the Bush administration eschews a "one-size-fits-all" model and instead aims for a multifaceted approach that includes tailored strategies to promote new technology and cut emissions in certain sectors. The "portfolio" approach the Bush administration is advocating does not include binding steps, but several members of Congress are proposing legislation that will include mandatory curbs. AEI scholars are studying various approaches to solving the problem of global warming.

Samuel Thernstrom addressed the Bush legacy on climate policy this week. In Strategic Options for Bush Administration Climate Policy (AEI Press, 2006), Lee Lane argues for a "modest carbon tax" and more investment in "breakthrough clean-energy technologies."
Kenneth P. Green, Steven F. Hayward, and Kevin A. Hassett recently weighed the relative costs and merits of emissions trading versus carbon-oriented tax reform. Green, Hassett, and N. Gregory Mankiw spoke at a forum on energy taxation. R. Glenn Hubbard has praised a prudent emissions-trading proposal.
Green testified before a Senate committee this week on whether climate change action can produce job growth. He recently engaged in a three-part online debate on regulating greenhouse gas emissions.
Hayward's documentary, An Inconvenient Truth . . . or Convenient Fiction? highlights gaps in scientific understanding of climate change and combats the pessimism of the modern environmentalist movement.
Karlyn Bowman, who documents public opinion about climate change, argues that although most people are concerned about global warming, it is not a top priority for them.

Biotech Drugs Change the Patent Game

Effective biotech drugs, based on advances in molecular biology, are often justly billed as medical miracles. But they are not always miracles for the investors who finance them, putting up huge amounts of capital for very uncertain returns. In a newly released AEI Press book, Biotechnology and the Patent System: Balancing Innovation and Property Rights, Claude Barfield and John E. Calfee argue that biotechnology patents--"patenting life," if you will--are essential if we are to get yet more miracles. But spectacular advances in biotechnology, combined with a newly patent-hungry nonprofit sector, have threatened to disrupt the patent system. Amid calls for sweeping change, Barfield and Calfee say, "first, do no harm." After navigating the complex economic and legal issues surrounding biotech drug development, they support modest reforms that will facilitate medical progress and offer investors a surer promise of returns on successful drugs--the down payment on future innovation and better health. Barfield and Calfee joined several experts on the biotech drug industry and intellectual property law at an AEI conference on September 25, 2007.

Calfee has previously written about intellectual property and follow-on biologic drugs, the effects of patent challenges on drug R&D, and the "golden age of medical innovation." He and Scott Gottlieb, M.D.--who also researches biologic drugs--spoke at a June conference on biologics.
Barfield, who studies science and technology policy, coauthored the AEI Press book The Future of Biomedical Research.

Taxing Private Equity Profits

The Blackstone Group's much-talked-about initial public offering has brought unprecedented attention to the private equity sector. With their great record of success, private equity firms have become targets for lawmakers, and legislation has been introduced to increase tax rates on their profits. Senator Chuck Schumer (D-N.Y.), an influential member of the Senate Finance Committee, has resisted the calls, saying "unintended consequences often occur when you do major tax work." How should private equity firm profits be taxed and what would be the implications of potential tax changes Congress is considering on private equity firms and the larger economy? These issues were discussed at AEI on September 19, 2007, where Victor Fleischer of the University of Illinois, whose academic work made this one of the most contentious tax issues of 2007, spoke. Joining him were AEI's Alan D. Viard and David Weisbach of the University of Chicago Law School. AEI's Kevin A. Hassett moderated.

John L. Chapman, a NRI Fellow at AEI, has written about the importance of a strong private equity sector to the U.S. economy. In November, he will organize a major conference on private equity through NRI.
Bill Thomas and Alex Brill recently addressed how a private equity tax hike would adversely affect ordinary investors.

Toxic Toys and Chinese Trade

China has come under heavy criticism for exporting tainted products. In the latest instance, toymaker Mattel recently recalled several million toys made in China because of defects. The toxic toys are not alone: U.S. federal regulatory agencies have in recent months also called attention to high levels of contaminants in Chinese toothpaste, pet food, seafood, grain, and produce. Many unlicensed pharmaceuticals manufactured in China and other developing countries are also dangerous, since they frequently contain incorrect ingredients or inaccurate amounts of active ingredients. The recalls have heightened already-high trade tensions between China and the United States. AEI scholars such as Scott Gottlieb, Roger Bate, and Philip I. Levy have been writing about the deadly global trade in tainted food, copied and counterfeit drugs, and trade concerns.

Gottlieb has testified before the Senate Commerce Committee and the U.S.-China Economic and Security Review Commission about the safety of Chinese pharmaceuticals and consumer products. A former Food and Drug Administration deputy commissioner, he has recommended beefing up FDA inspection capacities.
Bate has explored the dangers of illegally copied and counterfeit drugs in Thailand, India, and Nigeria.
Levy recently evaluated the U.S.-Chinese trade relationship. Levy has also raised warning flags about congressional efforts to get tough with China.

The Subprime Shuffle | The International Credit Crisis

On August 6, one of the biggest U.S. subprime and Alt-A lenders filed for bankruptcy as the credit crunch has left it unable to fund over $750 million in home loans. The filing was only one of several bankruptcies in the subprime lending sector over the past several months. In his July monetary report to Congress, Fed chairman Ben Bernanke noted the impact of the subprime market problems on homeowners and communities, arguing that "rising delinquencies and foreclosures are creating personal, economic, and social distress . . . problems that likely will get worse before they get better." He recently suggested that the subprime fallout could cost the U.S. economy as much as $100 billion. Still up in the air: the impact of mortgage market turmoil on the U.S. and global economies and on the possibility of a recession in the United States.

The credit crunch, fueled by losses in the U.S. housing markets and the recent bankruptcies of major U.S. subprime lenders, expanded to Asia on August 10. Central banks in Europe and the United States pumped liquidity into the markets on August 9, and Asian banks followed. The fallout from the credit crisis has raised concerns about a loss of global liquidity. AEI's Desmond Lachman wrote on August 10: "Perhaps an even greater overlooked risk to the U.S. economy than slowing consumer expenditure is the prospect of a full blown 'credit crunch' in the financial sector that would seriously curtail bank lending to the economy as a whole. Sadly, this prospect too now seems to becoming an ever increasing likelihood." AEI scholars have been focusing on the housing market and credit losses for some time, and they warn we are unlikely to have touched bottom yet.

Lachman has been writing extensively about the housing sector, offering an historical perspective on the subprime meltdown and arguing that the housing downturn is far from over. Lachman and Alex J. Pollock will speak at a follow-up conference this fall on the housing market.
Pollock has been working on ways to prevent a future mortgage crisis. He has proposed a one-page mortgage disclosure form (PDF) to make homebuyers fully aware of their obligations. In June, he moderated a conference on improving mortgage disclosure.
Lawrence B. Lindsey recently addressed flawed Congressional and regulatory responses to the subprime turmoil in the Wall Street Journal.
John H. Makin's August Economic Outlook examines how the subprime sector and other economic trends are affecting the world economy.
Other recent work by AEI scholars on the U.S. housing market and subprime lending is available at www.aei.org/subprime/.

Bad Reviews for the FDA?

The House of Representatives passed legislation this week to reauthorize Food and Drug Administration (FDA) user fees for new drug reviews and institute new drug safety policies. The Senate passed its version in May, and the bills will need to be reconciled in a conference committee. Both the House and the Senate versions of the legislation give the FDA more power over drugmakers, including the authority to require studies of--and controls over--prescription drugs after they have been approved. Companies that fail to follow FDA directives could face severe fines. Although the broad outlines of the two bills are similar, the Senate bill caps fines and the House does not, and it also sets lower fees that fund the FDA's work. Another important disagreement between the House and Senate concerns the FDA's authority to approve copycat versions of biotech drugs. AEI scholars have raised serious questions about the scope of the legislation, including the unprecedented new authority it gives the FDA for post-approval drug oversight and the control it gives the agency for the way drugs are distributed and prescribed.

Mark B. McClellan, M.D., a former FDA commissioner, testified before a Senate committee on drug safety reform.
Scott Gottlieb, M.D., a former FDA deputy commissioner for medical and scientific affairs, has written extensively on the drug approval process. He addresses legislation requiring the FDA to "manage" risk by determining how drugs are used, intruding into patient freedom and professional medical practice. John E. Calfee has also been following the drug approval process.
Calfee has documented the threat to innovation in biotech drugs from copycat "follow-on biologics" drugs in a recent Health Policy Outlook. Gottlieb has argued that restricting follow-on biologics can impede innovation. In June, Calfee and Gottlieb joined other panelists to discuss what Congress should do about follow-on biotech drugs, addressing safety, regulation, health-care costs, and intellectual property issues.

Global Warming

On July 7, eight major concerts took place around the world as part of Live Earth, intended to "trigger a global movement to solve the climate crisis." Organized by former vice president Al Gore, the concerts were part of an orchestrated political campaign to mandate reductions in greenhouse gas emissions, change individual behavior with respect to energy use, and advance international environmental agreements such as the Kyoto Protocol. AEI fellow Steven F. Hayward has rebutted Gore's gloomy forecasts on climate change in An Inconvenient Truth with his own movie, An Inconvenient Truth . . . or Convenient Fiction? At the G8 summit in June, President George W. Bush proposed a parallel track for climate change negotiations that could form the basis for a successor regime to the Kyoto Protocol, which was never ratified by the United States. Hayward, Kenneth P. Green, and Kevin A. Hassett recently examined the pros and cons of cap-and-trade and carbon tax approaches. In late June, AEI hosted a panel that examined California's new law--the first of its kind in the United States--establishing a mandatory cap on statewide greenhouse gas emissions.

Prior to his silver screen debut, Hayward wrote about the metaphysics behind Gore's climate alarmism. Samuel Thernstrom has addressed Gore's flawed climate reasoning.
In their most recent Environmental Policy Outlook, Hayward, Green, and Hassett recommend "carbon-centered tax reform" to deal with greenhouse gas emissions. R. Glenn Hubbard endorses an emissions-trading regime.
In Strategic Options for Bush Administration Climate Policy (AEI Press, November 2006), Lee Lane argues for a modest carbon tax and greater emphasis on zero-emissions technology research.
Karlyn Bowman has compiled the most recent polls and data on public opinion about global warming and the environment.

The Housing Slump

After a spectacular run-up in home prices from 2000 to 2006, home prices are now beginning to fall as the housing market cools. On June 25, 2007, the National Association of Realtors reported that the median home price dropped more than 2 percent over last year. Two weeks earlier, the Mortgage Bankers Association reported that the percentage of delinquent subprime home mortgages had risen to the highest rate on record, although--at least thus far--the subprime problems do not appear to have spread to the larger pool of prime borrowers. But the outlook for the housing market remains a serious worry as mortgage rates reached their highest level in a year last week and sentiment among home builders slid to its lowest level in sixteen years. AEI scholars have been writing about the roots of the subprime problem, the Fed's role, future prospects for the housing industry, and how to educate and protect those buying their most precious asset--their home.

Alex J. Pollock proposed a simple, one-page mortgage disclosure form to clearly inform homebuyers about their mortgage obligations. He and other experts in the mortgage industry, including Representative Patrick McHenry (R-N.C.), discussed how to improve disclosure at a recent conference.
Pollock testified about mortgage disclosure and described his plan before a U.S. House subcommittee and a committee of the Council of the District of Columbia.
Desmond Lachman has been writing about the housing slump. He recently addressed its effects on U.S. politics. He spoke at an event on the subject in March and will address the issue at a follow-up conference this fall.
AEI scholars--including Pollock, Lachman, and John H. Makin--wrote about the housing market and subprime lending sector often this past spring. Their work is available at www.aei.org/subprime/. A press advisory on Pollock's disclosure plan is available here.

The U.S. Economic Engine

On Wednesday, the closely watched S&P 500 index hit a record high, surpassing its previous high set on March 24, 2000. The Dow Jones Industrial Average has been setting new records in recent months, while the NASDAQ has yet to rebound to the levels it reached during the tech boom. Federal Reserve officials seem more confident about the outlook for the economy. Unemployment remains low at 4.5 percent. The economy has added more than 7 million jobs since August 2003, which, according to the Treasury Department, amounts to more new jobs than all other major industrialized countries combined. American consumers' spending surge continues, a factor that has kept a recession at bay. But not all the news is good. First quarter GDP growth (0.6 percent) was down sharply from 2.5 in the fourth quarter. Core inflation is stubbornly high, capital spending has been lower than expected, the housing sector is reeling, and gas prices are rising. AEI's scholars continue to evaluate the performance of the U.S. economy and analyze factors that have impeded growth.

John H. Makin's most recent Economic Outlook addresses U.S. consumer spending and its implications for the economy. In recent Outlooks, he has written about the possibility of a recession in 2007 and the slowdown of the U.S. economy.
Makin spoke about how the value of the dollar affects the U.S. economy at a May 31 conference, along with Anne Krueger, Kenneth S. Rogoff, and others.
Alex J. Pollock, Desmond Lachman, and Makin have been studying the effects of the subprime mortgage lending crisis on the U.S. and world economies.
In a Wall Street Journal article, Ted Frank addressed how private securities class actions can harm U.S. competitiveness in financial markets. Peter J. Wallison addressed this issue in his March Financial Services Outlook.

Speed Bumps Ahead for the Chinese Economy?

Talks in Washington on the U.S.-Chinese economic relationship ended on May 23 with only a few signs of what Treasury Secretary Henry M. Paulson called "incremental" progress, including more commercial airline routes and greater access for U.S. securities firms. But less progress was made in other areas, including the trade imbalance, disputes over intellectual property, and food and drug safety issues. China's economy grew at an impressive 11 percent in the first quarter of 2007. Its export engine is zooming ahead, and its trade surpluses are contributing to political tensions in the United States, with some members of Congress calling for economic sanctions. Other aspects of China's growth are more worrying, particularly its skyrocketing defense budget. China's continuing disregard for political freedom, aggressive posture toward Taiwan, and protection of the North Korean regime are also troubling U.S. policymakers.

In The Challenges of China's Growth (AEI Press, 2007), Dwight H. Perkins looks at the major obstacles--energy, strategic rivals, and economic discontents--that China must overcome to emerge from its growth period as a rich country.
John H. Makin argued in a recent Economic Outlook that China needs to float its currency to avoid an inflation crisis. At a May 31 conference, Makin and others addressed what China and other industrialized countries might do to minimize the risk of a disruptive decline in the U.S. dollar.
In the April National Security Outlook, Thomas Donnelly and Colin Monaghan argue that China's military growth and inscrutable strategic ambitions call for strengthened U.S. ties with other Asian security partners and increased U.S. military capacity in the Pacific.
Ellen Bork's May Asian Outlook addresses the lack of political freedom in China and how American pressure might yield improvement.
In 2006, the late Gary R. Saxonhouse wrote a May Asian Outlook comparing the rises of commercial giants Japan, Germany, and the United States with China's entry into the international economic system.

The 2007 Farm Bill & Beyond

Congress is preparing to reauthorize the farm bill later this year. The administration's proposal, with a price tag of more than $600 billion over ten years, presents the new Congress with an important opportunity to redesign a program that is outdated in significant ways. A large portion of American agriculture operates on a free-market basis, but government subsidies (averaging $16 billion annually between 2002 and 2005) distort the federal budget and complicate trade negotiations. At a conference, AEI released a series of papers that examine commodity support programs, crop insurance, international trade issues, conservation and environmental programs, and rural development. Taken together, these papers give lawmakers a road map for reauthorization of the legislation and provide a blueprint for agricultural policy in the twenty-first century.

Information about AEI's Agricultural Policy Studies program, the May 17 conference, working papers, and an executive summary may be found at www.aei.org/FarmBill/.

Reforming the Tax System

Today, more than 40 percent of all Americans can be described as being outside of the income tax system, either because they will pay nothing in income taxes or because they earn too little and do not have to pay. For many Americans who do file taxes, the system seems hopelessly complex. In a new poll, 78 percent say the system needs major changes or a complete overhaul. AEI scholars have been examining proposals for fundamental tax reform with an eye to their effect on the functioning of the economy and on different groups of taxpayers. This includes work on the alternative minimum tax, which may ensnare 20 million taxpayers this year, and on corporate and individual taxes.

Contributors to Toward Fundamental Tax Reform (AEI Press, 2005), edited by Kevin A. Hassett and Alan J. Auerbach, address different kinds of tax reform, its impact on the economy, and the political prospects for tax reform.
In the first issue of AEI�s recently inaugurated Tax Policy Outlook series, Alan D. Viard addresses drawbacks of replacing the regular income tax with the alternative minimum tax.
In 2006, Kevin A. Hassett and Aparna Mathur authored a working paper illustrating the responsiveness of wages to corporate taxation.
Kevin A. Hassett and Anne Moore have explored how tax policies affect low-income workers.
Karlyn Bowman has authored a study of public opinion on taxes.

Mixed Signals from the Fed

On March 21, the Federal Reserve Board voted to leave the fed funds rate unchanged at 5.25 percent. While describing recent economic indicators as "mixed," the Fed expressed cautious optimism that the economy would continue to expand at a moderate pace. Stock market volatility since the end of February and the housing slump associated with the crisis in subprime mortgage lending are worrying signs and may foretell a recession. AEI scholars have been researching these issues, addressing the outlook for economic growth, the risks associated with subprime lending, and what the housing slump means for the U.S. and world economies.

"Mortgage Credit and Subprime Lending: Implications of a Deflating Bubble"
Panel discussion, Wednesday, March 29, 2007, 2:00-4:00 p.m.
Speakers: Desmond Lachman, Nouriel Roubini, R. Christopher Whalen, and Thomas Zimmerman

"Recession in 2007?" by John H. Makin
Economic Outlook, April 2007

"Credit Crack-Up," by Alex J. Pollock
Article in the Wall Street Journal, March 12, 2007

"The Fed Is Not Asking the Right Questions," by Desmond Lachman
Article in the Australian Financial Review, March 9, 2007