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Ballooning Trade Deficits Demand Bold Remedies, Economists Argue in Latest Milken Institute Review
For Immediate Release
Apr 28, 2006

Tariffs are an anathema to modern economists, right? Not when the alternative is global recession, say three economists writing in the latest Milken Institute Review.

Wynne Godley, Dimitri Papadimitriou and Gennaro Zezza at Bard College′s Levy Economics Institute examine America′s chronic payments deficits with Asia and Europe from a Keynesian perspective.

"Those hoping for a market solution in which a substantial decline of the dollar exchange rate re-balances global demand may be chasing a mirage," they write. "That′s why it may be time to consider unilateral measures that reduce the U.S. current account deficit without imposing major distortions in global economic efficiency."

Also in this issue of the Institute′s quarterly journal of economic policy, Tomas Philipson (University of Chicago and the Milken Institute), Ernst Berndt (MIT), Adrian Gottschalk (Biogen Idec, Inc.) and Matthew Strobeck (Westfield Capital Management) estimate the costs and benefits of the FDA′s accelerated drug-review program under the Prescription Drug User Fee Act.

"The value Americans placed on accelerated access to new life-saving and life-enhancing drugs far exceeded the highest estimate of the cost in terms of greater risk of premature death and morbidity," they conclude. "Indeed, the value of accelerated review was so great that one must ask whether additional measures — measures that actually did allow more bad drugs to make the cut — would be justified."

Tim Haab of Ohio State University and John Whitehead of Appalachian State explain the perverse incentives built into the National Flood Insurance Program. "A well-intentioned government program has encouraged millions of Americans to live and play in places — often very beautiful places — that are accidents waiting to happen," they write. "It would be fitting to use the same program to tame this risky behavior gradually, at minimal cost to property owners and taxpayers."

Also in this issue:

-- Greg Rushford, publisher of a newsletter on the politics of international trade, handicaps the prospects for trade liberalization through the WTO. "Protectionist sentiments in the United States have been steadily rising in recent years," he notes, "and now they tend to dominate the debate in a politically gridlocked, bitterly partisan Washington." U.S. trade officials, he adds, "are still operating under negotiating instructions that would sound familiar to 18th-century mercantilists dedicated to the principle that the less you import, the better."

-- G. Pascal Zachary, a former reporter for The Wall Street Journal, takes stock of the consequences of America′s farm subsidies in general, and cotton subsidies in particular. "Taking a bold initiative in cotton would give the United States a rare home run in international affairs," he writes. "By demonstrating real seriousness about agricultural reform, the United States would revive the moribund talks on trade liberalization. And by leveling the playing field in cotton, Washington would offer the poorest part of the world a far more effective way to reduce poverty than foreign-aid-as-usual."

-- Frank Levy, Ari Goelman and Kyoung-Hee Yu of MIT focus on radiology as an example of a highly skilled profession newly vulnerable to outsourcing. While outsourcing might, in theory, undermine the incomes and security of professionals the way it undermines less-skilled work, "a close look at tele-radiology suggests that the threat is not very great. Indeed, if it says anything about the impact of globalization on the prospects for well-compensated skilled labor in rich countries," the three economists argue, "it is that professionals have effective ways to protect themselves from foreign competition."

-- David Galenson, an economist at the University of Chicago, examines the relationship between age and creativity. Until recently, it was widely assumed that peak ages of productivity varied by field — for example, mathematicians did their best work as 20-somethings, while the best philosophers were graybeards. But Galenson′s research suggests that creativity divides by personality type: "There seem to be two distinct sorts of life cycles of creative accomplishment within each artistic activity," he says. "The paths that individual artists follow don′t seem to be randomly divided between the two; rather, they are related to their artistic goals and to the methods they use in their work."

The Milken Institute Review is sent quarterly to the world′s leading business and financial executives, senior policy makers and journalists. Its editor is Peter Passell, former economics columnist for The New York Times.