LIKE AN ECONOMIST

Sangam, an Indian restaurant in Philadelphia, offers an all-you-can-eat lunch buf-
fet for $5. Customers pay $5 at the door, and no matter how many times they refill their plates, there is no additional charge. One day, as a goodwill gesture, the owner of the restaurant tells 20 randomly selected guests that their lunch is on the house. The remaining guests pay the usual price. If all diners are rational, will there be any difference in the average quantity of food consumed by people in these two groups?
Having eaten their first helping, diners in each group confront the following question: “Should I go back for another helping?” For rational diners, if the benefit of doing so exceeds the cost, the answer is yes; otherwise it is no. Note that at the moment of decision about a second helping, the $5 charge for the lunch is a sunk cost. Those who paid it have no way to recover it. Thus, for both groups, the (extra) cost of another helping is exactly zero. And since the people who received the free lunch were chosen at random, there is no reason to suppose that their appetites or incomes are different from those of other diners. The benefit of another helping thus should be the same, on average, for people in both groups. And since their respective costs and benefits of an additional helping are the same, the two groups should eat the same number of helpings, on average.
Psychologists and economists have experimental evidence, however, that people in such groups do not eat similar amounts.
In particular, those for whom the luncheon charge is not waived tend to eat substantially more than those for whom the charge is waived. People in the former group seem somehow determined to “get their money’s worth.” Their implicit goal is apparently to minimize the average cost per bite of the food they eat. Yet minimizing average cost is not a particularly sensible objective. It brings to mind the man who drove his car on the highway at night, even though he had nowhere to go, because he wanted to boost his average fuel economy. The irony is that diners who are determined to get their money’s worth usually end up eating too much, as evidenced later by their regrets about having gone back for their last helpings.

The fact that the cost-benefit criterion failed the test of prediction in this example does nothing to invalidate its advice about what people should do. If you are letting sunk costs influence your decisions, you can do better by changing your behavior. In addition to paying attention to costs and benefits that should be ignored, people often use incorrect measures of the relevant costs and benefits. This error often occurs when we must choose the extent to which an activity should be pursued (as opposed to choosing whether to pursue it at all). We can apply the Cost-Benefit Principle in such situations by repeatedly asking the question “Should I increase the level at which I am currently pursuing the activity?”
In attempting to answer this question, the focus should always be on the benefit and cost of an additional unit of activity. To emphasize this focus, economists refer to the cost of an additional unit of activity as the marginal cost of the activity. Similarly, the benefit of an additional unit of the activity is the marginal benefit of the activity.
When the problem is to discover the proper level at which to pursue an activity, the cost-benefit rule is to keep increasing the level as long as the marginal benefit of the activity exceeds its marginal cost. As the following example illustrates, however, people often fail to apply this rule correctly.

Economist running Nations... Look at India headed by MMS

They indulge in short term populist policies and do not look at the longer term picture

Mario Monti and Lucas Papademos have been rushed to manage Italy and Greece respectively in the ongoing crisis crisis. As both are famous economists turned technocrats this question is aptly asked by Matt Kahn - What If Economists Ran Nations?

Now, I realize that most economists are not electable.  Ben Stein is the most charismatic among economist.  But, suppose we managed to achieve power through some trick such as when Kevin Kline seized power in that epic “Dave”.   What would we do if Paul Krugman and Robert Barro jointly served as “co-presidents”?
Hmm. Barro and Krugman as co-Presidents would be fun for sure. The entire set of media can just focus on war of words between them.
He picks a list of things economists when elected heads would do:

1.   pursue international free trade in goods and labor (i.e immigration restrictions would ease sharply).
2.  credible short term and medium term budget targets would be announced and rules would be introduced to meet these targets.
3.  early life investments in children would be increased.
4.  A series of field experiments would launched to create an “evidence based” government who only intervenes in the free market after a serious cost/benefit analysis has been conducted.
5.  The government would commit that no government funds would be used in “picking winners” or “subsidizing industries” unless large positive externality effects are demonstrated to exist by a group of blue ribbon economists.
6.  Health care would be reformed to offer all Americans a basic package of services and citizens will be allowed to augment that care through private competitive markets.  A group of health economists would agree to what services and procedures would be bundled into the “basic package”.  For example, nose jobs would unlikely be part of this list.
7.   Retirement benefits will be adjusted to reflect life expectancy tables based on your birth year, age and sex. If you are part of a demographic group with a shorter life expectancy (i.e African Americans), then you can receive benefits earlier.  To give people time to plan for this transition, anyone who is over the age of 52 would not be affected by these new rules.
8.  The U.S Military would be given a fixed budget that is tied to the growth of the U.S economy.   The Military can save any budget allocation that it does not spend in any fiscal year.
9.  The U.S would enter an exchange program with China so that its leaders can travel in the U.S and vice-versa.  Such an international exchange program would facilitate trust and mutual understanding.
10.  The U.S government would take a close look at the unintended consequences of many of its policies. If these consequences are large and bad, then this would be used as a reason to end such programs.  For example, as Casey Mulligan has argued — many of the Obama Administration’s well meaning policies regarding student loans and housing loans discourage work. Here  is some survey evidence that backs up some of my claims.
11.  A vast majority of economists would support serious fossil fuel taxes and using this revenue to lower labor and capital taxes.

An impressive list but Kahn is clearly overestimating economists by a huge margin. Taking a cue from public choice theory, one would imagine economists to turn politicians and behave like one instead of being economists. After all that is a rational thing to do!!
Some econs might get a taste of real life and realise how difficult it is to be a politician and implement things. And how easy it is to be an economist and just suggest ideas without really worrying about implementation issues.
Kahn says Italy is running a natural experiment electing an economist as its new leader. He just needs to look a bit more east to see the natural experiment already running for many years now.  India has been running such an experiment since 2004.
Dr. Manmohan Singh has been India’s leader since 2004 and what can one say. There were huge expectations as he was seen as the father of India reforms as he initiated the process post 1991 crisis. In his first term (2004-09) nothing much happened as Left was coalition partner and did not allow reforms (that is what we were told). People gave him a second term (2009-04) with a bigger majority minus the left and this time expectations were a lot higher. But since then there has just been more and more disappointment.
What is worse is we now have perhaps the most corrupt government under the PM. Some even call it India’s gilded age. Things do not look good when we look at 20 years of reforms India between 1991 and 2011. Arun Shourie goes on to say it is not important to simply elect people who are seen as reformers. We need leaders who can stand upto reforms. Some even go onto say it was Prime Minister Narasimha Rao and his office which was responsible for the reforms and not Manmohan Singh.
Ironically, Lula of Brazil also started at the same time amidst very little expectations but by 2010 (after two terms) he seems to have done a fab job for Brazil. And he was no economist…
In a related article Ruchir Sharma of Morgan Stanley points leaders should know when to quit. If they elongate their career it not just leads to worse performance but even wipes out gains made in their earlier years:

At last, every hero becomes a bore. Writer Ralph Waldo Emerson’s observation is lost on most politicians who often tend to overstay their welcome in office. This is particularly true in the developing world with young democracies, where term limits are either not widespread or where several incumbent leaders change the constitution at the peak of their popularity to extend their stay in office. 

But in the long established democracies as well, the populace generally tires of rulers who hang around for more than one term and any goodwill generated in the first few years of their reign almost always dissipates rapidly if they remain in power for a decade or longer. This axiom is even more relevant in the current economic environment where growth and inflation dynamics are taking a turn for the worse across the globe. 
He points to several examples from Russia (Putin), Malaysia (Mahathir), UK (Thatcher) etc who were disasters in their second terms. Then there are countries in Latam and Africa where leaders toying with rules to elongate their careers.
Naturally he ends with MM Singh:

Although Prime Minister Manmohan Singh has not yet spent a decade in power, it is quite apparent that had he stuck to being a one-term head he would have gone down as one of the most accomplished leaders in India’s history, along the lines of the Italian economist and leader Calo Azeglio Ciampi, who held many public positions including those of the central bank governor, finance minister, prime minister and president of the country. 

Apart from his long stint as central bank governor from 1979 to 1993, Ciampi didn’t remain in any of the other posts for more than one term. For every day that Singh stays on as the premier, his legacy diminishes, as like most other long-serving leaders he now seems enervated. 
The lesson from history is that leaders are most effective in their first term of power and the goodwill they have erodes very quickly if they stay on in office up to a decade or longer. There are exceptions to the rule, such as Lee Kuan Yew in Singapore who after 30 years of rule was still widely admired. Those are very rare cases; the odds generally are that after a few years in power, most leaders become a bore. 
Am not sure about this conclusion. Yes they become a bore but it all boils down to the policies. Infact just reversing the debate one can say second term is the true test of a good leader. In the first term most policies are a carry on from the previous government/leader and difficult to seperate the impact of two leaders/sets of policies. Many now say that Congress and Dr MM Singh had a good first term in terms of economy mainly because of policies of previous BJP government. As nothing much was done in first term (blaming left for all ills), second term has just been a huge laggard.
Sharma mentions Lula’s success but he also completed his two terms. Clinton did well in two successive terms whereas Bush’s were just a disaster…
I would instead argue that whether to be a bore or an entertainer depends on the policies followed in the earlier terms. This might fail in other cases but we know that it is mostly true in case of Dr MM Singh who is an economist and a leader.
Though one must acknowledge that politicians do not get longer term like policymakers as most constitutions allow 4 to 5 year of government and then elections. So they indulge in short term populist policies and do not look at the longer term picture. But you would imagine better behavior from econ turned politicians but in India’s case it has not really worked…
It will be interesting to see if Monti and Papademos have a different tenure..

How Raghuram Rajan became an economist?

In this piece Raghuram Rajan recalls the events which made him become an economist:

As a young MBA student, Raghuram Rajan spent a summer interning at a prestigious foreign bank. “This was before quotes were online, and there was something called ‘cholesterol pricing,’” he said. “A colleague would offer to take a call from your client, who wanted a foreign exchange rate, and the colleague would offer ridiculous pricing,” Rajan recalled. “If the client didn’t immediately have a heart attack, that was the rate he got. But if he objected, the colleague would say, ‘Let me have your banker get back to you. He might be able to get you a better rate.’ It wasn’t the norm, but there was a sense that this was acceptable.”

Not to Rajan. “Who would I be making money for, and who would I be squeezing?” he recalls thinking. “Growing up in India, I had seen poverty all around me. I had read about John Maynard Keynes and thought, wow, here’s a guy who managed to have an enormous influence on the world. Economics must be very important.”

That summer, Rajan also worked on a project about options. He ran across Robert Merton’s paper on rational option pricing, and something clicked that set him on his own intellectual path. “It all came together. You didn’t have these touchy-feely ways of describing human behavior; there were neat arbitrage ways of pricing things. It just seemed so clever and sophisticated,” he said. “And I could use the math skills that I fancied I had, so I decided to get my PhD.”

It was an amazing decision really. But then Rajan is being modest. Looking at his CV, he was an early achiever (gold medalist at both IIT and IIM) and was destined to make it big.

Banks Inception

Banking as we know it actually began almost by accident, as a sideline of a very different business, goldsmithing. Goldsmiths, by virtue of the high value of their raw material, always had really strong, theft-resistant safes. Some of them began renting out the use of these safes: individuals who had gold but no safe place to keep it would put it in the goldsmiths’ care, receiving a ticket that would allow them to claim their gold whenever they wanted it. At this point two interesting things started happening. First, the goldsmiths discovered that they didn’t really have to keep all that gold in their safes. Since it was unlikely that all the people who had deposited gold with them would demand it at the same time, it was (usually) safe to lend much of the gold out, keeping only a fraction in reserve. Second, tickets for stored gold began circulating as a form of currency; instead of paying someone with actual gold coins, you could transfer ownership of some of the coins you had stored with a goldsmith, so the slip of paper corresponding to those coins became, in a sense, as good as gold. And that’s what banking is all about. Investors generally face a trade-off between liquidity—the ability to lay your hands on funds on short notice—and returns, putting your money to work earning even more money. Cash in your pocket is perfectly liquid, but earns no return; an investment in, say, a promising start-up may pay off handsomely if all goes well, but can’t easily be turned into cash if you face some financial emergency. What banks do is partially remove the need for this trade-off. A bank provides its depositors with liquidity, since they can lay hands on their funds whenever they want. Yet it puts most of those funds to work earning returns in longer-term investments, such as business loans or home mortgages. So far, so good—and banking is a very good thing, not just for bankers but for the economy as a whole, most of the time. On occasion, however, banking can go very wrong, for the whole structure depends on depositors’ not all wanting their funds at the same time. If for some reason all or at least many of a bank’s depositors do decide simultaneously to withdraw their funds, the bank will be in big trouble: it doesn’t have the cash on hand, and if it tries to raise cash quickly by selling off loans and other assets, it will have to offer fire-sale prices—and quite possibly go bankrupt in the What would lead many of a bank’s depositors to try withdrawing their funds at the same time? Why, fear that the bank might be about to fail, perhaps because so many depositors are trying to get out. So banking carries with it, as an inevitable feature, the possibility of bank runs—sudden losses of confidence that cause panics, which end up becoming self-fulfilling prophecies. Furthermore, bank runs can be contagious, both because panic may spread to other banks and because one bank’s fire sales, by driving down the value of other banks’ assets, can push those other banks into the same kind of financial distress. As some readers may already have noticed, there’s a clear family resemblance between the logic of bank runs—­especially contagious bank runs—and that of the Minsky moment, in which everyone simultaneously tries to pay down debt. The main difference is that high levels of debt and leverage in the economy as a whole, making a Minsky moment possible, happen only occasionally, whereas banks are normally leveraged enough that a sudden loss of confidence can become a self-fulfilling prophecy. The possibility of bank runs is more or less inherent in the nature of banking. Before the 1930s there were two main answers to the problem of bank runs. First, banks themselves tried to seem as solid as possible, both through appearances—that’s why bank buildings were so often massive marble structures—and by actually being very cautious. In the nineteenth century banks often had “capital ratios” of 20 or 25 percent—that is, the value of their deposits was only 75 or 80 percent of the value of their assets. This meant that a nineteenth-century bank could lose as much as 20 or 25 percent of the money it had lent out, and still be able to pay off its depositors in full. By contrast, many financial institutions on the eve of the 2008 crisis had capital backing only a few percent of their assets, so that even small losses could “break the bank.”

Second, there were efforts to create “lenders of last resort”—institutions that could advance funds to banks in a panic, and thereby ensure that depositors were paid and the panic subsided. In Britain, the Bank of England began playing that role early in the nineteenth century. In the United States, the Panic of 1907 was met with an ad hoc response organized by J. P. Morgan, and the realization that you couldn’t always count on having J. P. Morgan around led to the creation of the Federal Reserve. But these traditional responses proved dramatically inadequate in the 1930s, so Congress stepped in. The Glass-Steagall Act of 1933 (and similar legislation in other countries) established what amounted to a system of levees to protect the economy against financial floods. And for about half a century, that system worked pretty well. On one side, Glass-Steagall established the Federal Deposit Insurance Corporation (FDIC), which guaranteed (and still guarantees) depositors against loss if their bank should happen to fail. If you’ve ever seen the movie It’s a Wonderful Life, which features a run on Jimmy Stewart’s bank, you might be interested to know that the scene is completely anachronistic: by the time the supposed bank run takes place, that is, just after World War II, deposits were already insured, and old-fashioned bank runs were things of the past. On the other side, Glass-Steagall limited the amount of risk banks could take. This was especially necessary given the establishment of deposit insurance, which could have created enormous “moral hazard.” That is, it could have created a situation in which bankers could raise lots of money, no questions asked—hey, it’s all government-insured—then put that money into high-risk, high-stakes investments, figuring that it was heads they win, tails taxpayers lose. One of the first of many deregulatory disasters came in the 1980s, when savings and loan institutions demonstrated, with a vengeance, that this kind of taxpayer-subsidized gambling was more than a theoretical possibility.

Swiss banks and the World

Indians’ money in Swiss banks may have risen for the first time in five years, but they account for a meagre 0.14 per cent of total foreign wealth deposited there — putting India at 55th place globally for such funds.

The total overseas funds in Switzerland’s banking system stood at 1.53 trillion Swiss francs (about Rs. 90 trillion) at the end of 2011, which included 2.18 billion Swiss francs (Rs. 12,700 crore) belonging to Indian individuals and entities.

While India accounted for only 0.14 per cent of total foreign money in Swiss banks, the U.K. accounted for the largest share of little over 20 per cent, followed closely by the U.S. with about 18 per cent.

As per the latest data disclosed by Swiss National Bank (SNB), Switzerland’s central bank, India is now ranked 55th in terms of funds belonging to overseas clients in Swiss banks.

Among the top-ranked jurisdictions, the U.K. and the U.S. were followed by West Indies, Jersey, Germany, Bahamas, Guernsey, Luxembourg, Panama and France, Hong Kong, Cayman Islands, Japan, Singapore, Australia, Italy, Netherlands, Russia, Saudi Arabia and United Arab of Emirates.

The SNB data shows that the quantum of money held by Indians in the Swiss banking system rose for the first time in five years during 2011.

These official figures, described by SNB as ‘liabilities’ of Swiss banks towards their clients from various countries, do not indicate towards the quantum of the much-debated alleged black money held by Indians or other nationals in the safe havens of Switzerland.

Also, SNB’s figures do not include the money that Indians or other nationals might have in Swiss banks in others’ names. The total funds held by Indian individuals and entities include 2.025 billion Swiss francs held directly by them and 158 million held through ‘fiduciaries’ or wealth managers.

Fiduciaries are essentially wealth fund managers who hold the money of Indian private holders and families in the so-called numbered accounts.

The Swiss banks’ direct liabilities towards clients from India include funds held in savings and deposit accounts by Indian individuals, financial institutions and corporates.

India is ranked 55th in terms of only direct deposits as well, while it is placed much lower at 76th rank for fiduciary funds, where the top-ranked jurisdictions include West Indies, Panama, U.K., Saudi Arabia, Bahamas, Liberia, Cayman Islands, UAE, Turkey, Russia, Germany and the U.S.

Pakistan is ranked higher than India at 52nd place in terms of fiduciary funds (355 million Swiss francs), but lower at 60th for total money (2.12 billion Swiss francs).

While the funds belonging to Indians rose by about Rs. 3,500 crore last year, the total foreign money there rose by about Rs. two lakh crore (more than 36 billion Swiss francs).

The quantum of funds held by Indians in Swiss banks had last increased in 2006 by about one billion Swiss francs to 6.5 billion Swiss francs (over Rs 40,000 crore), but fell to less than one-third by the end of 2010.

In a White Paper on black money tabled in Parliament last month, the government had also said that Swiss banks’ total liabilities towards Indians have been coming down and fell by more than Rs. 14,000 crore between 2006 and 2010.

Amid allegations of Indians stashing huge amounts of illicit wealth abroad, including in Swiss banks, the government says it is making various efforts to bring back the unaccounted money.

As per SNB data, funds held by Indians directly in the Swiss banks increased by about 370 million Swiss francs to 2.025 billion Swiss francs (Rs 11,800 crore) in 2011.

On the other hand, the funds held through ‘fiduciaries’ nearly halved to 158 million Swiss francs (about Rs 900 crore) in 2011 — marking the fifth straight year of decline.

The experts have been saying that there has been a “perceptible flight of funds” of Indian holders from Swiss banks to other places in the recent years.

The foreign capital-friendly regulations in places like Mauritius and Dubai were possibly being exploited by those seeking to move their funds away from Swiss banks, which have come under strict scrutiny of late.

At the same time, the global pressure has been rising on Switzerland to ask its banks to share information about their clients with foreign governments.

It is suspected that Indians having illicit wealth in Swiss banks may be moving their funds in fear of being exposed due to growing scrutiny. At the same time, even those having legitimate funds in Swiss banks may be moving away, due to a growing level of negativity attached to them.

The countries placed above India in terms of total funds in Swiss banks also include Ireland, Spain, Israel, Canada, Brazil, Greece, China, Egypt, Thailand, Philippines, South Korea and New Zealand. Those ranked below India include Qatar, South Africa, Pakistan, Bahrain, Kenya, Nigeria and Iran.

US recession again

The U.S. economy would likely slide into a “significant recession” next year if Congress doesn’t avert tax increases and spending cuts set to begin in January, the Congressional Budget Office said Wednesday.
But if they are postponed for at least a year, the federal government would likely endure its fifth straight year with a budget deficit greater than $1 trillion, the CBO said.
These dueling pressures came into sharp focus as the nonpartisan agency released its final budget and economic forecast ahead of the November elections. “I think the stakes for fiscal policy are very high right now,” CBO director Douglas Elmendorf told reporters.
The fight over how to address tax and spending has put Washington in political paralysis. Democrats and Republicans aren’t expected to begin negotiating a deal until after the November elections, though some in both parties have warned that could be difficult given how little time they will have to maneuver.
The CBO painted two starkly different scenarios for next year, depending on what path lawmakers decide to take.
Under current law, the Bush-era tax cuts are scheduled to expire at the end of this year, raising tax rates on more than 100 million Americans. These tax increases, combined with roughly $100 billion in planned spending cuts on military and other government programs, would reduce projected deficits from $1.13 trillion

A laborer works at a rare-earth minerals mine in Jiangxi province in China.
in the fiscal year ending Sept. 30 to $641 billion for the year that ends Sept. 30, 2013.
That would cut the deficit from roughly 7.3% of the nation’s gross domestic product to roughly 4.0% of GDP, the CBO said, the largest oneyear reduction since 1969. But as a consequence, this would cause the economy to contract at an annualized rate of 2.9% in the first half of 2013, and by 0.5% over the entire year. The unemployment rate would rise to 9.1% at the end of the year from just above 8% now, CBO said.
If Congress were to postpone the tax increases and spending cuts, the deficit would fall just slightly in the next fiscal year, to $1.037 trillion, or 6.5% of GDP. The unemployment rate at the end of 2013 would be 8%, a difference of roughly two million jobs from the other scenario, CBO said. And the economy would grow by 1.7% over the year.
Democrats have advocated a combination of tax increases on upper-income Americans and spending cuts in a number of programs to reduce the deficit. The White House has called for extending all of the Bush-era tax cuts except on the portion of income earned that tops $250,000 for families. The CBO estimated this change would boost tax collections $42 billion in 2013 and $824 billion over the next 10 years.
Many Republicans have called for extending all the Bush-era tax cuts for at least another year and cutting spending on many programs. Likely GOP nominee Mitt Romney has called for a one-year extension of all the tax cuts and called on Congress to postpone spending cuts to next year, giving him time to develop his own deficit-reduction plan if elected.

China raise earth export quota WSJ

China’s government eased its restrictions on rare-earth exports for the first time since 2005, in an apparent nod to a trade fight over Beijing’s tight global grip on production of the strategically important minerals.
But industry executives said the move will do little to shake China’s dominance of a market crucial to industries as diverse as oil refining, electric vehicles and ballistic missiles.
China’s Ministry of Commerce said Wednesday that it will permit 2.7% more volume of rare-earth minerals—30,996 metric tons—to leave the country this year than it did in 2011. The increase follows a number of tighter limits imposed since 2005 that led to major price surges beginning about two years ago, making some of the elements more valuable than gold.
The restrictions raised cries from industries dependent on the minerals. In July, the World Trade Organization accepted a complaint from the U.S., the European Union and Japan, putting pressure on China at a time when it is contending with other trade disputes with the U.S. ranging from automobiles to solar panels. China contends its export limits are one of a number of efforts spurred by environmental concerns.
“Pressure on China [to loosen ex-
port controls] has been quite high,” said Frank Tang, an analyst at investment bank North Square Blue Oak. He said China is “now signaling to the wider world not to worry.”
But industry observers said the move comes as China’s rare-earth export limits become less important. Chinese miners haven’t come close to exporting as much as permitted during the past two years as manufacturers look to reduce their use of Chinese-produced minerals, leading to sharp price drops.
Companies in the U.S., Australia and elsewhere are also ramping up production of the minerals, which aren’t rare despite their name but can be complicated to process. Mining operations also take a long time to set up.
“The export quotas are not all that meaningful anymore,” says Mark Smith, chief executive officer of Molycorp Inc., a Colorado company that is trying to quickly boost its own production at a California mine.
Molycorp said that by the end of this year, it will be producing rare earths and related materials at a rate of 19,050 metric tons annually.
At the same time, China is moving up the rare-earth value chain, increasingly processing the minerals into high-end products like magnets, adding to its sway in the market even if limits are eased further.
China’s rare-earth exports this year are well below the quotas. Ex-
Rare Reversal
China’s rare-earth export quota, in metric tons
60,000
40,000
20,000
Sources: U.S. Department of Energy (export quota); Lynas Corporation (prices) The Wall Street Journal
ports in the first half reached slightly less than 5,000 tons, according to the state-run Xinhua news agency.
Prices outside China are also well off highs, with lanthanum oxide costing $19 a kilogram this week, compared with $104 last year, according to Australian miner Lynas Corp. The element, used in lenses and lights, is now priced close to where it was two years ago before fears about pinched quotas pushed rare earths toward the front of political debate.
It is a bit different inside China, where there has been a global shift into the country of the intermediate
chemical processing of the raw oxides needed to produce finished products such as magnets. That has sustained rare-earth demand there and likewise prices. Lynas said lanthanum sells for 2.5 times as much in China as it did two years ago. Japanese companies in the business of making high-performance dysprosium magnets used in hybrid vehicles are increasingly manufacturing in China. Shin-Etsu Chemical Co., for instance, announced plans in March for a magnetic-alloy plant in Fujian province with the ability to produce 3,000 metric tons annually beginning early next year. The purchase of rare earths in China isn’t subject to quotas, making it more economical for some users to do intermediate work there. Asked recently about the WTO case, a U.S. administration official said export quotas were part of “a deeply rooted industrial policy aimed at providing substantial competitive advantages for Chinese manufacturers at the expense of non-Chinese manufacturers.” Molycorp estimates that domestic Chinese demand absorbed 70% of the country’s rare-earth oxide output in 2011, up from 60% the previous year. And it said that for various reasons that include a clampdown on domestic miners, rare-earth oxide production could decrease by 20% this year. “We think the real story is [Chinese] production quotas, not export quotas,” Mr. Smith, Molycorp’s CEO, said.