Finance and Econ From the Web: Japan Overcoming Ageing, IQ Affects Inflation Expectations, Real Cause Of Populism

Close to 50 articles this week, each with short summaries. A good range of articles on politics that look at majority identity and populism, Trump and Ocasio-Cortez’s social media strategy and Soros’ attack on China. On the macro side, a good article on how the non-manufacturing sector needs to be elevated as a driver of the business cycle, another on how inflation expectations are formed (depends on IQ and news source) and some on wage suppression issues. There’s a nice selection of articles on climate change including on pro-and anti-protests, the language of climate change and increasing frequency of high cost weather events. Finally there’s a nice survey on equity factors. Enjoy.

Labour Market

How Big Firms Keep Wages Low “ Monopsony refers to a single (big) buyer of labor; monopoly represents the power of a single seller. In monopsony markets, employers are supersized or make themselves the one and only employer relevant for their workers. As such, they can keep wage growth down…  a study found that a significant jump in local employer concentration  can lead to a decrease in wages of at least 15%”

Stealing from the Poor and Giving to the Rich in the Workplace A recent report  finds that all kinds of employers violate federal laws and regulations governing wage standards. Both small and big companies break laws by overtime violations, forcing workers to labor off-the-clock, misclassifying workers as independent contractors, and stealing tips from tipped workers

Subsidising labour hoarding in recessions: New evidence from Italy’s Cassa Integrazione Argues in favour of helping companies retain staff during downturns.

Beyond Okun’s law: Introducing labour market flows One version of Okun’s law specifies a relationship between the change in the unemployment rate and output growth. The column uses US labour market flows data to investigate this relationship between 1990 and 2017. It finds that the net flows between employment and unemployment are sensitive to changes in growth but respond differently to positive and negative changes. This implies that the US Okun relationship is stable but asymmetric, the effect of a change being larger in contractionary periods than in expansionary ones.

How Japan is overcoming the demographic challenge Eye-opening article. Includes this quote: “Since 2012, its working-age population has shrunk by 4.7 million, yet the number of people working has surged by 4.4. million… The proportion of the population in the labor force has risen sharply since 2012, by more than in any other major advanced economy”

Taxes and Debt (6)

Davos Elites Love to Advocate for Equality – So Long As Nothing Gets Done “Only in passing, and probably on the margins of the official program, will the global elites gathered in Davos get into a discussion of the tremendous monopoly and monopsony power their companies have.”

Wealth taxation: An introduction to net worth taxes and how one might work in the United States Useful guide on the topic de jour

Great Britain land privatization Britain’s biggest privatization has not been of housing or a bank.  It has been of land.  Since Margaret Thatcher entered Downing Street in 1979, and continuing all the way to the present day, the state has been selling public land to the private sector.  It has sold vast quantities — some 2 million hectares, or about 10 per cent of the entire British land mass

Do Tax Cuts Produce More Einsteins? The Impacts of Financial Incentives vs. Exposure to Innovation on the Supply of Inventors Interesting paper that looks at inventors’ career trajectories and income distributions using de-identified data on 1.2 million inventors from patent records linked to tax records in the U.S. The authors find that the private returns to innovation are extremely skewed – with the top 1% of inventors collecting more than 22% of total inventors’ income. Inventors tend to have their most impactful innovations around age 40 and their incomes rise rapidly just before they have high-impact patents. They also predict that financial incentives, such as top income tax reductions, would have limited potential to increase aggregate innovation, while  increasing exposure to innovation (e.g., through mentorship programs) could make a difference.

A European fiscal capacity can avoid permanent transfers and improve stabilisation Column argues for fiscal risk sharing across the Euro-area to supplement national stabilisers, particularly when monetary policy is constrained by the effective lower bound. To avoid moral hazard, the authors argue that an unemployment reinsurance scheme could be designed in such a way that it would benefit all members of the currency area and would not lead to permanent transfers among countries (so the euro insurance would be paid only when unemployment has risen to a certain level and that the country has behaved well fiscally in the past) .

Budget Deficits and Debt: Background and Tradeoffs “ [the medium-term issue is that ] if one looks back at years when the [US] unemployment rate was below 6%, the average budget deficit has been 1.5% of GDP. But although the current unemployment rate has been substantially below 6% for several years, the [CBO] projected budget deficits for the next decade are projected at 4.4% of GDP….The longer-term issue involves the rising share of government spending that is going to support benefits for the elderly. Here’s an illustrative figure from the CBO on the share of federal (non-interest) spending going to the elderly. Specifically, federal spending on the elderly was 35% of total in 2005, 40% of the total by 2018, and headed for 50% of the total 2029.”

Growth (6)

Do Longer Expansions Lead to More Severe Recessions? No, says Cleveland Fed. But big recessions are followed by big (long) recoveries

Chemical Activity Barometer Declines in January In the absence of other data, this might be a useful measure.

In Conversation with Atif Mian Transcript of their conversation, where they talk about =: the role of household indebtedness in the most recent U.S. economic recession, the role of credit creation in economic boom-and-bust cycles, microeconomic perspectives on macroeconomic questions, economic inequality and the explosion of credit in China, and new research questions about whether low interest rates are leading to slowing economies, rising market concentration, and renewed political extremism.

Nonmanufacturing as an Engine of Growth San Francisco Fed paper finds that official numbers tend to understate growth among new producers that improve on existing producers, which is more prevalent outside of manufacturing. Accounting for such missing productivity growth shows that it plays a larger role in sectors such as retail trade and services. Also, the relative contribution of manufacturing to productivity growth has dropped significantly. These findings suggest that nonmanufacturing may be an increasingly important engine of U.S. growth and that an employment shift back to manufacturing would have virtually no effect on aggregate productivity growth.

Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis? ECB models the economy and finds “loans to households have been weaker than expected since the early phases of the financial crisis, while weaknesses in long-term loans to firms are more associated with the financial fragmentation emerged in euro area countries during the sovereign crisis”. Worth reading with another ECB paper: Mind the gap: a multi-country BVAR benchmark for the Eurosystem projections which describes a model that accurately mimics the growth and inflation forecasts made by the ECB

Economic uncertainty and fertility cycles: The case of the post-WWII baby boom Between the early 1940s and the late 1960s, the secular decline in fertility that started at the turn of the 19th century in most developed countries was interrupted by a massive baby-boom. The column argues that although much attention has focused on this boom, fertility rates preceding it were abnormally low. The evidence suggests that economic uncertainty can explain a substantial part of the major swings in fertility over the 20th century.

Central Banks and Policy (6)

Quantitative easing did not increase inequality in the euro area ECB paper finds that  QE decreased income inequality, mostly by reducing the unemployment rate for poorer households, but also, to a lesser extent, by increasing the wages of the employed. Quantitative easing has also helped to reduce net wealth inequality slightly through its positive impact on house prices.

IQ, Expectations, and Choice  Study based on Finnish data that finds that men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking — they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ.  (hmm, so how to help low IQ people?! And I wonder whether the authors have been trolled in social media)

Monetary Policy Communications and their Effects on Household Inflation Expectations
The authors solicit individuals’ inflation expectations and then provide eight different forms of information regarding inflation. Reading the actual Federal Open Market Committee (FOMC) statement has about the same average effect on expectations as simply being told about the Federal Reserve’s inflation target. Reading a news article about the most recent FOMC meetings results in a forecast revision which is smaller by half. It seems that the public does not trust the media. This suggests that if central banks want to add direct communications to the public as a new policy tool, they will have to find new ways to reach the public without relying on traditional media.

Japan wage data credibility in doubt over erroneous sampling In compiling the monthly data, which covers some 33,000 firms nationwide with five or more full-time employees each, the labor ministry is supposed to collect samples from all the firms that employ 500 or more workers. But it turned out that the data sampling failed to cover two thirds of some 1,400 businesses in Tokyo for an unspecified period of time, they said. (I spoke to our Japan economist, Miwa-san, about this and he said that the errors are associated with government numbers rather than the BoJ’s stats)

Risk endogeneity at the lender/investor-of-last resort  They ask to what extent a central bank can de-risk its balance sheet by unconventional monetary policy operations. They find that unconventional monetary policy operations by the ECB generated beneficial risk spill-overs across monetary policy operations, causing overall risk to be nonlinear in exposures. Some policy operations reduced rather than increased overall risk by reducing deflation risks.

When losses turn into loans: the cost of undercapitalized banks ECB finds that a weak banking sector contributed to low productivity following the debt crisis. An unexpected increase in capital requirements for a subset of Portuguese banks in 2011 provides a natural experiment to study the effects of reduced bank capital adequacy on productivity. Affected banks respond not only by cutting back on lending but also by reallocating credit to firms in financial distress with prior underreported loan loss provisioning.

Economic Theory, Models and Data (5)

The Three Revolutions Economics Needs Phelps attacks contemporary economists for not dealing with imperfect knowledge (ie having the correct model of the world), imperfect information (limited inputs) and a theory of economic dynamism (eg creative destruction etc)

Commodity Terms of Trade: A New Database IMF presents a comprehensive database of country-specific commodity price indices for 182 economies covering the period 1962-2018. Looks good!

Advances in weather prediction Modern 72-hour predictions of hurricane tracks are more accurate than 24-hour forecasts were 40 years ago. Key developments in observation, numerical modeling, and data assimilation have enabled these advances in forecast skill.

Revisions to the Federal Reserve Dollar Indexes Fed has revised the weighting scheme and country composition of its dollar indices. They are also changing their names to the advanced foreign economies (AFE) index and the emerging market economies (EME) index (previously it was “major currencies” and “other important trading partners”, respectively). Looking at the charts – it doesn’t result it major differences.

Why we need to be wary of narratives of economic catastrophe “Until recently, going global implied exuberant stories about one-world connectivity and technocratic togetherness. Now, it’s the other way around: the stories of our times are consumed with collapses, extinctions and doom. It’s a playbook for nativists, who see interdependence as a recipe for catastrophe.”

Climate Change (4)

Ban on diesel vehicles drives Germans to the street – to protest “Several hundred people attended a demonstration in Stuttgart last Saturday, as the city that is home to Mercedes-Benz and Porsche became one of the first to enforce a driving ban this month due to pollution. Larger rallies may be in store as the Free Democrats have called for a protest on February 9.” (Smaller than the yellow vest protest in France, but nevertheless worth monitoring)

People Power: 160,000 European Protesters Demand Action on Climate Crisis “At least 80,000 people marched in a cold rain in Brussels Sunday in another massive protest demanding that the European Union take urgent and far-reaching action to address the world’s climate crisis….In France, organisers said more than 80,000 people demonstrated in French towns and cities on Sunday”

The New Language of Climate Change Scientists and meteorologists on the front lines of the climate wars are testing a new strategy to get through to the skeptics and outright deniers.

Earth’s 39 Billion-Dollar Weather Disasters of 2018: 4th-Most on Record Only 2011, with 44 billion-dollar weather disasters, and 2010 and 2013, with 41 each, had more. The annual average of billion-dollar weather disasters is 25 since 1990 (see chart)

Globalisation and Automation (3)

Navigating a world of disruption McKinsey report focuses on winners and losers from de-globalisation. 

Automation and Artificial Intelligence: How machines are affecting people and places “The report focuses on areas of potential occupational change rather than net employment losses or gains. Special attention is applied to digging beneath national top-line statistics to explore industry, geographical, and demographic variations. “ Production, food service and transportation very likely to be automated, while business, arts and engineering least likely to be. “The gravest disruptions from automation in the coming decades will affect men, young workers, and underrepresented groups.” “large swaths of economic activity—from health care and social services to coaching and government and education—will remain durably human and shaped by empathy, tact, and the human touch. Such social skills may well be in greater demand in the near future than narrower technical skills such as programming.”

Productivity effects of internationalisation through the domestic supply chain Studies of the implications of trade openness for local economies rarely address the domestic supply chain. This column examines whether indirect effects of internationalisation affect the domestic supply chain. Micro-level data for manufacturing firms across 19 EU countries, combined with input-output tables, show that domestic access to intermediate inputs that are also exported leads to higher levels of efficiency.

Financial Markets (3)

Wrong-way Risk in Credit Valuation Adjustment of Credit Default Swap with Copulas BoJ compare various CVA models. Technical piece

Taming the Factor Zoo: A Test of New Factors Useful framework to assess the marginal value of new factors for explaining stock returns over and above the ones already known. They use a combination of the double-selection LASSO method and two-pass regressions. The methodology allows for potential model-selection mistakes, unlike the standard approaches that assume perfect variable selection. They apply the procedure to a set of factors recently discovered in the literature. While most of these new factors are found to be redundant relative to the existing factors, a few — such as profitability — have statistically significant explanatory power beyond the hundreds of factors proposed in the past. The appendix has an excellent summary of newly discovered factors. 

The Road to ETFs Fun read that describes versions of ETFs from a thousand years ago

US Politics (6)

Battle of the Billionaires?  “Suddenly Democrats are facing their own possible third-party headache. Lifetime Democratic billionaire Howard Schultz, the founder of the ubiquitous coffee chain Starbucks [is] close to launching a self-funded presidential run in 2020 — and he will run as an independent.” This could increase the chances of Trump winning re-election as would-be Democrat voters switch to candidates like Schultz. 

U.S. universities unplug from China’s Huawei under pressure from Trump  Top U.S. universities are ditching telecom equipment made by Huawei Technologies and other Chinese companies to avoid losing federal funding under a new national security law backed by the Trump administration. (I’d argue this is not just a Trump thing, but rather a broader establishment move against China tech)

Trump and Ocasio-Cortez use the same tricks to win at politics “Much like the way Donald Trump used social media in 2015 and 2016 to disrupt and energize people on the right who felt ignored, Ocasio-Cortez is energizing people on the left who felt left out of the process,” 

What the Covington Saga Reveals About Our Media Landscape Insightful article, that discusses the “agenda-setting effect” that social media has on journalists. This works as “journalists tend to interpret the fact that a topic is trending as a sign of its newsworthiness”, so someone can manipulate what’s trending they can make it become news.

In 1995, the U.S. Declared a State of Emergency. It Never EndedTrump recently renewed the terrorism state of emergency, which is just one of roughly 30 ongoing national emergencies in the U.S. (President Bill Clinton declared terrorism a national emergency precisely 24 years ago”

Eric Kaufmann’s *Whiteshift* Tyler Cowen gives a glowing review of Kaufman’s new book. From the book: “First, why are right-wing populists doing better than left-wing ones?  Second, why did the migration crisis boost populist-right numbers sharply while the economic crisis had no overall effect?  If we stick to data, the answer is crystal clear.  Demography and culture, not economic and political developments, hold the key to understanding the populist moment.”

Global Politics (7)

George Soros Remarks delivered at the World Economic Forum Here’s a taster: “I want to call attention to the mortal danger facing open societies from the instruments of control that machine learning and artificial intelligence can put in the hands of repressive regimes. I’ll focus on China, where Xi Jinping wants a one-party state to reign supreme.”

Welcome to the New Britain, Where Every Week Is Hell “Another week brings another political crisis as the time to reach a Brexit deal runs out.  It was “Crunch Week” when British and EU negotiators raced to sign off on a deal late last year, it was “Crunch Week” when lawmakers in London rebelled against it, and it was “Crunch Week” when May finally presented the agreement to Parliament earlier this month. Oh, and then there was “Hell Week,” “Hell Week 2.0,” and “Bloody Hell Week.” “

Can a “No-Deal” Brexit Be Avoided? Former British Prime Minister Gordon Brown writes: “So, on Tuesday, Parliament should vote not only to extend the Brexit deadline, but also to consider ushering in a series of Citizens’ Assemblies. With public hearings in each region of the UK, supported by Parliament’s Select Committees, a representative sample of electors should consider the facts, not least the issues that dominated the referendum debate: who controls the UK’s borders and laws.”

How Europe’s Populists Can Win by Losing The European Parliament elections this May have been described as a make-or-break moment for the future of the European project – and for good reason. With plans to form a populist united front, Euroskeptic parties need only capture one-third of parliamentary seats to bring EU governance to a crawl.

The lottocracy Elections are flawed and can’t be redeemed – it’s time to start choosing our representatives by lottery?!

Franco-German Friendship Is Not Enough By signing the Treaty of Aachen, German Chancellor Angela Merkel and French President Emmanuel Macron have taken an important step toward firming up the Franco-German partnership at the heart of the European project. But insofar as the pact excludes all other EU member states, it risks deepening Europe’s divisions even further.

The Euro’s First 20 Years. Harvard Prof Jeffrey Frankel opines on the euro. “According to public opinion polls, 20 years after its introduction, the euro is highly popular, with 64% of eurozone citizens supporting the common currency. This offers hope that, if the eurozone’s leaders can learn from past mistakes, the monetary union will survive and even thrive in the future.”


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