Macro From the Web: Nature Or Nature Helps Econ Outcomes?, Piketty’s EU Critique and China’s Rare Element Weapon

This week’s curated list features some good articles on the dynamics of inflation-less strong labour markets such as helping poorer people more than rich people. Then there’s an interesting article on how temperature affects economic growth – it seems like cooler climates are optimal.

On the markets side, a good piece on how positive corporate bond returns are due their embedded optionality, the noise of ETF rebalancings and the lack of contagion after the ECB’s OMT operation. On the politics front, we have articles on how being anti-China is the common stance amongst populist right-wing parties around the world, Piketty writes how the EU is pro-elites and the economic effects of Germany’s recent waves of immigration.

Source: click here for full article

Labour markets and Inequality

The role of nature versus nurture in wealth and other economic outcomes and behaviours Looking at the path of adopted children in Sweden, the study finds that the environment more than biology determines transmission of wealth.

Is the Hot Economy Pulling New Workers into the Labor Force? San Fran Fed finds “why underlying flows between labor force states shows that, rather than drawing new people in, the hot labor market has instead reduced the number of individuals who are dropping out.”

The Increasing Benefits and Diminished Costs of Running a High-Pressure Labor Market “changing inflation dynamics, in tandem with higher wage, income, and wealth inequality, should create an asymmetry in the Fed’s reaction function, as such dynamics elevate the benefits of full employment and diminish the risks of inflationary pressures.” [some good analysis that shows how tight labour markets help poor people more than rich people]

The new globalisation and income inequality “trade in intermediates generates a reallocation of capital across countries that exacerbates world inequality in both income and welfare. Unbundling of production hurts middle-income countries but helps those with high productivity.”

When American Capitalism Meant Equality Fascinating account of the shift from seeing capitalism bring equality to accepting inequality. Author traces this back to thinkers like Galbraith and Hostadter – both of whom shifted the focus away from fights over monopoly power to technocracies.

Predicting wage growth with measures of labor market slack “Since 2008, the share of adults between the ages of 25 and 54 who are employed (or the “prime-age EPOP”) has predicted wage growth better than the unemployment rate.”

Business cycle

Assessing the Business Cycle, Mid-May 2019 Several key series look like they have peaked; nowcasts indicate slowing growth. Forward looking indicators look “iffy”.

The Changing Mix of Light Vehicle Sales  In the 1970s, 80% of sales were passenger cars and only 20% SUVs in  the US. Today it has flipped to 30% of sales are passenger cars and 70% are SUVs.

The U.S. Economic Outlook Brad DeLong’s outlook presentation, includes some slides on San Fran economy “possible loss of hardware innovative dominance to Shenzhen, but software/network dominance remains”

America’s Illusions of Growth Jeffrey Sachs argues that current US growth masks issues like falling life expectancy.

What is behind the recent slowdown? BIS: “When financial conditions tighten, very long and elaborate global value chains [GVCs] will no longer be viable economically…around 80% of bank trade financing was denominated in US dollars.. fluctuations in the trade-to-GDP ratio closely track the strength of the dollar, with a stronger dollar associated with subdued GVC activity”

The RBA’s Economic Outlook and Monetary Policy Governor Lowe writes “looking forward, the global picture looks a little brighter” and “the decline in housing prices is a factor here [in lowering household consumption], but the more important factor is the long period of weak growth in household income” 

Long-term growth and productivity

Climatic Constraints on Aggregate Economic Output Authors look at longitudinal data on economic output from over 11,000 districts across 37 countries. They find that output peaks at cooler climates (<10°C) and declines steeply after. They estimate that since 2000, warming has already cost both the US and the EU at least $4 trillion in lost output, and tropical countries are >5% poorer than they would have been without this warming.

International Business Travel and Technology Sourcing Technology sourcing through in-person business travel is statistically and economically significant, accounting, for example, for 20% of the higher patenting in Germany’s Greater Stuttgart area, compared to Portugal’s Algarve region.

Globalisation and state capitalism: Assessing the effects of Vietnam’s WTO entry The recent success of China and Vietnam over the past three decades has triggered a debate over ‘state capitalism’ as a viable growth and development model. Comparing state-owned companies and private ones in Vietnam, the authors find that ”productivity gains from trade after WTO entry might have been 66% higher in the absence of state-owned firms”

Long-term and intergenerational effects of education Oover 61,000 primary schools were built by the Indonesian government between 1973 and 1979. The evidence shows that the people who accessed education provided by the construction programme benefited from significant improvements in their educational and later life outcomes. So too did their children.

Why We Need New Measures of Potential Output—and What They Tell Us Uses a version of Okun’s output gap measure rather than NAIRU to measure output gaps.Argues that currently the economy can “respond positively to a lasting expansion in demand” without inflation.

Monetary policy

The Disconnect between Inflation and Employment in the New Normal Fed governor Brainard argues that “the weakening in the relationship between inflation and employment [means] that we should not assume monetary policy will act to restrain the financial cycle as much as previously…One tool other central banks have been using to help temper the financial cycle is the countercyclical capital buffer (CCyB)”

Negative interest rates, excess liquidity and retail deposits: banks’ reaction to unconventional monetary policy in the euro area ECB finds that negative rates actually do promote loan growth contrary to earlier findings. This partly to do with incorporating how banks manage their excess liquidity with the ECB

A heterogenous response to unconventional monetary policy The ECB’s unconventional monetary policy package implemented in February 2012 changed collateral requirements. The blog looks French corporate loans and finds that credit increased after the liquidity injection, exclusively driven by supply.

Those revenue-raising early central banks Argues that “banking history contains much wider experiences than a simplified money-raising argument implies”

The Risk of Returning to the Zero Lower Bound San Fran Fed writes “that there currently appears to be a low risk of the economy returning to the zero lower bound for at least the next several years.”. They use a bunch of yield curve models to determine probabilities (see chart at top of email)

Markets and Investing

Give Credit Where Credit Is Due: What Explains Corporate Bond Returns? AQR paper finds finds that options markets explain a great deal of credit returns. Two features of corporate bonds generate option exposure. The first is thata corporate bond is economically equivalent to a short put option on a firm’s assets. The second is that many corporate bonds include call provisions, which are basically options granted to the bond issuer.

The sound of many funds rebalancing Authors results suggest that it is possible to predict if stock Z will be affected by an ETF rebalancing cascade, but not how stock Z will be affected. In short, susceptibility to ETF rebalancing cascades predicts noise volatility.

Measuring euro area monetary policy [impact on rates markets] ECB uses tick data to analyse the market response around ECB decision days. They find the policy decision affects mostly the very short-end of the yield curve, the information conveyed in the press conference window when related to forward guidance affects intermediate maturities of the term structure news relating quantitative easing affects longer maturities. The ECB has also created Euro Area Monetary Policy Event Study Database (EAMPD)

Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures The ECB’s taskforce on crypto releases some of its findings. Some good background on the crypto markets and their  potential risks to financial stability.

A Greek Canary in a Global Goldmine Yanis Varoufakis argues that as the global mismatch between economic reality and financial returns grows, there is clear danger that, once again, Greece is foreshadowing a new phase of the global crisis. “When vultures grow fat on a corpse, they do not revive it.”

Can Financial Participants Improve Price Discovery and Efficiency in Multi-Settlement Markets with Trading Costs? Author finds that the introduction of financial traders in US electricity markets did improve its efficiency and lowered electricity costs.

Euro area sovereign risk spillovers before and after the ECB’s OMT announcement Event study finds that post OMT, spillovers to non-crisis, non-safe haven countries have disappeared.


There’s a revealing puzzle in the China tariffs Larry Summers argues that stock market gyrations are too large to just reflect the direct costs of import tariffs, but rather they reflect “a world where relations between the United States and China are largely conflictual  [which] could involve a breakdown of global supply chains, a, greatly increased defense expenditures and conceivably even military conflict.”

Trade Hardball: China Threatens to Cut Off US Supply of Rare Earth Elements China produces 80% of the world’s rare earth elements. They are used in weapons, cell phones, hybrid cars, and magnets.

US: We’ll Pay Countries to Ditch Russian, Chinese Arms  The U.S. State Department wants to expand a little-known effort that offers countries cash to buy American-made weapons if they give up Russian-made arms.

The recent political revolution is a major shift toward the right Tyler Cowen argues that a common element in recent right-wing electoral victories is an anti-China stance.

Don’t relax about nuclear war Tyler Cowen warns about nuclear war

National politics

Did Changes in Economic Expectations Foreshadow Swings in the 2018 Elections? Yes according to NY Fed (or you can read 1800 words before they tell you)

Europe and the class cleavage On anti-EU sentiment of the less well-off,Thomas Piketty notes that while “according to those who are better off, the working classes are nationalist and xenophobic” the “simpler explanation is that the EU is based on widespread competition between countries, [and] favours the most mobile economic actors and functions objectively to the benefit of the most privileged.”

Can Ramaphosa Do It? Former deputy director-general of South Africa’s National Treasury gives the laundry list of issues South Africa faces including “South Africa’s biggest challenge is restoring its vertically integrated electricity monopoly, Eskom, to financial health”

How Has Germany’s Economy Been Affected by the Recent Surge in Immigration? NY finds per capita income growth has held up and unemployment has declined after the two waves of recent immigrations (2011 from EU and 2015 from Syria)

The Economics Discipline

75 Top Economics Influencers to Follow The top twitter economists includes Paul Krugman, Nate Silver and Nouriel Robini and 72 others!

Ice Cream Economics Apparently, the ultra-premium segment of the ice cream market reflects six economic issues including government regulation, trade-offs and a monopolistically competitive market structure

This economics journal only publishes results that are no big deal Its first paper, published Tuesday, is about an education intervention that was found to have no effects at all on anything. [Great  idea to over publication bias]

The Science of Using Science: Towards an Understanding of the Threats to Scaling Experiments Provides a framework for policymakers to know whether scaling up economic experiments will work

The bad news about nudges: They might be backfiring Do people see nudges as substitutes for larger, more effective policies? If so, they could backfire, undermining support for serious action.


The True Winners and Losers of Financial Regulation “the number of regulatory restrictions and mandates related to credit intermediation quadrupled between 1970 and 2010, from around 10,000 to just over 40,000.”. Blog argues that regulation is leading to consolidation in banking.

Fiduciary Duty and the Market for Financial Advice Looks at whether extending fiduciary duties to broker-dealers would help consumers. The paper uses state-level differences in the US (some states force broker-dealers to have those duties, others don’t) and finds that “extending fiduciary duty to broker-dealers causes their clients to purchase products with lower fees…broker-dealers steer customers towards products with a larger and more diverse set of investment options”

Public Sector

The Impact of CEOs in the Public Sector: Evidence from the English NHS The pay of CEOs of public hospitals vary widely, but there’s little evidence that the higher paid CEOs make much of a difference to hospital outcomes.


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