Finance and Econ From the Web: Night lights measure growth, why are rates so low, are bankers liberals or conservatives….

I thought I’d have a separate “Best Of the Web” devoted to economics and finance. Below I’ve found 30 articles and academic papers on macro and finance. Some are easy reads and others are denser, but I’ve summarised each one. Oh, if you come across anything interesting that I’ve  missed, then flag it to me and I’ll include it in my next list.  Enjoy!

North and South Korea at night , 1992 vs 2008

GROWTH (9)

Illuminating GDP (blog) and How Much Should We Trust the Dictator’s GDP Estimates? (paper). Excellent essay and academic paper on using satellite images of night-time lights to estimate actual GDP growth vs reported GDP growth. They find that autocratic regimes tend to overstate GDP growth by 15% to 30%. The work suggests that Chinese growth from 1992 to 2006 may have been 7.4% rather than 9.4%. Also, there’s a pretty cool picture of North vs South Korea (see above) over time.

Stiglitz, Summers, Secular Stagnation, and the Supply Side John Taylor of “the Taylor Rule” fame jumps into the secular stagnation debate between Larry Summers and Joe Stiglitz. Taylor argues that fiscal policy would not have led to a faster recovery after 2008, but rather supply-side policies such as tax reform, reg reform and budget reform would have made a difference. He argues that these reforms have been seen since President Trump’s election and the economy is “beginning to roar”.

Yes, Government Creates Wealth Runs through the history of economic thought on the role of the government from Adam Smith to Marx to Keynes. Argues that the government doesn’t just produce public goods, like rule of law and security, but also produces public value, which includes creating demand during recessions, creating break-through technologies and building infrastructure.

The Economic Impact of Universities: Evidence from Across the Globe (paper)  University academics find that a 10% increase in a region’s universities per capita increases GDP per capita by 0.4%. I’m guessing this paper will easily get published. This piece on China finds a similar result for China, though argues that intra-China migration restrictions has hampered the impact on national growth.

Why Growth Can’t Be Green A core plank of the UN’s Sustainable Development goals is the decoupling of GDP from resource use. On the current trajectory, our consumption of natural resources (including fish, livestock, metals and commodities) will increase from 70 billion metric tons per year to 180 billion by 2050. A new study finds that if we were to adopt the most efficient resource use in every category, our resource use would still increase, albeit more slowly to 93 billion metric tons. Similar results were found by adding taxes on resource use.  The authors argue that the pursuit of growth necessarily means  more resources.

Will Demographic Headwinds Hobble China’s Economy? NY Fed tentatively says yes (kind of). The demographic dividend is behind us and now urbanisation and fiscal policy will be critical.

WAGES and INFLATION (9)

Why central banks should not be inflation nutters These academics find that there are larger welfare costs if central banks put a larger weight on inflation than economic activity when inflation expectations are well anchored and/or labour markets are inefficient.

Forget universal basic income. We need universal basic mobility. Convincingly argues that achieving universal mobility is more achievable than UBI. Essentially, an underclass has developed around those that need to spend a large amount of time getting to and from work.

Ten years after the start of the great recession, middle-class incomes are only just catching up. New US income data finds that real household income for middle-class households did go up in 2017 –  the third year in a row. But real wages have fallen, which means households are working more hours to get an increase in income. Over a longer time-frame, the median household has not seen an increase in real income since 2007. This other piece also makes a case that we need to look at different measures of inflation for each household segment, which would make look inequality worse.  Here’s an interesting piece on the wages of McDonalds workers across the US (it varies a lot!).

A Wealthless Recovery? Asset Ownership and the Uneven Recovery from the Great Recession This Fed paper finds that the type of wealth held by different segments of the population had a big impact on their participation in the recovery. The bottom 30% of the population has more wealth tied to housing than equities and other assets and also their home-ownership rate fell since 2007.

Wider Labor Market Slack Implies Lower Rates A Moody’s report that argues the prime non-employment rate – the share of 25054 who don’t have a job – does a better job explaining wage growth than the unemployment. Using this wider measure of slack suggests that Fed policy rates should be between 0.5% to 1.5% lower than the current rate of 1.75%-2%.

Doubts about wage-led growth. A pessimistic view that higher wages lead to higher productivity.

ALICE: A new inflation monitoring tool The ECB has developed some new leading indicators for Euro-area headline and core inflation. They lead turns in the inflation cycle by between 3 to 9 months. However, they don’t perform better than ECB projections (hmm).

TRADE (4)

How much would the iPhone cost if it were made in America? Fascinating read on what it would mean to make I-Phones in the US rather than China. Argues that the main benefit of China is not just lower labour costs, but also the quantity of skills. Simply bringing everything onshore to the US would require building up a skilled labour force that hasn’t existed for decades in the US. One way around this would be to assemble the I-Phone in the US while sourcing everything from the rest of the world – that would likely increase the cost of an I-Phone by $8, but sourcing American parts would increase it by $100. The other point is that China only makes $8.46 on each I-Phone, which is fraction of the $240 factory cost that gets recorded as a US import.

The Global Trade System Could Break Down  Former World Bank and IMF big shot Anne Krueger writes about many of the non-tariff benefits of the WTO, such as equal treatment of international and domestic firms. She writes that President Trump has been blocking nominees to replace arbitration judges on the WTO’s dispute-settlement mechanism (DSM). This could prevent appeals from being heard and allow countries to easily violate WTO rules.

Can Trade Agreements Be a Friend to Labor? Dani Rodrik argues for the inclusion of labour standards in trade agreements.

Using Benford’s Law to detect tax fraud in international trade Clever use of a technique that looks at how import data should follow a certain distribution of numbers for each import. They find evidence tax evasion in imports for some countries,

FINANCE (7)

Systemic Banking Crises Revisited (paper) I remember using this IMF crisis database back in 2008, when we all scrambling around for precedents. The IMF update their database up to 2017 with crisis dates, policy responses and costs. They find new evidence that crises in high-income countries tend to last longer and be associated with higher output losses than crises in low- or middle-income countries.

Ratings and Asset Allocation: An Experimental Analysis (paper) Finds that investors tend to make sub-optimal investment decisions when presented with ratings across non-comparable categories of investments eg (3-star, 2-star etc) rather than just financial data (average returns, sharpe ratios).

The Subsidy to Infrastructure as an Asset Class (paper) Despite having access to the same infrastructure deals, public pension funds underperform private institutional investors. The authors argue that this implies the public funds provide a subsidy to private investors.

Global Trends in Interest Rates (paper) The NY Fed conducts some analysis on global rates going back to 1870.  They find that up to the 1970s global real yields hovered around 2%-2.5% but have since trended down to close to 0.5%. Much of this is driven by the US as markets have become more integrated. It appears the various crises of the 1990s (Asia, Russia, LTCM) resulted in an increase in demand for safe assets which the 2008 crisis accelerated. Demographic shifts may also have contributed to lower rates.

The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates (paper) Good paper that uses the full yield curve to capture unconventional monetary policy effects on FX. They find that while the initial effects of conventional and unconventional policy moves are similar, the subsequent moves are more varied.

Non-Monetary News in Central Bank Communication (paper) Clever look at the co-movement of stocks and bonds around key central bank announcements. Finds that a significant amount of non-monetary news is imparted at central bank meetings. The paper also has a good database on key non-conventional CB meetings and events.

An intermediation-based model of exchange rates (paper) This BIS paper builds a framework that includes brokers/intermediaries in their model. These brokers charge fees/mark-up for investors to access foreign markets/exchange rates. This introduction can help explain why certain currencies become safe-havens and why covered interest parity (or the cross-currency basis widens) can breakdown.

AND FINALLY:

Occupations and their ideologies from political scientist Adam Bonica. In the US, lawyers, teachers and musicians are liberal and truckers, dentists and builders are conservative. Within finance, hedge funds are most liberal, while insurance is most conservative.

Bilal

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