Today’s wrap-up leans a bit more towards the evolving structure of economies. It seems households are investing lots in R&D (but it is not measured), there is a difference between the 1% and the 0.1% and how collective wage bargaining impacts Italy differently to Germany. Elsewhere there’s a good article on how the US trade deficit is more due to global forces than US ones, while another argues that US inflation is caused by the US factors and not global ones. For markets, we have a good piece on how CoCos needs to be changed, the Fed argues the secular stagnation is holding global rates lower, and how real estate funds distort housing markets. Finally, I have a bunch of articles on politics including good overviews of Trump and Bernie Sanders chances for the 2020 election, an upcoming mass student strike (on climate change) and a former UK diplomat’s view on Brexit. Enjoy.
ECONOMY and TECH
The “Biggest Puzzle in Economics”: Why the “Superstar Economy” Lacks Any Actual Superstars A new study finds that the contribution of superstar firms to US productivity growth has decreased by over 40 percent over the past 20 years. [punchy paper argues that US superstar firms are not so special, but are special in that they pay lower taxes and that the real problem is the lack of competition, which ironically Europe is better at]
Household Innovation, R&D, and New Measures of Intangible Capital Interesting paper that argues that some of household consumption should actually be classified as R&D investment. They estimate that it could be as high as half the size of producers’ R&D investment.
Automation Is Coming for the Oil Jobs, Too “This is not an issue unique to energy by any means. We are all talking about how do we repurpose our workforce to optimize what we have available with digital technology.”
U.S. companies put record number of robots to work in 2018 U.S. companies installed more robots last year than ever before, as cheaper and more flexible machines put them within reach of businesses of all sizes and in more corners of the economy beyond their traditional foothold in car plants.
Artificial Intelligence: The Ambiguous Labor Market Impact of Automating Prediction Good guide to understanding how AI can increase or reduce labour demand
LABOUR MARKET and EARNINGS
The 1% vs The 0.1% Someone at the bottom of the top percentile of incomes is on about £120,000 a year. The top 0.1%, however, gets over £500,000. A very well-paid head-teacher, professor or NHS consultant might just get into the top 1%, but the top 0.1% comprises bankers, very successful entrepreneurs or bosses of big firms.
The Effects of Income Transparency on Well-Being Evidence from a Natural Experiment In 2001, Norwegian tax records became easily accessible online, allowing everyone in the country to observe the incomes of everyone else [you can snoop on your neighbours and friends incomes!]. New research finds that he made poorer people feel unhappier and richer people feel happier – thereby widening the happiness gap compared to before.
Coping with volatile labor markets There are high costs to not optimally adjusting government policy to deal with earnings volatility [Minneapolis Fed blog argues cost of governments doing nothing in face of this volatility is large drop in consumption]
We need stronger trade unions and corporate accountability. “Currently, in low-end supply chains, our companies scour the world for the lowest possible costs. They profit from labor repression and bear no liability for ensuing abuses (such as Rana Plaza). Without corporate accountability, we have corporate impunity.”
Wage Equalization and Regional Misallocation: Evidence from Italian and German Provinces Paper shows that Italian collective bargaining happens at the national level, while Germany’s happens more locally. This results in costly geographic imbalances where Italian companies cannot lower wages in low-productivity regions of the country.
Bernie Sanders sends a warning to 2020 rivals with rollicking weekend rallies “Sanders’ vow to uproot and discard the private health insurance industry and deliver a single-payer system still drew the loudest applause from an already spirited crowd.”
Why Donald Trump could win again, by Dave Eggers “nothing was more unexpected than the startling diversity of the crowd that came out [for Trump’s El Paso rally]”
Image of U.S. Leadership Now Poorer Than China’s The median global approval rating that adults across 133 countries and areas give the job performance of U.S. leadership remained stable at 31% in 2018…China is at 34%, Germany is at 39% and Russia is catching up with 30% approval.
There’s been a mysterious surge in $100 bills in circulation, possibly linked to global corruption “There’s certainly enough evidence to say it is an enabler of corruption, but it is also a way for people to keep assets outside of the financial system”
REST OF WORLD POLITICS
“What Surprises Me Is the Extent of the Mess” As the UK ambassador to the European Union, Ivan Rogers had a front-row seat as Brexit negotiations got underway. In an interview, he speaks with DER SPIEGEL about the mistakes made in London and the huge challenges that remain.
Youth climate strikers: ‘We are going to change the fate of humanity’ “The Youth Strikes for Climate movement is not centrally organized, so keeping track of the fast-growing number of strikes is difficult, but many are registering on FridaysForFuture.org. So far, there are almost 500 events listed to take place on March 15 across 51 countries, making it the biggest strike day so far. “
France, inequality, and the social elevator OECD argues that the ‘yellow vest’ are also rooted in the France’s broken social elevator. Redistribution through taxes and social transfers is not sufficient to curb the inequality in opportunity, which is mostly linked to the educational system and perpetuates economic and social situations from one generation to the next.
Portugal has found an antidote to right wing populism Considering the booming economy, dropping unemployment numbers and the return of many once-emigrated young Portuguese citizens, it seems Portugal is on the rise. Facing the policies of socialist Prime Minister António Costa, which include properly supporting the welfare state and investing in the public sector instead of austerity measures, right wing populists don’t stand a chance.
The Sensitivity of Long-Term Interest Rates: A Tale of Two Frequencies NY Fed paper finds that since 2000, long- and short-term rates co-move to a surprising extent at high frequencies but they co-move far less at lower frequencies (over six months or a year). This would mean that “ some of the impact of a news shock on long-term rates tends to wear off quickly, then a shock’s short- and long-run impact will be quite different. “ [This would also mean that we need to be careful interpreting short-term changes in 10y yields]
The Deep Vault of Millennial Fintech Apps Savings, investment, and credit card debt services are increasingly marketing to younger users. But they might be useless—or even predatory.
The agency of CoCos: Why contingent convertible bonds aren’t for everyone Authors find banks with lower risk are more likely to issue CoCos compared to their riskier counterparts. In line with Basel III, banks are expected to raise equity prior to CoCo conversion, which makes the bonds an expensive source of capital. The design of CoCos should be revised if they are to enjoy equity-like treatment.
The noise in stock prices matters for the real economy Study finds that corporate managers reduce investment even when stock prices declines are non-fundamentally driven (eg mutual fund fire sales)
Do Real Estate Markets Make Our Cities Less Livable? Industrial capital has looked towards city planners to make land cheaper and housing more affordable, because they want to pay their workers less, and if housing is cheaper, then there are fewer pressures to raise wages… The opposite is true of real estate capital. Real estate capital wants to see ever-rising land and property values. It wants to see less affordable housing because housing is their primary commodity. Of all the money that’s invested in real estate in the world, three quarters of it is invested in housing. That’s a real conflict between different kinds of capitalists. [great interview of author of new book on this little discussed area of housing]
Global Trends in Interest Rates NY Fed: “Long-term government bond yields are at their lowest levels of the past 150 years in advanced economies. In this blog post, we argue that this low-interest-rate environment reflects secular global forces that have lowered real interest rates by about two percentage points over the past forty years.” [ good selection of charts]
Should the United States Run a Trade Surplus? By Michael Pettis Although standard trade theory predicts that highly advanced economies with sophisticated financial sectors, like the United States, should generally run trade surpluses, the country has run persistent, and often large, trade deficits for five decades. This can only be a consequence of significant global economic distortions. [very good article – essentially arguing that the rest of the world’s excessive savings is causing the US’s deficit]
Trade war results in substantial losses for US and other countries US experienced $12.3 billion in added tax costs in 2018 [Summary of Fed paper that finds that trade benefit was less than cost to consumers]
The Return to Protectionism Another paper finds: “US tariffs favored sectors located in politically competitive counties, suggesting an ex ante rationale for the tariffs, but retaliatory tariffs offset the benefits to these counties. Tradeable-sector workers in heavily Republican counties are the most negatively affected by the trade war.”
MONETARY and FISCAL POLICY
MMT streetfighting Links to recent articles debating MMT!
Modern Monetary Nonsense by Ken Rogoff A number of leading progressive US politicians advocate using the Federal Reserve’s balance sheet to fund expansive new government programs. Although their arguments have a grain of truth, they also rest on some fundamental misconceptions, and could have unpredictable and potentially serious consequences…. Contrary to widespread opinion, the US central bank is not an independent financial entity: the government owns it lock, stock, and barrel. [Rogoff lets rip]
Former Fed Chair Janet Yellen: Far from retired, nowhere near done Interview with Yellen includes ““I doubt that he [Trump] would even be able to say that the Fed’s goals are maximum employment and price stability, which is the goals that Congress have assigned to the Fed,”
Global factors don’t determine US inflation “Slack doesn’t explain inflation, indeed the US had more slack in 1981 when inflation was 10% than it does today with 2% inflation. Inflation is determined by monetary policy.”
Happy Fed Independence Day NPR podcast: “In the years before 1951, the Federal Reserve took orders from the Treasury, and by extension, from the President. The President would request that interest rates remain low, and the Fed would oblige…”
FISCAL and CREDIT POLICY
Slow recoveries through fiscal austerity “European austerity affect the decision to adopt new technologies and can have negative consequences for productivity and growth in the medium run. Thus, low technology adoption due to fiscal austerity can lead to slow recoveries”.
How Effective is Macroprudential Policy? Evidence from Lending Restriction Measures in EU Countries IMF finds macro pru policies like LTV ceilings do work but their peak effect is three years later.
Consumer Law Myopia People make mistakes with debt, partly because the chance to buy now and pay later tempts them to do things that are not in their long-term interest. Lenders sell credit products that exploit this vulnerability…critiques of these products ignore what the borrowed funds are used for…. the same bias that causes someone to take an exploitative loan may also imply that the loan benefits them by causing them to purchase a product or service that they should, but wouldn’t otherwise, buy. [interesting nuance on exploitative loans]
Universal basic income in the developing world Good summary of current UBI pilots. They find several principles need to be followed for it to work (eg keep it simple, introduce some hassle factor to deter the wealthy from claiming UBI etc)
The End of Economics? (Fareed Zakaria) “Recent events have hammered still more nails into the coffin of traditional economics. If the great divide of 20th-century politics was over free markets, the key splits that have emerged in the past few years involve immigration, race, religion, gender, and a whole set of related cultural and identity issues.”
The Best Books on Capitalism and Human Nature by Robert Shiller Includes Rajan’s “Fault Lines”, Thaler’s “Nudge” and Hirschman’s “The Passions and the Interests”
Some Recommended Econometrics Reading for March Includes “Lag length selection and p-hacking in Granger causality testing: prevalence and performance of meta-regression models (2019)“, “Bootstrap methods in econometrics (2018)”, “Structural breaks in time series (2018)”
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