Current Affairs

Roughly 50% of Chinese savings – amounting to as much as half of GDP – lie in real estate alone, with 20% in deposits, 11% in stocks, and 12% in bonds. To compare, in the United States, real estate, insurance, and pensions each account for about 20% of total savings, with 7.4% in deposits, 21% in stocks, and 33% in bonds.

Rising stock-market capitalization also helps to reduce the real economy’s exposure to bank financing. The US is much more “financialized” than China, with stocks and bonds amounting to 133% and 205% of GDP, respectively, at the end of 2013. Those ratios were only 35% and 43%, respectively, in China. Meanwhile, China’s bank assets amounted to 215% of GDP – more than double America’s 95%.

That is from Sheng and Geng.

Chris Giles and Sam Fleming at the FT report:

Output per worker grew last year at its slowest rate since the millennium, with a slowdown evident in almost all regions, underscoring how the problem of lower productivity growth is now taking on global proportions.

The Conference Board, a think-tank, said that based on official data on output and employment from most countries, only India and sub-Saharan Africa enjoyed faster labour productivity growth last year.

Globally, the rate of growth decelerated to 2.1 per cent in 2014, compared with an annual average of 2.6 per cent between 1999 and 2006, it said.

…Bart van Ark, the Conference Board’s chief economist, said total factor productivity, which takes account of skill levels and investment as well as the number of workers, fell 0.2 per cent in 2014. “This is a global phenomenon and so we have to take it very seriously,” he said.

Economists are increasingly identifying the problem of low global productivity as one of the greatest threats to improved living standards, in rich and poor countries alike.

As you may know, I am on record as predicting that the great stagnation will end, but so far it doesn’t seem like it is happening.

That is the topic of his column today, I had not seen this very good point before:

One possibility is that the numbers are missing the reality, especially the benefits of new products and services. I get a lot of pleasure from technology that lets me watch streamed performances by my favorite musicians, but that doesn’t get counted in G.D.P. Still, new technology is supposed to serve businesses as well as consumers, and should be boosting the production of traditional as well as new goods. The big productivity gains of the period from 1995 to 2005 came largely in things like inventory control, and showed up as much or more in nontechnology businesses like retail as in high-technology industries themselves. Nothing like that is happening now.

Overall Krugman is agnostic on the stagnation argument.

John Nash, RIP

by on May 24, 2015 at 12:36 pm in Current Affairs, Economics | Permalink

John Nash and his wife died yesterday in a car accident.

CNN: Nash, who won the Nobel Prize for Economics in 1994, was known for his work in game theory, and his personal struggle with paranoid schizophrenia. His life story inspired the 2001 Oscar-winning film “A Beautiful Mind” starring Russell Crowe and Jennifer Connelly as the Nashes.

Nash’s 27 page dissertation would eventually win him a Nobel prize in economics. Nash’s dissertation extended von Neumann and Morgenstern’s theory of games from cooperative, bargaining-type solutions to non-cooperative solutions in which each player is assumed to act in their self-interest and in so doing made the theory tremendously more relevant to economics, business, political science, and even theories of animal behavior and evolution.

Here is further background on Nash’s work in game theory. Here is the PBS documentary A Beautiful Madness with lots of links to interviews and further explanations of his work and influence.

The recent terror attack in Karachi won’t help any, but still the news is looking up, from The FT:

The IMF has acknowledged that Pakistan averted a balance of payments crisis in 2013 and managed to stabilise its foreign reserves. This week Standard & Poor’s, the credit rating agency, raised the outlook for its B minus rating from stable to positive, while Moody’s last month raised its outlook to stable from negative — albeit for a Caa1 rating, which puts it one notch above Greece.

With liquid foreign reserves having grown almost fourfold in the past year to $12.5bn, a figure equivalent to about three months of imports, Mr Wathra has less cause for concern about the stability of the rupee than some of his predecessors.

The recent plunge in the price of crude has seen the cost of oil imports fall to $9.7bn in the nine months to March, down from just over $11.2bn a year earlier, according to central bank figures.

Falling oil prices have also helped lower the fiscal deficit to an expected 5 per cent of gross domestic product in the year to June, down from above 8 per cent just over two years ago. And the country’s GDP is forecast to grow by about 4 per cent this year, following a similar rise last year.

You may recall my earlier post on Pakistan being an undervalued economy, more here too.  It still is.

Since I’ve been in China, a number of you have written me and asked me how “conditions on the ground” are looking for a Chinese hard or soft landing.  But in fact visual inspection of the country does not answer this question in any simple way.

I recall being in Madrid in 2011 with Yana and seeing everything slow and all the people looking depressed; it was obvious that the country was in a deep recession.  But a comparable inference cannot be made from looking around China.

There is a visual feature of China which is incontestable, namely the country has a lot more buildings and structures than it is currently using.  If you take the train through the countryside, or out West, this is especially noticeable.  But does it have to be bad or fatal news?  Well, no.

At the very least it is possible that migration from the countryside will fill and validate those structures and other apparent over-extensions of capital investment.  Under both the optimistic and pessimistic views, China today evidences some extreme in-the-moment overcapacity.  That is what you would expect from a rapidly growing economy — “build for the glorious future!”, but it is also what you would expect from a rapidly malinvesting economy.

(By the way, those who have never visited often think that China is “crowded.”  But relative to facilities, the country is quite undercrowded; for instance it is easy enough to dispense with dinner reservations most of the time.)

How long will this excess capacity last?  How much time will the Chinese future need to “catch up” to this infrastructure?  Will that validation come too late?  We all may have opinions (or not), but the visuals themselves do not tell any specific tale.

So to a China pessimist and a China optimist, the world looks more or less the same.  For now.

I’m familiar with studies showing estimated economic gains from TPP in the neighborhood of $1.9 trillion (pdf).  Given the past performance of trade models, I am willing to believe that might be an overestimate.  So let’s cut those gains roughly in half to say a trillion.  (That said, if I understand the Peterson document correctly, they are not even trying to incorporate gains from reallocation on the production side, as might result from comparative advantage or dynamic specialization; in this sense $1 trillion may be a considerable underestimate of the upside.)

That is still a sizable sum of economic gain.

What would convince me to oppose TPP if is somebody did a study showing the following: when you use a better trade model, use better data, and/or add in the neglected costs of TPP (which are real), those gains go away and indeed become negative.

Then I would change my mind, or at least weigh those economic costs against possibly favorable geopolitical benefits from the deal.

What does not convince me is when people simply list various costs and outrages associated with TPP.  Furthermore if one of those problems with TPP is addressed, or partially addressed, often these commentators circle around to another possible problem.  In fact that response pattern is a sign the critics don’t themselves have a very good comprehensive estimate of global costs and benefits.  By the way, it also fails to convince me when the critics attack those who support TPP for being craven, superficial, lackeys, and so on.

I say let’s just have a two-way button and ask everyone to press it: do you believe that TPP would lead to a net gain in economic welfare or not?

If those costs and outrages associated with TPP are so bad, it ought to be possible to do a study which makes the trillion in benefits go away.  Has anyone done such a study?  Would such a study survive the commentary from the NBER annual macro conference?

I am not suggesting that economic welfare should be the only criterion for evaluating a policy.  But making everyone press this two-way button — and in the process citing their favorite comprehensive policy study of TPP – would do wonders to bring clarity to the debate.  Commentators still would have the liberty of accepting the reality of the economic gains while disfavoring the policy, as indeed I do with forced kidney extraction and transplant.

In the meantime, the more desultory lists I see of possible negative consequences of TPP, the more likely I am to think it is a good idea after all.

Has it been so bad?  For us?  For them?  How many of us had even noticed?

Here are some information (pdf), and here (pdf), I thank Matthew Vogel for reminding me of this.

Here is my previous post on ISDS and TPP.  Here is a good CRS brief on previous trade agreements with Vietnam.

Adding the ‘errors and omissions’ deficit to recorded net hot money outflows gives an aggregate estimate of overall hot outflows or capital flight from the mainland. By construction, this slumped to a record $209.5bn ($838bn annualised) or an eye-watering 9¼% of GDP (Chart 2). Overall, in the year to Q1, China has seen capital flight of $584bn or 5.6% of GDP.

That is from Richard Iley, cited by David Keohane at the FT.

By the way, here is the response of the Chinese government:

China has again ruled out the possibility of massive capital outflow, saying an overwhelming majority of foreign companies that pulled out their investments in the country were shell firms, The Beijing News reported on Wednesday.

The average investment scale of those firms is relatively small, and 20 percent of them entered China less than five years ago, said the newspaper citing Tang Wenhong, head of the Department of Foreign Investment Administration of the Commerce Ministry.

Judge for yourself…a better response would have been “this outflow is a natural process of investment diversification, as China liberalizes its capital markets gradually over time.”  That doesn’t account for everything that is going on, but at least it makes potential sense.

By the way, if you ask some Chinese about India, they will mention Buddhism and people riding on the top of trains.

 Truckmaker Freightliner’s newest commercial big rig can steer and drive itself, while the driver relaxes and enjoys the ride. No, I’m not talking about Autobot Ultra Magnus. It’s the Freightliner Inspiration Truck, the first ever self-driving commercial truck to receive a road license plate for autonomous operation on public highways.

The system, called Highway Pilot, operates like the autopilot on a commercial airliner. Once set and underway the system can maintain a cruise without the driver’s intervention. Highway Pilot uses stereoscopic cameras located at the front end of the truck that watch the road ahead for roadside signage, lane markers and other vehicles.

This 3D imagery is fed into the Inspiration Truck’s electronic brain, which then affects the electric steering rack, the drive-by-wire throttle and the automated manual transmission to keep the truck between the lines and a safe distance behind a leading vehicle.

It is not yet a fully autonomous vehicle:

Speaking of the human element, the Inspiration Truck still requires that a driver be in its driver’s seat. A person needs to get the truck moving from a stop, handle complex low-speed maneuvers and to monitor autonomous drive.

Freightliner tells us that the system will notify the driver with visual and audible cues in the event that conditions won’t allow confident autonomy (such as snow, rain or on roads with poorly defined lane markers) and a human is needed to take over. When driving conditions are optimal, however, and the road stretches out ahead, the Inspiration Truck’s driver can set the Highway Pilot and tend to other parts of the business of logistics.

There is more here.

What if, circa 2007, the Fed had figured out what was going on and wanted to take some concentrated steps to save the day?  Well, that is the position China is in today, and they are acting fairly decisively:

China is imposing a $160bn municipal bonds for debt swap on banks in an effort to shift some of the financing costs of cash-strapped local governments back to lenders…

Banks are supposed to swap out higher-yielding business loans in return for more municipal bonds, noting that banks owned about 63 percent of the outstanding municipal bonds to begin with.  As a form of compensation, the central bank will accept these municipal securities as collateral for some of its special lending facilities.  The policy is a mix of jawboning and inducement, in which exact proportions we shall see; there is further coverage here.

You can think of it as “we may expect you banks to share in some of the losses on this paper, but if push comes to shove we’ll just monetize the municipal debt and bail you out too.”

You may recall:

Rating agency Standard & Poor’s late last year estimated that half of all Chinese provinces would merit junk ratings…

These (non-transparent) municipal debts may exceed $3 trillion. And Christopher Balding, in his excellent post on all this, makes a very good point:

Especially with land revenue falling by more than 30% annually when it typically constitutes more than 50% of government revenue, the provinces’ ability to repay is highly suspect.

Some goals of the bailout are to keep the local governments up and running, and also building infrastructure, so that urbanization does not slow down.  This is all being done in conjunction with a series of interest rate cuts, and there is likely yet more to come.

Balding adds this as well:

…the banks, after getting cash for the bonds as collateral from the PBOC, are being encouraged to lend out this cash to firms in favored industries.  Given the drop in risk weighted capital from holding government as an additional benefit, this means that banks will have significant new capital to lend.  The rapid rise in Chinese debt, which has even officially surpassed most developed countries, seems bound to rise even more.  I can’t [help but] think that this seems like trying to sober up an alcoholic by buying him a beer.

…Here is hoping that deposit insurance will never be needed.

It will be very interesting to see how this goes, and so far these events remain a dramatically undercovered story.  My net takeaway, to date, is that the finances of the provincial governments must be worse than most observers had thought.

My research convinced me that bounty hunters were an effective part of the American justice system so I have long favored using large bounties to find international terrorists. In 2008 the Washington Post argued that Bounties were a Bust in Hunt for Al-Qaeda:

So far, however, Rewards for Justice has failed to put a dent in al-Qaeda’s central command. Offers of $25 million each for al-Qaeda founders Osama bin Laden and Ayman al-Zawahiri have attracted hundreds of anonymous calls but no reliable leads, officials familiar with the program say. For a time, the program was generating so little useful information that in Pakistan, where most al-Qaeda chiefs are believed to be hiding, it was largely abandoned.

“It’s certainly been ineffective,” said Robert L. Grenier, a former CIA station chief in Pakistan and former director of the agency’s counterterrorism center. “It hasn’t produced results, and it hasn’t particularly produced leads.”

I wasn’t impressed with that argument at the time and now Seymour Hersh says it wasn’t torture or the billions spent spying on the world that led to bin Laden’s discovery but a bounty:

…the CIA did not learn of bin Laden’s whereabouts by tracking his couriers, as the White House has claimed since May 2011, but from a former senior Pakistani intelligence officer who betrayed the secret in return for much of the $25 million reward offered by the US…

I can’t evaluate Hersh’s larger claims but I find this part of the story plausible.

 Addendum: The time I went bounty hunting in Baltimore.

Via Jasper Plan, Jonathan K. Pedde has a new paper on this:

Standard zero-lower-bound New Keynesian models generate large fiscal multipliers and expansionary negative supply shocks. Thus, according to these models, a political party that implements fiscal contraction coupled with policies to increase aggregate supply should unambiguously cause economic contraction, compared to a party that implements the opposite policies. I test this prediction using high-frequency prediction- and financial-market data from the night of the 2015 U.K. election, which featured two such parties. By analysing financial-market movements caused by clearly exogenous changes in expectations about the election winner, I find that market participants expected higher equity prices and a stronger exchange rate under a Conservative Prime Minister than under a Labour P.M. There were little to no partisan differences in interest rates, expected inflation, or commodity prices. These results cast doubt on the empirical validity of zero-lower-bound New Keynesian models.

And here is Noah on the UK, he is right, and I call this one pretty much settled.

On Sunday the Chinese central bank cut interest rates for the third time since November.  I have read a number of pieces on this move, but overall am a little disquieted at how quickly people are comparing China to the Keynesian vision of the United States or for that matter Japan.  I would stress a few points:

1. Many of China’s municipal governments are broke or close to broke, and in the meantime too heavily dependent on land sales and land leases for revenue.  Lower rates are intended to help them refinance themselves.  That is not opposed to a Keynesian or AD framework, but it is distinct from it.

2. The Chinese government is at the same time relaxing controls over deposit interest rates, so some interest rates in the economy will be going up.  In other words, part of the problem is figuring out the optimal speed for removing financial repression, and in the process allowing to “shadow banking bubble” to deflate at an appropriate speed, all the while trying to keep deposits in the formal banking system.

2b. A lot of borrowers are paying effective nominal rates of six to seven percent — don’t you wish we had a better understanding of the true rate of price inflation in China?  One policy goal is to get more loans to these businesses, but there the very real jawboning of the Chinese government may prove more effective than the interest rate cuts.  But should those businesses get more loans?

3. In an Austro-Chinese, excess capacity model of the business cycle, there is a gain and a loss from cutting interest rates when an economy is well into the over-expansion phase.  The gain is that you may mitigate the costs of the “secondary deflation,” as the Austrians call it.  The cost is that you may overextend the excess capacity even further.  That is a call the central bank must make, noting that the excess capacity model applies only with some probability.

4. “China’s imports also plunged 16.2 percent in April from a year earlier, a fall that economists attributed partly to low commodity prices and partly to weak demand within China’s economy.”  I doubt if they are growing at a true seven percent, or even a “slightly below seven percent” figure.

5. For well over thirty years, the Chinese economy has lived in a world where both the AD and AS curves swing rather wildly (in a good way) outwards and to the right.  Some of this is driven by migration to the cities, some of it is driven by trickle-down growth and the adoption of foreign technologies.  Some of it may be driven by China’s own TFP, and for sure some of it is driven by policy reform.  In any case, as long as that process continues, China is semi-immune to the standard Keynesian dilemmas — who needs to lower nominal wages when worker productivity and customer demand are rising so quickly?  But does that ongoing outward real expansion it render them immune to Austro-Chinese business cycle theory as well?  Sadly, Hayek never seems to have considered that problem, but it’s very much on my mind out here in Shaanxi.

Bryan Caplan considers this question in a very useful blog post.  He serves up these hypotheses, though I think without committing to any particular one of them:

1. Despite their rarity and absence on the front lines of politics, self-conscious libertarians still strongly shape mainstream conservative politicians’ economic policies.

2. Self-conscious libertarians, though rare, have still managed to sharply shift public opinion in a libertarian direction.

3. Self-conscious libertarians, though politically impotent, are a symbol of what’s wrong with American politics.

And then there are the stories the critics won’t embrace, but perhaps they’re true nonetheless…

4. Libertarians, unlike mainstream conservatives, openly defend many unpopular views.  Intellectuals who want to loudly champion popular views have to engage libertarians because there’s hardly anyone else to argue with.

5. Libertarian arguments, though mistaken, are consistently clever enough to get under the critics’ skin.  The purpose of the criticism is not shielding the world from bad ideas but giving the critics some intellectual catharsis.

6. Libertarian arguments are good enough to weigh on the critics’ intellectual consciences.  They attack libertarians to convince themselves that we’re wrong.  And they keep attacking us because they keep failing to fully convince themselves.

But I see more options.  Consider a simple model where bureaucracies maximize output, and try to produce correct output.  In my view, the more mainstream thinkers criticize libertarians so much because a) it helps them generate output, and b) they think they have the better arguments.   There is a clear target, easily explained (not always correctly explained, however), and very often the target can be taken on with a minimum of detailed empirical investigation.  Furthermore the arguments against the libertarian often position the critic in a favorable ideological space, especially for left-wingers: “look, there are people who believe this, better come ally with me!”

If we are talking about “The Left,” the libertarian is about the most welcome intellectual opponent there is.  The real scourge, correctly or not, is the common sense morality of the center.  That’s right, the people who favor and distrust big government at the same time, the people who think the poor deserve welfare support but only so much, the people who distrust intellectual elites and cosmopolitanism, the people who side with police more than they ought to, and yes the people who think Medicare is more based on just deserts than is Medicaid.

That set of views does not describe me well, but the funny thing is — unlike with both far left and libertarian ideas — we do in fact know you can build a workable polity from them.  The libertarians are so much more of a tempting opponent.