One estimate is that China has been spending about $400 billion to prop up stock and currency prices, but with no success. Might market-determined, flexible prices have some value today?
Cheng-chung Lai and Joshua Jr-Shiang Gau reiterate a well-known point about the 1930s:
It is often argued that the silver standard insulated the Chinese economy from the Great Depression that prevailed in the gold standard countries during the period 1929–1935. Using econometric testing and counterfactual simulations, this article shows that if China had been on the gold standard (or on the gold-exchange standard), the balance of trade of this semiclosed economy would have been ameliorated, but the general price level would have declined significantly. Due to limited statistics, two important variables (GDP and industrial production) are not included in the analysis, but the general argument that the silver standard was a lifeboat to the Chinese economy remains defensible.
China during the Great Depression remains very much an underexplored research topic. Here is Loren Brandt and Thomas Sargent on China later going off the silver standard. Here is Milton Friedman on the same (jstor). The Chinese were not able to sustain that peg either. So what should the smart money bet on today?
Here is Lars Christensen on the falling apart of the dollar bloc.
Economists are familiar with the use of monetary and fiscal policy to stimulate or restore nominal gdp, or other measures of aggregate demand if you prefer. But China faces a bigger dilemma. Part of its earlier pro-growth program overstimulated particular sectors of the economy, for instance construction and a variety of heavy duty state-owned enterprises. Not coincidentally, those are the same parts of the economy which have experienced excess capacity and decreasing returns.
The more specific dilemma is this: China’s main paths for boosting its nominal gdp path also tend to stimulate or re-stimulate these overextended sectors. Think for instance of pushing more credit through state-owned banks to favored state-owned firms. Or consider fiscal policy. At the margin that could mean municipal governments spending more on what they know best how to do, namely building more physical infrastructure.
Chinese stimulus, in the broad sense of that word, thus worsens previous Chinese malinvestments. China would like to stay on a smooth ngdp growth path, but they don’t know how to do this without overextending themselves in particular sectors all the more.
It is fine to call for “reform,” but there are two extra problems. First, most of the best reforms will lower ngdp in the short run and maybe even the medium run. Second, the ngdp crunch may be coming more quickly than reforms can be instantiated.
Over the next months, you will read many blog posts, from other economists, about China in an aggregate demand framework. Be wary of them if they do not appreciate this point.
Here are my earlier remarks from 2012.
Can you guess my answer to that question? But it does seem to be coming:
After decades of unregulated existence in all 50 states, the booming field of personal trainers is braced for a wave of scrutiny that is expected to transform the industry and could make or break some of the biggest fitness companies in the country.
The new regulations, being written by and for the nation’s capital city, will create a registry of all personal trainers in the District only. But they are expected to become a model that winners and losers in the fight believe will be replicated elsewhere.
The credit or blame, as you may care to describe it, goes to the Affordable Care Act:
A variety of workplace wellness programs and preventive health-care initiatives called for in the law could soon translate into rivers of billable hours for those with credentials to keep American waistlines in check.
And that means the race is on to be eligible for those credentials…
I believe the excess bureaucratization of the ACA is just beginning to show all of its implications…
The story is by Aaron C. Davis. And the article is sad throughout:
“We all have heard anecdotal reports of injuries, sexual misconduct and misrepresentation of titles by persons claiming to be competent in that area,” Simpson testified before a D.C. Council committee. She called the lack of any registration or licensure of personal trainers “a nationwide failure.”
Well, that is one “failure” we seem to be on the verge of remedying…
On the evidence of recent market developments, if tightening is a mistake, it’s a mistake the Fed already has made.
That is from Binyamin Appelbaum.
Quebec produces more than 70 percent of the world’s maple syrup and the Federation of Quebec Maple Syrup Producers is a cartel every bit as rapacious as OPEC or De Beers. The Federation is government backed and all producers must sell to them. From an excellent piece in the NYTimes:
After the spring harvest, farmers from around the province send their syrup to the federation.
…To keep prices high, the federation enforces strict quotas for the province’s 7,400 producers. Instead of flooding the market during years with bumper crops, all syrup produced beyond that amount is stored in the federation’s warehouse, which helps prop up prices by limiting supply. When seasons are lean, it releases the syrup, to maintain stable supply and pricing.
…When the federation suspects farmers are producing and selling outside the system, it posts guards on their properties. It seeks fines from producers and buyers who do not follow the rule. In the most extreme situations, it seizes production.
Addendum: The NYTimes video about rebel maple syrup producers is excellent.
Putting the immediate liquidity, debt, and asset price problems aside (ha), there is significant excess capacity on the real side of the economy. It will be very hard to fix this problem without letting significant numbers of SOEs go under. The central government fears the resulting unemployment, plus the SOEs are the Party’s power base. Yet the leaders know what must be done, and the SOEs have been reformed before. So the government is tightening the screws with more purges and censorship and power centralization, in part so they can do some SOE reform. The chance of this working is 30-70. One danger is that SOE reform leads to a loss of political stability. A second and more likely danger is that reform is incomplete and China ends up full of zombie companies and banks.
Nathan Smith has a very thoughtful speculative essay on that topic. Here is one interesting bit of many:
I would tentatively envision the US experience under open borders as resembling the British and Roman cases, inasmuch as the protocols and ideals of the US polity, as well as its merely ethnic characteristics, would persist in attenuated form, but governing a much larger population would necessitate improvisational and sometimes authoritarian expedients that would cumulatively transform the polity into something quite different, even as it claimed descent from the historic constitutional polity of the United States as we know it. The illusion of continuity would deceive the subjects of the new polity, native-born and immigrant, to a considerable extent, though on the other hand there would be a good deal of lamentation and triumphalism, and only after several generations would historians be able to look back and assess the bewildering transformation in a sober, balanced way.
Certain American ideals would die of their own increasing impracticality, e.g., “equality of opportunity,” the social safety net, one person, one vote, or non-discrimination in employment. Americans might continue to feel that these ideals were right long after they had ceased to be practiced, as the Romans seemed to feel that Rome ought to be governed by its Senate long after real governance had passed to the emperors. I don’t see how public schools could adapt to a far larger and more diverse student body.
I think the most wild-eyed predictions of the open borders optimists will come true, and to spare, but I think a lot of the forebodings of the grimmest open border pessimists will also prove more than justified.
The article is interesting throughout, do read the whole thing.
That is a new NBER paper from David J. Deming:
The slow growth of high-paying jobs in the U.S. since 2000 and rapid advances in computer technology have sparked fears that human labor will eventually be rendered obsolete. Yet while computers perform cognitive tasks of rapidly increasing complexity, simple human interaction has proven difficult to automate. In this paper, I show that the labor market increasingly rewards social skills. Since 1980, jobs with high social skill requirements have experienced greater relative growth throughout the wage distribution. Moreover, employment and wage growth has been strongest in jobs that require high levels of both cognitive skill and social skill. To understand these patterns, I develop a model of team production where workers “trade tasks” to exploit their comparative advantage. In the model, social skills reduce coordination costs, allowing workers to specialize and trade more efficiently. The model generates predictions about sorting and the relative returns to skill across occupations, which I test and confirm using data from the NLSY79. The female advantage in social skills may have played some role in the narrowing of gender gaps in labor market outcomes since 1980.
There is an ungated copy here.
Bowen and Casadevall have a new PNAS paper on this question:
The general public funds the vast majority of biomedical research and is also the major intended beneficiary of biomedical breakthroughs. We show that increasing research investments, resulting in an increasing knowledge base, have not yielded comparative gains in certain health outcomes over the last five decades. We demonstrate that monitoring scientific inputs, outputs, and outcomes can be used to estimate the productivity of the biomedical research enterprise and may be useful in assessing future reforms and policy changes. A wide variety of negative pressures on the scientific enterprise may be contributing to a relative slowing of biomedical therapeutic innovation. Slowed biomedical research outcomes have the potential to undermine confidence in science, with widespread implications for research funding and public health.
Carolyn Johnson summarizes the results of the paper:
Casadevall and graduate student Anthony Bowen used a pretty straightforward technique to try and answer the question. They compared the NIH budget, adjusted for inflation, with the number of new drugs approved by the Food and Drug Administration and the increases in life expectancy in the U.S. population over the same time period.
Those crude health measures didn’t keep pace with the research investment. Funding increased four-fold since 1965, but the number of drugs only doubled. Life expectancy increased steadily, by two months per year.
Johnson also covers some useful responses from the critics. The result also may say more about the NIH than about progress per se. And here is a more optimistic take from Allison Schraeger.
Martin Sandbu reports from the FT:
IMF research shows there is indeed more risk-sharing in federal countries such as the US and Germany. Eighty per cent of local economic fluctuations are smoothed in those countries, against 40 per cent between eurozone countries. In other words local consumption suffers only 20 per cent of any hit to local GDP (against 60 per cent for eurozone countries). Most of this smoothing, however, happens through private channels. Banks, credit markets and investments insulate disposable resources. Fiscal insurance, in contrast, only compensates for 15 per cent of local downturns in the US, and just 10 per cent in Germany. Daniel Gros has concluded that achieving US-style fiscal risk-sharing “would be of very limited usefulness” to absorb shocks in the eurozone.
The (gated) article is of interest more generally. I look forward to Sandbu’s new book, Europe’s Orphan: The Future of the Euro and the Politics of Debt, forthcoming from Princeton University Press this October.
One of the tragedies of Katrina was that so many of New Orleans’ residents were forced to move. But the severity of that tragedy is a function of where they were forced to move to. Was it somewhere on the Salt Lake City end of the continuum? Or was it a place like Fayetteville? The best answer we have is from the work of the sociologist Corina Graif, who tracked down the new addresses of seven hundred women displaced by Katrina—most of them lower-income and black. By virtually every measure, their new neighborhoods were better than the ones they had left behind in New Orleans. Median family income was forty-four hundred dollars higher. Ethnic diversity was greater. More people had jobs. Their exposure to “concentrated disadvantage”—an index that factors in several measures of poverty—fell by half a standard deviation.
That is from Malcolm Gladwell, interesting throughout.
At least at Northwestern University, the answer seems to be no. Figlio, Schapiro, and Soter report:
This study makes use of detailed student-level data from eight cohorts of first-year students at Northwestern University to investigate the relative effects of tenure track/tenured versus contingent faculty on student learning. We focus on classes taken during a student’s first term at Northwestern and employ an identification strategy in which we control for both student-level fixed effects and next-class-taken fixed effects to measure the degree to which contingent faculty contribute more or less to lasting student learning than do other faculty. We find consistent evidence that students learn relatively more from contingent faculty in their first-term courses. This result is driven by the fact that the bottom quarter of tenure track/tenured faculty (as indicted by our measure of teaching effectiveness) has lower “value added” than their contingent counterparts. Differences between contingent and tenure track/tenured faculty are present across a wide variety of subject areas and are particularly pronounced for Northwestern’s averages and less-qualified students.
Emphasis is added by me. I wonder how much of the problem is that the bottom quarter of the tenure track instructors are more likely not to have English as a first language?
The pointer is from Ben Southwood.
What is China’s Unemployment Rate? 4.1% For what month, what year? Doesn’t matter the answer is still 4.1%. That’s a slight exaggeration but for the last 3 years the unemployment rate has been 4.1% almost every month. Indeed, since 2002 the official unemployment rate has varied between 3.9% and 4.3%, an absurdly smooth series.
In contrast to the unemployment rate, China’s GDP growth rate has had massive swings. As a piece in Quartz puts it the unemployment rate exhibits an eerie stillness.
A new NBER working paper uses a newly available household survey and finds a very different series–the China-UHS series shown in black below. According to these estimates China’s unemployment rate shot up to around 11% in 2002 and has been nearly that high at least until 2009 when unfortunately the new series ends.
So how high is Chinese unemployment today? No one knows but it could well be closer to 10% than to 4.1%.
Keep an eye on China and don’t be surprised by the unexpected. In China it’s not just the unemployment rate that is more volatile than it appears.
Observers seem to focus on the target event and not its complement. Bagchi and Ince have a new paper on this question:
Consumers routinely rely on forecasters to make predictions about uncertain events (e.g., sporting contests, stock fluctuations). The authors demonstrate that when forecasts are higher versus lower (e.g., a 70% vs. 30% chance of team A winning a game) consumers infer that the forecaster is more confident in her prediction, has conducted more in-depth analyses, and is more trustworthy. The prediction is also judged as more accurate. This occurs because forecasts are evaluated based on how well they predict the target event occurring (team A winning). Higher forecasts indicate greater likelihood of the target event occurring, and signal a confident analyst, while lower forecasts indicate lower likelihood and lower confidence in the target event occurring. But because, with lower forecasts, consumers still focus on the target event (and not its complement), lower confidence in the target event occurring is erroneously interpreted as the forecaster being less confident in her overall prediction (instead of more confident in the complementary event occurring—team A losing). The authors identify boundary conditions, generalize to other prediction formats, and demonstrate consequences.
Of course this also has relevance for the evolutionary processes governing pundits.
Here is a related press release (pdf). For the pointer I thank Charles Klingman.
A few points on the Amazon story everyone is talking about:
1. First, if the story is somewhat true but exaggerated (a plausible scenario for something anecdotally based), the story may help Amazon with its current (but not prospective) employees. A lot of people suddenly are feeling better treated than the perceived average, and that may boost their morale and productivity. Yet they still feel the surrounding pressures to succeed. As a countervailing force, Amazon is now less of a high status place to work and that may lower productivity and also it may hurt recruiting.
2. Given the existence of a tax wedge, Amazon employees are perhaps treated better than they would be in an optimum. There is in general an inefficient substitution into non-pecuniary means of reimbursing workers because workplace income is taxed but workplace perks are not. So arguably Amazon is treating its workers too well. Think of this as another form of corporate tax arbitrage.
3. There is no right to an upper middle class lifestyle. And for a large number of people, getting one is not easy.