Category: Current Affairs
China errors and omissions of the day
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.
Self-driving truck receives license in Nevada, hi future!
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.
The Chinese bailout has started
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.”
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.
Bounties for bin Laden
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.
An event study of the recent UK election
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.
China’s third interest rate cut and how to think about it
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.
Why is libertarianism such a target?
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.
Will Scotland leave the Union?
I thought so at first, upon seeing the election results with strong SNP dominance. But upon further consideration, I’ve changed my mind. Here’s why:
1. A ruling British government simply doesn’t have to allow another referendum. Or they can time a referendum in a favorable manner, or insist on more favorable conditions the next time around, such as allowing Scots who live in England to vote.
2. Independence advocates realize that if a referendum fails a second time around, they will never get a third chance. So they will hesitate before moving forward again.
3. Holding 56 out of 59 seats is a pretty sweet lock for SNP. There will be a temptation to settle for the current form of electoral competition, rather than face a newly competitive Scottish national politics, or face being the backers of another failed referendum.
4. For many Scots, voting for SNP may be a substitute for independence (“we want to be as Scottish as possible, except…and who better to safeguard that Scots heritage politically?”) rather than a path toward independence. SNP itself stressed that a vote for SNP was not a vote for independence, and every now and then, believe it or not, political parties should be taken at their word.
Arguably Brexit could prompt a quick and strong desire to secede, but otherwise I am betting on the Union to continue.
Poker Bot Battles Humans to a Draw
NBC: A poker showdown between professional players and an artificial intelligence program has ended with a slim victory for the humans — so slim, in fact, that the scientists running the show said it’s effectively a tie .The event began two weeks ago, as the four pros — Bjorn Li, Doug Polk, Dong Kim and Jason Les — settled down at Rivers Casino in Pittsburgh to play a total of 80,000 hands of Heads-Up, No-Limit Texas Hold ’em with Claudico, a poker-playing bot made by Carnegie Mellon University computer science researchers.
…No actual money was being bet — the dollar amount was more of a running scoreboard, and at the end the humans were up a total of $732,713 (they will share a $100,000 purse based on their virtual winnings). That sounds like a lot, but over 80,000 hands and $170 million of virtual money being bet, three-quarters of a million bucks is pretty much a rounding error, the experimenters said, and can’t be considered a statistically significant victory.
The computer bluffed and bet against the best poker players the world has ever known and over 80,000 hands the humans were not able to discover an exploitable flaw in the computer’s strategy. Thus, a significant win for the computer. Moreover, the computers will get better at a faster pace than the humans.
In my post on opaque intelligence I said that algorithms were becoming so sophisticated that we humans can’t really understand what they are doing, quipping that “any sufficiently advanced logic is indistinguishable from stupidity.” We see hints of that here:
“There are spots where it plays well and others where I just don’t understand it,” Polk said in a Carnegie Mellon news release….”Betting $19,000 to win a $700 pot just isn’t something that a person would do,” Polk continued.
Polk’s careful wording–he doesn’t say the computer’s strategy was wrong but that it was inhuman and beyond his understanding–is a telling indicator of respect.
German magazine markets in everything
The Vangardist, a German men’s magazine, is printing an entire issue using HIV-infected blood in a quest to educate the public and eliminate misconceptions about HIV and AIDS.
Of course, there’s also the issue of taking this approach to raise the magazine’s literary and commercial value. The Vangardist‘s May issue is already being considered a collector’s item since just 3,000 copies featuring the HIV-positive ink blood have been printed.
There is further information here.
Two new and excellent short e-Books
Jonathan Rauch, Political Realism: How Hacks, Machines, Big Money, and Back-Room Deals Can Strengthen American Democracy. The tag “self-recommending” was made for books like this one. According to Rauch, transparency is overrated and politics should be more transactional.
Jeffrey Towson and Jonathan Woetzel, The One Hour China Consumer Book: Five Short Stories That Explain the Brutal Fight for One Billion Customers. The short tale of why the most successful beer companies are the state-owned enterprises is alone worth the price of this book.
And I just downloaded Hugo Dixon’s The In/Out Question, which argues the UK should try to stay in the European Union…
What would a Tory victory mean?
The exit polls are predicting a solid Conservative victory, as is most of my Twitter feed and most importantly the bookies. If indeed this comes to pass, it has (at least) two pretty simple implications:
1. A people “wise enough” to opt for government-owned hospitals and single-payer health care have decided they want government smaller, not bigger. You will note “UK public spending was 36.6% of gdp in 2000, and had edged up over 50% by 2009 and 2010 and now [2013] is still in the range of 49% or so.” The Tories are indeed the party for smaller government.
2. The verdict is sufficiently positive on the “austerity experiment” (not what I prefer to call it, but that is a different story). I know this is literally unfathomable to the authors of the 7,243 blog posts I have read criticizing or perhaps even savagely attacking UK austerity, but here’s the nub of the matter: If indeed the UK should have a smaller government relative to gdp, in the medium term it will make up all of the relevant lost ground, and then some. A lot of UK voters understand that, a lot of American and British intellectuals do not, even though the latter are the ones who have studied the Solow model. I do not a priori dismiss the “labor market scarring story,” but if there is any country where it does not seem to apply it is the UK, which has had quite a rapid labor market bounce back.
Anyway, electoral events may yet surprise us, but at the very least the Tories are still in the running. Scott Sumner comments as well. By the way, if SNP really did take 58 out of 59 Scottish seats, it does seem to me that Great Britain will split up, much to my chagrin. So I am not overall cheered by the exit poll.
Which students repay their student loans?
Fans of Game of Thrones know that “a Lannister always pays his debts.” So too do nearly all alumni from Notre Dame, Vassar, Harvey Mudd, and Brigham Young, at least when it comes to federal student loans.
There is more here, from Brookings, via Matthew C. Klein. Ahem…and for whatever reason, students from St. Johns do well too…
Deaths in police custody, research results
The limited data available do not suggest a recent overall increase in the number of homicides by police or the racial composition of those killed, despite the high-profile cases and controversies of 2014-2015, according to a New York Times analysis. But a January 2015 report published in the Harvard Public Health Review, “Trends in U.S. Deaths due to Legal Intervention among Black and White men, Age 15-34 Years, by County Income Level: 1960-2010,” suggests persistent differences in risks for violent encounters with police: “The rate ratio for black vs. white men for death due to legal intervention always exceeded 2.5 (median: 4.5) and ranged from 2.6 (95% confidence interval [CI] 2.1, 3.1) in 2001 to 10.1 (95% CI 8.7, 11.7) in 1969, with the relative and absolute excess evident in all county income quintiles.”
And this:
For the most recent period where statistics are available (2003-2009), the BJS found that 4,813 persons “died during or shortly after law enforcement personnel attempted to arrest or restrain them… About 60% of arrest-related deaths (2,931) were classified as homicides by law enforcement personnel.” However, among these 2,931 homicides by law enforcement personnel, 75.3% were reported to have taken place in response to a violent offense — constituting a force-on-force situation, such as an intervention with an ongoing assault, robbery or murder: “Arrests for alleged violent crimes were involved in three of every four reported homicides by law enforcement personnel.” Still, 7.9% took place in the context of a public-order offense, 2.7% involved a drug offense, and among 9.2% of all homicides by police no specific context was reported.
There is much more of interest at the Harvard Kennedy School link.
The ongoing rise of temping
The ever larger “staffing industry” may be having a similar effect. It is important across a much wider swathe of the economy than is often realised; having started out in the 1960s supplying office temps, today temping companies like Kelly Services, Adecco and Randstad mainly supply light manufacturing and industrial workers. In 2013 Kelly Services was America’s second-largest private-sector employer, after Walmart, with 750,000 staff. America’s 2.9m temps account for 2% of its jobs.
Temping is flourishing across the G7. In Japan, once the land of the shûshin koyô, or job for life, transient employment is ever more common; in 2014 Recruit, the country’s largest temp agency, listed for $19 billion on the Tokyo stock exchange. In Britain everything from the Olympics on down comes with temporary security guards supplied by G4S and temporary caterers provided by Compass, the country’s largest and third-largest private employers, respectively.
The industry provides flexibility for both workers and firms, and its ability to match workers on its databases to jobs may be very helpful: the 2010 Nobel prize was awarded for work showing how better job search and matching could lower unemployment. But labour aggregators that compete for business on the basis of helping lower clients’ staff costs have an incentive to keep pay low. In 2014 a report by Rebecca Smith and Claire McKenna of the National Employment Law Project, an American lobby group, claims that staffing agencies cut temps’ bargaining power.
The feature story is of interest more generally, much of it on when real wages will start to rise again by significant amounts.