Category: Current Affairs
China (India) facts of the day
The ratio of incomes gives a sense of the relative differences in productivity between the cities and countryside. For China, this ratio is 3.2 – the highest in world. On average, urban workers are more than three times as productive as rural workers and are being compensated accordingly. No wonder some 270m migrant workers have flocked to the cities to secure better paying industrial jobs. For India, the same measure gives a ratio of 1.6, one of the lowest for emerging market economies, indicating that urban productivity is only moderately higher than in rural areas, and cities do not offer such a magnet of higher earnings.
The other key indicator is the relative difference in property prices in China versus India. China’s mega-cities have seen a five-fold increase in property prices in renminbi terms, or nearly seven-fold in US dollars over the past decade. No wonder concerns about a possible property bubble in China dominate global financial news. Yet despite these astounding increases, property prices in Beijing and Shanghai are still only half those of their Indian counterparts of New Delhi and Mumbai.
…India’s excessively high property prices reflect a combination of two archaic practices. One is the legacy of its colonial past in reserving large parcels of valuable urban land for government use, including sprawling and wasteful estates for civil servants and military cantonments. The other comes from outdated and overly rigid building codes that discourage concentrated development of commercial activity and housing in the core of its major cities. This pushes development to the outer suburbs, making it difficult to realise the agglomeration benefits that drive productivity gains.
That is from Yukon Hwang at the FT.
Nevada enacts school choice
On Tuesday night, Nevada governor Brian Sandoval signed into law the nation’s first universal school-choice program. That in and of itself is groundbreaking: The state has created an option open to every single public-school student. Even better, this option improves upon the traditional voucher model, coming in the form of an education savings account (ESA) that parents control and can use to fully customize their children’s education.
…As of next year, parents in Nevada can have 90 percent (100 percent for children with special needs and children from low-income families) of the funds that would have been spent on their child in their public school deposited into a restricted-use spending account. That amounts to between $5,100 and $5,700 annually, according to the Friedman Foundation for Educational Choice. Those funds are deposited quarterly onto a debit card, which parents can use to pay for a variety of education-related services and products — things such as private-school tuition, online learning, special-education services and therapies, books, tutors, and dual-enrollment college courses. It’s an à la carte education, and the menu of options will be as hearty as the supply-side response — which, as it is whenever markets replace monopolies, is likely to be robust.
The pointer is from Adam Ozimek.
What if the Export-Import Bank expires?
Politico is now reporting this is very likely to happen. That does not distress me, but if it bothers you I have a simple offset: a looser monetary policy.
The biggest recent “tax” on our exports has been the strong and rising U.S. dollar. So a simple way to boost exports would be to depreciate the dollar. Even a slight depreciation likely would offset the effects of Ex-Im expiration by more than a factor of one hundred, perhaps by more than a factor of one thousand. Ex-Im is a relatively small program and it has nothing to do with more than 98 percent of American exports. Many of its foreign beneficiaries, such as Pemex and Chinese state-owned enterprises, don’t need the subsidy to fund their imports. Boeing is still reporting a robust demand for its planes.
Inflation has now undershot the Fed’s target for what — 36 months in a row now? So a looser monetary policy will hardly bring hyperinflation down upon our heads.
Again, I am not saying we need to do this. I am simply saying we could, and, if necessary, we could wash away all of your Ex-Im tears, just like that.
Sentences to ponder
Over the past 5 years, productivity has risen by less than 3%. That might not seem so bad, except I’m referring to the total increase, not the annual increase. Again, get used to 1.2% RGDP growth; it’s the new normal, the new trend line.
That is from Scott Sumner.
A tweet in the form of a blog post, with an addendum, #Paulson, #Harvard
Until “effective altruism” figures out what drives innovation, those recommendations simply aren’t that reliable.
Addendum: John Sterling just wrote this in the MR comments section:
I think Steven Landsburg made the definitive “pro-Paulson gift” argument in his classic Slate piece defending Ebenezer Scrooge. Paulson could have pulled a “Larry Ellison” and built himself a $200 mm yacht. He decided to forgo (some) of his conspicuous consumption and instead let the Harvard Management Company steward some additional capital.
I’ve sometimes wondered whether the Harvard endowment is the ultimate way to be an “effective altruist” for an Austrian-leaning type. If you believe, like Baldy Harper did, “that savings invested in privately owned economic tools of production amount to … the greatest economic charity of all.” then the Harvard endowment makes a pretty interesting beneficiary. I can’t think of another institution in the world today that is more likely to hold on to its capital in perpetuity than the folks in Cambridge.
I am not saying he is right, just don’t be so quick to conclude he is wrong. By the way, I do not in fact donate my own money to Harvard.
Did the Wisconsin state system just abolish tenure?
I don’t think so, not really. Here is one explanation:
The proposed changes would also remove tenure protections from state law. Darling and Harsdorf both said that Wisconsin is the only state that enshrines tenure in its statutes.
The GOP proposal puts the decision of whether to have tenure and how to define it in the hands of the Board of Regents.
“We believe in empowering the Board of Regents and the chancellors throughout the state of Wisconsin to be able to manage the System,” Nygren said. “I think this is a tool to enable them to do that.”
Cross and Board of Regents vice president Regina Miller pledged to uphold the tenets of shared governance and tenure in their policies.
For sure that is a decline in the relative status of tenure, but not an end to tenure itself.
By the way, I’ve seen so many criticisms of the $400 million Paulson gift to Harvard, almost making it sound worse than if he had kept the money for himself, as most people do with $400 million. Without a well-worked out theory of university endowments, and their importance and function (they do seem to matter), I don’t see a hard and shut case for condemning this gift. At the very least, it is likely to boost investment’ note that about 15% of Harvard’s endowment goes to private equity or venture capital. I do understand however that this gift sends an anti-egalitarian message about status relations and where investment should go.
Who is the best gun salesman in the whole world?
Emilio Depetris-Chauvin suggests a possible answer:
Using monthly data constructed from futures markets on presidential election outcomes and a novel proxy for firearm purchases, this paper analyzes the response of the demand for guns to the likelihood of Barack Obama being elected in 2008. Point estimate suggests the existence of a large Obama effect on the demand for guns. This political effect is larger than the effect associated with the worsening economic conditions. This paper presents robust empirical evidence supporting the hypothesis that the unprecedented increase in the demand for guns was partially driven by fears of a future Obama gun-control policy. Conversely, the evidence for a racial prejudice motivation is less conclusive. Furthermore, this paper argues that the Obama effect did not represent a short-lived intertemporal substitution effect, and that it permanently affected the stock of guns in circulation. Finally, states that had the largest increases in the demand for guns during the 2008 election race experienced significant changes in certain categories of crime relative to other states following Obama’s election. In particular, those states were 20% more likely to experience a shooting event where at least three people were killed.
The published paper is here, via Kevin Lewis.
Greece fact of the day
By contrast, Greek households own more foreign assets than they owe in liabilities to foreigners. Exiting the euro area would immediately make them wealthier, although, perversely, the stimulus would be most potent the longer the government waits for citizens to pull their savings out of the banks.
That is from Matthew C. Klein at the FT.
Tyrone says the Chinese stock market is not a bubble
James Surowiecki writes:
Of seventeen hundred stocks on the Shenzhen Exchange, only four have fallen this year, and more than a hundred have seen their shares rise more than five hundred per cent. The Shenzhen Index as a whole has doubled since January, and is up more than two hundred per cent in the past year. The action on China’s other major stock exchanges—in Shanghai and Hong Kong—hasn’t been quite as torrid, but they’ve had their share of extraordinary winners. The Shanghai Composite Index has risen a hundred and forty per cent since this time last year. In Hong Kong, Jicheng Umbrella Holdings (which makes, yes, umbrellas) went public in February: its shares are up almost seventeen hundred per cent.
Tyrone, Tyler’s evil twin, says buy, buy buy! Borrow to buy, and then borrow to borrow! Tyrone has read so many people in the last week calling the Chinese stock market a bubble, so the contrarian in him thinks you simply need to take the plunge as soon as possible.
Direct foreign investment has been allowed only as of late 2014:
The Shanghai-Hong Kong Stock Connect program will allow all investors to buy shares on the Shanghai Stock Exchange, while also permitting wealthy investors in mainland China to buy stocks listed in Hong Kong. The move allows investors access to companies with an overall market value of roughly $2 trillion.
“We think it is very significant. We plan to participate,” said Gary Greenberg, head of emerging markets at Hermes Investment Management in London, which managed $46.9 billion in assets as of June 30.
That’s a lot of foreign capital to push up the value of Ma and Pa Tofu, and indeed that flood of capital will validate your early investment. And who amongst us is not tempted to diversify just a wee bit into the world’s second largest economy, indeed the very largest by PPP measures? Surely the coming tidal wave of foreign liquidity will push aside all present minor worries.
On the domestic front, Chinese savings are currently real-estate intensive, and over time those funds be shifting into equities, especially as Chinese graduate students carry the lessons of Mehra and Prescott back home. As prices fluctuate, the market is assessing how significant these effects will be, just as it once did with subprime.
Besides, the market went up 4.6% on Monday alone, and that is at a time when Chinese manufacturing seems to be slowing. The Chinese government itself proclaimed the stock market to be “healthy,” and indeed many different parts of the government, including the media, have seconded this verdict. Why bet against all of them?
Did you not know that the Chinese debt-equity ratio is too high? Well, higher equity prices will help lower that ratio, as the government intends; new stock issues are being used to buy back corporate debt, some of it dollar-denominated.
If nothing else, return back to some patriotic context. Was it not a good idea to buy American stocks when our country had a per capita gdp of 6-7k, and headed up? With a 20-30 year time horizon, was it not a good idea to buy American stocks even in 1929?
To be sure, the forthcoming liquidity-based, foreign investor-driven price movements imply a non-horizontal demand curve for those stocks, and thus violate the stricter forms of EMH. But who said a demand curve should be perfectly flat anyway? Weren’t the Marxists referring to perfectly flat demand curves when they said competitive capitalism is the absolute loss of freedom? And hasn’t China been moving away from Marxism? Q.E.D. So Tyrone says it is time to borrow to buy. Someone out there — maybe even you — won’t regret it.
“One Belt, One Road”, or the New Silk Road for China?
That is the new China initiative to rebuild the Old Silk Road along modern principles. The plan is a bit of a grab bag, but seems to include the following:
a. A deepwater naval base in Pakistan, plus a $42 billion aid/investment package for Pakistan. Here is some background on what already has been done.
b. A Chinese route to the sea through Myanmar and Bangladesh.
c. Northern shipping routes to Europe, through the Arctic, as the ice melts.
d. A rail line from Zhengzhou through Russia to Hamburg (already running, a 17-day trip).
e. Power stations and manufacturing plants for the Central Asian republics, in return for gas supply. This infrastructure transfer is also supposed to limit excess capacity in China by sending infrastructure abroad.
f. A railway and highway to connect China to the Arabian Sea.
Arnold Kling, telephone! Are these sustainable patterns of trade and specialization? Or are they slated to be proverbial white elephants? Does anyone know? Bueller?
A few points are striking here.
1. Much of this seems to be defensive geopolitics. Most of China’s oil supply, and much of China’s trade, runs through the Straits of Malacca. This plan, assuming it can be well-executed, affords China a good deal of protection. Yet that insurance does not add growth on top of the status quo, which currently is an open, well-functioning (mostly), trade channel at the Straits. At best it would hold a future catastrophe at bay for China.
2. The gravity equation in international trade economics suggests that countries trade much more when they are “near each other.” But what does proximity in this context mean exactly (pdf, an interesting trade paper by the way, on the “death of distance” theme and where it fails)? The most successful gravity models cite “distance between national capitals” rather than “distance between closest borders.” For evaluating this plan, that difference matters a great deal! I say distance between capitals is likely the more relevant variable, all the more for an economy dominated by state-owned enterprises.
3. The idea of easing excess capacity by sending infrastructure to other countries seems unlikely to succeed. Other than gas, how much do these countries currently have to offer China? And how much infrastructure can be transferred how quickly?
4. China’s economic growth has been dominated by the coasts, and the Great Canal, for approximately one thousand years; today Xi’an is a backwater for instance, although in the Tang dynasty it was possibly the most advanced city in the world. Can this now-deeply entrenched pattern — water transport beats land transport — be reversed by a lot of government spending?
5. To date China’s main external ally is North Korea, even though China is the world’s second largest economy. How well will relations with all these other nations evolve, and what does that mean for the value of those investments? Sri Lanka already has decided to redo its deals with China, and it doesn’t seem China can bully them out of that, though read this update.
During my China visit, I heard repeatedly that this New Silk Road plan will limit the pending decline of China’s growth rate. Each time I expressed skepticism about that prospect, my words were met with great dismay and, I felt, disbelief. Yet I do not see how these pieces are supposed to fit together as a growth-boosting enterprise. They do seem well-designed to extend China’s political influence in the western direction, and to transfer more contracts to state-owned firms. But to raise living standards for most of the Chinese people? I don’t see it, or even see it coming close.
Urban Average is Over
Nearly half of the biggest US metropolitan areas have yet to recoup all the lost jobs from the Great Recession and almost a third have failed to return to previous levels of output, according to analysis that underscores the fragmenting urban fortunes beneath the surface of America’s recovery.
Research on 100 urban areas from the Brookings think-tank, reveals an economic patchwork in which the legacy of boom and bust hangs heavily over cities in Florida and inland California, while at the other end of the spectrum, technology and bioscience-focused cities such as Austin, Texas, San Francisco, and Raleigh, North Carolina have comfortably surpassed their previous peaks.
“This may be the norm now — extreme variation,” said Mark Muro, policy director for the Metropolitan Policy Program at Washington-based Brookings.
Icelandic-Basque relations on the upswing
A memorial dedicated to the 32 Basque whalers who were killed in the West Fjords in 1615 in what’s known as Iceland’s only mass murder was unveiled in Hólmavík, the West Fjords, on April 22, the last day of winter. At the occasion, West Fjords district commissioner Jónas Guðmundsson revoked the order that Basques could be killed on sight in the region.
“Of course it’s more for fun; there are laws in this country which prohibit the killing of Basques,” Jónas told mbl.is. When asked whether he’s noticed an increase of Basque tourists since the order was revoked, he responded, “at least it’s safe for them to come here now.”
President of Gipuzkoa Martin Garitano spoke at the ceremony, as did Icelandic Minister of Education and Culture Illugi Gunnarsson, strandabyggd.is reports. The speeches were followed by musical performances and a moment of prayer.
The program included Xabier Irujo, descendant of one of the murdered Basque whale hunters, and Magnús Rafnsson, descendant of one of the murderers, taking part in a symbolic reconciliation, as it says on etxepare.eus.
There is more here, via Peter Kobulnicky.
Enough said
Labor leaders, who were among the strongest supporters of the citywide minimum wage increase approved last week by the Los Angeles City Council, are advocating last-minute changes to the law that could create an exemption for companies with unionized workforces.
The push to include an exception to the mandated wage increase for companies that let their employees collectively bargain was the latest unexpected detour as the city nears approval of its landmark legislation to raise the minimum wage to $15 an hour by 2020.
The story is here. And here is a mood-affiliated Jared Bernstein piece on the L.A. minimum wage hike; it would have been stronger if all he had written were the simple eleven words: “I’m sorry, but I don’t think this is a good idea.” In a way, the labor unions have just said the same.
Hat tip goes to Modeled Behavior.
Sentences to tremble by
It is far from clear whether Europe can act as an engine of world recovery.
You will find more pessimism here, by Ambrose Evans-Pritchard.
Facts about China (America)
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.