Category: History
Which economies are most likely to be shrinking?
Not just an economic slowdown, but actual, ongoing consistent negative economic growth. In my latest NYT column at The Upshot, I argue for some economies it may happen that living standards fall over the course of a few decades:
In 1750, India accounted for one-quarter of the world’s manufacturing output, but by 1900 that was down to 2 percent. The West became more productive as a result of the Industrial Revolution, and India lost much of its leading export sector, textiles. While the data is fragmentary, the best estimates show that India’s living standards declined through the middle of the 19th century and that its economy retrogressed, even as it borrowed some technological improvements from the West. India just didn’t do enough to move toward production on a larger scale or with better machines.
This story of India’s loss to foreign competition is documented in “Deindustrialization in 18th and 19th Century India,” a paper by David Clingingsmith, an economics professor at Case Western Reserve University, and Jeffrey G. Williamson, an emeritus professor of economics at Harvard.
Economists are accustomed to emphasizing the benefits of international trade, and these arguments are largely correct. But in India, internal regulations and underdevelopment, combined with British colonial depredations, prevented Indian resources from being redeployed productively. The lesson is that a sufficiently large international trade shock can lead to decades of economic decline in a major economy, especially if that economy isn’t geared to mounting a flexible response.
As I explain in the piece, the most likely economies to undergo sustained negative growth today are Italy, France, Croatia, Greece, Portugal, and possibly Taiwan. We should be more optimistic about the United States, but still a similar logic is applying to some parts of our middle class.
Here is my concluding paragraph:
India’s economy started to reindustrialize in the late 19th century, but growth remained subpar until the 1990s — a truly long recovery lag. This may sound strange to say, but when it comes to some parts of the Western world, the Great Depression may offer the cheerier analogy.
Read the whole thing.
The loss of skill in the Industrial Revolution
From The Growth Economics Blog:
There’s a recent working paper by Alexandra de Pleijt and Jacob Weisdorf that looks at skill composition of the English workforce from 1550 through 1850. They do this by looking at the occupational titles recorded in English parish records over that period, and code each observed worker by the skill associated with their occupation. They use the standardized Dictionary of Occupational Titles to infer the skill level for any given occupation. For example, a wright is a high-skilled manual laborer, a tailor is medium-skilled, while a weaver is a low-skilled manual laborer.
The big upshot to their paper is that there was substantial de-skilling over this period, driven mainly by a shift in the composition of manual laborers. In 1550, only about 25% of all manual laborers are unskilled (think ditch-diggers), while 75% are either low- or medium-skilled (weavers or tailors). However, over time there is a distinct growth in the the unskilled as a fraction of manual laborers, reaching 45% by 1850, while the low- and medium-skilled fall to 55% in the same period. You can see in their figure 10 that this shift really starts to take place by 1650, while before the traditional start of the Industrial Revolution.
Looking at more refined measures, de Pleijt and Weisdorf find that the fraction of workers classified as “high-quality workmen” – carpenters, joiners, wrights, turners – rose only from 3.9% to 4.9% of the workforce between 1550 and 1850.
Adjustment to major technological shocks takes a long time…
*Gaza: A History*
That is the new book by Jean-Pierre Filiu, Oxford University Press. It would not have come right now unless I were supposed to read it on the plane, so I will.
The worst part of one of this year’s best pieces
I loved the Michael Hofmann review of Stephen Parker’s Bertolt Brecht: A Literary Life in the 15 August 2014 Times Literary Supplement. Every paragraph of that review is a gem and Hofmann calls the book perhaps the greatest literary biography he has read. I’ve ordered my copy.
Here is one part of that review, toward the end, which caught my eye:
I’m not really sure what the case against Brecht is. That he treated women and co-workers badly? That he played fast and loose with the intellectual property of others, but was litigiously possessive of his own? That he wrote no more hit shows after The Threepenny Opera? That he failed to crack America? That he wouldn’t denounce the Soviet Union? That he was drab and a killjoy? That he had it cushy after settling back in East Germany in 1949? That he was consumed with his own importance?
Perhaps the Parker book will change my mind, but for now file under “All of the Above.”
Addendum: Here is another superb Michael Hofmann review.
Acemoglu and Robinson on Piketty
There is a new paper out by them:
Thomas Piketty’s recent book, Capital in the Twenty First Century, follows in the tradition of the great classical economists, Malthus, Ricardo and Marx, in formulating “general” laws to diagnose and predict the dynamics of inequality. We argue that all of these general laws are unhelpful as a guide to understand the past or predict the future, because they ignore the central role of political and economic institutions in shaping the evolution of technology and the distribution of resources in a society. Using the economic and political histories of South Africa and Sweden, we illustrate not only that the focus on the share of top incomes gives a misleading characterization of the key determinants of societal inequality, but also that inequality dynamics are closely linked to institutional factors and their endogenous evolution, much more than the forces emphasized in Piketty’s book, such as the gap between the interest rate and the growth rate.
For the pointer I thank Nathaniel Bechhofer.
From the comments, on Bob Shiller and CAPE
For context, CAPE is the cyclically adjusted price-earnings ratio. On that topic, 3rdMoment writes:
While I have great respect for Shiller, I don’t understand his confidence that the CAPE is likely to return to it’s historical average of around 16. There are several reasons why we might expect the average CAPE going forward to be higher than in the past:
1. The average levels of CAPE in most of the last century appear, with hindsight, to have been puzzlingly low. This is the well-known “equity premium puzzle.”
2. There has been a large shift in corporate payout mix, from virtually all dividends in the past, to a roughly equal mix of dividends and share repurchases today. This by itself will add a couple of points to CAPE even if nothing else changes, (as shown in this post by the anonymous blogger who tweets as “Jesse Livermore”): http://www.philosophicaleconomics.com/2013/12/Shiller/
3. Some other accounting changes to the definition of profits might raise the CAPE as well, again see the linked blog post above.
4. Lower information and transaction costs and the rise of index investing have dramatically lowered the cost of maintaining a globally diversified portfolio. This decreases the raw rate of return for any given required rate of realized returns. For example if the costs of investing in equities fall by just 50 basis points, this would allow the required raw earnings yield to fall from 5% to 4.5%, corresponding to a rise in CAPE from 20 to 22, without changing realized returns for investors.
5. The real “risk free” return on treasuries seems to be very low by historic standards. Real returns on other forms of debt also appear low. This lowers the return stocks need to be attractive by comparison.
6. Large corporate cash balances, a “global savings glut,” lower rates of real economic growth, possible “secular stagnation,” all seem to point to the idea that real returns are somewhat harder to get than the past.
Some of these reasons are more certain than others, but taken together they seem to show that we have good reason to expect CAPE levels significantly above the historical average going forward.
Are there any countervailing reasons offsetting the list above, factors that would tend to make CAPE lower than in the past? I can’t really think of any. And I haven’t seen anybody else offering any.
The decline of the week-long vacation (America fact of the day)
Nine million Americans took a week off in July 1976, the peak month each year for summer travel. Yet in July 2014, just seven million did. Keeping in mind that 60 million more Americans have jobs today than in 1976, that adds up to a huge decline in the share of workers taking vacations.
Some rough calculations show, in fact, that about 80 percent of workers once took an annual weeklong vacation — and now, just 56 percent do.
That is from Evan Soltas, there is more here. And Evan offers a bit more here.
Sentences to ponder
“Always assume that there is one silent student in your class who is by far superior to you in head and in heart.” This is the counsel Leo Strauss, among the most consequential teachers and scholars of political philosophy in the 20th century, offered an advanced graduate student who had asked for a general rule about teaching.
In a short essay published in the early 1960s, “Liberal Education and Responsibility” (based on a public lecture he gave), Strauss elaborated on his exquisite advice. “Do not have too high an opinion of your importance,” he said, “and have the highest opinion of your duty, your responsibility.”
Brad DeLong is relatively optimistic on stock returns
There are many interesting charts and graphs in the post, and he argues against a belief in mean reversion, along with a discussion of “the original Black Swan.” It is a difficult post to excerpt, best to read and view the whole thing.
*Finding Equilibrium*
The authors are Till Düppe and E. Roy Weintruab and the subtitle is Arrow, Debreu, McKenzie and the Problem of Scientific Credit. I very much liked this book, which provides an inside look at the discovery of some key theorems in economics, with an emphasis on the problem of joint discovery. McKenzie, by the way, is the one who received the least credit, an example of the Matthew Effect.
Tocquevillean sentences to ponder
“There are two things which a democratic people will always find very difficult – to begin a war and to end it.”
— Alexis de Tocqueville
What is the implied MRS for dead vs. kidnapped Israeli soldiers?
If a captive soldier is known to be in a certain vehicle, Mr. Amidror said, it is permissible to fire a tank shell toward the engine of the car. “You for sure risk the life of the soldier, but you don’t intend to kill him,” he said.
Asked whether it was morally acceptable to risk a soldier’s life in this way, Mr. Amidror said: “You know, war is very controversial. Soldiers have to know there are many risks in the battlefield, and this is one of them.”
That is for Israeli soldiers and it is called the Hannibal Procedure more generally. The subtext is that an Israeli soldier captured by the enemy can end up being traded for a thousand or more imprisoned Palestinians. The persistence of the kidnapped state for the soldier may create an intolerable situation for the Israeli public, more than would seem to be the case for a deceased soldier, and arguably it damages morale for future soldiers to a greater extent.
Not everyone likes the Hannibal Procedure:
“The procedure is morally flawed,” said Emanuel Gross of Haifa University, an expert in military law and a former military judge. “We have no right to risk the life of a soldier only to avoid the payment for his return from captivity.”
Instead, Mr. Gross said, Israel ought to stand more firmly against the inflated demands of the captors.
I wonder how the opinion of the median soldier or soldier-to-be on this policy compares to the opinion of the median Israeli citizen. Our philosopher readers will also note the connection of this debate to the longstanding conundrums over whether a person ceasing to exist can be said to harm that person, a topic discussed by Derek Parfit among others.
The full story is here, interesting throughout.
Who are the Yazidis?
Their supreme being is known as Yasdan. He is considered to be on such an elevated level that he cannot be worshipped directly. He is considered a passive force, the Creator of the world, not the preserver. Seven great spirits emanate from him of which the greatest is the Peacock Angel known as Malak Taus – active executor of the divine will. The peacock in early Christianity was a symbol of immortality, because its flesh does not appear to decay. Malak Taus is considered God’s alter ego, inseparable from Him, and to that extent Yazidism is monotheistic.
There is more here, interesting throughout.
Ian Bremmer on Ukraine, and an observation on Putin’s food import ban
Putin’s Plan A: Long game, squeeze Ukraine, force deep federation, formalize Russian influence & primacy in SE
Plan B: Invade
The link to that tweet is here. There is more from Ian here.
I find it worrying that Putin is suspending food imports from parts of the West. (Note that the text of the ban may be deliberately ambiguous.) Commentators are criticizing the economics of such a move, but I think of this more in terms of Bayesian inference. Long-term elasticities are greater than short. Under the more pessimistic reading of the action, Putin is signaling to the Russian economy that it needs to get used to some fairly serious conditions of siege, and food is of course the most important of all commodities. Why initiate such a move now if you are expecting decades of peace and harmony? Or is Putin instead trying to signal to the outside world that he is signaling “siege” to his own economy? Then it may all just be part of a larger bluff. In any case, Eastern Europeans do not take food supply for granted.
Stratfor on the Chinese anti-corruption campaign
That campaign is one of the more notable events going on in a busy and event-rich world, so it feels remiss not to cover it at all. Here is John Minnich:
The anti-corruption campaign is one of those steps. It serves many overlapping functions: to clear out potential opponents, ideological or otherwise; to consolidate executive power and reduce bureaucratic red tape so as to ease the implementation of reform; to remind the Chinese people that the Communist Party has their best interests at heart; and to make it easier to make tough decisions.
Underlying and encompassing these, we see the specter of something else. The consensus-based model of politics that Deng built in order to regularize decision-making and bolster political stability during times of high growth and that effectively guided China throughout the post-Deng era is breaking down. It can no longer hold in the face of China’s transformation and the crises this will bring. Simply put, now that its post-1978 contract with Chinese society — a social contract grounded in the exchange of growth for stability — is up, the Party risks losing the public support and political legitimacy that this contract undergirded. A new and more adaptive but potentially much less stable model is being erected, or resurrected, from within the old. This model is grounded more firmly in the personality and prestige of the president and more capable, or so Chinese leaders seem to hope, of harnessing and managing the Chinese nation through what could well be a period of turmoil.
This does not necessarily mean a return to Imperial China, nor does it mean a return to the days and methods of the Great Helmsman, Mao. It doesn’t even mean the new model will succeed, even remotely. What it means will be decided only by the specific interplay of structure and contingency in the unfolding of history. But it is this transformation that serves as the fundamental, if latent, purpose for Xi’s anti-corruption campaign.
The full piece is here, and for the pointer I thank Jim Olds. “Be careful what kind of anti-corruption campaign you wish for…”