Disputes over China and structural imbalances
There has been some pushback on my recent China consumption post, so let me review my initial points:
There exists a view, found most commonly in Michael Pettit (and also Matthew Klein), that suggests economies can have structural shortfalls of consumption in the long run and outside of liquidity traps.
My argument was that this view makes no sense, it is some mix of wrong and “not even wrong,” and it is not supported by a coherent model. If need be, relative prices will adjust to restore an equilibrium. If relative prices are prevented from adjusting, the actual problem is not best understood as a shortfall of consumption, and will not be fixed by a mere expansion of consumption.
Note that people who promote this view love the word “absorb,” and generally they are reluctant to talk much about relative price adjustments, or even why those price adjustments might not take place.
You will note Pettis claims Germany suffers from a similar problem, America too though of course the inverse version of it. So whatever observations you might make about China, the question remains whether this model makes sense more generally. (And Australia, which ran durable trade deficits from the 1970s to 2017, while putting in a strong performance, is a less popular topic.)
Pettis even has claimed that “US business investment is constrained by weak demand rather than costly capital”, and that is from April 4, 2023 (!).
It would take me a different blog post to explain how someone might arrive at such a point, with historic stops at Hobson, Foster, and Catchings along the way, but for now just realize we’re dealing with a very weird (and incorrect) theory here. I will note in passing that the afore-cited Pettis thread has other major problems, not to mention a vagueness about monetary policy responses, and that rather simply the main argument for current industrial policy is straightforward externalities, not convoluted claims about how foreign and domestic investment interact.
Pettis also implicates labor exploitation as a (the?) major factor behind trade surpluses, and furthermore he considers this to be a form of “protectionism.” Now you can play around with scholar.google.com, or ChatGPT, all you want, and you just won’t find this to be the dominant theory of trade surpluses or even close to that. As a claim, it is far stronger than what a complex literature will support, noting there is a general agreement that lower real wages (ceteris paribus) are one factor — among many — that can help exports. This point isn’t wrong as a matter of theory, it is simply a considerable overreach on empirical grounds. Of course, if Pettis has a piece showing statistically that a) there is a meaningful definition of labor exploitation here, and b) it is a much larger determinant of trade surpluses than the rest of the profession seems to think…I would gladly read and review it. Be very suspicious if you do not see such a link appear!
Another claim from Pettis that would not generate widespread agreement is: “…in an efficient, well-managed, and open trading system, large, persistent trade imbalances are rare and occur in only a very limited number of circumstances.” (see the above link) That is harder to test because arguably the initial conditions never are satisfied, but it does not represent the general point of view, which among other things, considers persistent differences in time preferences and productivities across nations.
Now, it does not save all of this mess to make a series of good, commonsense observations about China, as Patrick Chovanec has done (Say’s Law does hold in the medium-term, however). And as Brad Setser has done.
In fact, those threads (and their citation) make me all the more worried. There is not a general realization that the underlying theory does not make sense, and that the main claim about the determinants of trade surpluses is wrong, and that it requires a funny and under-argued tracing of virtually all trade imbalances to pathology. And to be clear, this is a theory that only a small minority of economists is putting forward. I am not the dissident here, rather I am the one delivering the bad news.
So the theory is wrong, and don’t let commonsense, correct observations about China throw you off the scent here.
Monday assorted links
1. Why are food trucks abandoning D.C. for the suburbs?
2. Golf course living leads to a diet shift for American alligators.
3. Tenochtilan reconstruction, the founding of a city.
4. My podcast with More to Learn.
5. Bottoms is quite a good movie, much smarter and more serious than its preview might indicate.
Why are folk songs such a poor guide to economics?
Oliver Anthony (perhaps he should leave his town of per capita income 13k?) is the centerpiece of the column, but I’ll excerpt the bit of Springsteen:
When singers turn to economic issues, who plays the role of victim? Very often it is people who have lost their jobs, such as in Bruce Springsteen’s “My Hometown,” about a textile mill leaving the singer’s hometown. (Springsteen is not generally considered a folk singer, but many of his songs have folk roots and channel folk vibes.) That sounds terrible, and for many former workers it was.
But in fact the mill was relocated further south, where presumably it helped to create other jobs. Was this development an egalitarian way to help spread prosperity to a poorer part of the country? Did it help spur the transition of New Jersey to a service economy? That seems to have worked out: Average household income today in Freehold, Springsteen’s hometown, is more than $133,000. Or were more sinister forces at work? Was the factory closing a form of regulatory arbitrage against trade unions that protect worker interests?
No matter what your view, the song doesn’t clarify the issue very much. Nor should it be expected to.
As a general rule, music and the arts excel at pointing attention toward the seen — that is, identifiable victims or beneficiaries. In contrast, many of the most important insights of economics concern the unseen — that is, people who benefit in non-obvious ways, and sometimes many of them actually are unidentifiable. Automation, for instance, will throw some people out of work, but economics teaches us that in the longer run it usually benefits society, through both lower consumer prices and the creation of jobs in other, less visible sectors of the economy. You don’t hear many songs about that.
Not surprisingly, Bob Dylan is the hero of the story.
Labor Day
Thanks capitalism!
Is Bach the greatest achiever of all time?
I’ve been reading and rereading biographies of Bach lately (for some podcast prep), and it strikes me he might count as the greatest achiever of all time. That is distinct from say regarding him as your favorite composer or artist of all time. I would include the following metrics as relevant for that designation:
1. Quality of work.
2. How much better he was than his contemporaries.
3. How much he stayed the very best in subsequent centuries.
4. Quantity of work.
5. Peaks.
6. Consistency of work and achievement.
7. How many other problems he had to solve to succeed with his achievement. For Bach, this might include a) finding musical manuscripts, b) finding organs good enough to play and compose on, c) dealing with various local and church authorities, d) migrating so successfully across jurisdictions, e) composing at an impossibly high level during the four years he was widowed (with kids), before remarrying.
8. Ending up so great that he could learn only from himself.
9. Never experiencing true defeat or setback (rules out Napoleon!).
I see Bach as ranking very, very high in all these categories. Who else might even be a contender for greatest achiever of all time? Shakespeare? Maybe, but Bach seems to beat him for relentlessness and quantity (at a very high quality level). Beethoven would be high on the list, but he doesn’t seem to quite match up to Bach in all of these categories. Homer seems relevant, but we are not even sure who or what he was. Archimedes? Plato or Aristotle? Who else?
Addendum: from Lucas, in the comments:
The good news
Or: solar deployment is ~0.5% of global GDP and growing 43% Y/Y. https://t.co/1EqOj9C9vf
— Patrick Collison (@patrickc) September 4, 2023
That was then, this is now, Budapest edition
Trains between the two cities [Budapest and Vienna] were fast — four and a quarter hours in 1896. In 2022 it was three hours and thirty-five minutes.
And:
Budapest finance caught up and surpassed the growth of agricultural and industrial production. By 1900 Budapest became the bankming centre of Central and Eastern Europe. Between 1867, the date of the ‘Compromise’ which created the Dual Monarchy of Austria-Hungary, and 1914 the number of Hungarian banks grew from eleven to 160 and their capitalization increased fivefold. A few of them — the First Hungarian Commercial Bank and the Hungarian Credit Bank — rivalled the biggest Viennese and German banks in size and prestige, as their palatial headquarter buildings in downtown Budapest, designed by the most renowned European and Hungarian architects, showed. Their owners, such as the Wolianders, the Wahrmanns, Hatvany-Deutsch and Chorins, joined the European super-rich.
That is all from Victor Sebestyen’s interesting new book, Budapest: Portrait of a City Between East and West.
Sunday assorted links
2. When and why did French fertility fall so rapidly?
3. Different accents in English.
4. Glimpse inside the Delhi punk scene.
5. Can you blame him? A story of biryani.
6. Alas, GBD was not about protecting the vulnerable. Sorry, people.
7. Is the standard model of the universe wrong? (NYT)
8. The invention of a new chess variant? (“Try as hard as you can to lose, and then win when your opponent resigns”?)
Proudhon: To be Governed
To be GOVERNED is to be watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded, by creatures who have neither the right nor the wisdom nor the virtue to do so. To be GOVERNED is to be at every operation, at every transaction noted, registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished. It is, under pretext of public utility, and in the name of the general interest, to be place under contribution, drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed; then, at the slightest resistance, the first word of complaint, to be repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored. That is government; that is its justice; that is its morality.
Pierre-Joseph Proudhon, “General Idea of the Revolution in the Nineteenth Century,” first published in French 1851; translated by John Beverly Robinson (1923), pp. 293-294.
Hat tip: Robert Higgs.
The Dominican Republic is underrated
Despite being one of Latin America’s poorest countries in the mid-1960s, the Dominican Republic has made remarkable progress in terms of income convergence…
What is remarkable about the Dominican Republic’s progress is not just the level of convergence but also its speed compared to other countries in the region. By examining the average convergence velocity, or the rate of change in income convergence per decade, it is evident that the Dominican Republic has exhibited the highest average convergence velocity, or “blue shift,” in Latin America over the past 50 years. Panama and Chile have achieved equally meaningful but still lower positive convergence velocities, while the majority of countries in the region have experienced either very low (“green shift”) or negative (“red shift”) convergence velocities.
Here is the full IMF brief, retweeted by Matt Yglesias. There is much more at the link. I have been there twice, including as recently as last year (albeit briefly), and this accords with my intuitions.
Who Runs the AEA?
That is a new JEL publication (gated) by Kevin D. Hoover and Andrej Svorenčík, here is the abstract:
The leadership structure of the American Economic Association is documented using a biographical database covering every officer and losing candidate for AEA offices from 1950 to 2019. The analysis focuses on institutional affiliations by education and employment. The structure is strongly hierarchical. A few institutions dominate the leadership, and their dominance has become markedly stronger over time. Broadly two types of explanations are explored: that institutional dominance is based on academic merit or that it is based on self-perpetuating privilege. Network effects that might explain the dynamic of increasing concentration are also investigated.
And this:
The current paper is based on an extensive prosopographical database covering the entire leadership of the AEA over the
1950–2019 period, including all Presidents, Presidents-elect, Vice Presidents, ordinary members of the Executive Committee, as well as the losing candidates for all elective offices, and members of the Nominating Committee.
The results?:
The 14 institutions in the table account for almost more than 80 percent of the positions for the whole 1950–2019 period. Even within this select group, the distribution is highly skewed with Harvard, the top supplying institution over the period accounting for more than a fifth of the total, and the last five universities accounting for around 2 percent each. The top five institutions, Harvard, MIT, Chicago, Columbia, and Stanford, which we designate as the first tier, account for over half (57.1 percent) of the positions over the whole period…
The authors summarize their findings:
The most obvious lessons are, perhaps, hardly surprising: the AEA leadership is overwhelmingly drawn from a small group of elite, private research universities—in the sense that its leaders were educated at these universities and, to a lesser degree, employed by them. What is less well-known is that for much of the past 70 years, the AEA leadership has been drawn predominantly from just three universities—Harvard, MIT, and Chicago.
By the way, institutional concentration has become more pronounced over time, not less. But since about eighty percent of U.S. students go to state schools, most of those large state schools, I guess we can reconfigure all these panels to have eighty percent state school representation, rather than 80 percent elite school representation. Right? Right?
You may or may not like these facts (I for one am willing to admit to more elitism than are many people), for the time being I will say only this: “Do not listen to what they say, watch what they do!”
Model this (p.s. price controls!)
The Bucks are signing Alex Antetokounmpo. Now all 3 brothers are playing together. pic.twitter.com/rwD5QVY8RX
— SAY CHEESE! 👄🧀 (@SaycheeseDGTL) September 1, 2023
Saturday assorted links
1. The Howdy Doody longhorn steer car culture that is Nebraska, good video too (NYT). Who needs an old-style NJ hood ornament?
2. Investment is booming in Ohio.
3. Markets in everything: buy a government surveillance van for 26k.
4. The political economy of the Magna Carta.
5. Become an expert in something specific and boring.
6. Parfitian, Kafkaesque insects (New Yorker).
7. New Melissa Dell et.al. data set from historical U.S. newspapers, now with LLMs far more valuable than they realized when they started constructing it.
Towards a Platform for Dominant Assurance Contracts
Moyamo at LessWrong is committed to getting dominant assurance contracts, aka refund bonuses up and running.
Imagine a world with no ads or paywalls. A world where open-source software gets the same level of funding as proprietary software. A world where people can freely reuse ideas and music without paying royalties. A world where people get paid for writing book reviews. A world where Game-of-Thrones-quality shows are freely available on YouTube. A world where AI safety research gets the same-level of funding as AI capabilities research. Is this a fantasy world? No, this is the world where people use Dominant Assurance Contracts.
If you think this is a bad idea that no one will support, click on the donation link and make some money. If you think it’s a great idea with lots of potential, click on the donation link and be the one to make this public good a reality. Read the first link to find out more.
*All the Kingdoms of the World*
The author is Kevin Vallier, and the subtitle is On Radical Religious Alternatives to Liberalism. This is an excellent and important book, starting with its defense of classical liberalism over Catholic integralism and indeed illiberalism more generally. But do note that Kevin, although a professional philosopher is also a Christian (Eastern Orthodox), and he is writing from a Christian perspective. This is also an excellent book simply for learning what integralism is. Overall, perhaps this is analytic political theology!?
In the final chapter, Kevin considers illiberal strands within Chinese Confucianism and Sunni Islam as well.
To be clear, if you are interested in neither religion nor political philosophy, this is not for you. But it is likely to be one of this year’s books that turns out really to matter.