Macro Roundup

to answer your question. 1) they had access to a unique dataset, 1427 Florencian Census records, and 2) some quirks of Italian surnames, one unique to Florence that allow you to track individuals more effectively versus say using "smith" in the UK (See 3.2 The origin and distribution of surnames)

“…. The paper examines intergenerational mobility in the very long run, across generations that are six centuries apart. We exploit a unique dataset containing detailed information at the individual level for all people living in Florence in 1427. These individuals have been associated, using the surnames, to their pseudo-descendants living in Florence in 2011. We find that earnings elasticity is about 0.04, much higher than that predicted by traditional models of intergenerational mobility. We also find evidence of strong real wealth inheritance. These findings are confirmed when we test the robustness of the pseudo-links and address the potential selectivity bias due to the heterogeneous survival rates across families…”

"...Italians surnames have some peculiarities that deserve further discussion. Surnames were inherited from one generation to the next, through the patriline, and most Italians began to assume hereditary surnames in the 15th Century...All these features can be summarized in two striking features.First, in Italy there is a large number of surnames, likely one of the largest collections of surnames of any ethnicity in the world. This is associated to a high fractionalization: the first 100 most frequent surnames account only for 7% of overall population against 22% in England. Second, and unsurprisingly, the surnames present in our samples are highly Florence-specific: on average, the ratio between the surname share in Florence and the corresponding figure at the national level, which measures a specialization index centered in 1, is nearly 6.Therefore, the informational content of surname is presumably much higher than elsewhere, supporting our empirical strategy in the identification of the pseudo-links...."

Guglielmo Barone, Sauro Mocetti, "Intergenerational mobility in the very long run: Florence 1427-2011," July 2015, http://www.aiel.it/cms/cms-files/submission/all20150614183657.pdf
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"...Linking people belonging to generations that are distant each other is difficult because of data limitations. In this paper we exploit a unique dataset containing main socioeconomic variables at the individual level for people living in Florence in 1427. These individuals (the ancestors) have been associated, using surnames, to their pseudo-descendants living in Florence in 2011. Empirically we use a two-sample two-stage least squares (TS2SLS) approach: first, we use the sample of ancestors and regress the log of earnings on a full set of surname dummies (and on age and gender); second, we observe current taxpayers (living in the city of Florence and present in the 2011 tax records) and regress the log of their earnings on those of their ancestors, as predicted by their surname in the first step. The same strategy has been repeated using the log of real wealth or dummies for professions instead of log of earnings as dependent variables...Our empirical findings have two main weaknesses.First, the strength of the pseudo-links may be questioned as we are working with generations that are six centuries apart. However, we argue that our pseudo-links are reliable as they are generated in the intersection of surname and geographical localization, by including only people living in Florence.If the same data were available for all Italian cities, our strategy would entails prediction of ancestors’ socioeconomic status using interaction between surnames and cities. This is arguably a more demanding and more precise approach to create links across generations than the one adopted in previous studies. Moreover, a rich set of robustness checks, including placebo regressions where we randomly reassign surnames to the descendants, is largely reassuring on the strength of the pseudo-links.Second, family survival rates - and, therefore, the likelihood of finding descendants of Florentine families in the 15th Century among current taxpayers - may vary to a large extent across families. If variation in the survival rate were correlated with current earnings and wealth, this would bias our estimates. To address this issue, we account for survival through a Heckman approach that confirms our main findings..."

Scale of the Chinese risk adverse savings is amazing. Wolf worries about the potential for additional outflows

"...The macroeconomic issue is simple: China saves more than it can profitably invest at home. In 2015, gross national savings were 48 per cent of GDP. World Bank data show that households contributed only a half of this. The rest came from corporate profits and government savings. International comparisons suggest that economic growth of 6 per cent warrants investment of little more than a third of GDP. This indicates that China’s surplus savings — surplus, that is, to domestic requirements — may be as much as 15 per cent of GDP...."

These are huge challenges that need to be discussed in full between the US and China (and others). They have profound implications for trade, but they are not about trade policy at all. They require joint consideration of macroeconomic and financial policy. They also demand attention to the management of China’s external account: above all, exchange controls, the exchange rate and foreign currency reserves. Mr Xi has people in his government who at least understand these issues. Is the same also true for Mr Trump? The stability of the world economy depends on the answer. Alas, I suspect it is no.

Suppose the Chinese authorities adopted, instead, the alternative policy of rapid liberalisation of both inflows and outflows, while relying on credit expansion to sustain domestic demand. It is possible, but unlikely, that the flow of money into China from abroad would match the outflow, as foreigners and Chinese both diversified their portfolios. Yet that would also cause three headaches. First, the domestic macroeconomic imbalances would persist. Second, the financial sector would become still more fragile. Finally, this vast, complex and fragile financial system would become fully integrated with the rest of the world’s, itself still far from fully stable. Instead of the Chinese financial crisis that many now think imminent, this would enormously increase the likelihood of another global crisis with China, not the US, at its heart.

Why is the latter essential? With such large and growing stocks of liquid, risky or low-yielding financial assets, plus a huge flow of savings, not to mention the anxieties caused by the anti- corruption campaign, Chinese corporations and individuals have been desperate to take money out. This explains why, despite a persistent trade surplus, the country’s foreign exchange reserves fell from $4tn in June 2014 to $3tn in January 2017. The reserves can certainly fall further. But the Chinese authorities will not wish them to fall indefinitely. Since they also recognise the dangers of allowing the renminbi to fall too far, they have duly tightened controls on capital outflows.

Today’s credit growth and consequent financial fragility are a direct consequence of the desire to prevent this from happening. It has been the way to keep investment up at uneconomic levels. The Chinese authorities are in a trap: either halt credit growth, let investment shrink and generate a recession at home, a huge trade surplus (or both); or keep credit and investment growing, but tighten controls on capital outflows.

Where might such surpluses go? The answer is abroad, in the form of current account surpluses. That is what happened before the financial crisis. It is likely that this is what would also happen now if the government relaxed exchange controls and brought credit and debt growth to a halt. Capital would pour out, the renminbi would tumble and, in time, a globally unmanageable current account surplus would emerge.

The macroeconomic issue is simple: China saves more than it can profitably invest at home. In 2015, gross national savings were 48 per cent of GDP. World Bank data show that households contributed only a half of this. The rest came from corporate profits and government savings. International comparisons suggest that economic growth of 6 per cent warrants investment of little more than a third of GDP. This indicates that China’s surplus savings — surplus, that is, to domestic requirements — may be as much as 15 per cent of GDP.

I have argued elsewhere that it is essential to understand the interaction of macroeconomics with finance. China’s external accounts already played a significant role in the run-up to the financial crisis of 2007-08. Now the dangers it creates are still greater.

Financially, China is the wild east. Remember what the wild west did over the last century: the Great Depression and Great Recession originated in the interaction between US-led finance and the global economy. In view of its macroeconomic imbalances and financial excesses, China could deliver at least as much global financial mayhem.

Consider a few facts. Annual gross savings in the Chinese economy amount to 75 per cent of the sum of US and EU savings, at over $5tn last year. China’s gross investment, at 43 per cent of gross domestic product in 2015, was still above its share in 2008, even though the economy’s rate of growth had fallen by at least a third. To sustain such high investment, the ratio of credit to GDP soared from 141 per cent of GDP at the end of 2008 to 260 per cent at the end of last year. The “shadow banking system”, in the form of “wealth management products” and other instruments, has exploded. Interbank lending has also soared. Last, but not least, the banking system is now the world’s largest.

Why does the capital account matter more? The answer is that this is where two interrelated aspects of an economy interact with the world economy: macroeconomic balances between savings and investment; and the financial system. In both respects, the Chinese economy is, to cite the celebrated words of former premier Wen Jiabao, “unstable, unbalanced, uncoordinated and unsustainable”. That was true in 2007, when he said it. It is truer today. As the Chinese authorities realise, but their western counterparts may not, the integration of China’s financial system into the global economy is fraught with peril.

Donald Trump, US president, is to meet Xi Jinping, his Chinese counterpart, at Mar-a-Lago in Florida this week. Discussions of economics seem likely to focus on China’s trade and exchange rate policies. This would be a mistake even if the US president’s views of trade were not mistakenly fixated on bilateral imbalances. Far more challenging and important is integrating China into the financial system. US policymakers should worry about China’s capital account, not its current account. That is where danger now lies.

Given its macroeconomic imbalances, China could unleash global mayhem

Chinese finance is storing up trouble for the rest of the world

Martin Wolf, "Chinese finance is storing up trouble for the rest of the world,"Financial Times, April 4, 2017, https://www.ft.com/content/da94e4e2-1787-11e7-9c35-0dd2cb31823a

"...China, for example, severely repressed interest rates in order to boost growth. This simultaneously reduced the household share of Chinese GDP to among the lowest ever recorded and raised Chinese savings to among the highest -- so high that, even with the fastest-rising investment in the world, China still needed large trade surpluses to make up for weak domestic demand. What happens next is the most confusing part for economists who don’t understand how trade has changed. When new capital pours into advanced economies that have always had easy access to investment -- such as the U.S. and southern Europe -- it doesn't boost investment further. Instead it automatically causes savings to contract...As counterintuitive as it may seem, if Trump wants to address the U.S. trade deficit with China, he must focus on the capital account, not the trade account. Instead of imposing tariffs, he should either implement policies that absorb foreign savings more productively into the U.S., say by exploiting historically low interest rates and investing in much-needed infrastructure whose economic benefits are too diffuse to be captured by the private sector.Or his administration should change the way savings imbalances are transmitted into the U.S., for example by taxing capital flows, which the U.S. was doing as recently as the 1960s....."

What Trump shouldn't do is get involved in a tit-for-tat tariff war with China that sidesteps the real sources of the imbalances. In a world in which capital flows overwhelm trade flows, trade imbalances are driven by imbalances in global savings, and the U.S. cannot resolve the former without addressing the latter. Nothing he and Xi discuss this week will change that fact.

As counterintuitive as it may seem, if Trump wants to address the U.S. trade deficit with China, he must focus on the capital account, not the trade account. Instead of imposing tariffs, he should either implement policies that absorb foreign savings more productively into the U.S., say by exploiting historically low interest rates and investing in much-needed infrastructure whose economic benefits are too diffuse to be captured by the private sector. Or his administration should change the way savings imbalances are transmitted into the U.S., for example by taxing capital flows, which the U.S. was doing as recently as the 1960s.

These automatic adjustments, and many others, force down savings rates in the capital-receiving countries. With its deep and flexible capital markets and dominant reserve currency status, the U.S. is especially vulnerable. It is the only country able to absorb large amounts of foreign capital, currently taking in nearly half of the world’s excess savings.

There are many ways this can happen. Capital inflows might raise the real exchange rate, which reduces savings by increasing household purchasing power. Inflows can also lower interest rates and weaken credit standards, both of which encourage high-flying households to fund consumption binges. They can set off wealth effects, as foreign money pours into real estate and leaves households suddenly feeling richer. They can raise unemployment, forcing workers to dig into savings.

What happens next is the most confusing part for economists who don’t understand how trade has changed. When new capital pours into advanced economies that have always had easy access to investment -- such as the U.S. and southern Europe -- it doesn't boost investment further. Instead it automatically causes savings to contract.

While the experiences of China and Japan may seem different on the surface, they were broadly similar in impact. China, for example, severely repressed interest rates in order to boost growth. This simultaneously reduced the household share of Chinese GDP to among the lowest ever recorded and raised Chinese savings to among the highest -- so high that, even with the fastest-rising investment in the world, China still needed large trade surpluses to make up for weak domestic demand.

German businesses, blessed with higher profits, responded unhelpfully. They paid down debt instead of investing the profits, increasing the share of national income devoted to savings. As the growing gap between German savings and investment soon became among the largest in history, so did the German trade surplus. German banks exported the excess savings into other European countries, no longer protected by the interest-rate and currency adjustments proscribed under the rules of the euro. By 2009, after insolvency prevented one European country after another from absorbing any more of the German tsunami of capital outflows, these shifted to countries outside Europe.

Take Germany, for example. After a decade of trade deficits and high unemployment, worried leaders in Berlin implemented labor reforms in 2003-05 whose main effect was to weaken wage growth. As unemployment dropped and business profits surged, the reforms also shrunk the share of national income allocated to ordinary households, driving down the consumption share as well.

This has profound implications for trade. Large, persistent trade surpluses such as the one China runs with the U.S. are no longer the consequence of explicitly mercantilist measures. Instead, they're driven by policies that distort domestic savings rates by subsidizing production at the expense of households.

During this time trade imbalances were mostly determined by direct differences in the cost of traded goods, while capital flowed from one country to another mainly to balance trade flows. Today, however, conditions have changed dramatically. Capital flows dwarf trade flows, and investment decisions by fund managers determine their direction and size.

Unlike in the past, most deficits today have little to do with currency manipulation or unfair tariffs. In the 19th century, import tariffs were the main instrument of trade intervention, increasingly supplemented during the 1920s and 1930s by currency machinations. This continued well into the 20th century. Even as international agreements -- usually championed by the U.S. -- began to restrict the use of tariffs in the post-Bretton-Woods era, Europe and Japan, taking advantage of Cold War exigencies, protected domestic industries for decades by keeping their currencies undervalued relative to the dollar.

U.S. President Donald Trump has warned that discussions with his Chinese counterpart Xi Jinping in Florida this week will be "very difficult," in large part because of disagreements over trade. But before Trump can shrink America's lopsided trade deficits -- with China or anyone else -- he first must recognize what's driving them.

What's Really Driving the Trade Deficit With China

Michael Pettis, "What's Really Driving the Trade Deficit With China,"Bloomberg, April 3, 2017, https://www.bloomberg.com/view/articles/2017-04-04/what-s-really-driving-u-s-trade-deficit-with-china