Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, March 14, 2019

AI Summary. China's current-account surplus has narrowed to 0.4% of GDP, close to balanced trade. Morgan Stanley projects China could swing to a current-account deficit, its first annual gap since 1993, while the International Monetary Fund still projects a marginal surplus.

Economist Staff The Economist
Date Posted:
Is Database:
Database

China’s current-account surplus has vanished, now standing at just 0.4% of GDP, marking a shift towards balanced trade.

Has China's current-account surplus disappeared?

Core argument: China's current-account surplus has narrowed to 0.4% of GDP, a substantial change from earlier years in which China consistently ran a large surplus.

China's current-account surplus has significantly diminished, now standing at just 0.4% of GDP, indicating a shift towards balanced trade. This marks a substantial change from previous years when China consistently maintained a robust surplus. Analysts at Morgan Stanley suggest that China could experience a current-account deficit by 2019, potentially marking the first annual gap since 1993. This shift is attributed to various factors, including changes in global trade dynamics and domestic economic policies. While some forecasts, like those from the International Monetary Fund, still predict a marginal surplus, the overall trend points towards a narrowing gap. This development has significant implications for China's economic strategy and its role in global trade, as it may need to adjust its policies to accommodate this new economic reality.

Takeaways by Macro Roundup® AI

  1. China's current-account surplus has narrowed to 0.4% of GDP, a substantial change from earlier years in which China consistently ran a large surplus.
  2. Morgan Stanley analysts suggest China could post a current-account deficit by 2019, which would be its first annual gap since 1993.
  3. The International Monetary Fund still forecasts a marginal Chinese surplus, though the overall trend points toward a narrowing gap attributed to shifts in global trade dynamics and domestic economic policies.

"...No longer. Last yearChina’s current-account surplus was just 0.4% of GDP. Analysts at Morgan Stanley predict that China could be in deficit in 2019—which would be the first annual gap since 1993—and for years to come. Others, such as the International Monetary Fund, forecast that China will maintain a surplus, though only by the slimmest of margins...."

Economist Staff, "China’s current-account surplus has vanished,"The Economist, March 14, 2019, https://www.economist.com/leaders/2019/03/16/china-may-soon-run-its-first-annual-current-account-deficit-in-decades

AI Summary. Secular stagnation holds that rich economies face persistently weak demand, with one estimate putting the decline in the natural interest rate at 3 percentage points over a generation, and at 7 percentage points absent public policy interventions. The zero lower bound is not absolute, as some central banks have set rates below zero.

Martin Sandbu Financial Times
Date Posted:
Is Database:
Database

@MESandbu argues that the concept of secular stagnation suggests rich economies face persistently low demand, challenging central banks & potentially justifying harmful trade policies.

Is weak demand in rich economies a lasting condition?

Core argument: Lawrence Summers and Lukasz Rachel estimate that the natural rate of interest in rich economies fell by 3 percentage points over a generation, and that absent public policy interventions it would have fallen by 7 percentage points.

The concept of secular stagnation suggests that rich economies face persistently low demand, with Lawrence Summers and Lukasz Rachel estimating a 3 percentage point drop in the natural rate of interest over a generation. Without public policy interventions, this rate could have fallen by 7 percentage points. This persistent low demand challenges central banks, as equilibrium rates are too low to match potential supply, leading to underemployment. While fiscal policy is often suggested to boost demand, concerns arise that secular stagnation may justify harmful trade policies focused on export surpluses. Additionally, the zero lower bound on interest rates is not absolute, as some central banks have set rates below zero, indicating potential for further monetary policy action. The debate continues on whether secular stagnation truly limits growth or if it reflects policy timidity, as seen in the European Central Bank's recent dovish stance.

Takeaways by Macro Roundup® AI

  1. Lawrence Summers and Lukasz Rachel estimate that the natural rate of interest in rich economies fell by 3 percentage points over a generation, and that absent public policy interventions it would have fallen by 7 percentage points.
  2. Secular stagnation poses a problem for central banks because equilibrium interest rates are too low to match potential supply, leaving economies with underemployment.
  3. The zero lower bound on interest rates is not absolute, as some central banks have set policy rates below zero, leaving room for further monetary action.

would add to this "beggar thy neighbor" isn't the only implied win set, could get same effect by fiscal expansion in the chronic surplus countries, Germany and South Korea come to mind.

"...If demand is chronically too low, it is not just fiscal policy that can address this; so can a mercantilist trade policy aimed at boosting net exports. Secular stagnation quickly becomes a justification for the Trumpian fetish of seeing exporting as strength and importing as weakness, and all the bad policies such a view brings with it. It is true that at a global level, net exports must be zero and cannot add or subtract from demand — so only other demand-boosting policies work in the aggregate. But in our imperfect world with national policymaking, and (supposedly) “bounded” monetary policy, this may just reinforce zero-sum-game thinking, in which it is all about who wins the competition for national export surpluses...."

Martin Sandbu, "How secular is secular stagnation?"Financial Times, March 14, 2019, https://www.ft.com/content/7f6b72f8-456f-11e9-b168-96a37d002cd3

How secular is secular stagnation?

There was, as usual, a rich trove of economic research in the Brookings Papers on Economic Activity presented last week. In particular, Lawrence Summers further developed his thesis that rich economies are in the grip of “secular stagnation”. In an article, Summers and Lukasz Rachel develop new estimates of the “natural” rate of interest — the interest rate that brings desired savings and desired investment in the economy into balance — and find that it has fallen by about 3 percentage points over the last generation. More astonishing, they point out that several public policy decisions (such as higher government debt) has counteracted this fall, and that without them, the “private” real natural rate of interest would have fallen by as much as 7 percentage points.

This is enormous. It is also, in all likelihood, more or less right; the factors the authors attribute it to are plausible. (Emmanuel Farhi and François Gourio establish similar magnitudes in a paper asking why the marginal product of capital has not been driven down along with cheaper borrowing costs.)

The most consequential question, however, is what it means for policy. Summers’s secular stagnation analysis is that equilibrium rates have come so far down that it is impossible for central bank or market interest rates to make demand match the level of potential supply, leaving the economy indefinitely underemployed. To get out of stagnation, other sources of demand have to be increased, where Summers often points to fiscal policy. Rachel has written in a tweet the interesting observation that if the asset-wealthy are less likely to spend out of income than the asset-poor, then a net wealth tax of the kind I have analysed here could be implemented so as to lift aggregate demand.

But I worry about the usefulness of secular stagnation theory, for three reasons.

First, it may lead to policy cures that are worse than the disease. If demand is chronically too low, it is not just fiscal policy that can address this; so can a mercantilist trade policy aimed at boosting net exports. Secular stagnation quickly becomes a justification for the Trumpian fetish of seeing exporting as strength and importing as weakness, and all the bad policies such a view brings with it. It is true that at a global level, net exports must be zero and cannot add or subtract from demand — so only other demand-boosting policies work in the aggregate. But in our imperfect world with national policymaking, and (supposedly) “bounded” monetary policy, this may just reinforce zero-sum-game thinking, in which it is all about who wins the competition for national export surpluses.

Second, I am unconvinced that monetary policy cannot do more (unlike my colleague Martin Wolf, who has also commented on the Rachel and Summers paper). The “zero lower bound” is clearly not at zero since several central banks have lowered short-term rates below it. The idea of an “effective” lower bound somewhere below, but allegedly close to, zero is a theoretical construct. Nobody has seen any sign of it, which means there is at least some further way to go for conventional policy. Meanwhile, more unconventional policies, such as directly targeting long-term interest rates, retain a lot more scope. With the 10-year Treasury yield near 3 per cent, the US economy is far from any lower bound, if one exists.

Third, we must avoid confusing between stocks and flows. The arguments about chronically weak demand are “stock” arguments — reasons why the level of aggregate demand is lower, and has stayed lower, than the level of supply for surprisingly long. Economic growth, however, is a matter of changes in the levels of demand and supply. A low level of demand is perfectly compatible with steady-state solid growth in which all the components of demand change by the same percentage every year. And it is not clear how secular stagnation arguments that explain why the level is low also act as arguments for why growth should be low (except insofar as the forces depressing demand levels are slow-working ones that have not yet worked themselves out).

There are equilibrating mechanisms when the level of demand is below that of supply for some time. If it subdues price growth — and it seems to have done so — it will make for a greater real money supply over time, which should push up demand. But this could take time. Alternatively, inadequate demand levels may inhibit investment and employment, which reduces the level of supply capacity permanently — so-called “hysteresis”. Other stabilising (and indeed destabilising) dynamics set off by demand levels below supply levels can be found, and the secular stagnation discussion needs to say more about these. My own chief worry is that policymakers mistakenly take the “secular” part of stagnation so seriously that they snuff out any sign that demand is catching up with supply.

As the European Central Bank’s dovish turn last week illustrated, central bankers have often made this mistake in the past decade. Perhaps our stagnation is only as secular as macroeconomic policy timidity.

Monday, March 18, 2019

AI Summary. The U.S. poverty rate has stayed near 12-15% despite more than $22tn spent on anti-poverty programs and a rise in GDP per capita from $3,000 in 1960 to over $60,000 in 2023. Over the same period income inequality widened, with the Gini coefficient rising from 0.39 in 1968 to 0.48 in 2022.

Eric A. Hanushek Wall Street Journal
Date Posted:
Is Database:
Database

The US poverty rate has remained unchanged at 12-15% despite $22tn spent on anti-poverty programs since the 1960s. Economic growth has not translated into poverty reduction, with income inequality widening. @EricAHanushek

Has decades of anti-poverty spending and growth reduced the poverty rate?

Core argument: More than $22tn has been spent on U.S. anti-poverty programs since the 1960s, yet the poverty rate has remained roughly 12–15%.

Despite over $22tn spent on anti-poverty programs since the 1960s, the poverty rate in the U.S. has remained relatively unchanged, hovering around 12-15%. Economic growth has not translated into significant poverty reduction, as GDP per capita increased from $3,000 in 1960 to over $60,000 in 2023, yet income inequality widened. The Gini coefficient, a measure of income inequality, rose from 0.39 in 1968 to 0.48 in 2022. Labor market shifts, such as the decline in LFP [Labor Force Participation] from 67% in 2000 to 62% in 2023, have exacerbated economic disparities. Additionally, inflation-adjusted wages for the bottom quintile have stagnated, growing only 5% since 1980, compared to a 40% increase for the top quintile. These data suggest that while economic indicators show growth, structural issues continue to impede progress in reducing poverty effectively.

Takeaways by Macro Roundup® AI

  1. More than $22tn has been spent on U.S. anti-poverty programs since the 1960s, yet the poverty rate has remained roughly 12–15%.
  2. U.S. GDP per capita rose from $3,000 in 1960 to over $60,000 in 2023 while income inequality widened, with the Gini coefficient climbing from 0.39 in 1968 to 0.48 in 2022.
  3. Inflation-adjusted wages for the bottom quintile have grown only 5% since 1980 versus 40% for the top quintile, and labor force participation fell from 67% in 2000 to 62% in 2023.

Eric A. Hanushek and Paul E. Peterson, "The War on Poverty Remains a Stalemate,"Wall Street Journal, March 17, 2019, https://www.wsj.com/articles/the-war-on-poverty-remains-a-stalemate-11552847932

AI Summary. The US lost roughly 2m manufacturing jobs to China while China gained about 12.2m, a sixfold gain per US job lost, alongside a $240bn rise in Chinese exports to the US versus a $40bn rise in imports from it. Lower Chinese labor productivity and highly elastic local labor supply help explain the asymmetry.

Harald Hau Center for Economic and Policy Research
Date Posted:
Is Database:
Database

Btw 1999-2007, every US manufacturing job lost to China created 6 manufacturing jobs in China.

Did China gain far more manufacturing jobs than the US lost?

Core argument: Between 1999 and 2007 the US lost roughly 2m manufacturing jobs to China while China gained about 12.2m manufacturing jobs, a sixfold job creation in China for every US job lost.

Between 1999 and 2007, the US lost approximately 2m manufacturing jobs to China, while China gained about 12.2m new manufacturing jobs, illustrating a sixfold job creation in China for every US job lost. This shift was driven by a $240bn increase in China's exports to the US, compared to a $40bn rise in imports from the US. The rapid growth in China's export-led industries led to significant employment increases, particularly among local workers transitioning from agriculture or non-participation in the workforce. The lower labor productivity in China contributed to this asymmetry, as did the highly elastic local labor supply, which prevented wage pressure despite the employment surge. In contrast, the US experienced strong negative wage effects in its manufacturing sector, highlighting the divergent economic impacts of trade between the two nations.

Takeaways by Macro Roundup® AI

  1. Between 1999 and 2007 the US lost roughly 2m manufacturing jobs to China while China gained about 12.2m manufacturing jobs, a sixfold job creation in China for every US job lost.
  2. China's exports to the US rose by $240bn between 1999 and 2007 against a $40bn rise in imports from the US, with China's employment gains concentrated among local workers moving out of agriculture or non-participation.
  3. China's lower labour productivity and highly elastic local labour supply held back wage pressure despite the employment surge, while the US manufacturing sector saw strong negative wage effects.

Every US manufacturing job lost to China (1999-2007) created 6 manufacturing jobs in China

"...The annual value of China’s exports to the US increased by $240 billion from 1999 to 2007, whereas China’s imports from the US grew by only $40 billion. Such a rapid and asymmetric surge in trade influenced not only the US labour market as highlighted by a growing literature, but similarly transformed the Chinese labour market. The data suggest a dramatic employment increase in export-led industries and cities where these industries were initially located. Partly due to a much lower Chinese labour productivity,each job lost in the US is associated with up to six new manufacturing jobs created in China. Much of the new manufacturing employment in China goes to local workers previously employed in agriculture or not participating in the workforce at all. A highly elastic local labour supply also explains why the export surge did not create any pressure on the average industrial wage. This contrasts with the strong negative wage effects of trade identified in the US manufacturing sector.....The aggregate analysis reveals that China’s export growth created approximately 12.2 million new manufacturing jobs. For comparison, the corresponding decline for US manufacturing employment is only about 2 million (Autor et al. 2013). This means that every US manufacturing job lost to trade with China came with the creation of up to six new manufacturing jobs in China. The much lower labour productivity of Chinese workers accounts for a large part of this important asymmetry between job destruction and job creation. Industrial wages are roughly ten times higher in the US than in China...."
Harald Hau, Difei Ouyang, Weidi Yuan, "China Syndrome redux: New results on global labour reallocation," Center for Economic and Policy Research, March 1, 2019, https://voxeu.org/article/china-syndrome-redux-new-results-global-labour-reallocation