Macro Roundup

Brad Setser points out a key fact about the global economy - the absence of any growth in China's imports of manufactures.

In short the world's fastest growing economy over the last six years isn't importing any more manufactures (in dollar terms) than it did six years ago. Or as he put it, "... It increasingly looks like China’s post global crisis import income elasticity is well below 1.That’s the internalization of supply chains—with more parts for electronics exports produced in China..."Import substitution working?

Brad offers a few hypothesis for what is driving this trend, though he notes there isn't a definitive answer:

1)Is it a function of the direct effect of Trump’s tariffs and China’s retaliation on trade with the United States, and the indirect effects of tariff uncertainty on investment in China’s tradables sector?
2)Is it a function of Yi Gang’s apparently successful effort to limit China’s stimulus to the minimum necessary—and China’s broader decision not to sacrifice deleveraging to the exigencies of the trade war?
3)Is it a function of China’s version of peak “autos”?
4)Is it a function of Xi’s campaign to “localize” production in China—a push symbolized by import substitution goals embedded in “Made in China 2025”?
5)Or is it something else?

Brad Setser, "China, More Than Trump, Has Been Driving the Slowdown in Global Trade," Council on Foreign Relations, December 10, 2019, https://www.cfr.org/blog/china-more-trump-has-been-driving-slowdown-global-trade

"... One of the key stylized facts about the global economy in 2019 is that everyone should know China’s trade surplus in manufactures has increased by just under a percentage point of China’s GDP on the back of falling imports (the overall surplus is also up, but by a bit less).Even with the fall in trade with the United States. Yet it is something that a lot of people haven’t quite internalized. The IMF’s 2019 assessment of China was built around the assumption that the 2018 fall in China’s trade surplus would be sustained.And most of the financial press—the Wall Street Journal, the Economist—and many investment banks were forecasting that 2019 would be the year when China’s current account moved into deficit. Yet China's current account surplus is on track to top $200 billion this year on the back of a rising trade surplus…It isn't just a direct function of the trade war. China’s exports to the United States are on pace to fall by about 75 billion this year. That automatically would reduce China’s imports by say $25 billion (fewer exports mean fewer imported inputs). China’s tariffs will reduce imports from the United States by something like $20 billion. That isn't enough to explain the broader fall in China’s imports. But it is hard to differentiate between the impact of domestic weakness on investment—weak auto demand and auto oversupply should be combining to reduce investment in new Chinese capacity—with the impact of trade uncertainty, which also would deter investment in new manufacturing in China. We do though know that China's investment has been weak and investment tends to have a disproportionate impact on trade, as the imported content of investment is higher than the imported content of consumption…. Imports of manufactures for China's own use (that is, excluding processing imports) have been sliding relative to China's economy for quite some time.This isn’t just something that I have noticed. The ECB and the IMF both were on the case back in 2016. As was the Banque de France, which was somewhat more direct than either the ECB or the IMF ("the recent trade deceleration is closely linked to the shift of China’s production towards domestic demand," updated graphs here). It increasingly looks like China’s post global crisis import income elasticity is well below 1. That’s the internalization of supply chains—with more parts for electronics exports produced in China. And, perhaps, that’s China’s industrial policy in action...."

Good explanation of the mechanics

Swanson pushes back on Phillippon's claims the US telecommunications industry is extracting rents - American per capita internet traffic is 43.8% higher than western Europe and 42.6% higher than Japan

"....In most of at advanced economies, consumers pay around $35 per month for broadband Internet connections. In the US, they pay almost double. How on earth did that happen?...It turned out that most of the comparisons were poorly conceived and executed. The studies mostly failed to adjust for quality, speed, demographics, population density, data usage, and/or proper price indexes. They often cherry picked some nations and left out inconvenient ones — Switzerland comes to mind....After reviewing the conflicting claims and doing our own analysis, we concluded that overall, “The US Leads the World In Broadband.” US speeds were fast, coverage was broad (although never broad enough!), prices were competitive, and Americans generated and consumed (both per capita and per user) more data than anyone (see nearby chart). The US actually generates three times more internet data traffic than Western Europe....In its 2019 mobile report, Ericsson estimated data traffic per smartphone and found that in 2018, the US generated 7.0 gigabytes (GB) per month, while Western Europe generated 6.7 GB per month. Ericsson projects that by 2024, US traffic per smartphone will grow to 39 GB per month and Western Europe will rise to 32 GB per month. If US prices are in fact high, they are not depressing smartphone uptake and data usage. Direct price comparisons are tricky. And it’s true that in some studies, US mobile prices appear high. In its most recent international report, the Federal Communications Commission found that, according to simple metrics, out of 28 advanced nations, US mobile prices ranked in the teens or twenties. But after making hedonic adjustments for speed and quality, the US ranked 12th and 10th, respectively. We hear that newer studies, with more advanced methodologies, are on the way...."

counterintuitive study using data from 30 European countries looks at the impact of relative decline in social status on both an individual, and a macro level finds that an individual's downward social mobility is not linked to increased hostility towards immigrants on a personal level.

However people living in macro environments of overall negative social mobility are more hostile to immigrants and marco environments of upward mobility have more positive attitudes towards immigrants.

"... Our central question is: Are downwardly mobile individuals less supportive of immigration than the upwardly mobile or immobile individuals?.....We interpret a failure to keep up with parental social class (i.e. downward mobility) as an indicator that individual’s status achievements lag behind expectations and contribute to subjective feelings of loss and decline....The findings show that more downward mobility is associated with more hostile attitudes towards immigration, upward mobility is linked with more positive attitudes. When there is more downward mobility relative to upward mobility, anti-immigration attitudes are stronger…. Our findings show that there is little evidence that the experience of downward social class mobility, in itself, has a particular influence on attitudes towards immigration, apart from in a few countries.Generally, a failure to do better than one’s parents does not make people more hostile towards immigration. Furthermore, we find little evidence in line with the narrative that blocked opportunities in a context as a whole—in terms of low relative mobility rate— are at the heart of attitudes towards immigration. However, people living in contexts with high downward mobility rates and low upward mobility rates, in absolute terms, are indeed more negative towards immigration. This suggests that limited opportunities for upward mobility might contribute to the feelings of frustration and hostility towards outsiders....Our results show that the working classes hold stronger anti-immigration attitudes and parental class continues to exert an effect on attitudes in adulthood even after accounting for individual’s own social class position. Being downwardly mobile from parental class does not appear to be associated with more hostility towards immigrants, except in a few European countries like Italy, Poland, and Greece. Our random-effects meta-regression models show, however, thatpeople living in contexts of high downward mobility are more hostile towards immigrants compared to people in contexts with high upward mobility.....”

Marii Paskov, Patrick Prag, and Lindsay Richards, "Does Downward Social Mobility Make People More Hostile towards Immigrants?" Nuffield College and University of Oxford, December 8, 2019, https://osf.io/preprints/socarxiv/yxe7u/

"… How can you avoid missing the best seed deal? The simplest way is to put money into every credible deal. Maybe you have a crystal ball that gives you perfect foresight, in which case you can pick only the best winners. Even then, if your crystal ball is even a little cloudy eventually you will miss a winning deal—and that winning deal might have been the best-performing investment.... Simulations on 10-year investing windows for seed-stage deals suggest fewer than 10% of investors will beat the index, even if those investors have skill in picking deals.....Our research provides a principled quantitative underpinning for a broadly indexed “spray and pray” model of investing at a company’s earliest stages. This is a controversial and contrarian point of view because this kind of investing has been maligned, or at least misunderstood, by traditional venture capitalists.... We have contextualized money-losing investments in this way because in the presence of an α < 2 power law for returns the opportunity cost of missing a single winning investment is theoretically infinite, and investors without perfect foresight that select from a static pool of potential investments achieve their highest expected return by investing in every seed-stage deal..... Our results suggest that after five years a winning seed-stage investment begins to draw its return multiple distribution from an α < 2 (i.e., unbounded mean) power law. This means that the regret an investor could have for missing a winning seed-stage investment is theoretically infinite, a phenomenon that does not appear to hold for later-stage investments. The implication is thatinvestors increase their expected return by indexing as broadly as possible at the seed stage (i.e., by putting money into every credible deal),because any selective policy for seed-stage investing—absent perfect foresight—will eventually be outperformed by an indexing approach.... This difference in approaches aligns with one of our most intriguing results: that over time the fundamental nature of the stock of startup companies changes, so that winning investors in a Series D round can expect very different returns than the winning investors in the Seed round of that same company, to the point that the two investors are in a qualitative sense investing in different asset classes.This result explains why VCs partition themselves primarily by company stage; there is no firm that will make new fintech investments from Seed to Series F, but there are many VC firms that will do the Seed round of a hardware, a biotech, and a fintech company. (Consider the intra-corporation split between GV, the entity formerly known as Google Ventures, which advertises their diverse early-stage investments in“Consumer”,“Enterprise”,“LifeScience”, and “Frontier Tech” companies, and CapitalG, the entity formerly known as Google Capital, which does later-stage investing.)..."

Later fundraising rounds (post-seed), so presumably after investors have reduced information asymmetries, the benefits of indexing decline.

Study of VC returns at the seed stage finds efforts to pick winners underperform simple indexing, ":....Conventional investing wisdom tells us that VCs should pass on most deals they see. But our research indicates otherwise:At the seed stage, investors would increase their expected return by broadly indexing into every credible deal...."

Penn Wharton Budget Model forecats that if implemented Warren’s wealth tax would reduce GDP by about 1 to 2 percent by 2050 and raise between $2.3 trillion (including macroeconomic effects) and $2.7 trillion (not including macroeconomic effects) in additional revenue in the 10-year window 2021 - 2030 (That’s 1 trillion under Warren’s team’s estimate) Note attached short WSJ writeup of paper.

“…. PWBM projects that the proposal would reduce GDP by 0.9 percent in 2050 under the standard budget scoring convention that additional revenues reduce the deficit.If the revenues were instead spent on public investments, PWBM projects GDP in 2050 would fall between 1.1 and 2.1 percent, depending on the productivity of the investment. Average hourly wages in the economy in 2050, including wages earned by households not directly subject to the wealth tax, would fall between 0.8 and 2.3 percent due to the reduction in private capital formation…”

John Ricco, Zheli He and Jon Huntley, "Senator Elizabeth Warren's Wealth Tax: Projected Budgetary and Economic Effects," University of Pennsylvania, https://budgetmodel.wharton.upenn.edu/issues/2019/12/12/senator-elizabeth-warrens-wealth-tax-projected-budgetary-and-economic-effects