Archive for the ‘Macroeconomics’ Category

official statistics and China’s GDP growth

Monday, April 24th, 2017

China’s official GDP estimates are distrusted by many, who think that the government is overstating the country’s true rate of economic growth. Columbia University’s Xavier Sala-i-Martin teamed up with two economists from the New York Fed (Hunter Clark and Maxim Pinkovskiy) to examine satellite data on variation over time of nighttime light emissions – a proxy for GDP growth. They find that the official statistics on average do not overstate China’s growth rate; in fact, in recent years they understate it.

For analysts of the Chinese economy, questions about the accuracy of the country’s official GDP data are a frequent source of angst, leading many to seek guidance from alternative indicators. These nonofficial gauges often suggest Beijing’s growth figures are exaggerated, but that conclusion is not supported by our analysis, which draws upon satellite measurements of the intensity of China’s nighttime light emissions—a good proxy for GDP growth that is presumably not subject to whatever measurement errors may affect the country’s official economic statistics. ….

The chart below presents the path of official Chinese GDP growth alongside our modified Li Keqiang Index (with the weights determined by the nighttime lights regression). We place a 95 percent confidence interval around our prediction.

Is Chinese Growth Overstated?

Hunter Clark, Maxim Pinkovskiy, and Xavier Sala-i-Martin, “Is Chinese Growth Overstated?“, Liberty Street Economics, 19 April 2017.

The authors’ full working paper on which this article is based, “China’s GDP Growth May be Understated” (NBER No. 23323, issued in April 2017), can be downloaded here.

economic ignorance and trade wars

Sunday, April 23rd, 2017

It is sad (and dangerous) that policymakers in the current US government display an ignorance of basic economics. A column like this, written by Columbia University economist Jeffrey Sachs, would not be necessary if Mr Trump and his advisors had even a minimal understanding of economic principles taught in economics 101. (more…)

US trade follies

Tuesday, April 18th, 2017

FT columnist Martin Wolf worries that “US policymakers talk nonsense” and, for this reason, “could demolish the open trading system”. (more…)

unemployment rates and participation rates

Thursday, March 30th, 2017

Unemployment rates are useful for describing the health of the economy, but they do have an important flaw. They ignore those who are not in the labour force, those who are not actively seeking employment. Often, this is correct. Students and housewives, for example, may not desire wage employment. But, when the economy is really depressed, many of the involuntarily unemployed become so discouraged that they no longer seek work. By failing to account for these discouraged workers, the unemployment underestimates the true amount of unemployment (slack) in the economy.

President Trump, for all his shortcomings, does have the intuition that the unemployment rate is not a flawless indicator of the health of the economy. Participation rates, as Bloomberg journalist Justin Fox explains, can be more revealing.

President Donald Trump says lots of nutty, made-up things that invariably generate lots of appalled reactions from the news media and the wonkocracy. His statements about the unemployment rate have generated lots of appalled reactions, too. But, as I’ve written before, they’re not entirely nutty or made-up. In fact, they address — albeit in exaggerated Trumpian fashion — a real measurement problem.

Here, for example, is the president in his much-discussed (and yes, in parts quite nutty) interview last week with Time’s Michael Scherer:

I inherited a mess with jobs, despite the statistics, you know, my statistics are even better, but they are not the real statistics because you have millions of people that can’t get a job, OK.

OK! Although I wouldn’t put it exactly that way. Here’s what Trump should have said if he wanted to do more to court the crucial econowonk demographic:

Yes, the unemployment rate is low — and going lower! But the job market still isn’t in great shape, which the unemployment rate misses because it fails to count the millions of people who have given up looking for work. A better measure to focus on would be the prime-age employment-to-population ratio ….

I think it’s fair to characterize this as “a mess with jobs” — although it’s a mess that’s been many decades in the making, and I doubt President Trump really knows what to do about it.

Justin Fox, “The Jobs Statistics Trump Should Be Worried About“, Bloomberg View, 29 March 2017.

Click on the link above for much more analysis and charts. Mr Fox is author of Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (Harper Business, 2009).

 

fiscal austerity in the eurozone

Wednesday, December 7th, 2016

The eurozone’s pursuit of austerity, when fiscal stimulus is needed, continues to worry Martin Wolf. Here are the concluding two paragraphs of his exceptionally informative Wednesday column.

What the eurozone needs most is a shift away from the politics of austerity. In its most recent Economic Outlook, the OECD, a club of mostly rich nations, makes a cogent (albeit belated) plea for a combination of growth-supporting fiscal expansion with relevant structural reforms. This is most relevant to the eurozone because that is where demand has been weakest and the fetish over fiscal deficits most exaggerated. In the big eurozone economies, net public investment is near zero. This is folly.

Alas, little chance of change exists. Those who matter — the German government, above all — view public borrowing as a sin, regardless of its cost. The political and economic impact of breaking up the eurozone is so great that the single currency may well soldier on forever. But it has by now become identified with prolonged stagnation. Those member countries with the power to change this approach should ask themselves whether it really makes sense. It is time for the eurozone to stop living dangerously and start living sensibly, instead.

Martin Wolf, “More perils lie in wait for the eurozone“, Financial Times, 7 December 2016 (metered paywall).

Trump’s tax plans favour the rich

Monday, December 5th, 2016

Harvard economist Larry Summers explains that Trump’s proposed tax cuts will benefit high-income taxpayers, at the expense of those with lower incomes. He predicts that this is likely to retard rather than stimulate economic growth, in part because after-tax income is shifted “towards those most likely to save it”.

Just as Ronald Reagan’s landmark 1986 bipartisan tax reform increased simplicity, fairness and economic efficiency by broadening the tax base and reducing rates, today reform of the system has the potential to help American families and the economy. ….

A core principle agreed to by all in 1986 was that reform would not reduce the tax burden on high-income taxpayers. Reagan achieved this objective while reducing top marginal rates because he raised capital gains rates, scaled back investment incentives, increased corporate tax collection, curtailed shelters and left estate and gift taxes alone. Unfortunately, neither the Trump plan, nor the one put forward by Paul Ryan, speaker of the House of Representatives, provides for nearly enough base-broadening to finance all the high-end tax cutting they include.

Steven Mnuchin, Treasury secretary-designate, asserts there will be no absolute tax cut for the upper class because deductions would be scaled back. The rub is that totally eliminating all deductions for those with incomes over $1m would not even raise enough revenue to cover reducing their marginal tax rates from 39 to 33 per cent, let alone offset their benefit from huge rate reductions on business and corporate income, and the elimination of estate and gift taxes.

Lawrence Summers, “Trump’s tax plans favour the rich and will hamper economic growth“, Financial Times, 5 December 2016 (metered paywall).

See also this post from February 2014 on Professor Summers’ concern with increasing inequality in the distribution of after-tax income.

Keynes vs Hayek podcast

Sunday, December 4th, 2016

I enjoy very much listening to weekly podcasts from FT Alphachat. The host is Cardiff Garcia, and the hour-long talk is almost always entertaining. This week’s podcast is particularly good. You can download it at the link below, or at iTunes. Notes and links for this episode will be posted at ftalphaville within a few days.

All FT blogs and podcasts can be downloaded without charge. (Free registration may be required.)

Cardiff Garcia sits down with Nicholas Wapshott, author of Keynes Hayek: The Clash that Defined Modern Economics [Norton, 2011], to discuss which economist’s ideas are ascendant in the post-crisis cycle, and why both will matter during the Trump administration.

Cardiff Garcia, “Keynes vs Hayek: NOW who is winning?“, FT Alphchat, 2 December 2016.

Nicholas Wapshott (born 1952) is a British journalist and author of numerous books, including Ronald Reagan and Margaret Thatcher: A Political Marriage (Sentinel, 2007). His latest publication is The Sphinx: Franklin Roosevelt, The Isolationists, and the Road to World War II (Norton, 2014).

I have added “Keynes Hayek” to my reading list.

China’s “debt funding bubble”

Sunday, December 4th, 2016

Here is an interesting column from a seasoned FT researcher.

When Marco Polo went to China [in the 13th century] he discovered something better than alchemy. Rather than turning base metals into gold, he marvelled that the Chinese were creating money out of paper. ….
(more…)

Trump’s infrastructure investment plans

Monday, November 14th, 2016

Harvard economist Larry Summers gives low marks to Trump’s plan for infrastructure investment.

I have long been a strong advocate of debt-financed public investment in the context of low interest rates and a decaying US infrastructure, so I was glad to see Mr Trump emphasise it. Unfortunately, the plan presented by his advisers, Peter Navarro and Wilbur Ross, suggests an approach based on tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting of public resources.

Many of the highest return infrastructure investments — such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system — do not generate a commercial return and so are excluded from his plan. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage of the program.

Lawrence Summers, “A badly designed US stimulus will only hurt the working class“, Financial Times, 14 November 2016 (metered paywall)

Lawrence Summers (born 1954) was President Bill Clinton’s Treasury Secretary.

what is competitiveness, and does it matter?

Monday, August 15th, 2016

Some economists, and many policymakers, believe that wage cuts are needed to restore ‘competitiveness’. FT columnist Martin Sandbu writes “There are many problems with this view”, and proceeds to discuss three of them.

First, … it makes little sense to apply the concept of competitiveness to countries, which can’t go out of business, unlike companies, which can. National prosperity depends not on competitiveness but on productivity.

Second, the word competitiveness focuses our attention on tradeable sectors, as in “export competitiveness”. Non-tradeable goods and services, after all, do not compete internationally. … [D]uring the euro’s early boom years … cost increases were in non-tradeable sectors, and the deficits were racked up by import booms, not export erosion.

Third, competitiveness is often treated as measured by how low “unit labour costs” are — the total compensation paid to workers for a given quantity of production. But it is misleading to apply unit labour costs to whole economies rather than individual sectors. … [W]hat is the labour compensation involved in producing one unit of gross domestic product? It boils down to labour’s share of economic output. The theoretical abuse of applying the unit labour cost concept at the whole-economy level camouflages the capital-labour distributive conflict in the language of efficiency.

Martin Sandbu, “Free Lunch: Getting real about competitiveness“, Financial Times, 16 August 2016 (metered paywall).

Norwegian economist Martin Sandbu (born 1975) writes “Free Lunch”, an FT daily briefing on economic issues. He is author of Europe’s Orphan: The Future of the Euro and the Politics of Debt (Princeton University Press, 2015).

Sandbu draws freely from (and cites) a working paper written more than five years ago by Jesus Felipe and Utsav Kumar, two economists on the staff of the Asian Development Bank (Manila, Philippines). Here is the abstract and an ungated link to the paper.

Current discussions about the need to reduce unit labor costs (especially through a significant reduction in nominal wages) in some countries of the eurozone (in particular, Greece, Ireland, Italy, Portugal, and Spain) to exit the crisis may not be a panacea. First, historically, there is no relationship between the growth of unit labor costs and the growth of output. This is a well-established empirical result, known in the literature as Kaldor’s paradox. Second, construction of unit labor costs using aggregate data (standard practice) is potentially misleading. Unit labor costs calculated with aggregate data are not just a weighted average of the firms’ unit labor costs. Third, aggregate unit labor costs reflect the distribution of income between wages and profits. This has implications for aggregate demand that have been neglected. Of the 12 countries studied, the labor share increased in one (Greece), declined in nine, and remained constant in two. We speculate that this is the result of the nontradable sectors gaining share in the overall economy. Also, we construct a measure of competitiveness called unit capital costs as the ratio of the nominal profit rate to capital productivity. This has increased in all 12 countries. We conclude that a large reduction in nominal wages will not solve the problem that some countries of the eurozone face. If this is done, firms should also acknowledge that unit capital costs have increased significantly and thus also share the adjustment cost. Barring solutions such as an exit from the euro, the solution is to allow fiscal policy to play a larger role in the eurozone, and to make efforts to upgrade the export basket to improve competitiveness with more advanced countries. This is a long-term solution that will not be painless, but one that does not require a reduction in nominal wages. [Emphasis added.]

Jesus Felipe and Utsav Kumar, “Unit Labor Costs in the Eurozone: The Competitiveness Debate Again“,  Levy Economics Institute Working Paper No. 651, Bard College (New York), February 2011.