Should-Read: Paul Krugman: Trade Wars, Stranded Assets, and the Stock Market: “Even a trade war that drastically rolled back globalization wouldn’t impose costs on the economy comparable to the kinds of movement we’ve seen in stock prices…

…But the costs to the economy as a whole might not be a good indicator of the costs to existing corporate assets. Since about 1990 corporate America has bet heavily on hyperglobalization…. Apple could produce… entirely in North America, and probably would in the face of 30 percent tariffs. But the factories it would take to do that don’t (yet) exist. Meanwhile, the factories that do exist were built to serve globalized production–and many of them would be marginalized, maybe even made worthless, by tariffs that broke up those global value chains. That is, they would become stranded assets. Call it the anti-China shock…. My original question was why stocks are dropping so much more than the likely costs of trade war to the economy. And one answer, I’d suggest, is disruption–which business leaders love to celebrate in their rhetoric, but hate when it happens to them.

Should-Read: William Beveridge (1942): Beveridge Report: Social Insurance and Allied Services: “Three guiding principles may be laid down at the outset…

• The first principle is that any proposals for the future, while they should use to the full the experience gathered in the past, should not be restricted by consideration of sectional interests established in the obtaining of that experience. Now, when the war is abolishing landmarks of every kind, is the opportunity for using experience in a clear field. A revolutionary moment in the world’s history is a time for revolutions, not for patching.

• The second principle is that organisation of social insurance should be treated as one part only of a comprehensive policy of social progress. Social insurance fully developed may provide income security; it is an attack upon Want. But Want is one only of five giants on the road of reconstruction and in some ways the easiest to attack. The others are Disease, Ignorance, Squalor and Idleness.

• The third principle is that social security must be achieved by co-operation between the State and the individual. The State should offer security for service and contribution. The State in organising security should not stifle incentive, opportunity, responsibility ; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.

The Plan for Social Security set out in this Report is built upon these principles. It uses experience but is not tied by experience. It is put forward as a limited contribution to a wider social policy, though as something that could be achieved now without waiting for the whole of that policy. It is, first and foremost, a plan of insurance–of giving in return for contributions benefits up to subsistence level, as of right and without means test, so that individuals may build freely upon it….

Abolition of want requires, first, improvement of State insurance that is to say provision against interruption and loss of earning power…. Abolition of want requires, second, adjustment of incomes, in periods of earning as well as in interruption of earning, to family needs, that is to say, in one form or another it requires allowances for children. Without such allowances as part of benefit – or added to it, to make provision for large families, no social insurance against interruption of earnings can be adequate…

Should-Read: Martin Wolf: The Chinese economy is rebalancing, at last: “Consumption is at last becoming the most important driver of demand in the Chinese economy…

…This is a long-awaited and desirable adjustment…. But it still has a long way to go…. In 2007, premier Wen Jiabao argued rightly that “the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated and unsustainable”. In that year, gross national savings were 50 per cent of gross domestic product, up from 37 per cent in 2000. These huge savings financed domestic investment of 41 per cent of GDP and a current account surplus of 9 per cent. Then came the global financial crisis. The Chinese authorities promptly realised that the current account surplus had become unsustainable. In the short run, the only way to avoid a slump was to expand investment further. In 2011, gross investment reached 48 per cent of GDP and the current account surplus fell to 2 per cent. But national savings remained at 50 per cent of GDP.

This solution brought new problems. The first was a declining return on investment…. The second problem is that the increased investment was driven by a huge rise in debt…. Up to 2014… nothing had happened to make the Chinese economy seem any less unstable, unbalanced, uncoordinated and unsustainable….

The past three years have witnessed change at last: investment has fallen by 3 per cent of GDP, while public and private consumption have risen by much the same proportion. As a result, consumption has become a more important source of additional demand than investment. Thus, in 2017, notes a background paper to this year’s China Development Forum, final consumption contributed 59 per cent of GDP growth…. The rise in indebtedness has also (apparently) stopped. Behind this has been a willingness to substitute quality for quantity of growth…. While the shifts are slow and the full adjustment to more reasonable levels could take until the middle of the next decade, we are seeing early signs of the necessary change in the structure of the Chinese economy towards one that is less unbalanced and, above all, one that is more reliant on the consumer demand of China’s vast population. That would, in turn, be good for China and for the rest of the world….

The story told by former premier Wen is far from over. But we can now at least envisage a happy ending.

Should-Read: Remember this negative singularity of idiocy? I am still unaware of any “I’m sorrys” or any “I have had to rethink my vision of the Cosmic All” from any of the signers, and it has been more than seven years: Michael J. Boskin, Charles W. Calomiris, John F. Cogan, Niall Ferguson, Kevin A. Hassett, Douglas Holtz-Eakin, David Malpass, John B. Taylor, and others not worth mentioning: (November 15, 2010): Open Letter to Ben Bernanke: “We believe the Federal Reserve’s large-scale asset purchase plan (so-called ‘quantitative easing’) should be reconsidered and discontinued…

…We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We disagree with the view that inflation needs to be pushed higher and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems

Cliff Asness, Michael J. Boskin, Richard X. Bove, Charles W. Calomiris, Jim Chanos, John F. Cogan, Niall Ferguson, Nicole Gelinas, James Grant, Kevin A. Hassett, Roger Hertog, Gregory Hess, Douglas Holtz-Eakin, Seth Klarman, William Kristol, David Malpass, Ronald I. McKinnon, Dan Senor, Amity Shlaes, Paul E. Singer, John B. Taylor, Peter J. Wallison, Geoffrey Wood

Should-Read: Janet Yellen: Statement on the Appointment of John Williams as President of the Federal Reserve Bank of New York: “I strongly support the appointment of John Williams as President of the Federal Reserve Bank of New York… Continue reading “Should-Read: Janet Yellen: Statement on the Appointment of John Williams as President of the Federal Reserve Bank of New York” →