Should-Read: Noah Smith: Peak Finance Looks Like It’s Over

Posted on by Brad DeLong

Should-Read: Noah Smith applies standard economic logic to declare that Peak Finance has passed. The problem is that standard economic logic would not have predicted the hypertrophy of finance in the first place, especially given the zero sum nature of active portfolio management:

Noah Smith: Peak Finance Looks Like It’s Over: “How much of the financial industry will soon be obsolete?…

…As long as capitalism lives, there will be a financial industry. What’s happening, however, is a winnowing…. For the past seven decades, but especially since 1980, finance has grown fat indeed. The share of gross domestic product going to the finance, insurance and real estate industries rose from less than 4 percent in the early 20th century to more than 8 percent by the start of the 21st…. Financial-industry profits also soared, briefly topping 40 percent of all U.S. business profits in the first years of the century. Compensation for financial sector employees far outpaced that of workers in other industries, even after accounting for their average higher skill levels….

Asset management is a second area that will probably be squeezed by the double fists of technology and regulation. As [Thomas] Philippon has shown, asset management, along with real estate, is one of the two sectors responsible for most of the financial industry’s growth. But that might just make it ripe for compression. As with trading, the biggest force putting pressure on asset management is new technology…. Each asset manager will be able to handle much larger volumes…. Passive investing also means that each dollar of assets takes less time and effort to manage…

Should-Read: Mehreen Khan: Carney: world at risk of low rate ‘trap’ for decades

Posted on by Brad DeLong

Should-Read: IMHO, the phrase “structural reform” should be banned from discussion. It is as close to being completely uninformative as a phrase could possibly be. But Carney’s main point–that monetary policy has been the only thing “keeping the patient alive” is certainly very true:

Mehreen Khan: Carney: world at risk of low rate ‘trap’ for decades: “The world economy risks being stuck in a low interest rate “trap” for decades without efforts to boost growth through structural reforms…

…Mark Carney has warned. The governor of the Bank of England said monetary policy was the only thing “keeping the patient alive” in the world’s economic policy mix eight years on from the financial crisis. Low rates around the world were the result of structural factors such as ageing demographics rather than central bank policy, Mr Carney told MPs on Tuesday. “Curing the patient requires the operation”, said Mr Carney. “Monetary policy is keeping the patient alive”.

Must- and Should-Reads: November 15, 2016

Posted on by Brad DeLong

Interesting Reads:

Should-Read: Dietz Vollrath: Labor’s Share, Profits, and the Productivity Slowdown

Posted on by Brad DeLong

Should-Read: Dietz Vollrath: Labor’s Share, Profits, and the Productivity Slowdown: “There’s been a slowdown in measured productivity growth… since about 2000…

…At the same time, there has been increasing attention given to the fact that labor’s share of GDP has been trending downward over the last 30 years or so…. The flip side of this declining labor share is a less well-documented sense that this is related to greater rents being collected by firms with more market power…. What I want to do here is show how these two trends are related in some fundamental sense through how we measure productivity growth. The TL;DR version is that a falling labor share (and rising profit share of GDP) will necessarily lead to a decline in measured productivity growth, even if underlying innovation doesn’t change. The reason is that if firms have increasing market power, then they are using inputs less efficiently from an aggregate perspective, and measured productivity growth is about how efficiently we use inputs. So increased market power–captured by the decline in labor share–will put a drag on productivity growth…

Should-Read: Barry Eichengreen: Asia Needs to Spell Out Changes They Want in International Monetary System

Posted on by Brad DeLong

Should-Read: Barry Eichengreen: Asia Needs to Spell Out Changes They Want in International Monetary System: “China and Asia need an international monetary system that is stable…

…eliminates imbalances smoothly… provide[s] emergency assistance where it is needed…. The problem of IMF stigma… remains as potent as ever…. CMIM… has yet to be activated…. The adequacy of the actual existing global financial safety net is less than meets the eye…. Countries with deficits don’t want to allow their currencies to depreciate because doing so will increase the burden of servicing foreign-currency debts. Countries in surplus hesitate to allow their currencies to appreciate for fear of losing competitiveness…. A stronger sanction would be that when a chronic surplus country buys foreign assets with its currency to prevent its exchange rate from rising, the IMF could sell foreign assets in exchange for that same national currency, neutralizing the inappropriate national intervention in the foreign exchange market.
Clearly, there would have to be strong support among IMF members for this kind of direct market action. Asian countries could exercise leadership by advocating just such a step…

Fiscal Expansion Needs to Be Done Right

Posted on by Brad DeLong
10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Fiscal expansion now is really a no-brainer:

  • borrow at unbelievably low rates;
  • use it to put people to work doing useful things to make America more productive;
  • if we are near full employment, it will also push up interest rates, restore equilibrium to the banking sectors, and reduce the chances of future bubbly financial vulnerabilities;
  • if we are not near full employment, it will pull people back into the labor force and raise production and employment now as well as in the future.

What’s the downside? Implementation. Larry Summers thinks it will be very badly implemented indeed:

Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class: “Rüdiger Dornbusch made an extensive study of… populist economic programmes….

Over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump programme given its design errors, implausible assumptions and reckless disregard for global economics…. 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…. 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….

Trump’s global plan… rests on a misunderstanding…. The plan seems to assume we can pressure countries not to let their currencies depreciate…. [But] not even US presidents… can repeal the laws of economics. Populist economics will play out differently in the US than in emerging markets. But the results will be no better…

Back in 1980 there were a great many people who thought they had Reagan’s approval and baton for:

  • cutting interest rates,
  • returning to the gold standard,
  • balancing the budget,
  • boosting military spending
  • cutting taxes,
  • cutting “weak claims” to federal dollars by successful rent seekers,
  • cutting off federal support to “weak claimants” who did not look or act like real America.

All six of these factions were correct: they all did have Reagan’s approval baton. But few of these goals were consistent with the others. The final policy outcome in the 1980s was random. It was disastrous for midwestern manufacturing, disastrous for fiscal stability, a negative for economic growth, but an extremely strong positive for the rich and superrich whose taxes were cut the most.

Because the last group speaks with a loud voice, there are lots of people today who think that Reagan’s economic policies were, in some vague way they do not understand, a success. But that is the wrong lesson. The right lesson is: incoherent and contradictory policy goals produce largely-random policies that are very unlikely to turn out well.

Must-Read: Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class

Posted on by Brad DeLong

Must-Read: Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class: “Investors have… concluded that… very expansionary fiscal policy and major reductions in regulation…

…in sectors ranging from energy to finance to drug pricing will raise demand and reflate the American economy. The result has been a rise in real interest rates and inflation expectations, along with a strong stock market and a strong dollar…. [But] initial market responses… are poor predictors…. Rüdiger Dornbusch made an extensive study of… populist economic programmes…. Over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump programme given its design errors, implausible assumptions and reckless disregard for global economics….

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…. 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…. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage…. [AND] the Trump tax reform proposals are too expensive. Many… only benefit the high-saving wealthy….

Trump’s global plan… rests on a misunderstanding…. The Mexican peso has depreciated about 10%… rais[ing] the cost of anything the US exports to Mexico and to lower the cost of anything Mexico exports to the US… mak[ing] Mexico and other emerging markets much cheaper relative to the US for global companies… US workers, particularly in manufacturing, will see increased pressure. The plan seems to assume we can pressure countries not to let their currencies depreciate…. [But] not even US presidents… can repeal the laws of economics.

Populist economics will play out differently in the US than in emerging markets. But the results will be no better…

Should-Read: Matthew Rognlie (2015): Deciphering the fall and rise in the net capital share

Posted on by Brad DeLong

Should-Read: Not supply and demand, but rent-seeking and monopoly as potential sources of our Second Gilded Age:

Matthew Rognlie (2015): Deciphering the fall and rise in the net capital share: “In the postwar era, developed economies have experienced two substantial trends in the net capital share of aggregate income…

…a rise during the last several decades, which is well-known, and a fall of comparable magnitude that continued until the 1970s, which is less well-known. Overall, the net capital share has increased since 1948, but when disaggregated this increase comes entirely from the housing sector: the contribution to net capital income from all other sectors has been zero or slightly negative, as the fall and rise have offset each other. When decomposed into a return on fixed assets and a residual share of pure profits, the fall and rise of capital income outside the housing sector in the US owes mostly to the residual: it is not paralleled by fluctuations in the measured value of non-housing capital. This observation—combined with the theory of factor substitution, and simulation results from a multisector model—casts doubt on explanations of changes in the net capital share that rely on changes in the value of capital. There is greater support in the data for narratives that emphasize cyclical and trend variation in market power.

Should-Read: Dan Wang: How Smartphones Made Shenzhen China’s Innovation Capital

Posted on by Brad DeLong

Should-Read: Speaking of “communities of engineering practice” and Hirschman linkages:

Dan Wang: How Smartphones Made Shenzhen China’s Innovation Capital: “The technological implications of smartphone technology go far beyond the smartphone itself…

…Pry open your iPhone or Android device, you’ll see… chips… computing… take pictures… wireless communications… pinpoint… GPS…. Companies have invested millions of dollars in figuring out how to make them small, cheap, and light enough to include in smartphones. And most of these chips have proven useful well beyond the smartphone market. As a result, we’re in the midst of a hardware renaissance, in which it’s easier than ever to develop and market new gadgets. The center of this renaissance is Shenzhen….

In 2013, Chris Anderson coined the phrase “the peace dividends of the smartphone wars” to describe this flowering of innovation…. Apple decided that the first iPhone would be manufactured in Shenzhen by a Taiwanese company called Foxconn. Shenzhen is now totally dominant in mobile production, turning out not just iPhones but also Android devices for the whole world. And the spillover effects of these innovations have made it a lot easier to develop new products. Electronic components that used to cost tens of thousands of dollars (if they could be bought at all) may now only cost a few dollars, allowing more inventors to prototype and produce…. Hoverboards might provide the most colorful example of how smartphones have enabled spinoff technologies…

Must-Read: Tomas Hellebrandt and Paolo Mauro: The Future of Worldwide Income Distribution

Posted on by Brad DeLong

Must-Read: I am not sure that this is right. Rapid economic growth in the emerging-market economies–actual catch-up–is a phenomenon limited to 1980-2015, and is driven by China and India. Otherwise the rest have merely kept pace with the Global North + Pacific Rim. And the rest have fallen behind Global North + Pacific Rim + China + India. The future global between-country income distribution picture looks very cloudy to me…

Tomas Hellebrandt and Paolo Mauro: The Future of Worldwide Income Distribution: “Over the next two decades the structure of world population and income will undergo profound changes…

…Global income inequality is projected to decline further in 2035, largely owing to rapid economic growth in the emerging-market economies. The potential pool of consumers worldwide will expand significantly, with the largest net gains in the developing and emerging-market economies. The number of people earning between US$1,144 and US$3,252 per year in 2013 prices in purchasing power parity terms will increase by around 500 million, with the largest gains in Sub-Saharan Africa and India; those earning between US$3,252 and US$8,874 per year in 2013 prices will increase by almost 1 billion, with the largest gains in India and Sub-Saharan Africa; and those earning more than US$8,874 per year will increase by 1.2 billion, with the largest gains in China and the advanced economies.