Must-Read: James J. Feigenbaum and Christopher Muller: Lead exposure and violent crime in the early twentieth century

Must-Read: James J. Feigenbaum and Christopher Muller: Lead exposure and violent crime in the early twentieth century: “In the second half of the nineteenth century, many American cities built water systems using lead or iron service pipes…

…Municipal water systems generated significant public health improvements, but these improvements may have been partially offset by the damaging effects of lead exposure through lead water pipes. We study the effect of cities’ use of lead pipes on homicide between 1921 and 1936. Lead water pipes exposed entire city populations to much higher doses of lead than have previously been studied in relation to crime. Our estimates suggest that cities’ use of lead service pipes considerably increased city-level homicide rates [by 24%].

Good Riddance to Fidel Castro…

Good Riddance to Fidel Castro!: Fidel Castro has retired. Good riddance!!

That the Lenin-Trotsky-Stalin Authoritarian Project of which Fidel Castro was the next-to-last exemplar was not an advance toward but a retreat from a better world was obvious long, long ago. Quite early–Kronstadt?–it was clear to all save the dead-enders that the project was a mistake.

As Rosa Luxemburg wrote in “The Russian Revolution”:

Freedom only for the supporters of the government, only for the members of one party — however numerous they may be — is no freedom at all. Freedom is always and exclusively freedom for the one who thinks differently… because all that is instructive, wholesome and purifying in political freedom depends on this essential characteristic….

The tacit assumption underlying the Lenin-Trotsky theory of dictatorship is this: that the socialist transformation is something for which a ready-made formula lies completed in the pocket of the revolutionary party, which needs only to be carried out energetically in practice. This is, unfortunately — or perhaps fortunately — not the case…. What we possess in our program is nothing but a few main signposts which indicate the general direction in which to look….

The socialist system of society should only be, and can only be, an historical product, born out of the school of its own experiences, born in the course of its realization, as a result of the developments of living history… socialism by its very nature cannot be decreed or introduced by ukase. It has as its prerequisite a number of measures of force — against property, etc. The negative, the tearing down, can be decreed; the building up, the positive, cannot. New Territory. A thousand problems.

Only experience is capable of correcting and opening new ways. Only unobstructed, effervescing life falls into a thousand new forms and improvisations, brings to light creative new force, itself corrects all mistaken attempts. The public life of countries with limited freedom is so poverty-stricken, so miserable, so rigid, so unfruitful, precisely because, through the exclusion of democracy, it cuts off the living sources of all spiritual riches and progress….

The whole mass of the people must take part in it. Otherwise, socialism will be decreed from behind a few official desks by a dozen intellectuals…. [Lenin] is completely mistaken in the means he employs. Decree, dictatorial force of the factory overseer, draconian penalties, rule by terror…. It is rule by terror which demoralizes.

When all this is eliminated, what really remains?… Without general elections, without unrestricted freedom of press and assembly, without a free struggle of opinion, life dies out in every public institution, becomes a mere semblance of life, in which only the bureaucracy remains as the active element. Public life gradually falls asleep, a few dozen party leaders of inexhaustible energy and boundless experience direct and rule. Among them, in reality only a dozen outstanding heads do the leading and an elite of the working class is invited from time to time to meetings where they are to applaud the speeches of the leaders, and to approve proposed resolutions unanimously — at bottom, then, a clique affair — a dictatorship, to be sure, not the dictatorship of the proletariat but only the dictatorship of a handful of politicians, that is a dictatorship in the bourgeois sense….

Yes, we can go even further: such conditions must inevitably cause a brutalization of public life: attempted assassinations, shooting of hostages, etc….

That–written some ninety years ago–strikes me as a good epitaph for Castro’s rule.

Must-Reads: November 25, 2016


Interesting Reads:

Should-Read: David Jacks et al.: Infant Mortality and the Repeal of Federal Prohibition

Should-Read: David Jacks et al.: Infant Mortality and the Repeal of Federal Prohibition: “Exploiting county-level variation in prohibition status…

…this paper asks…. What were the effects of the repeal of federal prohibition on infant mortality? And… were there any significant externalities from the individual policy choices of counties and states on their neighbors? We find that dry counties with at least one wet neighbor saw baseline infant mortality increase by roughly 3%. Cumulating across the six years from 1934 to 1939, this would suggest a substantial number of excess infant deaths which can be attributed to the policy externalities alone arising from the repeal of federal prohibition in 1933. We argue that such policy externalities should be a key consideration in the contemporary policy debate on the prohibition of illicit substances.

Should-Read: David Weil and Heidi Sherholz: CBO Report Confirms What We Already Knew

Should-Read: David Weil and Heidi Sherholz: CBO Report Confirms What We Already Knew: “The Congressional Budget Office released a study of the economic impact of reversing these updates to the overtime regulations…

…The CBO report confirms what we already knew – that the rule will increase earnings for middle-income Americans. Here are our takeaways…. Reversing the rule would strip nearly 4 million workers of overtime protections… reduc[ing] workers’ earnings while increasing the hours they work… the total annual earnings of all affected workers would decrease by more than $500 million in 2017…. CBO finds that reversing the rule would primarily benefit people with high incomes… 85 percent… would accrue to people in the top income quintile. CBO finds that reversing the rule would not create or save jobs…

Central Banks, Neutral Policy, and Economic Structure

Since 2009 the Federal Reserve and other global north central banks have, first hesitantly and enthusiastically, been trying to sacrifice the health of the commercial banking sector in order to keep the life support machines that are keeping the rest of the economy alive going.

Your average commercial bank needs a 2.5% margin on its liabilities in order to cover the cost of its branches and its ATM network. Commercial banks are used to taking their deposits, sticking them in long term Treasuries and similar assets, and relying on time, diversification, the slope of the yield curve ,and the normal level of interest rates to generate the revenue so that they can earn profits if they manage their branches and ATM networks efficiently. Since 2008 that has not been a profitable strategy for commercial banks. Thus commercial banks have been under enormous pressure for a near-decade now.

It is there, I think, that central banks have been inflicting significant pain. It is not the case that extremely low interest rates on extremely safe assets has been keeping alive businesses that ought to shut down. For small businesses, credit is tight. Equity earnings yields are about normal–a company that is trying to think about whether to expand or payout its earnings is not facing any sort of environment in which there is a cost of capital that is in any sense “artificially low”.

So I do not see the Fed as having given any sort of pass to industry as a whole at all. It has kept the rest of the economy functioning while imposing very heavy pressures on the commercial banking sector. This is not normal. But it is not a bubble…

Trumpism on Trade as a Wild Goose Chase

In the United States 24% of nonfarm workers were manufacturing workers in 1971.

It’s 8.6% today.

Maybe it would be 9% if NAFTA has not been negotiated and if China had not joined the WTO, but maybe it would still be 8.6%–analysts disagree on trade expansion vs. trade diversion here.

Datawrapper bzG79 Visualize

Maybe it would be 12% if the United States had followed Japan’s and Germany’s roads of being high-savings low-currency value countries focused on nurturing their communities of engineering excellence, rather than running the Reagan and Bush 43 deficits and combining that with a focus on financialization and a strong-dollar policy. I certainly think that would have been a better policy road for the United States. But it gets you only to 12% at most–not back to 24%.

The fall from 24% to 12% is the technological tide: increasing labor productivity in manufacturing, large but not infinitely elastic demand for manufactured goods.

Looking forward we can say that by 2060 manufacturing in the United States is likely to be 6% of production workers, in which case whatever you think of what the most important parts of the value chain are, tuning the location of manufacturing labor–the people watching the robots and swapping them out when they go bad and break–is unlikely to be an important part. The thing that had been a major driver of growth in employment worldwide for two centuries–since the cotton masters of Lancashire realized the first automatic spinning machines needed a lot of labor to watch and maintain them because they were fragile–will no longer be salient in our economies. Gone with it for EMs will be the road to development that used labor cost advantage to find a niche making basic manufactures and a national champion firm that could export into that niche, and then relying on learning by doing and osmotic technology transfer to carry you forward. For today’s EMs that are not already well along the road: Strait is the gait. Narrow is the way. Many are called, but few are chosen.

As Pascal Lamy said last week: “There is supposed to be an old Chinese proverb: ‘When the wise man points at the moon, the fool looks at the finger’. Market capitalism is the moon. Globalization is the finger.”

The problems of market capitalism are broad and deep. They are not solved–they are not event addressed–by trade wars, by “renegotiating” NAFTA, by (falsely today) labeling China as a currency manipulator.

And Trump’s core supporters will not be happy if his trade policies sharply raise the prices of the goods they buy at Walmart.

Must-Reads: November 23, 2016


Interesting Reads:

Should-Read: Izabella Kaminska: Global Trade Alert

Should-Read: And how would the adverse Hayekian business shock manifest itself if not in a sharp slowdown in the growth of trans-Pacific trade? Very interesting. But I don’t now what or how to think about this yet:

Izabella Kaminska: Global Trade Alert: “Hyun Song Shin’s latest thoughts on the connection between the bank/capital markets nexus, the dollar shortage problem and the break down of covered interest rate parity arbitrage deserve some careful consideration…

…Shin reminded the audience that every argument which suggests market finance is a stabilising influence on the financial system (acting as a spare tire when the banking sector is impaired) can be offset with the argument that capital markets force banks to behave even more pro-cyclically than they might otherwise be inclined to do so….

When banks and other financial intermediaries are stretched to high levels of leverage, supported by razor-thin haircuts, any slight knock to the haircut leaves them vulnerable to forced deleveraging… [which] is the key to understanding funding pressures on banks….

The Vix no longer works as a barometer of leverage appetite…. This poses a bit of a conundrum:

On one hand, there are signs of unabated risk appetite in financial markets, as witnessed in high stock market valuations, compressed credit spreads and subdued volatility, the recent pickup notwithstanding. Yet the banking sector is going through a tough time. In contrast to the overall stock market, banking stocks are struggling, with depressed market-to-book ratios, especially for advanced economy banks outside the United States. Why is this?
Bear with us, because the answer is quite disturbing.

As Shin notes, the easy answer is the weirdness of extended monetary easing…. The more complex answer is that it’s all down to overly restrictive bank regulation…. Introduce the breakdown of covered interest rate parity (CIP) into the equation (because yes, according to Shin it’s all connected), and we find ourselves in an exceptional situation…. He proposes the gap may be persisting because banks simply do not have enough capital available to take on such transactions. Indeed, given many banks have capital comfortably above any regulatory constraints…. So what’s the real issue?

As interest rates have fallen to historically low and even to negative levels in some regions, investors searching for yield have sought higher-yielding assets. In practice, given the global role of the dollar as the borrowing currency of choice, such higher-yielding assets have been denominated in US dollars, even if the borrowers are non-US residents. Long-term yields for US dollar-denominated securities have been higher than for assets of similar maturities in Japan, the euro area or Switzerland. For institutional investors who hold a global portfolio of assets, the currency mismatch between the assets they hold and the commitments they have to their domestic stakeholders in yen, euros or Swiss francs looms large….

Follow the implications of the stronger dollar for the viability of lengthy global value chains (GVCs). Long production chains make heavy demands on working capital…. The financing demand typically grows at the rate of the square of the length of the chain…. The strength of the dollar tracks closely the latest slowdown in export growth. Could it be that the tighter financial conditions resulting from the stronger dollar have been a drag on export growth?… This is an issue of first-order importance…