Archive for September 2012


Will China own 1/2 of the planet?

I was reading a study by Garett Jones in the Asian Development Review and came across this interesting tidbit:

Modern optimizing macroeconomics begins with the Ramsey growth model, where time preference plays a large role. If national average IQ differs across countries, and if the IQ-time preference relationship discussed by Shamosh and Gray (2008) holds across countries, then the Ramsey model makes a strong prediction. That is, in a closed-economy world, high-IQ countries will save more and have larger ratios of capital to output. Jones and Podemska (2010) provide evidence that this theoretical prediction holds true in practice. They found that the correlation between national IQ and a nation’s capital-output ratio is 0.64.

Further, in an open-economy world, the Ramsey model predicts that high-IQ countries will ultimately own all of the world’s capital (Barro and Sala-i-Martin 2003). In the modern world, presumably somewhere between those two extremes, we might expect high-IQ countries to hold, at the least, a disproportionate share of the world’s globally traded low-risk assets. And that is indeed the case. Since the mid-1990s, when reliable data first became available, a nation’s average IQ has been positively correlated with the ratio of US Treasuries to that nation’s nominal GDP (Jones and Podemska 2010). In 2007, the correlation between national IQ and that nation’s Treasury-GDP ratio was 0.39, and the relationship remained statistically significant when controlling for log GDP per capita.

As long as East Asian countries (and Singapore) continue to have the world’s highest average IQs””not a foregone conclusion, to be sure””conventional growth theory predicts that these countries will hold a disproportionate share of the world’s globally traded low-risk debt. The predictions of theory hold in the data””indeed, the empirical relationships are actually stronger than conventional theory predicts, as demonstrated in Jones and Podemska (2010).

Then Matt Yglesias directed me to a fascinating Tim Fernholz post with this graph:

So let me get this straight.  The ethnic Chinese are already buying up half of all the best real estate in London.  And of that share, 45% comes from a tiny number of Chinese in Hong Kong, Singapore and Malaysia, and the other 5% from the 1.4 billion mainland Chinese who are ultra-thrifty but haven’t yet gotten rich like the 20 million Chinese in those three small economies.   Care to estimate the share of planet Earth that will be owned by the Chinese in 2075, once the mainland becomes rich?

PS.  After doing the post I came across this:

President Obama has become the first president in 22 years to issue a formal order blocking a foreign investment into the United States on national security grounds. The decision, which denies the acquisition of a small Oregon wind farm project by a Chinese-owned company, will unfortunately be seen as yet another signal – this time from the highest possible level “” that the United States does not really want Chinese investment. And for an economy still struggling to create jobs, that’s the wrong signal to send.

Yeah!  That’ll stop the Chinese!

An argument against overabundance and for a progressive consumption tax

Here’s Larry Ellison’s lifestyle, which relates to my previous post:

One of the mysteries surrounding Larry Ellison is how he can afford so many mansions, islands, yachts and planes, all while retaining his shares in his company.

Now we have some clues as to how Ellison funds his acquisitive lifestyle. . . .

Still, Ellison’s stock-backed borrowing has grown dramatically. Last year, he pledged 40 million shares. So the number of shares he’s using for personal loans and lines of credit have more than tripled over the past year. (Read more: Ultra Rich Spend Less on Bling)

One big reason may be Lanai. This summer, Ellison made news when he purchased the island, Hawaii’s sixth largest, for a reported $500 million.

His serial real-estate buying has continued: this week Ellison reportedly picked up another home in Malibu, where he already has at least five other properties.

His trophy collection now includes a former Astor family mansion in Rhode Island, a 10,742-foot home in San Francisco, a historic garden property in Kyoto, three parcels in Lake Tahoe, and Porcupine Creek, a 240-acre estate in California once owned by the billionaire couple Tim and Edra Blixseth, with its own 19-hole golf course.

Ellison also just took delivery of a new yacht, and has spent tens of millions on acquiring the BNP Paribas Open tennis tournament and sponsoring boats in the America’s Cup sailing race.

When does overabundance become a problem?  When every single peasant farmer in Bangladesh has the same lifestyle as Larry Ellison. Let me know when that happens and then we can talk.

This article also presents a good argument for a progressive consumption tax.  Obviously Ellison wouldn’t be happy to see a big new progressive consumption tax.  And obviously we should be careful we don’t impose such a high tax that our most talented people flee to France, or engage in wasteful tax avoidance strategies.  But on pure utilitarian grounds the case is clear, if Ellison’s wealth was cut in half, and the memory of the previous wealth was removed from his brain, he’d be just as happy.

I’d add that the “just deserts” argument for low taxes is also not persuasive.  Perhaps you could make that argument when people became rich though hard work.  But no one has the ability to produce billions in wealth on their own.  Adam Ozimek makes the following argument:

First, it is true that no distributions is commanded by the fabric of the universe. But it also seems pretty obvious to me that the basic concept of private property is a social construct rather than a government one. Now private property in a modern society does require government in order to function well. After all, the social construct of private property is a basic one, and in the real world laws need to be precise and often complex. Furthermore it is in many instances beneficial for everyone to limit private property for the greater good. But private property is not a government created construct, it is a social construct. And this social construct often does provide us with a default form of economic institutions.

Imagine a plane crashes on an uninhabited island with many survivors. It is clear to all that they will be here for the rest of their lives, outside of the laws of their different homelands. Imagine one man walking up to another and casually taking the watch off his wrist. “Hey what are you doing?” the man losing his watch would say. “We haven’t elected a government and defined private property yet, so you can’t own this”. Does this sound plausible? I don’t think so. Sure, you could easily imagine one man taking the watch because he is stronger, and nobody can stop him. But both the taker or the takee would understand that the man’s property is being taken. Both thief and owner recognize private property even in the absence of a government or legal system, and even if the thief chooses to ignore this.

This notion of just deserts does fit our moral intuitions.  But the billionaires of today got their wealth through property laws that don’t match our moral intuitions.  Thus it seems intuitively wrong to steal a tomato that Steve Jobs grew in his garden, but not to allow Samsung to make products with an iPhone-like zoom function.

So why not reform intellectual property laws and then refrain from redistribution?  Because they are completely separate issues.  We should reform the IP laws so that Apple has more competition.  But the optimal set of intellectual property rights should be those that maximize global real output in the long run, not those that match our moral intuitions.  Suppose I invented a drug that cured lung cancer, and refused to market the drug.  Then suppose another firm tries to market the drug.    Do our moral intuitions suggest that action is “theft of property” just because I have a patent?  Obviously not.  The socially optimal intellectual property regime for encouraging medical innovation is completely unrelated to moral intuitions about how much of the resulting benefits is “deserved” by the inventor.

PS.  I’m seeing bloggers claiming the French are implementing the Saez tax plan.  Not so, the French law excludes income on capital, as it should.  The rate is still somewhat too high, but not a complete disaster.

PPS.  I see the NGDP debate rages on.  The bottom line is that NGDP doesn’t matter very much if wages are flexible.  If they are sticky (and they are) it becomes all-important.  Indeed a fall in NGDP/person will seriously distort the labor market regardless of whether it’s caused by tight money or falling productivity combined with an inflation target.  Having said that, obviously it’s the supply-side (what Miles Kimball calls the “deeper magic”) that drives the long run.

Will the NIRA be resurrected?

Here’s Izabella Kaminska in the Financial Times:

You see, contrary to popular belief, our working theory is that the crisis results as much from the conjoined effects of a suddenly over-abundant and over-productive world (on account of technology advances) “” something which has been exacerbated by a shortage of safe assets, credit and money relative to goods available “” as it does from credit profligacy in the mid-naughties.  .  .  .

And as strange as it sounds, in a ‘no-growth’ looking glass world like this, it makes sense for people to be incentivised not to go to work, and to be less productive “” all the while being compensated in monetary terms for choosing to consume today rather than to hoard for tomorrow.

In July 1933 FDR tried to incentivize workers to work less, by semi-coercing companies into reduce the workweek.  In the 4 months prior to this program, industrial production rose 56%.  After July 1933, industrial production immediately started falling, and remained below the July 1933 level as late as May 1935, when the NIRA was declared unconstitutional.  Then output immediately began soaring, in a boom that would last until monetary and fiscal policy were tightened in 1937.

Worth another try?

PS.  What exactly does “overabundance” mean?  The end of scarcity?

HT:  Marcus Nunes

Bullard: The biggest demand shock since the 1930s didn’t cause any unemployment

I’m still in a state of shock after reading the newest PowerPoint slides by James Bullard, sent to me by Bill Woolsey.  He seems to think monetary policy was right on target during 2008-09, despite the biggest fall in NGDP since the Great Depression.  For some miraculous reason that is not stated, the 4% drop in NGDP between mid 2008 and mid-2009 didn’t cause any unemployment.  Rather for some mysterious reason there was a huge downshift in the natural rate of employment, and the natural rate of output.  Why did this occur?  He doesn’t say.  We know it wasn’t housing, as most of the housing collapse occurred well before mid-2008, and was not accompanied by any fall in RGDP, and only a trivial rise in unemployment.  Rather for some mysterious reason the trend rate of output and employment in industries all across the economy plunged in 2009.  And so there was no “output gap,” we stayed right near full employment, it’s just that the definition of full employment changed radically.  Here’s one graph:

And here’s the graph for real GDP:

Even many of the conservative critics of market monetarism concede money was too tight in 2008-09, when NGDP plunged.  Bullard says it wasn’t too tight, and the plunge did not raise unemployment.  He’s not a conservative, he’s ventured into radical RBC territory.  Bullard keeps citing Rogoff and Reinhart.  I’d love to hear what they think of what Bullard has done with their model.

Believe it or not I think there might actually be some people at the Fed who are receptive to this view.  After all, it suggests the Fed was not to blame.  Some sort of financial crisis hit the US in 2008 for reasons having nothing to do with falling NGDP, even though throughout history falling NGDP almost always triggers financial crises (think of the US in 1931, Argentina in 2000, Europe in 2009, etc.)  In his view the post-Lehman crisis just happened for some mysterious reason in the fall of 2008, unrelated to the crash in NGDP that began in July 2008.

It’s too bad Bullard could not go back in a time machine and warn FDR against devaluing the dollar in early 1933.  After all February and March 1933 saw the worst banking crisis in American history, so trend output must have fallen to a new and lower level.  All FDR would get is inflation, with no real growth.  And it’s too bad he couldn’t go back in time and warn the Argentines not to devalue in 2002.  It would just cause inflation, not real growth.

And finally, we have a graph showing NGDP is right on track:

I do agree with Bullard on one point.  If you draw the trend line to reflect wherever the economy happens to be at any given time, then the economy will always be right on track.  And how could it be otherwise, as that would imply the Fed had made a mistake.  All those stock market investors who (since 2008) seem to suddenly favor higher inflation?  They’re simply deluded, they haven’t had the good fortune to study Bullard’s PowerPoint slides.

PS.  There’s lots more.  He says the price level was way too high in mid-2008, so at the time Lehman failed we needed a deflationary monetary policy to bring prices back to the trend line.  Mission accomplished.

PPS. If this is a satirical prank that some grad student posted on the internet to mock the Fed then I apologize to Mr. Bullard for all the snark.  If not . . . well I’d rather not even think about that possibility.

Update:  Tim Duy sent me an email suggesting that Bullard seems to have abandoned the hp-filter approach he used earlier.  See this Tim Duy post for a good discussion of Bullard’s earlier proposal.  I think that one was also wrong, but it was somewhat more defensible.

The WSJ says the lowest inflation since the mid-1950s is killing the middle class

Here’s the latest from the WSJ:

In the past four years alone, since the Federal Reserve started aggressively expanding its balance sheet, the declines in the middle class’s real income have been particularly severe. With American median household income unchanged at roughly $50,000 since 2008, inflation has been steadily chipping away at middle-class earnings. Adjusted for inflation, the real income of the average American household has fallen each of the past four years, resulting in a cumulative real decline of 7% since the Federal Reserve embarked on its experiment in money printing.

The standard textbook AS/AD model says that if AD growth slows sharply, but not quite sharply enough to cause outright deflation over 4 years, then you will experience slightly rising prices and falling real incomes.  Which is exactly what has happened.  Inflation over the past 4 years has been lower than at any time since the mid-1950s.  So what inferences can we draw from these facts?  The Journal suggests that if only money had been tighter, if only AD had grown even more slowly, if only inflation had been still lower, then real incomes would have done better.  First we see Forbes carrying columns by John Tamny, and now this.

HT  Ramesh Ponnuru

PS.  Saturos sent me an excellent post by Ryan Avent, which addresses the issues raised by Eli Dourado.

PPS.  There’s a lot of talk about whether the 5% NGDP growth we’ve had is sufficient, or whether we need more monetary stimulus to get back to the old trend line.  In fact, NGDP growth hasn’t be 5%, it has averaged less than 4.1% over the last three years.  Over the last year growth slowed to 3.88%.  And the most recent quarter was just downgraded to 2.77%.  Europe’s already in recession (depression in some cases), the BRICS are slowing, and 2.77% NGDP growth is pretty close to recession territory.  The question is not whether we need QE3, it’s whether QE3 is enough.

Off topic:  Paul Krugman gets it exactly right:

Mitt Romney is catching a lot of flack from his own side now, which seems premature; although the odds are now against him, this is by no means over. But let me say that even if he does spend election night weeping in his car elevator, his critics from the right are being unfair. Yes, he’s a pretty bad candidate “” but the core problem is with his party, not with him.