Tag Archives: economic growth

more jobs doesn’t lessen poverty?

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This article digs into a study on correlations between poverty, job creation and social mobility (along with several other factors). Unfortunately, just creating new jobs in low-income areas didn’t seem to increase the chances of children moving up the economic ladder compared to their parents. However, living or moving to a neighborhood where most people are employed does increase the chances of a child moving up the economic ladder compared to their parents.

It’s puzzling. The explanation that is easy to jump to is that cultural factors are very important and can’t be changed overnight. I’m sure there is some truth to that. I can think of other potential factors though – maybe parents in low income areas are taking those jobs, but whatever extra income they are pulling in is not enough to offset spending less time with their children. Maybe they are more likely to be single parents, lack extended family support, struggle with substance abuse and mental illness, not be able to afford high quality health care and child care, and live in low-performing school districts. Under these circumstances, it wouldn’t be too surprising that their children are not getting ahead. Those middle class professional parents in the neighborhoods where everyone is employed are probably scraping together enough to pay for decent health care and child care, and are probably demanding more from their school systems.

more reasons to worry about the global financial system

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William White, formerly with the Bank of Canada among other jobs, has another cheery list of reasons to worry about a new financial crisis.

  • large increases in dollar-denominated debt in the private sectors of emerging market economies,
  • high property prices in many countries,
  • asset-management and private equity firms acting as lenders in place in traditional banks, with less regulation and fewer limits on risk taking,
  • disparities in interest rates between countries leading to capital movement
  • flash crashes,
  • algorithmic trading,
  • passive investing, and
  • the possibility of slower growth, higher inflation, and political meddling in monetary policy in the U.S. caused in part by Trump’s misguided policies.

Modern Monetary Theory

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The Intercept has a long article on Modern Monetary Theory.

In a nutshell: MMT proponents believe that the government can safely spend far more money than it currently does, and increasing the federal deficit is not a bad thing in and of itself — a public deficit is also a private-sector surplus, after all.

While typically we hear rhetoric that our political leaders must first “find” money through new taxes or budget cuts in order to pay for new programs, MMT proponents say that’s a fundamental misunderstanding of how money works. In so-called fiat currency systems (meaning societies in which money isn’t backed by physically valuable commodities like gold or silver) governments literally create the money and tax it later to control for inflation and keep it in demand.

Inflation is still a risk, MMT advocates say, but it’s a much more remote risk than mainstream economists let on, and it’s one that can be addressed down the line if it arises, without so much pre-emptive austerity.

They also talk about the idea of a federal jobs guarantee.

I just had a few college economics courses, but the idea seems risky. By expanding the money supply so drastically, I thought you risked hyper-inflation and a devaluing of your currency relative to others. Of course the U.S. can push it further than other countries, but there still must be a breaking point. But the idea of some kind of counter-cyclical automatic investment in infrastructure, education, training, and research is appealing to me. This could kick in if unemployment hits a certain level, growth falls below a certain level, or some combination of the two. Then during stronger economic times, the government steps back and lets the private sector take the lead. I think it would have to be some kind of formula or else the politicians will ruin it.

September 2018 in Review

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Most frightening stories:

Most hopeful stories:

  • The Suzuki and Kodaly methods are two ways of teaching music to young children that may actually help them think later in life. Training in jazz improvisation may also be good for young brains in a slightly different way.
  • There are some bright ideas for trying to improve construction productivity, which has languished for decades. Most involve some form of offsite fabrication.
  • In energy news, there’s a big idea to produce half the world’s electricity from sunlight in the Sahara desert. Another idea for collecting solar energy in otherwise (ecologically) wasted space is solar roadways, and there are a few prototypes around the world but this doesn’t seem to be a magic bullet so far. Another big idea is long-term storage of energy to smooth out fluctuations in supply and demand over months or even years.

Most interesting stories, that were not particularly frightening or hopeful, or perhaps were a mixture of both:

the mini-recession of 2015-16

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The New York Times has a nice piece of economics reporting on a downturn that affected the U.S. manufacturing, farming and energy industries in 2015 and 2016. I’ll see if I can summarize it, but really we have to admit to ourselves that spinning these narratives after the fact doesn’t mean we have the ability to predict the future.

  • China tried to slow down lending because it was worried about a bubble. The article doesn’t say how, but maybe they raised interest rates or put other requirements on banks.
  • This affected developing countries that export to China.
  • The U.S. Federal Reserve was also starting to raise interest rates because it thought growth and inflation were both starting to pick up.
  • Europe and Japan were decreasing interest rates due to low growth at time.
  • The disparity in interest rates caused a rise in the dollar, because investors pulled money out of other countries/currencies to invest in the U.S.
  • China’s currency is (partially?) pegged to the dollar, so this caused its currency to rise and hurt its exports.
  • China reduced its peg to the dollar in response to allow its currency to depreciate and help its exports. However, this caused more investors to shift money out of China and reduced growth even more.
  • Governments and companies in emerging markets had a lot of dollar-denominated debt, which was now more expensive to repay in their local currencies.
  • The slowdown in emerging markets reduced demand for oil, minerals and agricultural goods, which caused prices to drop and hurt those sectors in the U.S., along with manufacturing that serves those sectors. Some emerging countries are also active in energy, mining, and agriculture so they were also hurt.
  • This may have had political consequences both in terms of disgruntled voters in key states during the 2016 election, and the perception of increased growth following the election.

It’s pretty interesting how it is all connected, and even though it seems complex the reality is probably much more complex than the way I have tried to puzzle it out above. The lesson going forward seems to be that a slow down in China, coupled with a disparity in growth between the U.S., China, and other developed countries in Europe and Asia, can lead to recession conditions in the U.S., even if the U.S. economy is healthy at the beginning of the process. Put another way, global growth is clearly not a zero sum game as some politicians would like to try to convince us. The U.S. Federal Reserve is trying to gradually raise rates to give it some ability to respond to an event like this in the future, but it is clearly a balancing act.

The Economist on the next financial crisis

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The Economist joins the chorus warning that another financial crisis could be in the cards. They offer three reasons:

  1. There is too much lending against real estate and not enough to businesses that generate real value.
  2. The U.S. dollar is still the world’s reserve currency, but political pressure may prevent the Federal Reserve from flooding the world with dollars in a future crisis like it has in the past.
  3. The Euro is still dangerously unstable.

the next financial crisis

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There seems to be increasing concern among economists, journalists and politicians that another severe financial crisis could be looming in the next few years. Of course, the next recession, war or disaster is inevitable and to be expected at some point. The question is how resilient or panic-prone our financial system is when something inevitably happens.

Axios suggests that as advanced economies raise interest rates, they could force debt-laden emerging markets into situations where they can’t afford interest payments. Turkey is of particular concern, and owes large amounts of money to European countries. A trade war is also a concern.

Nouriel Roubini gives ten reasons why a severe financial crisis may be coming, starting with interest rates being too low to give countries any chance to react to a crisis by lowering them (which is probably why they are trying to gradually raise them in the first place.) He also mentions poor (or no) U.S. policies towards trade, immigration, and infrastructure, and high-speed trading algorithms.

Jeffrey Frankel, a professor at Harvard, argues that U.S. policy is unnecessarily pro-cyclical in in terms of expanded government spending, lowered taxes, reduced capital requirements for banks, and political criticism of the Federal Reserve.

Let’s hope a consensus among the experts is actually a contrarian indicator.

August 2018 in Review

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Most frightening stories:

  • In certain provinces with insurgent activity, the Chinese government is reportedly combining surveillance and social media technologies to score people and send those with low scores to re-education camps, from which it is unclear if anyone returns.
  • Noam Chomsky doesn’t love Trump, but points out that climate change and/or nuclear weapons are still existential threats and that more mainstream leaders and media outlets have failed just as miserably to address them as Trump has. In related news, the climate may be headed for a catastrophic tipping point and while attention is mostly elsewhere, a fundamentalist takeover of Pakistan’s nuclear arsenal is still one of the more serious risks out there.
  • The U.S. government is apparently very worried about a severe cyber attack. Also, a talented 11-year-old can hack a voting machine.

Most hopeful stories:

Most interesting stories, that were not particularly frightening or hopeful, or perhaps were a mixture of both:

infrastructure decay like “hidden debt”?

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This article describes the U.S. lack of needed investment in infrastructure and (including maintenance) and renewable energy as a “hidden debt” that will come due. They liken it to not disclosing to a home buyer that your roof needs repairs, which if disclosed would reduce the expected selling price of the home. I don’t know about the accounting questions involved, but as a communication approach maybe this could work.

The federal government also has debt that has not been accounted for, and which one doesn’t often hear about. The debt that has been accounted for is the $15.6 trillionheld by the public in the form of US Treasury bonds. The debts that have not been accounted for include the deferred costs of maintenance on roads, water systems, and 54,560 structurally deficient bridges, as well as the yet-to-be-built low-carbon energy systems necessary to mitigate the catastrophic effects of climate change. And these are just two broad examples.

So, just how much hidden US debt is there? At this point, we must rely on rough estimates. For example, according to a 2016 report from the American Society of Civil Engineers (ASCE), upgrading the country’s crumbling infrastructure would cost $5.2 trillion. And, according to a 2014 International Energy Agency (IEA) report and our own calculations based on the US share of global CO2 emissions, transitioning to a clean-energy system will cost an additional $6.6 trillion. All told, that is $11.8 trillion in unaccounted-for non-inflation-adjusted liabilities.