Tag Archives: economic growth

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.

Capitalism without Capital

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Bill Gates reviews Capitalism without Capital, a new book about “intangible” products and services.

They start by defining intangible assets as “something you can’t touch.” It sounds obvious, but it’s an important distinction because intangible industries work differently than tangible industries. Products you can’t touch have a very different set of dynamics in terms of competition and risk and how you value the companies that make them…

What the book reinforced for me is that lawmakers need to adjust their economic policymaking to reflect these new realities. For example, the tools many countries use to measure intangible assets are behind the times, so they’re getting an incomplete picture of the economy. The U.S. didn’t include software in GDP calculations until 1999. Even today, GDP doesn’t count investment in things like market research, branding, and training—intangible assets that companies are spending huge amounts of money on.

Measurement isn’t the only area where we’re falling behind—there are a number of big questions that lots of countries should be debating right now. Are trademark and patent laws too strict or too generous? Does competition policy need to be updated? How, if at all, should taxation policies change? What is the best way to stimulate an economy in a world where capitalism happens without the capital? We need really smart thinkers and brilliant economists digging into all of these questions. Capitalism Without Capital is the first book I’ve seen that tackles them in depth, and I think it should be required reading for policymakers.

Recently I was reading something suggesting that countries should keep a balance sheet, which keeps track of stocks, in addition to GDP, which is more like an income statement keeping track of flows. This seems right to me. Spending on education and training adds to the stock of human capital at some rate, but efficiency may vary and the stock is also being depleted at the same time. Drawing down natural capital increases income on the short term but comes at the expense of the long term. Research and development are a little different because they affect the pace of progress, or at least improve the odds of the gamble.

China’s population could “drop sharply”

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According to this New York Times article, China’s working-age and child-bearing age population has already started to drop, and the population as a whole may follow. Considering that China represents 1/7th or so of humanity, this is supposedly bad for the economy. It could be good for the planet, but just a reminder that peak population does not necessarily peak ecological footprint if “living standards” (i.e. fossil fuel burning, private car driving, plastic consuming, meat eating, etc.) per person continues to rise.

 

 

 

alternatives to GDP

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This article in The Conversation (which is a new publication to me) goes through some of the alternatives and potential augmentations for GDP.

One approach is to have a dashboard of indicators that are assessed on a regular basis. For instance, workers’ earnings, the share of the population with health insurance and life expectancy could be monitored closely, in addition to GDP…

Another approach is to use a composite index that combines data on a variety of aspects of progress into a single summary number. This single number could unfold into a detailed picture of the situation of a country if one zooms into each indicator, by demographic group or region.

One challenge is to select the dimensions that should be covered. Through an international consultative process, the commission led by Sen, Stiglitz and Fitoussi defined eight dimensions of individual well-being and social progress, including health; education; political voice and governance; social connections and relationships; and the environment.

They also mention the Better Life Index from the OECD and the Human Development Index from the UN.

adjusting productivity/GDP for ecosystem services

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Here’s a new paper on a method of adjusting productivity/GDP (they seem to use the terms interchangeably, which confuses me) for ecosystem services and natural capital depletion.

Environmentally Adjusted Multifactor Productivity: Methodology and Empirical Results for OECD and G20 Countries

This paper extends the analytical framework for measuring multifactor productivity in order\ to account for environmental services. A growth accounting approach is used to decompose a pollution-adjusted measure of output growth into the contributions of labour, produced capital and natural capital. These indicators allow the sources of economic growth, and its long run sustainability, to be better assessed. Results presented here cover OECD and G20 countries for the 1990–2013 period, and account for the extraction of subsoil natural assets and emissions of air pollutants and greenhouse gases. The main findings suggest that growth in OECD countries has been generated almost exclusively through productivity gains, while BRIICS countries have drawn largely on increased utilisation of factor inputs to generate additional growth. Regarding natural capital, in countries such as Russia, Saudi Arabia, and Chile, reliance on subsoil assets extraction has contributed to a significant share of income growth. Results also point to a shift towards more environmentally friendly production processes in many countries. In fact, most OECD countries have decreased their emissions over the last two decades, and these pollution abatement efforts result in an upward adjustment of their GDP growth rates, allowing for a more accurate assessment of their economic performance.

It’s a little hard to tease out (from the abstract, since I haven’t read the paper) whether this means we are turning the corner and becoming more sustainable as a planet, or simply becoming more unsustainable at a slower rate than the past. I suspect it is the latter – so while it might be good news, it doesn’t necessarily mean that we are on a sustainable path.

July 2018 in Review

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Most frightening stories:

  • The UN is warning as many as 10 million people in Yemen could face starvation by the end of 2018 due to the military action by Saudi Arabia and the U.S. The U.S. military is involved in combat in at least 8 African countries. And Trump apparently wants to invade Venezuela.
  • The Trump administration is attacking regulations that protect Americans from air pollution and that help ensure our fisheries are sustainable. Earth Overshoot Day is on August 1 this year, two days earlier than last year.
  • The U.S. has not managed a full year of 3% GDP growth since 2005, due to slowing growth and the working age population and slowing productivity growth, and these trends seem likely to continue even if the current dumb policies that make them worse were to be reversed. Some economists think a U.S. withdrawal from the World Trade Organization could trigger a recession (others do not).

Most hopeful stories:

  • Looking at basic economic and health data over about a 50-200 time frame reminds us that enormous progress has been made, even though the last 20 years or so seems like a reversal.
  • Simultaneous Policy is an idea where multiple legislatures around the world agree to a single policy on a fairly narrow issue (like climate change or arms reductions).
  • I was heartened by the compassion Americans showed for children trapped in a cave 10,000 miles away. The news coverage did a lot to humanize these children, and it would be nice to see more of that closer to home.

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