Domestic solutions to global problems

Trade Wars are Class Wars by Matthew Klein and Michael Pettis is an excellent account of the global imbalances that have emerged in the 21st century, contributing to the GFC among other consequences. “A core argument of this book is that the distribution of purchasing power within a society affects its economic relations with the rest of the world,” they write. They trace the imbalances problem to the inequailities of income and wealth within China and Germany that mean domestic demand in each case is inadequate to absord domestic production, so the two run large current account surpluses with the rest of the world. “People who cannot buy what they produce must rely on foreign demand for their output.” Hence the ‘class wars’ of the title.

While the US should have been in the same position, given how unequal it is, foreign demand for US assets means it has run a consistent deficit instead: “For more than six decades the United States has satiated savers in the rest of the world at the expense of its own workers” – the dollar being an “exorbitant burden” in this perspective. (Another great virtue of the book is spelling out the fact that balances balance and so the capital account will be in deficit if the current account is in surplus; and if some people are saving – eg the rich in surplus countries – others will have to be borrowing – Greece, or ordinary Americans before the GFC.)

A lot of the commentary has focused on the bilateral US-China trade deficit and the “China shock” due to offshoring, but Klein and Pettis argue that the link is less direct than Chinese vs American factories, and must include an account of capital flows. It portrays inequality within China and Germany, rather than China’s low-wage manufacturing capabilities, as the root cause. The book is just as critical of German as of Chinese domestic policies: “Germany’s ideological and constitutional commitment to fiscal rectitude caused lasting harm to ordinary Germans.” The harm has taken the form of welfare cuts, eroded protection in the labour market, massive under-investment in infrastructure. One doesn’t think of Germany as particularly unequal. Yet although the average German is twice as rich as the average Spaniard, the median German is much poorer – about as wealthy as the median Polish person.

The book refers back to the writings of John Hobson in the early 20th century, when the US was the surplus economy in its gilded age, and Britain the bearer of the reserve currency burden. In Imperialism: A Study (1902) Hobson wrote: “When the distribution of income is suchas to enable all classes of the nation to convert their felt wants into an effectiove demand for commodities, there can be no over-production, no under-employment of capital and labour, and no necessity to fight for foreign markets.” Inequality and the competition for overseas markets led to what what he described as “the greed of empire.” It didn’t end well a century ago, and it isn’t going so well now.

Trade Wars are Class Wars is a tale of three economies, China, Germany and the US. I’m not sure where others fit in – including the UK, also highly unequal but with a (Brexit-augmented) current account deficit. (Greece gets a walk-on role.) Still, I found the argument persuasive and in any case reducing within-country inequality from today’s socially-destructive levels can only be a good thing. It’s a terrific book.

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Geography as destiny

I just read Enrico Moretti’s (2012) The New Geography of Jobs, having not done so before now because I’d read quite a lot of his papers. Anyway, now I have and it’s very good. It’s a nicely accessible survey of the literatures on trade/tech and jobs, and on the geographic aspect – the concentration of skilled people in cities and growing divergence. The evidence it cites is entirely US-centric but the drivers obviously apply elsewhere, even though their effects in other countries are not exacerbated by theĀ  unattractive features of US society. So I would recommend this to anybody who would like a readable big-picture overview of what has been happening to jobs and incomes in recent decades. The major irritation is that the notes aren’t flagged in the text & you just have to root around at the back of the book to see if a given statement has a reference attached to it.

The conclusions are a little bleak in terms of policies to address the growing divergence between rich skilled places and the left-behinds.Being in the right place matters. There are spillovers between people, so even as a graduate you do better in terms of earnings the more other skilled people are around you, but non-graduate occupations also have higher earnings in high skill places.

Overcoming the gaps requires a Big Push, the book concludes (I like this allusion to Rosenstein-Rodin, although that literature doesn’t seem to be cited here). Only governments can do these, given the amount of co-ordination involved. Many interventions are just too small scale to have a hope. Looking at the Big Push of the Tennessee Valley Authority, Moretti and his colleagues concluded it was successful in raising productivity in the region but not wages, because the labour supply increased as workers moved in from elsewhere. However, a couple of pages later, he points out that the prominent successful clusters of today did not come about because of a Big Push. Most were organic developments, albeit aided of course by government investment in R&D or defence – see Margaret O’Mara’s book The Code on Silicon Valley which I described in the previous post.

So this is rather sobering. My hunch is that policies will need to rest on a better understanding of the relationships between human capital investments (a college degree is the key variable seemingly driving so many outcomes from earnings to voting pattern to subjectove well-being), social spillovers, intangible assets, amenities including nature and housing, and produced capital especially communications infrastructure. In other words, what assets are there available to people living in in a given place, and to what extent do these complement and substitute for each other?

Anyway, I enjoyed the book even if it left me feeling a bit glum.

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Angry Man

Angrynomics by Eric Lonergan and Mark Blyth is a rip-roaring read, and I wish I’d been in the pub with them as they discussed the state of the world and how to set it to rights. Not that I wholly agree with them, although disagreeing would obviously be half the fun. Normally I hate dialogue formats, as they’re usually constructed as a kind of semi-polite Punch and Judy show, presenting polarised views that are never intended to be reconciled. Lonergan and Blyth – it even sounds like a Victorian music hall act – agree on the basics so they riff of each other here in a more positive way.

Their basic thesis is that there are two kinds of anger abroad in the world: moral outrage (good) and tribal anger (bad), both reactions to the way the global economy has affected people since 1989.

Increased inequality is part of the story, genuine economic grievance in the rust belt and its equivalents, and another part is the cynical exploitation of tribalism or identitarianism by some politicians. So Lonergan and Blyth wear their left-of-centre hearts on their sleeves. The dialogues then describe and discuss the economic aspects of the political changes amply described in the now-extensive ‘decline of democracy’ literature – the micro, the macro/monetary, inequality (including, importantly, intergenerational), technological change – concluding with what to do now.

One huge gap evident right at the start is a passing parenthesis that the expression of anger is a largely male phenomenon. The book never picks this up; there is surely an important gender aspect to the way work has changed.

I disagree with dating the anger phenomenon to the collapse of communism in 1989, which removed a coherent (albeit flawed) ideology to oppose neoliberalism. Surely the hinge was the crisis of the 1970s, Thatcher and Reagan, and the early 1980s recession. That was the start of de-industrialisation, and the scarring of people’s economic prospects for the rest of their lives, and their children’s. These sea changes take time and there is never a single moment. As the book notes, too little has been reformed since 2008/9, but my view is that looking back with the hindsight of 2030, the combination of the Financial Crisis and the Covid depression will prove to be another hinge. (The book pre-dates the pandemic.)

As for the proposals, I think they get the role of competition all wrong, blaming excessive competition in tech and telecoms – whaaaaat??? – for the race to the bottom in employment practices. Amazon reports low profits because it reinvests so much revenue in continuing world domination, not because it has scrappy margins due to competitors snapping at its heels. I understand little about current monetary and alternative proposals, but as a diehard microeconomist find it hard to understand how administered negative prices in a market dominated by the state (ie central bank) can function well. Regulate the financial sector firmly – a big yes. The book has an interesting idea about government auctions of collective data rights – like spectrum auctions – which answers my profound objection to the proposal ‘create property rights in personal data and sell them’, namely that the value in data is collective, is due to aggregation.

Anyway, my copy has a combination of big ticks and scrawls of ‘nonsense!’ in the margins. A very satisfying read.

 

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Digital arrivals and deaths of despair

There’s definitely a digital theme in the new crop of books arriving at Enlightenment Towers – the left hand mini-pile here.

IMG_0292On my recent trip to Washington (for a fascinating National Academies/Royal Society discussion on international co-operation on AI, culminating in this public symposium) I read the pile on the right.

The Economics of Artificial Intelligence is a terrific collection, edited by Ajay Agarwal, Josh Gans and Avi Goldfarb. It has sections on AI as a general purpose technology, jobs and inequality, regulation and the implications of machine learning for economics. The cast list of contributors is stellar. It’s far from the last word but a must-read as a starting point.

61bIH+8Vs2L._AC_UL872_QL65_The Economics of Artificial Intelligence: An Agenda (National Bureau of Economic Research Conference Report)

Tom McLeish’s The Poetry and Music of Science is a persuasive comparison between creativity in the arts and in the sciences, exploring the parallels between the creative process in music, poetry, art and fiction and the discovery process in the natural sciences. Well, I was persuaded. 51wNUley1XL._SX351_BO1,204,203,200_

The Poetry and Music of Science: Comparing Creativity in Science and Art

Matthew Desmond’s Evicted is a distressing piece of reportorial sociology (Pullitzer-winning), detailing through a handful of specific individuals in Milwaukee the reality of the human crisis and housing crisis in America. The book describes the knot of poverty, drugs, ill-health, appalling housing conditions, impossible for any individual to escape. I was shocked on my recent trip to San Francisco to see the desperate condition of its large numbers of homeless people, literally worse than I have seen anywhere in the world. The conditions described in Evicted are intolerable. I recently heard Angus Deaton talk about his and Anne Case’s work on the ‘deaths of despair’ in the US (and some foreshadowing of a similar if less pronounced pattern in UK data). Given the extreme social inequality in the US, its political disintegration is not surprising. The new Deaton Review here in the UK into inequality may uncover ominous similarities, and it would be good to know how other OECD countries compare/contrast.

41qhBahSGLL._SX323_BO1,204,203,200_Evicted: Poverty and Profit in the American City

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Who benefits from research and innovation?

I’ve been pondering a report written by my friend and Industrial Strategy Commission colleague Richard Jones (with James Wilsdon), The Biomedical Bubble. The report calls for a rethinking of the high priority given to biomedical research in the allocation of research funding, and arguing for more attention to be paid to the “social, environmental, digital and behavioural determinants of health”. It also calls for health innovation to be considered in the context of industrial strategy – after all, in the NHS the UK has a unique potential market for healthcare innovations. It points out the there are fewer ill people in the places where most biomedical and pharmaceutical research is carried out, thanks the the UK’sregional imbalances. It also points out that, despite all the brilliant past discoveries, the sector’s productivity is declining:

“In the 1960s, by some measures a golden age of drug discovery, developing a successful
drug cost US$100 million on average. Since then, the number of new drugs developed per
billion (inflation adjusted) dollars has halved every nine years. Around 2000, the cost per
new drug passed the US$1 billion dollar milestone, and R&D productivity has since fallen
for another decade.”

All of this seems well worth debating, for all its provocation to the status quo – and this is a courageous argument given how warm and cuddly we all feel about new medicines. I firmly believe more attention should be paid to the whole system from basic research to final use that determines the distribution of the benefits of innovation, rather than – as we do now – treating the direction of research and innovation as somehow exogenous and worrying about the distributional consequences. This goes for digital, or finance, say, as well as pharma. What determines whether there are widely-shared benefits – or not?

Serendipitously, I happened to read a couple of related articles in the past few days, although both concerning the US. One was this BLS report on multi-factor productivity, which highlights pharma as a sectors making one of the biggest contributions to the US productivity slowdown (see figure 3). And this very interesting Aeon essay about the impact of financial incentives on US pharma research. It speaks to my interest in understanding the whole system effects of research in this domain. Given that this landscape in terms of both research and commerce is US-dominated, this surely makes the question of how the UK spends its own research money all the more relevant? As The Biomedical Bubble asks:

“[T]he importance of the biotechnology sector has been an article of faith for UK
governments for more than 20 years, even when any notion of industrial strategy in other
sectors was derided. So the failure of the UK to develop a thriving biotechnology sector
at anything like the scale anticipated should prompt reflection on our assumptions about
how technology transfer from the science base occurs. The most dominant of these is that
biomedical science would be brought to market through IP-based, venture capital funded
spin-outs. This approach has largely failed, and we are yet to find an alternative.”
For it seems the model is no longer serving the US all that well either – not economy-wide innovation and productivity, and not the American population, which has worth health outcomes at higher cost that any other developed economy. There are some challenging questions here, fundamentally: who benefits from research and innovation, how should the public good being funded by taxpayers be defined and assessed, and what funding and regulatory structures would actually ensure the gains are widely shared?
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