↳ Trade

July 1st, 2020

↳ Trade

Balanced Sheets

On the conceptual and methodological stakes of Trade Wars Are Class Wars by Matthew C. Klein and Michael Pettis

Good writing on international macroeconomics reads like a detective novel. There’s a suspicious event—hundreds of millions of dollars in phantom FX swaps, a container port’s worth of missing exports—and an enormous cast of closely-linked characters. But instead of a preternatural ability to see the clear-cut means, motive, and opportunity of fictional characters in a pulp whodunit, the macroeconomic detective is armed with the knowledge that balance sheets always balance. This simple insight, that every transaction has two sides, means that there are certain aggregate relationships between transactions that must obtain for the world economy. Knowing this, it’s possible to chase actors across seemingly unrelated balance sheets to find where the system as a whole was forced to balance. From here, the skillful economist can identify the long-run tendencies that a given balance is likely to create. (Wynne Godley famously predicted the Global Financial Crisis in just this way, following US mortgage debt around the world and back.) This kind of detective work is difficult, and often unpopular. The balance sheet approach cuts through political and media platitudes to reveal who the winners and losers are in a given regime. By taking this approach to examining trade policy, Michael Pettis and Matthew Klein have, with Trade Wars Are Class Wars, written the ideal book for understanding the long-run trends that have shaped our dysfunctional present.

Pettis and Klein tell a broad story about the last fifty years of global economic development, which links the dynamics of global supply chains and tax evasion, and the historical shift from wage-led to profit-led growth.

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June 13th, 2020

Trade Wars Are Class Wars

A discussion between Adam Tooze, Michael Pettis, and Matthew Klein

Michael Pettis and Matthew Klein's new book Trade Wars Are Class Wars begins with an epigraph from John A. Hobson: "The struggle for markets, the greater eagerness of producers to sell than of consumers to buy, is the crowning proof of a false economy of distribution. Imperialism is the fruit of this false economy." Pettis and Klein's book updates the Hobsonian thesis for the twenty-first century, arguing that, while trade wars are often thought to be the result of atavistic leadership or the contrasting economic priorities of discrete nation states, they are best understood as the malign symptoms of domestic inequalities that harm workers the world over. In a panoramic account of the shifts in the global economy over the past several decades, Pettis and Klein detail the development of the economic ills that define modern international political economy. It is essential and provocative reading with broad implications for international politics, the study of inequality, and the future of the global monetary system.

On May 28, Pettis and Klein were joined by Adam Tooze, author of Crashed, for a discussion about their new book. A recording of the conversation can be watched here. The transcript was lightly edited for length and clarity.

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March 23rd, 2019

Instruction

LONE LADDER

On the history of protectionist development and trade policy

There is renewed debate around the merits of protectionism and free trade, spurred by political rhetoric from the left and right in the US, and in Europe and Latin America. Active disagreements over the consequences of free trade date back to policies promoted in the 50s and 60s, a period during which many newly-decolonized countries undertook an import-substitution-industrialization (ISI) model of development. Popularized by Argentine economist Raul Prebisch, ISI was a development strategy which advocated a prolonged period of state investment in manufacturing and infrastructure prior to trading in the global market. Subject to extensive criticism, it was thought to have been discredited in favor of the Washington Consenus throughout the late-70s and early 2000s.

Beginning most notably with Hajoon Chang’s Kicking Away the Ladder, however, a growing number of economists have come to question the viability of the Washington Consensus as a development model, both historically and in the present. In a 2017 article, AREGBESHOLA R. ADEWALE lends further evidence to these critiques. Using the World Bank’s Development Indicators, he develops a model which tests the relationship between ISI policies and industrialization in the BRICS (Brazil, Russia, India, China, South Africa). His model finds a strong and consistent correlation between economic growth and ISI policy:

"The analyses confirm the short and long run relationships between growth and ISI’s measurable indicators, in a chronological manner that supports import substitution in the short run and exports promotion in the long run… A conclusion can thus be drawn, both from literature and econometric estimations, that the ISI macroeconomic policy defies the self-defeating prophecy levied against it by the institutions of the Washington Consensus."

Link to the paper.

  • Dani Rodrik’s 2011 book, The Globalization Paradox, offers a detailed overview of the distributional consequences of free trade both domestically and globally. Chapter 8 of the book presents a compelling vindication of ISI policies: "Even where ISI underperformed, it often bequeathed industrial capacities that would later prove very helpful." Link to the book, and link to an earlier blog post in which Rodrik takes Mexico as a case study for the potential benefits of ISI.
  • "This special issue is an attempt to advance a production-centred agenda focusing on the real dynamics of productive organisations and ecosystems, with the emphasis on their transformation and innovative renewal in mature economies." Hajoon Chang introduces an issue of the Cambridge Journal of Economics. Link.
  • John Waterbury’s The Egypt of Nasser and Sadat provides a rigorous evaluation of the transition from state- to market-led development in Egypt from the 50s and into the 80s. Link.
  • "I find that regions in the French Empire which became better protected from trade with the British for exogenous reasons during the Napoleonic Wars (1803-15) increased capacity in mechanized cotton spinning to a larger extent than regions which remained more exposed to trade.” Réka Juhász tests the economic impacts of protectionism through a natural experiment. Link.
  • An excellent new paper by Nathaniel Lane surveys new empirical research examining industrial policy. Link.
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February 9th, 2019

Overboard

HETEROGENOUS GAP

In search of a more just model for higher education financing

This week, we delve into the persisting inequalities of our higher education system. Since Winston, Hill, and Boyd found that only 10% of students at elite universities came from families who fell within the bottom 40% of the income distribution in 2005, universities across the board have revived efforts to diversify their student bodies.

The idea that there's a need for greater socioeconomic diversity in higher education is largely uncontroversial, particularly amid growing evidence of the higher earnings potential for college graduates. However, the policies best suited to addressing this gap see far less consensus. ROSINGER, BELASCO, and HEARN in the Journal for Higher Education examine the impact of both means tested and universal policies that replace student loans with grants in financial aid packages. The impact of these policies on socioeconomic diversity is somewhat counterintuitive:

"We found that colleges offering universal discounts experienced increased enrollment among middle-class students. Our study indicates universal no-loan policies represent one strategy to increase access and affordability for the middle-class in the elite reaches of higher education. The study also, however, raises questions about the policies’ effectiveness in addressing access for low-income students and efficiency in targeting aid."

Link to the full paper.

  • For more on the potential for universities to facilitate both the entrenchment and supersession of generational inequalities, see the groundbreaking 2017 paper by Chetty et. al. The authors used fourteen years of federal income tax data to construct mobility report cards of nearly 2000 colleges, provoking a range of new literature in the field. Their findings: "The colleges that have the highest bottom-to-top-quintile mobility rates – i.e., those that offer both high success rates and low-income access – are typically mid-tier public institutions. For instance, many campuses of the City University of New York (CUNY), certain California State colleges, and several campuses in the University of Texas system have mobility rates above 6%… Elite private (Ivy-Plus) colleges have an average mobility rate of 2.2%." Link to the paper, as well as the digitization of its results, courtesy of the New York Times.
  • Drawing on "Mobility Report Cards," a recent paper by Bloome, Dyer, and Zhou finds that parental income has become less predictive of adult income, offsetting inter-generational income persistence resulting from education. Link.
  • Anna Manzoni and Jessi Streib find that wage gaps between first- and continuing-generation college students are not caused by the institutions they attend, the grades they earn, or the subjects they study: "Our decomposition analysis shows that the uneven distribution of students into labor market sectors, occupations, hours worked, and urban locations is more responsible for the wage gap than the distribution of students into and within educational institutions." Link.
  • A book on the trials and tribulations of building and maintaining the "Harvard of the proletariat": Anthony Picciano and Chet Jordan on the history of the CUNY system. Link.
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August 4th, 2018

The Great Abundance

ENERGY BOOM

A new carbon tax proposal and a big new carbon tax research report

Representative Carlos Curbelo (R-FL) introduced a carbon tax bill to the House last week (though it is “sure to fail” with the current government, it's unusual to see a carbon tax proposed by a Republican). According to Reuters popup: yes, “Curbelo said the tax would generate $700 billion in revenue over a decade for infrastructure investments.” A deep analysis popup: yes is available from The Center on Global Energy Policy at Columbia SIPA, which started up a Carbon Tax Initiative this year.

For a broader look at carbon taxes, earlier this month the Columbia initiative published a significant four-part series on the “economic, energy, and environmental implications of federal carbon taxes” (press release here popup: yes).

The overview covers impacts on energy sources:

“The effects of a carbon tax on prices are largest for energy produced by coal, followed by oil, then natural gas, due to the difference in carbon intensity of each fuel. Every additional dollar per ton of the carbon tax increases prices at the pump by slightly more than one cent per gallon for gasoline and slightly less than one cent per gallon for diesel.”

And examines a few possible revenue uses:

“How the carbon tax revenue is used is the major differentiating factor in distributional outcomes. A carbon tax policy can be progressive, regressive, or neither.”

Overview here popup: yes. Link popup: yes to report on energy and environmental implications; link to report popup: yes on distributional implications; link to report popup: yes on implications for the economy and household welfare.

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