Saturday, August 3, 2019

A Smart Approach to China-U.S. Relations [feedly]

A Smart Approach to China-U.S. Relations
https://www.bradford-delong.com/2019/08/a-smart-approach-to-china-us-relations.html

Consider a country that is the global superpower.

Its military is best-of-breed. Its reach extends from Japan to the West Indies to the Indian Ocean, and beyond. Its industries of the most productive in the world. It Is predominate in world trade. It dominates global finance.

But, when this global superpower looks to the west, across the sea, it sees a rising power—a confident nation with a larger population, hungry for wealth, hungry for preeminence, seeing itself as possessing a manifest destiny to supersede the old superpower. And, unless something goes horribly wrong with the rising power to the west, its rise is indeed all but inevitable.

Thus the proper goal for the current superpower is to ensure a soft landing—ensure that the world will still be a comfortable place for it, once its preeminence as the global superpower is over.

There are, of course, sources of conflict: the rising superpower wants more access to markets and to intellectual property than the current superpower wishes to provide. And what the current superpower does not willingly provide, the rising superpower will seek to take. The rising superpower wants a weight in international councils corresponding to what its fundamental power will be a generation hence, nd is not satisfied with a weight corresponding to its fundamental power today.

These are all valid sources of conflict. They need to be managed. Interests need to be advanced, and defended. But they do not outweigh the joint interests in peace and prosperity.

So what should the superpower currently dominant do? How should it use its current preeminence?

And am I talking about the United States and China today, about Britain and the United States a century and a half ago, or about Holland and Britain 350 years ago?

In the case of Holland and Britain, a spate of cold trade and hot naval wars in the 1600s led to the infusion into the English language of a remarkably large number of derogatory phrases based on "Dutch": Dutch bargain, Dutch book, Dutch comfort, Dutch concert, Dutch courage, Dutch defence, Dutch leave, Dutch metal, Dutch nightingale, Dutch reckoning, Dutch treat, Dutch uncle, "if I do it not, I'm a Dutchman"—and, possibly, Dutch auction and Dutch oven. It led also to perhaps the most memorable line in British naval bureaucrat Samuel Pepys's diary, as the navy he had built and supplied faced superior numbers of Dutch at Harwich, Portsmouth, Plymouth, and Dartmouth: "By God! I think the Devil shits Dutchmen!"

But in the long run fundamentals told, and Britain rose to global hyperpower. Possibly decisive for the Dutch-British transition was the wind shift of 24 October 1688 to an east Protestant wind. That allowed the Dutch fleet to leave harbor. The following Dutch military intervention in support of the aristocratic-Whig coup against the Stuart dynasty that brought hereditary Dutch Stadthouder William III of Orange to the British throne.

Thereafter the common interests of both powers in limited government, mercantile prosperity, and anti-Catholicism created a durable alliance with the Dutch as junior partner around, in the words of the viral tweet of the 1700s, "no popery or wooden shoes!" Under Britain's aegis the Dutch remained independent rather than becoming involuntarily Francofied. It was a—largely—comfortable world for the Dutch, and for Holland.

In the case of Britain and the United States, after 1815 the British government followed a durable policy that was rather odd for 19th Century Britain, whose SOP was usually: "we burn your fleet, and perhaps your capital, first, and negotiate later".

Britain acceded to the Monroe Doctrine in 1823; accepted a line of demarcation in the Oregon Territory that left the British-settler majority region that is now the state of Washington in American hands; did not intervene on the side of free trade in 1862; accepted American mediation on the Venezuelan border; supported American annexation of the Philippines; relinquished rights and interests in what became the Panama Canal zone; and acquiesced to the American position on where the boundary between Alaska and the Yuko actually was.

Britain, instead, gave scholarships to American wannabe aristocrats who wanted to study at Oxford and Cambridge; gleefully married off its own aristocrats with titles to American heiresses—Winston Churchill's parents became engaged three days after meeting at a sailing regatta on the Isle of Wight—and stressed common lineage, cultural, and economic ties; and, as the young Harold Macmillan unwisely, because too publicly, put it when he was seconded to Eisenhower's staff in North Africa in late 1942, became "the Greeks to the American Romans".

The result was that the United States became Britain's wired aces in the hole in teh game of seven-card stud that was twentieth-century geopolitics.

The fundamentals tolled against Britain. One island cannot, they said, in the long run "Half a continent will, said economic historian J.H. Clapham speaking of the United States, in the end raise more coal and melt more steel than one small densely-populated island".

Yet perhaps Britain's supersession by America was not inevitable. In 1860 the United States had a full-citizen population of 25 million, and Britain and its dominions had a full-citizen population of 32 million. By 1940 the full-citizen numbers were 117 and 76 million. But the pro-rated descendents of the full citizens as of 1860 were 50 and 65 million, advantage Britain and the Dominions.

As the Financial Times's Martin Wolf points out, his ancestors were some of the very few who made the much cheaper migration from the Ashkenazi Pale of Settlement to London than to New York.

Up to 1924 New York welcomed all comers from Europe and the Middle East, while London and the Dominions were only welcoming to northern European Protestants.

A Britain more interested in turning Jews, Poles, Italians, Romanians, and even Turks who do not happen to be named Alexander Boris de Pfeffel Johnson—who bears Turkish Minister of the Interior Ali Kemal's Y and five other chromosomes, and hence is, by all the rules of conservative patriarchy, a Turk—at turning them into Britons or Australians or Canadians would have been much stronger throughout the twentieth century.

Perhaps it would not be in its current highly undignified position.

Compared to Holland and Britain when they were global hyperpowers pursuing soft landings, how are we doing?

The answer has to be: since January 2017, not well at all.

There is a lot of wisdom in George Kennan's 1947 "Sources of Soviet Conduct". Three points stand out:

  1. Do not panic, but recognize what the long game is, and play it.

  2. Contain, but not unilaterally: assemble broad alliances to confront, resist, and sanction as a group.

  3. Become your best self, because ultimately, as long as the struggle between systems can be kept peaceful, liberty and prosperity will be decisive.

    • Are we forming alliances—cough, TPP— to contain?
    • Or are we making the random incoherent demands for things like immediate bilateral balance that can only be understood as the actions of a chaos monkey?
    • Are we not panicking?
    • Are we soberly playing the long game?

 -- via my feedly newsfeed

Congress has never let the federal minimum wage erode for this long

https://epi.org/170071#.XUXIJvK0g3U.gmail

June 16th marks the longest period in history without an increase in the federal minimum wage. The last time Congress passed an increase was in May 2007, when it legislated that the minimum wage be raised to $7.25 per hour on July 24, 2009. Since the minimum wage was first established in 1938, Congress has never let it go unchanged for so long.

When the minimum wage remains unchanged for any length of time, inflation erodes its buying power. As shown in the graphic, when the minimum wage was last raised to $7.25 in July 2009, it had a purchasing power equivalent to $8.70 in today's dollars. Over the last 10 years, as the minimum wage has remained at $7.25, its purchasing power has declined by 17 percent. For a full-time, year-round minimum wage worker, this represents a loss of over $3,000 in annual earnings. Moreover, since its historical peak in February 1968, the federal minimum wage has lost 31 percent in purchasing power—meaning that full-time, year-round minimum wage workers today have annual earnings worth $6,800 less than what their counterparts earned five decades ago.

A simple way to fix this problem once and for all would be to adopt automatic annual minimum wage adjustment (or "indexing"), as 18 states and the District of Columbia have done. The Raise the Wage Act of 2019 would raise the federal minimum wage to $15 by 2024—boosting wages for nearly 40 million U.S. workers—and establish automatic annual adjustment of the federal minimum wage. Automatic annual adjustment would ensure that the paychecks of the country's lowest-paid workers are never again left to erode.

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Thursday, August 1, 2019

The Inequality of Nations [feedly]

are globalization and inequality eroding the viability of democracy?

The Inequality of Nations
https://www.project-syndicate.org/commentary/market-power-encroaching-on-politics-by-michael-spence-2019-08

Markets are mechanisms of social choice, in which dollars effectively equal votes; those with more purchasing power thus have more influence over market outcomes. Governments are also social choice mechanisms, but voting power is – or is supposed to be – distributed equally, regardless of wealth.

MILAN – The eighteenth-century British economist Adam Smith has long been revered as the founder of modern economics, a thinker who, in his great works The Wealth of Nationsand The Theory of Moral Sentiments, discerned critical aspects of how market economies function. But the insights that earned Smith his exalted reputation are not nearly as unassailable as they once seemed.

.

Perhaps the best known of Smith's insights is that, in the context of well-functioning and well-regulated markets, individuals acting according to their own self-interest produce a good overall result. "Good," in this context, means what economists today call "Pareto-optimal" – a state of resource allocation in which no one can be made better off without making someone else worse off.1

Smith's proposition is problematic, because it relies on the untenable assumption that there are no significant market failures; no externalities (effects like, say, pollution that are not reflected in market prices); no major informational gaps or asymmetries; and no actors with enough power to tilt outcomes in their favor. Moreover, it utterly disregards distributional outcomes (which Pareto efficiency does not cover).

Another of Smith's key insights is that an increasing division of labor can enhance productivity and income growth, with each worker or company specializing in one isolated area of overall production. This is essentially the logic of globalization: the expansion and integration of markets enables companies and countries to capitalize on comparative advantages and economies of scale, thereby dramatically increasing overall efficiency and productivity.

Again, however, Smith is touting a market economy's capacity to create wealth, without regard for the distribution of that wealth. In fact, increased specialization within larger markets has potentially major distributional effects, with some actors suffering huge losses. And the refrain that the gains are large enough to compensate the losers lacks credibility, because there is no practical way to make that happen.1

Markets are mechanisms of social choice, in which dollars effectively equal votes; those with more purchasing power thus have more influence over market outcomes. Governments are also social choice mechanisms, but voting power is – or is supposed to be – distributed equally, regardless of wealth. Political equality should act as a counterweight to the weighted "voting" power in the market.



To this end, governments must perform at least three key functions. First, they must use regulation to mitigate market failures caused by externalities, information gaps or asymmetries, or monopolies. Second, they must invest in tangible and intangible assets, for which the private return falls short of the social benefit. And, third, they must counter unacceptable distributional outcomes.

But governments around the world are failing to fulfill these responsibilities – not least because, in some representative democracies, purchasing power has encroached on politics. The most striking example is the United States, where electability is strongly correlated with either prior wealth or fundraising ability. This creates a strong incentive for politicians to align their policies with the interests of those with market power.

To be sure, the Internet has gone some way toward countering this trend. Some politicians – including Democratic presidential candidates like Bernie Sanders and Elizabeth Warren – rely on small individual donations to avoid becoming beholden to large donors. But the interests of the economically powerful remain significantly overrepresented in US politics, and this has diminished government's effectiveness in mitigating market outcomes. The resulting failures, including rising inequality, have fueled popular frustration, causing many to reject establishment voices in favor of spoilers like President Donald Trump. The result is deepening political and social dysfunction.1

One might argue that similar social and political trends can also be seen in developed countries – Italy and the United Kingdom, for example – that have fairly stringent restrictions on the role of money in elections. But those rules do not stop powerful insiders from wielding disproportionate influence over political outcomes through their exclusive networks. Joining the "in" group requires connections, contributions, and loyalty. Once it is secured, however, the rewards can be substantial, as some members become political leaders, working in the interests of the rest.

Some believe that, in a representative democracy, certain groups will always end up with disproportionate influence. Others would argue that more direct democracy – with voters deciding on major policies through referenda, as they do in Switzerland – can go some way toward mitigating this dynamic. But while such an approach may be worthy of consideration, in many areas (such as competition policy), effective decision-making demands relevant expertise. And government would still be responsible for implementation.

These challenges have helped to spur interest in a very different model. In a "state capitalist" system like China's, a relatively autocratic government acts as a robust counterweight to the market system.

In theory, such a system enables leaders, unencumbered by the demands of democratic elections, to advance the broad public interest. But with few checks on their activities – including from media, which the government tightly controls – there is no guarantee that they will. This lack of accountability can also lend itself to corruption – yet another mechanism for turning government away from the public interest.

China's governance model is regarded as dangerous by much of the West, where the absence of public accountability is viewed as a fatal flaw. But many developing countries are considering it as an alternative to liberal democracy, which has plenty of flaws of its own.

For the world's existing representative democracies, addressing those flaws must be a top priority, with countries limiting, to the extent possible, the narrowing of the interests the government represents. This will not be easy. But at a time when market outcomes are increasingly failing to pass virtually any test of distributional equity, it is essential. -- via my feedly newsfeed

Important article on wv

Wednesday, July 31, 2019

ACA Lawsuit Threatens Tens of Millions of Medicaid, Medicare Beneficiaries [feedly]

ACA Lawsuit Threatens Tens of Millions of Medicaid, Medicare Beneficiaries
https://www.cbpp.org/blog/aca-lawsuit-threatens-tens-of-millions-of-medicaid-medicare-beneficiaries

 -- via my feedly newsfeed

EPI: Not just ‘no heat’ but signs of cooling: The case for FOMC rate cuts has real merit [feedly]

Not just 'no heat' but signs of cooling: The case for FOMC rate cuts has real merit
https://www.epi.org/blog/not-just-no-heat-but-clear-signs-of-cooling-the-case-for-fomc-rate-cuts-has-real-merit/

Federal Reserve Chair Jerome Powell's July 10 testimony before the House Financial Services Committee was unlike any hearing featuring his predecessors.

Despite the vital importance of Fed decisions for the day-to-day lives of working families, congressional hearings featuring the Fed chair speaking about the state of the economy historically have disappointed. Disinterested and poorly informed questions posed by members of Congress have elicited opaque answers from Fed chairs.

This hearing was different. The questions were probing and informed, and Powell answered them with clarity.

Perhaps the most illuminating exchange occurred when Representative Steve Stivers (R-Ohio) asked Powell if the Fed was worried that low interest rates would cause the job market to run "hot."

Some quick background throws Powell's remarkable answer into sharp relief. One of the Fed's two mandates—and the mandate that the Fed has unfortunately prioritized in recent decades—is to keep inflation under control. Traditionally, the perceived threat to controlled inflation in an expanding economy has been thought to come from the improving labor market. As unemployment falls and workers feel more confident, they can demand faster wage growth from employers. If wage growth (adjusted for inflation) exceeds economywide productivity growth, it puts upward pressure on prices (since labor costs are by far the largest component of prices).

Often in the Fed's history, the response to Stivers's question would have been, "Yes, unemployment this low definitely has us worried about overheating leading to inflation." But too often this answer would have had very little empirical backing. For example, for a short spell in 2011 the estimated "natural rate" of unemployment below which inflation was forecast to begin accelerating was 2 full percentage points above today's 3.7% rate. Yet no acceleration of inflation happened between 2011 and today.

'To call something hot, you need to see some heat'

Powell's answer to Stivers's loaded question admirably reflected the facts.
We don't have any basis or any evidence for calling this a hot labor market. We have wages moving up at 3%, which is good because it was 2% a year ago, but 3% barely covers productivity increases and inflation. And it certainly isn't fast enough to put upward pressure on inflation. [However], we haven't seen wages moving up as sharply as they have in the past. … 3.7% is a low unemployment rate, but to call something hot, you need to see some heat. While we hear reports of companies finding it hard to find qualified labor, we don't see wages responding.

In this newsletter, I look for some "heat" in widely watched economic variables. But instead of seeing heat in these variables, I find pretty consistent cooling.

Wage growth has actually flattened recently

The most important indicator of a fast-warming job market is wage growth. Powell's reference point for wage growth—the sum of productivity growth and inflation—is exactly the one EPI has used for years. Specifically, according to our Nominal Wage Tracker, as long as nominal wage growth is less than or equal to the Federal Reserve's 2% overall price inflation target plus the growth rate of potential productivity, the labor market is not getting too "hot." Our tracker usually looks at year-over-year changes in wages as our measure of growth. However, this measure could in theory miss (or at least obscure) quite recent accelerations or decelerations in the data.

Figure A presents our usual nominal wage growth measure for all (nonfarm) workers and a supplemental measure using a more timely (but more volatile) series measuring quarterly wage growth, and highlights a more recent period. The dark blue line in the graph measures growth relative to the same month in the previous year, and the light blue line shows wage growth measured as the average of the most recent three months relative to the average of the three preceding months. So, the last data point in this line is average wages in April, May, and June of 2019 as compared with average wages in January, February, and March of 2019. This growth is then expressed as an annualized rate to make it comparable with the other line.

Our original wage tracker shows clearly that wage growth steadily—but very slowly—improved in the years following the Great Recession. For example, growth was below 2% for much of 2010, but by December 2016 had risen to 2.7%. Moreover, as the figure shows, wage growth moved into a notably higher gear in 2018. From January 2018 to December 2018, year-over-year wage growth rose from 2.8% to 3.3%. And our more timely three-month measure of wage growth rose even faster in this period, consistent with wage growth acceleration.

One might even be tempted to call this evidence of heat. But in 2019, this growth has not just moderated but has actually decelerated slightly. In June 2019 wage growth was just 3.1%.

Figure A

The quarterly growth numbers (expressed at annualized rates) make the deceleration even clearer, as the more timely three-month measure of wage growth has dipped sharply below the year-over-year measure throughout 2019. In June 2019, this three-month measure of wage growth was just 2.7%.

As we've argued before, a nominal wage target really is the most important real-time indicator the Fed should be watching to assess economic overheating. If there's no ongoing heat in this variable, the case for tightening is much, much harder to make.

Any signs of 'heat' in GDP, residential investment, and other variables?

Recent reports have indicated that the Fed's intentions extend beyond just holding pat on interest rates to cutting rates in the next Federal Open Markets Committee (FOMC) meeting. Can we use the "heat check" of quarterly changes to shed any light on the wisdom of this decision by focusing on some other variables as well?

Table 1 shows growth rates for a number of variables, including average hourly earnings. It shows the annual growth rate for 2016, 2017, and 2018; the growth rate over the past six months; and the last quarter's growth (with these last two growth rates expressed in annualized terms to make them directly comparable to the others). Essentially, this table aims to show longer-run trends in these variables as well as what has happened to them in increasingly recent periods. An "overheating" economy would see growth rates that were higher the more recently they were measured. In almost all cases we see the opposite of this pattern: Growth accelerates from 2016 to 2018, but then begins to decelerate.

Table 1

First, we examine growth in gross domestic product (GDP). Between 2016 and 2018 GDP growth accelerated from 1.6% to 2.9%. But in the latest six months, it decelerated to a 2.6% growth rate, and further decelerated to a 2.1% growth rate in the most recent quarter.

Next, we examine growth in the average hourly earnings measure shown in Figure A. Earnings accelerated from 2.6% to 3.0% between 2016 and 2018. But over the last six months the growth rate was 2.9%, and for the last quarter the growth rate was just 2.7%.

Growth in the price deflator for personal consumption expenditures excluding food and energy (the price inflation measure the Fed watches most closely) accelerated from 1.3% to 1.6% between 2016 and 2018. But the last six months' growth was steady at this 1.6% rate, and growth ticked down slightly to 1.5% in the last quarter.

The next indicator we examine is residential investment—probably the component of GDP most sensitive to interest rate changes. As the Fed raised interest rates steadily (if slowly) between 2015 and 2018, this sector should be where we see evidence that these rate hikes have constrained growth. This is borne out in the data, as growth in residential investment slowed from 6.5% in 2016 to −1.5% in 2018. In the last six months residential investment decelerated a bit more slowly, contracting at a 1.3% rate. The last quarter saw a 1.5% contraction.

The second most interest-sensitive component of GDP is nonresidential fixed investment (NRFI—or business investment). NRFI accelerated from 0.7% growth in 2016 to 6.4% growth in 2018. In those years, the NRFI trends were dominated by changes in the prices of energy goods and services, with faster price growth in the energy sector inducing more business investment. But more recent data show a pronounced slowdown. In the last six months, NRFI grew at just a 1.9% rate, while it contracted 0.6% in the latest quarter.

Cooling economy does provide some basis for a rate cut

By many measures, the U.S. economy seems to be cooling. A Fed decision this week to cut rates would have some real evidentiary basis behind it.


 -- via my feedly newsfeed