Prepping for Friday: What’s trend GDP growth? [feedly]

Prepping for Friday: What's trend GDP growth?
http://jaredbernsteinblog.com/prepping-for-friday-whats-trend-gdp-growth/

This Friday morning at 8:30, we'll see the first estimate of GDP for 2018Q2. Various trackers have it coming in at or above 4% (that's the real, annualized quarterly growth rate). It's that ballpark correct, as I expect it is—the trackers use much of the same incoming data as BEA—it will be a big political football, but that's not the purpose of this post. Here, I'd like to think about the best way to pull out the underlying trend of real GDP growth.

While team Trump will be going bananas for any number with a handle of 4 on it (as would, to be fair, even a normal administration), it's widely agreed upon by long-time GDP watchers that any single quarter should be down-weighted, and even more so if it's an outlier (i.e., well above or below trend). But the concept of outlier implies the existence of a known trend, and that's where things get a bit more confusing these days.

The first thing you want to do when hunting the trend is to get away from the noisy, annualized quarterly growth series. Figure 1 shows, for example, how the year-over-year change cuts through the volatile annualized quarterly data (for all of these figures I've plugged in 4.5%, as per the Atlanta Fed's GDPNow, for 2018Q2).

Source: BEA

The end of the yr/yr series, juiced in part by my plug-in, shows a nice acceleration to around 3%, but it also shows rates of 3% achieved pretty recently, around 2014-15. Yet, most non-thumb-on-the-scale analysts estimate trend GDP growth to be closer to 2 than 3. I agree, meaning there is still be too much noise in the yr/yr series to pull out a reliable signal of the underlying trend.

If you didn't know better, you'd use a simple HP filter to pull out the signal and call it a day, as in the next figure (most such examples apply the filter to log GDP, not to its annual change, as I do here, but the reasons to not use this filter pertain here as well). But as Jim Hamilton recently wrote, this approach risks bringing "all kinds of patterns into the HP-filtered series that have nothing to do with the original data-generating process and are solely an artifact of having applied the filter."

Source: BEA, my analysis

The HP filter can be especially misleading at the end of series as its construction leads it to hew too close to the actual data. And that's the part in which we're often most interested.

Hamilton has his own recommended approach (follow the link above), and sure enough, if you run both the HP and Hamilton filters on log real GDP, the Hamilton trend is well below the actual data at the end of the series (remember, all these figures plug 4.5% in for Q2). The Hamilton filter, to its credit, is a tougher customer and requires more convincing than HP before it accepts a more persistent shift in the series, i.e., a change in the trend. The implied recent growth rate of the Hamilton series, btw, is around 2%, which, as noted, many of us still think of as real GDPs trend.

Source: BEA, my analysis

There is, however, the matter of the stimulus, which is clearly pushing growth above that trend rate as fiscal injections of more than $200 billion a year both this and next year are prone to do. Goldman Sachs researchers report a fiscal boost to real GDP growth of a bit north of 0.5 ppt in both 2018 and 2019.

But that's Keynes, not Laffer, meaning once the fiscal impulse fades, it's back down to trend (more precisely, negative fiscal impulse might will take GDP below trend for a few quarters).

So, beyond a wild card I'll note in a moment, GDP is probably growing at a long-term trend around 2%, though near-term quarters will be above trend. And we should get no more elated by the 4.5% on Friday, if that's the print, than we should be disappointed by the 2% final estimate for Q1.

The wild card is this: Though we could use more empirical evidence, I'm increasingly moved by reverse hysteresis arguments, where positive demand shocks can boost the economy's supply side (here's a nice empirical paper with some evidence from Coibion et al written for CBPP's Full Employment Project). To the extent, for example, that the tight job market pulls in more labor market sideliners, there's the potential for faster labor force growth. Also, as Bivens argues: "A 'high-pressure economy' that eliminates the remaining demand shortfall in the U.S. economy and leads to low rates of unemployment and rapid wage growth would likely induce faster productivity growth."

The logic is that firms, in order to maintain profit margins in periods of high labor costs, must find efficiencies they can ignore in slack markets. [What's that? This can't be right because any firm not operating at the edge of their PPF will be forced out of businesses by more productive competitors? Yeah…no.]

Especially given relatively tame (core) price and wage inflation, what's the downside of seeing if he's right?!

At any rate, if BEA delivers unto us a GDP growth rate for Q2 that starts with a 4, go ahead and applaud. Then sit down and back out the trend.

Note 1: I'll rerun some of these figures with the actual estimate on Friday, time permitting.

Note 2: I didn't get into it here, but there are good arguments for gleaning real GDPs trend from sub-measures that leave out volatile components. One popular entry is real final sales to private domestic purchasers, which is C + I – inventories + imports. BEA itself says this series tracks "the more persistent movements in spending by consumers and businesses."

This last figure plots real GDP and real final sales to domestic purchasers, yr/yr. There is less of an acceleration in final sales toward the end of the series, and I like that it's smoother than GDP growth. But since 2010, they seem to telling a similar story.

Note 3: For others who play in this sandbox, what's your preferred method for GDP trend extraction? I only ask that it's a technique we can all try at home, i.e., nothing too esoteric.

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Downward causation [feedly]

Downward causation
http://understandingsociety.blogspot.com/2018/07/downward-causation.html

I've argued for the idea that social phenomena are generated by the actions, thoughts, and mental frameworks of myriad actors (link). This expresses the idea of ontological individualism. But I also believe that social arrangements -- structures, ideologies, institutions -- have genuine effects on the actions of individual actors and populations of actors and on intermediate-level social structures. There is real downward and lateral causation in the social world. Are these two views compatible?

I believe they are compatible.

The negative view holds that what appears to be downward causation is really just the workings of the lower-level components through their aggregation dynamics -- the lower struts of Coleman's boat (link). So when we say "the ideology of nationalism causes the rise of ultraconservative political leaders", this is just a shorthand for "many voters share the values of nationalism and elect candidates who propose radical solutions to issues like immigration." This seems to be the view of analytical-sociology purists.

But consider the alternative view -- that higher level entities sometimes come to possess stable causal powers that influence the behavior and even the constitution of the entities of which they are composed. This seems like an implausible idea in the natural sciences -- it is hard to imagine a world in which electrons have different physical properties as an effect of the lattice arrangement of atoms in a metal. But human actors are different from electrons and atoms, in that their behavior and constitution are in fact plastic to an important degree. In one social environment actors are disposed to be highly attentive to costs and benefits; in another social environment they are more amenable to conformance to locally expressed norms. And we can say quite a bit about the mechanisms of social psychology through which the cognitive and normative frameworks of actors are influenced by features of their social environments. This has an important implication: features of the higher-level social reality can change the dispositions and workings of the lower-level actors. And these changes may in turn lead to the emergence of new higher-level factors (new institutions, new normative systems, new social practices of solidarity, ...). So enduring social arrangements can cause changes in the dynamic properties of the actors who live within them.

Could we even say, more radically and counter-intuitively, that a normative structure like extremist populism "generates" behavior at the individual level? So rather than holding that individual actions generate higher-level structures, might we hold that higher-level normative structures generate patterns of behavior? For example, we might say that the normative strictures of patriarchy generate patterns of domination and deference among men and women at the individual level; or the normative strictures of Jim-Crow race relations generate individual-level patterns of subordination and domination among white and black individuals. There is a sense in which this statement about the direction of generation is obviously true; broadly shared knowledge frameworks or normative commitments "generate" typical forms of behavior in stylized circumstances of choice.

Does this way of thinking about the process of "generation" suggest that we need to rethink the directionality implied by the micro-macro distinction? Might we say that normative systems and social structures are as fundamental as patterns of individual behavior?

Consider the social reality depicted in the photograph above. Here we see coordinated action of a number of soldiers climbing out of a trench in World War I to cross the killing field of no mans land. The dozen or so soldiers depicted here are part of a vast army at war (3.8 million by 1918), deployed over a front extending hundreds of miles. The majority of the soldiers depicted here are about to receive grievous or mortal wounds. And yet they go over the trench. What can we say about the cause of this collective action at a specific moment in time? First, an order was conveyed through a communications system extending from commander to sergeant to enlisted man: "attack at 7:00 am". Second, the industrial wealth of Great Britain permitted the state the ability to equip and field a vast infantry army. Third, a system of international competition broke down into violent confrontation and war, leading numerous participant nations to organize and fund armies at war to defeat their enemies. Fourth, the morale of the troops was maintained at a sufficiently high level to avoid mass desertion and refusal to fight.  Fifth, an infantry training regime existed which gave ordinary farmhands, workers, accountants, and lords the habits and skills of infantry soldiers. All of these factors are part of the causal background of this simple episode in World War I; and most of these factors exist at a meso- or macro-level of social organization. Clearly this particular group of social actors was influenced by higher-level social factors. But equally clearly, the mechanisms through which these higher-level social factors work are straightforward to identify through reference to systems of individual actors.

Think for a minute about materials science. The hardness of titanium causes the nail to scratch the glass. It is true that material properties like hardness depend upon their microstructures. Nonetheless we are perfectly comfortable in attributing real causal powers to titanium at the level of a macro-material. And this attribution is not merely a way of summarizing a long story about the micro-structure of metallic titanium.

I've generally tried to think about these kinds of causal stories in terms of the idea of microfoundations. The hardness of titanium derives from its microfoundations at the level of atomic and subatomic causation. And the causal powers of patriarchy derive from the fact that the normative principles of partriarchy are embedded in the minds and behavior of many individuals, who become exemplars, enforcers, and encouragers of compliant behavior. The processes through which individuals acquire normative principles and the processes through which they behaviorally reflect these principles constitute the microfoundations of the meso- and macro-power of patriarchy.

So the question of whether there is downward causation seems almost too easy. Of course there is downward causation in the social world. Individuals are influenced in their choices and behavior by structural and normative factors beyond their control. And more fundamentally, individuals are changed in their fundamental dispositions to behavior through their immersion in social arrangements.

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Capitalism as a fetter [feedly]

Capitalism as a fetter
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2018/07/capitalism-as-a-fetter.html

I was a little disappointed to see Tony Yates' reaction to Aaron Bastani:

Can we ditch 6th form debates and have someone arguing for evidenced based improvements to our policy portfolio please?

My disappointment is the failure to see that there is, if you like, a third way between utopian communism on the one hand and technocratic tweaks on the other.

It begins from the idea that ten years of stagnant productivity might mean we are now at the phase of capitalism that Marx foresaw:

At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. 

If this is the case, then Tony's reply to Aaron is half right. He's right to decry utopianism and demand improvements to our policy portfolio. Where he might err, though, is in not seeing that capitalism itself is the problem. If so, we need quite radical solutions.

So, how might capitalism now be a fetter on the productive forces? Here are a few ways:

First, low investment and innovation might be due in part to the fact that these have external benefits which firms cannot internalize. William Nordhaus famously showed that capitalists capture only a "minuscule fraction" of the benefits of innovation. It might well be that one reason why techno-optimism co-exists with low investment is that firms are loath to invest for fear that their profits will be competed away by future innovations.

Secondly, it's possible that tough intellectual property laws stifle innovation whilst protecting monopolies.

Thirdly, the failure to align managerial and shareholder incentives has led to a lack of productive investment. As Stutz and Kahle have shown, quoted firms today tend to be older and to invest less than their counterparts did years ago. In a similar vein, entrenched management acts as what Joel Mokyr calls a "force of conservatism." Eric Brynjolfsson and Andrew McAfee say that "significant organizational innovation is required to capture the full benefit of…technologies." But bosses lack the incentives or the skills to undertake such innovations.

Fourthly, inequality – not just of income but of workplace power – might itself be a fetter on production. I'm thinking of (at least) three mechanisms here:

 - It breeds distrust (pdf). The reduces growth in several ways. It might reduce the many transactions which depend upon trust. The fear of future expropriation or tax increases might deter investment and innovation. It might encourage capitalists to invest in guard labour or in political lobbying to entrench their privilege rather than in productive activity. It can lead to worse policy-making as populism increases because people no longer trust "elites": Brexit might be a consequence of high inequality.

 - The high-powered incentives that lead to big CEO salaries can backfire. They encourage dishonesty, reduce creativity and divert management effort from hard-to-monitor tasks such as long-term innovation and towards easier-to-monitor ones such as short-term earnings management.

 - Inequalities of wages within the workplace cause dissatisfaction (pdf), which demotivates employees and reduces productivity. Inequalities of power can have the same effect. They demotivate more junior staff, who expect to be told what to do rather than use their initiative. They can also suppress productivity by failing to fully exploit the dispersed fragmentary knowledge of "ground truth" which workers possess.

You might wonder: if all this is the case, how did capitalism ever grow? One answer comes from Schumpeter; growth was powered by an entrepreneurial spirit which has been supplanted by bureaucratic management. Another answer is that capitalism has changed. What worked when workers were unskilled drones operating physical machines does not work when skilled immaterial labour works with intangible assets. And thirdly, we must remember that capitalism grew fastest between 1945 and 1973, when it contained a big dollop of social democracy.

If this diagnosis is right, what's the answer? For me, it would comprise a mixture of conventional supply-side policies, state support for innovation and worker coops, and measures to improve workers' bargaining power such as a citizens income and full employment to incentivize labour-saving productivity. You might object that these aren't very socialist. But they should be a stepping stone to socialism, a form of accelerationism. We can't get to a communist utopia overnight.

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Economy of Intangibles [feedly]

Economy of Intangibles
https://www.nakedcapitalism.com/2018/07/economy-of-intangibles.html

Has the rising role of intangibles, as in intangible assets. helped cause secular stagnation?

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Trade agreements and global production

Edith Laget, Alberto Osnago, Nadia Rocha, Michele Ruta 14 July 2018

The making and unmaking of trade agreements affects global production. This column reveals how deeper agreements have boosted countries' participation in global value chains and helped them integrate in industries with higher levels of value added. Investment and competition now drive global value chain participation in North-South relationships, while removing traditional barriers remains important for South-South relationships.

Europe and North America are entangled in discussions to reverse or renegotiate existing trade agreements (Brexit, NAFTA), but other regions of the world are moving in the opposite direction. Examples include the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP) between China, ASEAN countries and other regional partners, and the African Continental Free Trade Area (AfCFTA). 

An important question is how these agreements, made and unmade, will shape future trade and economic relations. Recent studies have investigated the effect of trade agreements on trade flows (Baier et al. 2017, Mattoo et al. 2017). In our research (Laget et al. 2018), we use new data on the content of trade agreements to assess their effects on countries' participation in global value chains (GVCs).¹

Preferential trade agreements (PTAs) have become deeper over time, often going beyond traditional trade policy to encompass areas such as investment, competition, and intellectual property rights protection. To estimate the relationship between cross-border production linkages and the depth of trade agreements, we use a structural gravity model at the aggregate and sectoral levels. PTA depth measures are based on the new World Bank dataset on the content of PTAs, which covers 260 agreements signed by around 180 countries between 1958 and 2015 (Hofmann et al. 2018). This is the entire realm of PTAs in force and notified to the WTO as of December 2015. 

Cross-border production linkages are measured in two ways: 

• We use value-added trade measures from Wang et al. (2012) based on the World Input Output data set (WIOD). 
• We use data from UNCOMTRADE on bilateral trade in parts and components. This records gross trade flows, which can be subject to double-counting, but it has the advantage of being available for the full set of countries and years covered by the new data set on PTAs.

Deep trade agreements promote global value chain participation

Using value added trade data, we find that deep PTAs increase the domestic value-added content of exports, mainly through global value chains. Figure 1 shows that adding a provision to a PTA boosts domestic value added of intermediate goods and services exports (in other words, forward GVC linkages) by 0.48%, while an additional provision in a PTA increases foreign value added of intermediate goods and services exports (backward GVC linkages) by 0.38%. We also find evidence that deep trade agreements improve forward linkages particularly for more complex GVCs, that is, GVCs for which exported intermediates cross borders two times or more. We do not find a significant impact of deep trade agreements on domestic and foreign value added of final goods and services exports. We make separate estimations for services and goods to show that the impact of deep trade agreements is usually higher for value-added trade in services than value-added trade in goods. 

Figure 1 Effect of deep trade agreements on GVC integration

Source: Laget et al. (2018).
Notes: The estimator is PPML. All specifications include bilateral fixed effects and country-time fixed effects. The 90% confidence intervals are constructed using robust standard errors, clustered by country-pair.

Deep trade agreements help countries integrate in high-value added industries

We also analyse whether the impact of deep trade agreements on GVC integration is heterogeneous across industries. Specifically, we estimate a set of sectoral regressions, including an interaction term between the depth of an agreement and the share of value added that a sector has in overall production. The results suggest that deep trade agreements are particularly relevant for GVC integration in high value-added industries (Figure 2). Not surprisingly, these industries are usually services sectors, which are characterised by non-tangible activities such as research and development or retail services that have high value added. 

Figure 2 Marginal effect of additional provision in terms of average share of value added

Source: Laget et al. (2018).

Trade agreements matter to different countries for different reasons 

Finally, we focus on the larger sample of country data available for trade in parts and components to empirically explore whether the impact of different provisions is heterogeneous across countries with different levels of development. We split the provisions covered in PTAs into two categories, depending on their relationship with WTO rules (Horn et al. 2010). 

'WTO plus' provisions fall under the current mandate of the WTO (for example, tariffs and customs) and are already subject to some form of commitment in WTO agreements. 'WTO extra' provisions, on the contrary, refer to policy obligations outside the current mandate of the WTO (for example, investment, competition). The estimates suggest that WTO extra provisions are particularly important for GVC-related trade between North and South countries. On the other hand, WTO plus provisions are still relevant for trade among developing countries (South-South agreements). 

Deep agreements

Since the early 1990s, governments have signed progressively deeper trade agreements, and firms have fragmented production internationally. Our research finds that the deepening of the trade arrangements has been a key factor in the rise of global value chains. It has also helped countries to integrate in industries with higher values of production. These results indicate that the reshaping of international trade policy relationships we are observing today may have far-reaching consequences for the organisation of production in the future. 

References

Baier, S, Y Yotov, T Zylkin (2017), "One size does not fit all: On the heterogeneous impact of free trade agreements", VoxEU, 28 April. 

Dhingra, S, R Freeman, E Mavroeidi (2018), "Beyond tariff reductions: The effect of deep provisions on gross and value-added trade", VoxEU, 30 March. 

Hofmann, C, A Osnago, M Ruta (2018), "The Content of Preferential Trade Agreements", forthcoming, World Trade Review.

Horn, H, P C Mavroidis, and A Sapir (2010), "Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements", The World Economy 33: 1565-1588.

Laget, E, A Osnago, N Rocha, M Ruta, (2018), "Deep Trade Agreements and Global Value Chains", World Bank policy research working paper 8491.

Mattoo, A, A Mulabdic, M Ruta (2017), "Deep Trade Agreements As Public Goods", VoxEU, 12 October. 

Mulabdic, A, A Osnago, M Ruta (2017), "Trading off a 'soft' and 'hard' Brexit", VoxEU, 23 January.

Endnotes

[1] See also the related works by Mulabdic et al. (2017) and Swati et al. (2018) that discuss how Brexit will affect UK value chains under different post-Brexit trade arrangements.

--

John Case
Harpers Ferry, WV

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Russia is dumping US Treasuries. Will China be next?

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Russia is dumping US Treasuries. Will China be next? // Asia Times
http://www.atimes.com/article/russia-is-dumping-us-treasuries-will-china-be-next/amp/

Moscow is offloading dollar assets at a record pace amid questions about how Beijing will respond to escalating trade war

The post Russia is dumping US Treasuries. Will China be next? appeared first on Asia Times.


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