Asia Times: The lasting legacy of Deng Xiaoping’s rise to power [feedly]

He did this on principles derived from Vladimir Lenin's New Economic program, which more on the Left could profit from studying. I wish more of Deng's work was available in English, since he performed a near miracle that apparently escaped Gorbachev, or else the USSR was too far in the hole by 1989,  

The lasting legacy of Deng Xiaoping's rise to power
http://www.atimes.com/article/deng-xiaopings-rise-to-power/  

Deng Xiaoping left a lasting legacy on China and the world by orchestrating China's transition to a market economy. After becoming the leader of the Communist Party of China in 1978, following Mao Zedong's death two years earlier, Deng launched a program of reform that ultimately saw China become the world's largest economy in terms of its purchasing power in 2014.

Last year it accounted for 18% of global purchasing power, compared with 15% for the United States.

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A major turning point was the 3rd Plenum of the 11th Central Committee of the Communist Party of China, which took place in December 1978.

For the three decades prior, production in China was structured around a central planning model: collectivized agriculture in rural areas and state-owned industrial firms (SOEs) in urban regions. The prices of goods and services were also fixed by the government rather than determined by supply and demand.

Deng recognized that the outcomes produced by the planned economy were poor, with more than 60% of the population living in poverty. That's why he launched a series of measures such as opening up the economy to foreign trade and investment.

He summarized his distinctly pragmatic rather than ideological approach to development with the phrase, "It doesn't matter whether the cat is black or white, so long as it catches mice".

Under Deng, the market wasn't given free rein immediately. There was no reform of the "big bang" variety seen in former centrally-planned economies of Central and Eastern Europe. Rather, in the words of Barry Naughton, China's economy was simply allowed to "grow out of the plan".

For example, state-owned firms were not sold off to private entrepreneurs at the outset. Rather, privately-owned companies were permitted to emerge alongside SOEs. This gave Chinese consumers choices and the competition forced SOEs to become more responsive to market demand and efficient in their production practices.

Impact of the reforms

The outcomes of Deng's reforms have been without historical peer.

A Deng Xiaoping billboard. Photo: Wikicommons/ Brücke-Osteuropa

 

The latest data put the proportion of China's population living in poverty at less than 1%. Of course, despite hundreds of millions being lifted out of poverty, this does not mean that all Chinese are rich: average incomes are still only around one-third of those in Australia.

The reasons Deng's reforms proved successful can be traced back to two key factors.

The first is policy logic. John McMillan and Barry Naughton showed that the newly-emerged private sector played a crucial role in improving the Chinese economy's overall efficiency.

Another key consideration was that China benefited from its starting point.

Jeffrey Sachs and Wing Thye Woo pointed out that in 1978, most Chinese people were poor and living in rural areas. Compared with other centrally-planned economies such as the former Soviet Union, this made the task of shifting labor from producing low-productivity agricultural output to higher productivity industrial goods easier.

Just how far along the path to a market economy has China come? That depends on the measure and the part of China's economy under focus.

Last month, Meixin Pei, a professor at Claremont McKenna College in the United States, pointed to China's state sector as evidence its economic growth would slow. He wrote that China's economy was "nowhere near as efficient as that of the US".

And the "main reason for this is the enduring clout of China's state-owned enterprises (SOEs), which consume half of the country's total bank credit, but contribute only 20% of value-added and employment".

Yet, perhaps unwittingly, Pei makes an important observation: SOEs may account for one-fifth of China's value-added output and employment, but that means four-fifths now comes from Deng's private sector.

Contemporary relevance

Careful work by Nicholas Lardy at the Peterson Institute for International Economics has concluded that by 2011, China's public sector, including SOEs, only employed 11% of China's labor force. As a comparison, in 2013, Australia's public sector accounted for 18.4% of total employment. In other words, at an aggregate level and in terms of employment, the private sector is more prominent in China than in Australia.

An OECD study in 2010 found that 87% of China's 523 industrial sectors were highly competitive. They observed that this compared favorably with international standards, including with the US.

Commentators like Minxin Pei are correct that China's SOEs do benefit from government policy support, such as cheap loans from state-owned banks. But the data nonetheless points to China's private sector being hyper-competitive in the sense that despite such discriminatory policies, the sector as a whole has continued to thrive.

In a 2016 paper for a Reserve Bank of Australia conference, Nicholas Lardy highlighted that in terms of output growth, profitability and indebtedness, private Chinese industrial firms outperform SOEs by a wide margin.

The prominent and vibrant role the private sector plays in China today means that its economic growth may be more sustainable than some of its critics imagine.

That said, the pace of economic reform has slowed under current Chinese leader, Xi Jinping, who took over in 2012.

President Xi Jinping looms large over Chinese society. Photo: AFP / Greg Baker

Arguably, the slowdown dates back even further. For example, in terms of subjecting Chinese firms to increased competition from overseas firms, China's trade-weighted average tariff in 2000 stood at 14.7%. After entering the World Trade Organisation (WTO) in 2001, this fell dramatically to 4.7% by 2005. Since then, no further progress has been made. In fact, in 2016 the figure was higher at 5.2%.

Similarly, four decades after Deng began to allow foreign investment into the manufacturing sector, other parts of China's economy, particularly the so-called "commanding heights" of the economy such as energy, telecommunication and finance, remain curtailed or off limits entirely. Overall, China is less open to foreign investment than high-income countries and many emerging markets as well.

This lack of reciprocity is at least partly responsible for much of the international community's criticisms of China's economy today. Jason Young, director of the New Zealand Contemporary China Research Centre wrote last week that the current US-China trade war is really a "dispute over what models of political economy are deemed fair and legitimate economic policy-making in today's highly integrated global economy".

Over the past decade, around one-third of the world's economic growth has emanated from China. Countries like Australia have been leading beneficiaries, with China buying $116 billion last year.

China's economic growth, and therefore the world's, will be more assured if Deng's reform legacy is reclaimed by China's current crop of leaders. Just announced tariffs cuts and new openings for foreign investment are steps in that direction.

This story first appeared in The Conversation. You can see the original report here.

Author: James Laurenceson, deputy director and Professor at the Australia-China Relations Institute (ACRI) at the University of Technology Sydney.

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Anne Krueger: Trump’s North American Trade Charade [feedly]

A mainstream economist dumps on NAFTA 2

Trump's North American Trade Charade
https://www.project-syndicate.org/commentary/usmca-employment-north-american-competitiveness-by-anne-krueger-2018-10

Trump's North American Trade Charade

Oct 12, 2018 ANNE O. KRUEGER

US President Donald Trump's goals in renegotiating the North American Free Trade Agreement were to reduce the current-account deficit and restore US manufacturing jobs. But the new United States-Mexico-Canada Agreement fails on both counts and will reduce US employment and weaken American producers' position in international markets.

WASHINGTON, DC – When the United States-Mexico-Canada Agreement (USMCA) was announced, it was met by a sigh of relief around the world. A deal to replace the North American Free Trade Agreement meant that a complete disaster had been averted. Repudiation of NAFTA with no replacement would have been so costly that it was always a distant possibility, but it was a possibility all the same.


Still, the best that can be said is that the worst will not happen. Two of most damaging US proposals were rejected or weakened significantly. First, instead of a sunset clause that would have forced a renegotiation every five years, the parties agreed to a 16-year sunset, with a review of the arrangement every six years. Given that a five-year renewal schedule would have created massive uncertainty for businesses and governments alike, the 16-year proviso is to be welcomed. That said, it remains to be seen what the six-year review will entail.

Second, the "Chapter 19" dispute-settlement mechanism that the Trump administration wanted to kill has been retained, albeit in a watered-down form. This provision will offer some buffer –specifically, for Canada – against anti-dumping duties and other protectionist measures. Among the other minor changes to NAFTA under the USMCA, most had already been agreed to during negotiations for the Trans-Pacific Partnership, which US President Donald Trump abandoned upon taking office.

All told, then, the USMCA has very little to recommend it. This is evident in the fact that the Trump administration's main selling point for the deal is a concession by Canada to open about 3.6% of its $16.3 billion dairy market to more US exports. In exchange, the US has agreed to import more peanuts and sugar from Canada, which implies that imports from other countries may fall. Meanwhile, US tariffs on imported steel and aluminum from Mexico and Canada remain in place.

Throughout the process, US negotiators focused mainly on the auto industry. Among other things, the USMCA will limit the number of vehicles that can be imported into the US, which effectively opens the door to managed trade. It is not yet clear how import quotas will be allocated; but almost any quota-allocation system will stifle competition and innovation by favoring incumbents over new market entrants.

Trump's stated goals in renegotiating NAFTA – if "renegotiation" is the right word for when a bully attacks his smaller neighbors until they accede to his demands – were to reduce the bilateral US trade deficits with Canada and Mexico and "bring good jobs back home." By those criteria, the new agreement is a spectacular failure. As any economist knows, a deficit in goods and services is a macroeconomic phenomenon reflecting a country's domestic expenditures and savings. For the US to shrink its overall deficit, it must either reduce expenditures or increase savings. Nothing in the USMCA does that.


To be sure, Mexican producers will probably choose to incur the costs of the 2.5% US tariff on imported cars rather than meet the ROO or wage requirements (hence the need for import quotas). But, either way, both provisions will reduce the competitiveness of North American producers across the board. In fact, automakers in Asia and Europe are probably ecstatic at the prospect of increased sales. They have gained an edge over North American producers in third countries, and perhaps even in the US market itself.Moreover, the deal will probably destroy more US jobs than it creates. The new rules-of-origin (ROO) benchmark requiring that 75% of an imported vehicle be produced in North America (up from 62.5% under NAFTA) is likely to reduce employment by raising the costs of production. So, too, will the provision requiring that 40-45% of a vehicle's value be produced by workers earning a minimum of $16 per hour by 2023 – a rate that is far above what Mexican autoworkers can expect to make.

As for foreign-owned automakers operating in the US, they will almost certainly offshore any facilities that are producing inputs destined for foreign markets. This diversion, combined with the higher price of cars in the US, will further reduce overall US auto production, and thus auto-sector employment. And even if US parts producers were to expand production, they would be inclined to automate as much of it as possible, rather than hire more workers.

One of NAFTA's major benefits was that it allowed for integrated supply chains across North America. US automakers gained access to labor-intensive parts at lower cost from Mexico, and Mexican producers gained access to less expensive capital-intensive parts from the US. As a result, the North American auto industry improved its competitive position internationally. The USMCA will not destroy NAFTA's efficient supply chains, but it will raise their costs, thus undercutting that advantage.

In the near-term, the USMCA will not change very much. But in the long run, it will likely reduce US employment, shrink North America's share of the global auto market, and undermine America's credibility on international trade issues – all while failing to reduce the US current-account deficit.

Overall, then, there is good reason to believe that Trump's renegotiation has done serious damage indeed. Most important, other governments will now have to ask themselves why they should negotiate with a country that tears up settled agreements at will. Up until 2017, the US had been a global leader in trade liberalization; not anymore. Even if forcing friends and allies to the negotiating table actually benefited US trade, it still would not be worth the loss of US soft power.


ANNE O. KRUEGER

Writing for PS since 2014
9 Commentaries

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University.
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ITEP-Prosperity Now: 2017 Tax Law Gives White Households in Top 1% More Than All Races in Bottom 60% [feedly]

ITEP-Prosperity Now: 2017 Tax Law Gives White Households in Top 1% More Than All Races in Bottom 60%
https://www.cbpp.org/blog/itep-prosperity-now-2017-tax-law-gives-white-households-in-top-1-more-than-all-races-in-bottom

We've explained that the 2017 tax law largely ignored working-class families, instead delivering large tax cuts to the most well-off and large, profitable corporations. A new analysis from the Institute on Taxation and Economic Policy (ITEP) and Prosperity Now shows that that's particularly troubling for Black and Latino households:

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Stiglitz on the global mid-term stakes: People vs. Money in America’s Midterm Elections [feedly]

People vs. Money in America's Midterm Elections
https://www.project-syndicate.org/commentary/how-democrats-can-win-midterms-by-joseph-e-stiglitz-2018-10
People vs. Money in America's Midterm ElectionsOct 11, 2018 JOSEPH E. STIGLITZ

We will soon find out whether US voters matter more than the money flowing into the Republican Party's coffers. America's political and economic future, and most likely the peace and prosperity of the entire world, depends on the answer.

NEW YORK – All eyes are on the United States as November's Congressional elections approach. The outcome will answer many alarming questions raised two years ago, when Donald Trump won the presidential election.


Will the US electorate declare that Trump is not what America is about? Will voters renounce his racism, misogyny, nativism, and protectionism? Will they say that his "America First" rejection of the international rule of law is not what the US stands for? Or will they make it clear that Trump's win was not a historical accident resulting from a Republican primary process that produced a flawed nominee and a Democratic primary process that produced Trump's ideal opponent?

As America's future hangs in the balance, impassioned debates about what caused the 2016 outcome are more than academic. At stake is how the Democratic Party – and similar parties of the left in Europe – should position themselves to win the most votes. Should they lean toward the center or focus on mobilizing young, progressive, and enthusiastic newcomers?

There are good reasons to believe that the latter course is more likely to bring electoral success and stymie the dangers posed by Trump.

American voter turnout is abysmal, and worse in non-presidential-election years. In 2010, just 41.8% of the electorate voted. In 2014, only 36.7% of eligible voters cast ballots, according to data from the United States Elections Project. Democratic turnout is even worse, although it appears to be on the upswing this election cycle.

People often say they don't vote because they think it makes no difference: the two parties are as similar as Tweedledee and Tweedledum. Trump has shown that's not true. The Republicans who abandoned all pretense of fiscal rectitude and voted last year for a massive tax cut for billionaires and corporations have shown it's not true. And the Republican senators who rallied behind the nomination of US Supreme Court Justice Brett Kavanaugh, despite his misleading testimony and entirely credible evidence of past sexual misbehavior, have shown it's not true.


The thirst for a different kind of contender is evident in voter support for progressive candidates like former presidential candidate Senator Bernie Sanders and New York's 28-year-old Alexandria Ocasio-Cortez, who recently defeated the fourth-ranking Democrat in the US House of Representatives in a party primary.But the Democrats are also responsible for voter apathy. The party must overcome a long history of collusion with the right, from President Bill Clinton's capital gains tax cut (which enriched the top 1%) and financial market deregulation (which helped bring on the Great Recession), to the 2008 bank bailout (which offered too little to displaced workers and homeowners facing foreclosure). Over the last quarter-century, the party has sometimes seemed more focused on winning the support of those who live on capital gains than those who live on wages. Many stay-at-home voters complain that the Democrats are relying on attacks on Trump, rather than putting forward a real alternative.

Progressives like Sanders and Ocasio-Cortez have managed to present an attractive message to the voters whom Democrats must mobilize to win. They seek to restore access to a middle-class life by providing decent, well-paying jobs, reestablishing a sense of financial security, and ensuring access to quality education – without the chokehold of student debt that so many graduates currently face – and decent health care, regardless of pre-existing medical conditions. They call for affordable housing and a secure retirement in which the elderly are not preyed on by an avaricious financial sector. And they seek a more dynamic, competitive, and fair-market economy by curbing the excesses of market power, financialization, and globalization, and by strengthening workers' bargaining power.

These perquisites of a middle-class life are attainable. They were affordable a half-century ago, when the country was substantially poorer than it is today; and they are affordable now. In fact, neither America's economy nor its democracy can afford not to bolster the middle class. Government policies and programs – including public options for health insurance, supplementary retirement benefits, or mortgages – are crucial to realizing this vision.

I am encouraged by the outpouring of support for these progressive proposals and the political leaders who support them. In a normal democracy, these ideas would, I am confident, prevail. But US politics has been corrupted by money, gerrymandering and massive attempts at disenfranchisement. The 2017 tax bill was nothing short of a bribe to corporations and the wealthy to pour their financial resources into the 2018 election. Statistics show that money matters enormously in American politics.

Even with a flawed democracy – including a concerted effort to prevent some from voting – the power of the American electorate matters. We will soon find out whether it matters more than the money flowing into the Republican Party's coffers. America's political and economic future, and most likely the peace and prosperity of the entire world, depends on the answer.


JOSEPH E. STIGLITZ

Writing for PS since 2001
251 Commentaries

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Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. His most recent book is Globalization and Its Discontents Revisited: Anti-Globalization in the Era of Trump.

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They Won this Year’s Nobel for Economics. Here’s Why their Work Matters [feedly]

They Won this Year's Nobel for Economics. Here's Why their Work Matters
https://www.globalpolicyjournal.com/blog/10/10/2018/they-won-years-nobel-economics-heres-why-their-work-matters

On the day that the UN Intergovernmental Panel on Climate Change (IPCC) warned that we only have 12 years left in which to prevent climate catastrophe, an American climate economist cited heavily in…

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Richmond Federal Reserve: "Inequality in and across Cities" [feedly]

"Inequality in and across Cities"
http://www.calculatedriskblog.com/2018/10/inequality-in-and-across-cities.html

Inequality in and across Cities

Article by: Jessie Romero and Felipe F. Schwartzman

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Inequality in the United States has an important spatial component. More-skilled workers tend to live in larger cities where they earn higher wages. Less-skilled workers make lower wages and do not experience similar gains even when they live in those cities. This dynamic implies that larger cities are also more unequal. These relationships appear to have become more pronounced as inequality has increased. The evidence points to externalities among high-skilled workers as a significant contributor to those patterns.

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Imagine you have just completed an advanced degree and are entertaining multiple job offers. One offer would take you to a large city, such as Washington, D.C.; your other offers are in smaller cities, such as Greenville, South Carolina, or Roanoke, Virginia. The large city probably offers more job opportunities down the line, as well as a greater number of people to interact with and learn from. In Washington you also will enjoy a greater variety of cultural amenities, such as restaurants and theaters. At the same time, housing is very expensive there; even if the job in the large city pays a higher salary, you may still have to settle for a smaller home or a longer commute.

Imagine you have completed high school and do not wish, or are unable, to pursue post-secondary education. If you move to Washington, it's unlikely you will find a job with a salary that enables you to pay the high housing costs, much less provides you with enough disposable income to eat at restaurants and attend plays. You might find better job opportunities in a smaller town and be able to purchase a better home relative to your wage.

In the end, where one lives is also influenced by personal preferences — a highly educated worker might choose to live in a small town, or a less-educated worker in a large city, to be closer to relatives or because they find the lifestyle more appealing.

Together, all these factors determine what's known as a "spatial equilibrium" — people choose where to live, and wages and housing prices adjust accordingly.1 Over the past few decades, this equilibrium has shifted. Certain cities have experienced faster and more concentrated wage growth, a higher share of college-educated workers, and higher rents. In a recent article, one of the authors of this Economic Brief, Schwartzman, reviews the literature documenting these shifts and organizes some of its main lessons with the help of a stylized spatial equilibrium model.2 He finds that the trend is driven by relative increases in the demand for skilled labor in large cities where there is already a high proportion of high-skilled workers.

Key Facts about Spatial Inequality

A large body of research has identified several key facts about inequality across and within cities. First, larger cities have a greater concentration of high-skilled workers.3 In the Fifth District, for example, the share of the population over age twenty-five with a bachelor's degree is 45 percent in the most urban areas, compared with 16 percent in the most rural areas. In the United States as a whole, the proportion ranges from 35 percent in the most urban areas to 17 percent in the most rural areas. (See Figure 1 below.)

Second, nominal wages are higher in larger cities and in cities with a larger proportion of high-skilled workers. In the most urban areas of the Fifth District, average annual pay in 2016 was nearly $64,000; in the most rural areas, it was less than $35,000. Nationwide, workers in the most urban areas earned about $60,000 on average in 2016, while workers in the most rural areas earned about $36,000. (See Figure 2 above.) In recent research, Nathaniel Baum-Snow, Matthew Freedman, and Ronni Pavan find that nominal wages increase 0.065 percent for every percentage point increase in city size (based on data from 2005–07). They also find that the relationship between city size and wages has strengthened over time and that the wage gap between urban and rural areas has increased.4

While nominal wages are higher in larger cities, the same is not necessarily true of real wages. That's because the largest cities and the cities with the most skilled workers also tend to have the highest rents and have experienced the largest rent increases in recent decades; high housing costs somewhat offset high wages.

One challenge for researchers studying local price levels is accounting for differences in the quality and variety of goods — such as the larger selection of restaurants and theaters one finds in a large city. In a 2015 article, for example, Jessie Handbury and David E. Weinstein conclude that even when focusing on groceries, typical price indices used to compare cities are biased because they don't account for quality and variety.5In addition, Rebecca Diamond finds in a 2016 article that other contributors to quality of life, such as schools and air quality, are better in larger, more-skilled cities.6Factoring in such amenities suggests that standards of living increase with city size. Thus, while high housing costs in cities may suggest that there is less inequality in standards of living than one would infer based on nominal wage data alone, the quality and variety of goods and other amenities in cities could mean the opposite.

The third key fact about cities is that larger cities and cities with more skilled workers are more unequal and have become more unequal over time. Baum-Snow and Pavan found in a 2013 article that from 2004 through 2007, the variance of log hourly wages in rural wages was 0.28 percent. The variance was nearly double — 0.53 — in the three largest metropolitan areas, meaning that the gap between the highest and the lowest earners in metro areas was much larger than the gap in rural areas. In 1979, the variance in rural areas was 0.19 and just slightly more in the three largest metropolitan areas at 0.24.7

In addition, the skill premium increases with city size, and it appears to increase with the share of skilled workers already living in a city. This might seem surprising because basic supply and demand implies that when the supply of something (in this case skilled workers) goes up, the price (in this case wages) should go down. In fact, prior to 1980, cities with more skilled workers had lower skill premia, but this correlation reversed by the early 2000s.8

Explaining the Facts

The most natural explanation for these facts is that the demand for skilled workers has increased more in larger cities and in cities with a high share of skilled workers, while the demand for unskilled workers has not increased much anywhere. Schwartzman develops a stylized model that illustrates this explanation. In the model, cities are in fixed locations and are equipped with a production technology for a tradeable good. Production in each city depends on the number of high- and low-skilled workers in the city. While low-skilled workers are similarly productive in different cities, the productivity of high-skilled workers varies by city. More productive cities try to attract more workers, and the resulting increase in workers pushes up housing demand and rents. So firms have to increase wages to retain workers in those cities. Workers' utility depends on their preferences about location, housing, and consumption, and can also vary with a city's amenities. Consequently, the supply of labor in a city is a function of wages and rental prices. In this model, variation in firms' demand for skilled labor can explain the spatial equilibrium described above, in which wages and wage inequality are higher in larger cities and in cities with a greater share of skilled workers.

This invites the question, what accounts for that variation in demand? Researchers have explored three main possibilities: information technology, industrial composition, and externalities.

Information technology plays a role by making skilled workers more productive; it is a complement to skilled labor but not to unskilled labor. As computers become cheaper, firms increase their use, which gives them an incentive to use more high-skilled workers. At the same time, firms have a greater incentive to adopt technology in cities where there is already a high supply of skilled labor that can use the technology. Together, these trends increase the demand for skilled workers in high-skill cities. Still, while technology can help explain the shift from a negative correlation between college-educated workers and wage inequality to no correlation, this explanation does not readily support the shift to a positive correlation.

Another contributing factor could be the industrial composition of cities. Different industries have different skill intensities; so the extent to which cities specialize in these different industries could explain cross-city variation in the number of and demand for skilled workers. It's also the case that cities with a large fraction of skilled workers have large business services sectors, such as accounting or law firms. Lutz Hendricks proposes in a 2011 article that the output of these service firms is complementary to skilled workers. As it becomes cheaper to hire an external accountant, for example, firms may choose to outsource those services rather than hire them internally.9 Other research suggests that availability of business services might contribute to firms' decisions to locate their managers and executives in cities, while locating their production facilities in more rural areas.10 Hendricks finds, however, that cross-city variation in industrial composition accounts for only a small fraction of cross-city variation in skill composition and that the special role of the business services sector has to be explained by increasing returns to that sector.

This takes us to the final explanation for increasing demand for skilled workers, and the one for which Schwartzman finds the most support in his model and in the literature: externalities. These externalities may operate in various ways. For example, there are more opportunities for knowledge transfer when people are in close proximity; because high-skilled workers perform more knowledge-intensive tasks, they stand to benefit more, in terms of increasing their productivity, from these transfers than do lower-skilled workers. Alternatively, a larger supply of high-skilled workers might also facilitate better matching of workers and firms, leading to higher productivity. These externalities are one example of what urban economists call "agglomeration economies," or the idea that there are advantages to concentrating economic activity in one place.11

The above explanations all refer to factors that influence the demand for skilled labor. It's possible, however, that the observed wage trends could result instead from workers sorting themselves; that is, the highest-skilled workers move to the cities with the most amenities, and the high wages they receive in those cities are just reflections of the high productivity that they would have irrespective of where they live. However, there are a variety of reasons why sorting does not appear to be the explanation, including the fact that a sorting explanation may require unrealistic assumptions in the model. Most importantly, recent empirical work using detailed administrative data has found little role for sorting.12

Conclusion

After considering multiple explanations, Schwartzman concludes that externalities that benefit high-skilled but not low-skilled workers are a major contributor to inequality across and within U.S. cities. This explanation creates a challenge for policymakers, who then face a tradeoff between equality and efficiency. From the perspective of productivity and economic growth, there are potentially large gains to policies that incentivize high-skilled workers to become even more concentrated — but these policies would tend to make cities even more unequal. Exploring these tradeoffs, and what they imply for optimal policy, is an important direction for future research.

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Jessie Romero is an economics writer and Felipe Schwartzman is a senior economist in the Research Department at the Federal Reserve Bank of Richmond.

 

1 

For an overview, see Edward L. Glaeser, "The Economics Approach to Cities," NBER Working Paper No. 13696, December 2007.

2 

Felipe Schwartzman, "Inequality across and within US Cities around the Turn of the Twenty-First Century," Federal Reserve Bank of Richmond Economic Quarterly, First–Fourth Quarter 2017, vol. 103, nos. 1–4, pp. 1–35.

3 

This remains true regardless of how skill is defined, for example, by education level, occupation, or the degree of cognitive processing required for the position.

4 

Nathaniel Baum-Snow, Matthew Freedman, and Ronni Pavan, "Why Has Urban Inequality Increased?" American Economic Journal: Applied Economics, October 2018, vol. 10, no. 4, pp. 1–42.

5 

Jessie Handbury and David E. Weinstein, "Goods Prices and Availability in Cities" Review of Economic Studies, January 2015, vol. 82, no. 1, pp. 258–296.

6 

Rebecca Diamond, "The Determinants and Welfare Implications of U.S. Workers' Diverging Location Choices by Skill: 1980–2000," American Economic Review, March 2016, vol. 106, no. 3, pp. 479–524.

7 

Nathaniel Baum-Snow and Ronni Pavan, "Inequality and City Size," Review of Economics and Statistics, December 2013, vol. 95, no. 5, pp. 1535–1548.

8 

Paul Beaudry, Mark Doms, and Ethan Lewis, "Should the Personal Computer Be Considered a Technological Revolution? Evidence from U.S. Metropolitan Areas," Journal of Political Economy, October 2010, vol. 118, no. 5, pp. 988–1036.

9 

Lutz Hendricks, "The Skill Composition of U.S. Cities," International Economic Review, February 2011, vol. 52, no. 1, pp. 1–32.

10 

Gilles Duranton and Diego Puga, "Micro-Foundations of Urban Agglomeration Economies," in Handbook of Urban and Regional Economics Vol. 4, edited by J. Vernon Henderson and Jacques-François Thisse, Amsterdam: Elsevier, 2004, pp. 2063–2117.

11 

For a discussion of agglomeration economies in the Fifth District, see Sonya Ravindranath Waddell, "A Tale of Three Cities: Richmond, Charlotte, and Baltimore," Federal Reserve Bank of Richmond Regional Matters, October 18, 2017.

12 

See Nathaniel Baum-Snow and Ronni Pavan, "Understanding the City Size Wage Gap,"Review of Economic Studies, January 2012, vol. 79, no. 1, pp. 88–127; also, see Jorge De La Roca and Diego Puga, "Learning by Working in Big Cities," Review of Economic Studies, January 2017, vol. 84, no. 1, pp. 106–142.

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This article may be photocopied or reprinted in its entirety. Please credit the authors, source, and the Federal Reserve Bank of Richmond and include the following statement. Views expressed in this article are those of the authors and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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Trump bangs table as Seoul differs over North Korea sanctions [feedly]

The China plan moves forward, not backward, at key pressure points: Russia, India, S. Korea, Vietnam.  The Philippines and Indonesia, not so much 

Trump bangs table as Seoul differs over North Korea sanctions
http://www.atimes.com/article/trump-bangs-table-as-seoul-differs-over-nth-korea-sanctions/

t has always been a delicate balancing act, but a policy gap – the much feared "wedge" – now appears to be widening between South Korea and the United States over the issue of North Korean sanctions.

For decades, South Korea has been united with the United States against North Korea. There has always existed the possibility that the South will one day turn away from its political and military ally in order to embrace its estranged brother nation in the north.

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Now, with inter-Korean tensions easing far more rapidly than North Korea-US strains, that possibility is looking more likely.

In a range of trial balloons released over the last week, South Korean Foreign Minister Kang Kyung-wha has raised the possibility of lifting bilateral sanctions against North Korea, while winning waivers on international sanctions. Her latest statement, made at the Korean National Assembly, appeared to be a bridge too far for Washington.

On Wednesday, US President Donald Trump, when asked whether South Korea would lift sanctions, said: "They won't do it without our approval. They do nothing without our approval."

That presidential broadside may appear to stamp upon Seoul's sovereignty. But given the apparent pushback against North Korean engagement in Washington's defense, foreign policy and intelligence communities, Seoul's Moon Jae-in administration has little choice but to continue championing Trump.

The president may be the only member of his administration who believes that ties with North Korea – a foreign policy black hole – can improve.

And while Trump huffs and puffs, Kang's moves may win approval elsewhere. On the same day that Kang spoke and Trump issued his brow-beating, China, North Korea and Russia called for eased sanctions.

Seoul seeks sanctions waivers

While Washington holds a veto on the UN Security Council – meaning it can prevent motions to alter international sanctions – it has no power over Seoul's policies, which include a range of bilateral sanctions against North Korea.

On Wednesday, during a National Assembly audit of her ministry, Kang raised the possibility of lifting those sanctions. "A review is underway," she said in the National Assembly, according to Yonhap newswire. "It's an important executive order. (We) have constantly reviewed it," she added. "As there are many (bilateral) sanctions overlapping the UN ones, it won't necessarily mean the substantive lifting (of sanctions on the North)."

Though she clarified that there was no "pan-governmental" discussion on the issue yet underway, she added: "I think it's a matter to be reviewed in comprehensive consideration of South-North relations."

The sanctions were emplaced in 2010, following the sinking of a South Korean corvette in the Yellow Sea, in what the South insists was a Northern torpedo attack. North Korea denied it. The sanctions severed all trade and investment ties with North Korea.

However, if they were lifted, by allowing cross-border barter trade – in which goods, but no actual currency crosses borders – North-South trade could feasibly resume without violating international sanctions.

North Korean exports that were former hits in the South include fresh seafood, wild vegetables, some alcohol and even sand – used by the South Korean construction industry for concrete.

Moreover, in prior comments, Kang had also raised the possibility of exemptions from international sanctions.

In an interview granted to the Washington Post on the sidelines of the UN General Assembly in New York last month, Kang said: "What we need to proceed with the South-North cooperation project as identified in the Panmunjom Declaration [issued after the April inter-Korean summit] means that sometimes we may need waivers on the sanctions, but getting waivers is very different from seeking a weakening of the sanctions regime."

And last Saturday, she told reporters in Seoul, according to Bloomberg: "The South Korean government's position on sanction exemptions is that we will request exemptions of sanctions to pursue various collaboration projects between North and South Korea."

Foreign Ministry spokesman Noh Kyu-duk later clarified, saying the government would seek sanction exemptions "in the event they are necessary," citing previous sanction exemptions that enabled the invitation of North Koreans to the Pyeongchang Winter Olympics early this year, Bloomberg reported.

Considerable exemptions would almost certainly be necessary if the North and South are to carry out their flagship cross-border project: The re-linking of their rail nets. The two Koreas have agreed to begin work on that by the end of this year, and the equipment and technology that would cross the border would almost certainly require UN Security Council permissions.

Earlier this year, in an unusual and still-murky episode, the UN Command in South Korea – headed by a US general – prevented a South Korean train from crossing the border into North Korea. The train had Seoul governmental officials on board, reportedly planning an exploratory mission in advance of the rail re-linking project.

Kang's remarks drew the ire not only of Trump, but also Korea's right wing.

"Kang flubs it," the conservative Joongang Daily editorialized. "We are flabbergasted … We can't violate international sanctions. Sanctions are the very leverage we have to denuclearize the North."

But it seems unlikely that Kang flubbed it, one expert said. Her comments more likely reflect the opinions of an administration frustrated with Washington.

"Kang is biting the bullet, and indicating to North Korea that South Korea is trying its best to ease sanctions," said Go Myong-hyun, a North Korea researcher at the Asan Institute in Seoul. "This indicates that Seoul is unhappy with the Americans: If Kang made a faux pas, she would be fired."

Opposed to sanctions

Kang's remarks generated smiles in other quarters.

On Wednesday, Beijing's Foreign Ministry released a statement reading: "It is time to start considering the adjustment of the UN Security Council's sanctions regime against [North Korea]. The three parties also oppose unilateral sanctions."

The statement following a two-day meeting in Moscow between the deputy foreign ministers of China, North Korea and Russia, who all favor a phased, quid-pro-quo process in which Pyongyang is rewarded by eased sanctions as it takes steps on denuclearization.

The statement contradicts the "maximum pressure" strategy pursued by Washington and enthusiastically endorsed by Tokyo, but which Seoul now appears to be wavering on: It calls for sanctions to remain in place until denuclearization is complete.

While some in the US administration have indicated that denuclearization could be completed within the lifespan of the Trump administration, some experts say it could take more than a decade – assuming it is faithfully implemented, which many doubt.

In her remarks to the Washington Post, Kang also differed with the US view on the denuclearization process.

She suggested that US demands for a full disclosure of North Korean nuclear assets – which Pyongyang has balked at providing – is a poor path to follow, citing how the last time a similar process took place, it disintegrated in 2008 over the issue of related verification protocols.

She suggested instead the dismantlement of the Yongbyon nuclear reactor complex – an idea North Korea has put forward, in return for vague, reciprocal US steps. Washington has not yet reacted to that suggestion and remains mum on Pyongyang's repeated demands for a peace treaty to end the Korean War and for upgraded bilateral relations.

The denuclearization process, which looked so promising when Kim and Trump met in Singapore in June, is now looking stillborn. Visits to Pyongyang by US Secretary of State Mike Pompeo, and other contacts with North Korean officials, have made little apparent leeway regarding how denuclearization should proceed.

Some clarity may transpire when Kim and Trump meet for their second summit, at a date and location yet to be decided, after the US mid-term elections on November 6.

Meanwhile, despite Trump's undiplomatic language, the Moon government is in a bind. "It is in the interest of the South Korean government to retain good relations with Trump, as the only person in his administration who is truly in favor of good relations with North Korea is Trump himself," said Asan Institute's Go. "In that sense, President Moon considers Trump an ally."

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