Saturday, July 27, 2019
Wednesday, July 24, 2019
Let Me Smackdown Jared Bernstein on International Trade Here... [feedly]
https://www.bradford-delong.com/2019/07/let-me-smackdown-jared-diamond-on-international-trade-here.html
I really, really wish Jared Bernstein would not do this. It is simply not the case—as he knows well—that policymakers "quickly forgot about the need to compensate for the losses" from expanded international trade. Democratic policymakers—of whom Jared is one—well-remembered this, but after November 1994 did not have the power. Republican policymakers did not see the need as a need at all: they did not forget it: they ignored it.
Do you want to know what I think? I think a lot of not completely consistent things. Here are three things to read:
2017: Gains from Trade: Is Comparative Advantage the Ideology of the Comparatively Advantaged?: The true arguments for free trade have always been a level or two deeper than 'comparative advantage': that optimal tariff equilibrium is unstable; that other policy tools than trade restrictions resolve unemployment in ways that are not beggar-thy-neighbor; that countries lack the administrative competence to successfully execute manufacturing export-based industrial policies; that trade restrictions are uniquely vulnerable to rent seeking by the rich; and so forth. The... internal misdistribution hole...[patched by] the late 19th C. 'social Darwinist' redefinition of the social welfare function as not the greatest good of the greatest number but as the evolutionary advance of the 'fittest'—that is, richest—humans.... 'Comparative advantage'... an exoteric teaching: an ironclad mathematical demonstration that provides a reason for believing political-economic doctrines that are in fact truly justified by more complex and sophisticated arguments... more debatable and dubious than a mathematical demonstration that via free trade Portugal sells the labor of 80 men for the products of the labor of 90 while England sells the labor of 100 men for the products of the labor of 110...
2016: The Benefits of Free Trade: Time to Fly My Neoliberal Freak Flag High!: I figure that, all in all, not 5% but more like 30% of net global prosperity—and considerable reduction in cross-national inequality—is due to globalization. That is a very big number indeed. But, remember, even the 5% number cited by Krugman is a big deal: 4 trillion a year, and perhaps 130 trillion in present value...
2008: Brad DeLong: Trade and Distribution: A Multisector Stolper-Samuelson Finger Exercise: We have a world with multiple sectors and with substantial differences in factor endowment intensities... a fair degree of formal and informal cross-ownership—formal cross-ownership via property rights... the financing of the government... labor rent sharing, efficiency wages, monopoly power based on location, monopolistic competition, and all the other deviations from perfect competition that can give... stakeholders... effective claim on the cash flows.... Thus it seems a slam-dunk to presume that in the real world free trade is very likely to benefit the overwhelming majority of people in nearly every country, in spite of the intuitions generated by the two-good two-factor two-country version of Stolper-Samuelson...
And here is Jared:
Jared Bernstein: What Economists Have Gotten Wrong For Decades: "theory never said expanded trade would be win-win for all. Instead, it (and its more contemporary extensions) explicitly said that expanded trade generates winners and losers, and that the latter would be our blue-collar production workers exposed to international competition. True, the theory maintained (correctly in my view) that the benefits to the winners were large enough to offset the costs to the losers and still come out ahead. But as trade between nations expanded, policymakers quickly forgot about the need to compensate for the losses...
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Some Snapshots of University Endowments [feedly]
http://conversableeconomist.blogspot.com/2019/07/some-snapshots-of-university-endowments.html
Of course, it's always easy to note in retrospect that some alternative investment choice would have performed better. Back int 2008, it certainly wasn't clear to many investors how much stock markets would rebound if and when the Great Recession ended. Moreover, a number of large-endowment Ivy League school had had great success with alternative investment categories in the 1990s and into the early 2000s. For a useful discussion of college endowment returns from 1992-2005, I recommend Josh Lerner, Antoinette Schoar, and Jialan Wang on "Secrets of the Academy: The Drivers of University Endowment Success," which appeared in the Summer 2008 issue of the Journal of Economic Perspectives.
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Payments from China for Foreign Intellectual Property [feedly]
http://conversableeconomist.blogspot.com/2019/07/payments-from-china-for-foreign.html
Payments from China for Foreign Intellectual Property
Measuring the total amount of technology transfer to China is, in its nature, hard to do. But one approach is to look at royalty payments from China to outside firms. Ana Maria Santacreu and Makenzie Peake of the Federal Reserve Bank of St. Louis offer some data in "A Closer Look at China's Supposed Misappropriation of U.S. Intellectual Property" (Economic Synopses, 2019, No. 5).
The top panel shows China's payments for use of US intellectual property, which have risen sharply, The second panel shows that this growth in China's payments has been faster than the growth of China's GDP.
Of course, the rise in payments doesn't mean that the appropriate level of payments is being made. Annual payments from China to the US of about $8 billion for intellectual property don't seem extraordinarily high. And given that China's economy has been shifting from reliance on low-wage labor to an economy based more in technology and services, the pattern of intellectual property payments rising faster than GDP is the pattern one would expect.
Here's some additional data from Nicholas Lardy at the Peterson Institute for Economic Economics (April 20, 2018). This This figure shows the rise total payments from China to all countries for the use of foreign intellectual property.
This figure, also from Lardy, shows countries ranked by how much they pay in intellectual property fees. This figure illustrates something rather odd: the two countries that pay the highest charges for intellectual property are the relatively small economies of Ireland and Netherlands. As Lardy explains: "However, licensing fees in Ireland and the Netherlands are paid mostly by foreign holding companies that are legally domiciled in these countries for tax reasons. Since the subsidiaries of these holding companies using the licensed foreign technology are located in other jurisdictions worldwide, China probably ranks second globally in the magnitude of licensing fees paid for technology used within national borders." (A few years ago, I offered a description of the famous "Double Irish Dutch Sandwich" technique for multinational firms to reduce their tax liabilities.)
It may well be true that China should be paying more to other countries, including the US, for use of intellectual property. But the numbers in these tables suggest that in purely economic terms, a negotiated solution would be affordable and therefore possible. If a set of trade negotiations led to China doubling its royalty payments to the world as a whole, that additional $27 billion or so would certainly not cripple China's $13.6 trillion (converted at the current US dollar exchange rate) economy. On the other side, while this shift would be a nice windfall for some multinational companies around the world, it's not an amount that is likely to change the course of the $20.5 trillion US economy, either. Also, if the rules for making payments for foreign intellectual property were tightened up, it's likely that US firms already making such payments (as shown in the figure above) would see those payments rise, as well.
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Monday, July 22, 2019
Reducing Carbon Emissions Must Not Be Done on the Backs of the World’s Poorest [feedly]
http://cepr.net/publications/op-eds-columns/reducing-carbon-emissions-must-not-be-done-on-the-backs-of-the-world-s-poorest
By all appearances, the economic positions of the world's poorest people have improved considerably over the most recent three decades. Households living on $1.90 per capita per day have — on average — seen their real (inflation-adjusted) incomes grow approximately 4.2 percent per year for the last 30 years. Consequently, less than 10 percent of the world's population lives in extreme poverty today, compared to about 40 percent in 1989. Going forward, we must both understand how this came about and remove barriers to continued progress. Specifically, poverty reduction requires the world to address the threat of climate change— to open up additional space for growth in the Global South without making the entire planet uninhabitable to humans.
Considering that this fall in the poverty rate was about twice that in the three decades prior, this ought to feel like quite a victory. And yet, something feels off. One reason: $1.90 per day is a terribly low threshold by which to define poverty. More than half the world's population still lives on less than $7.40 per day — a mere $2,700 annually. Another reason is that almost all the accelerated poverty reduction took place in China and India.
These are very populous countries, and most of the world's poor lived in these two countries during this period. What about poor people residing elsewhere? Over the last 30 years, their incomes grew at an average of only 2 percent per year — certainly an improvement over the 1980s when their incomes grew less than 0.2 percent per year, but far from the more dramatic income growth enjoyed by their peers in China and India.
Indeed, outside of China, the world saw almost no progress in reducing the rate of extreme poverty between the late 1970s and early 1990s. But the rise of China masked this broader failure. Most interestingly, China's rise bucked the neoliberal "Washington Consensus." As I wrote in a recent piece, "The History of Poverty Worldwide":
the Chinese government played a central role in managing the economy. True, China has opened up to foreign investment; but it has done so with strong capital controls and foreign exchange management, imposition of myriad demands on would-be investors including significant transfer of technology, and lax enforcement of foreigners' so-called intellectual property rights. Nor can China's acceleration be attributed to neoliberal policy in the United States — see the negative economic experiences that most Latin American countries have seen with their increased exposure to the United States economy. Mexico, for example, had a higher poverty rate, and stagnant wages, after 20 years of NAFTA.
The rest of the world did eventually return to reasonable economic growth rates by the mid-2000s. By then, China had further accelerated its rate of growth, and — critically — amplified the effectiveness of growth in reducing poverty, bringing its poverty rate down toward 50 percent. Furthermore, India joined China in comparatively rapid economic growth, also pulling large numbers of people out of extreme poverty.
However, as the number of extremely poor people in these countries dwindles, global progress in poverty reduction necessarily slows. The world's remaining poor should not be left behind, nor should we be content to have such a huge percentage of the world's population living just above this poverty line. Rich countries would be outraged if significant numbers of their own people struggled with a mere $700 per month— let alone $700 per year. The very least bit of economic justice will allow the world's poor to increase their consumption, more fully reducing extreme poverty and lifting more of the world's poor out of poverty. This will mean either continued economic growth, a genuinely radical redistribution of global incomes, or some combination of the two.
Still, neither approach is sustainable without decarbonizing the world economy as rapidly as possible, with the intent to stave off catastrophe. As fast as carbon emissions have increased in the last half century, they must be cut twice as fast over the next two decades, and to zero by 2060, to keep the total increase in global warming above preindustrial levels under 1.5°C (2.7°F). Thereafter, we will need to remove — on net — carbon from the atmosphere. Because large-scale carbon capture technology is still out of reach, we must act immediately to minimize the damage by reducing emissions quickly and effectively.
It is possible for the world economy to continue growing without additional carbon emissions, but energy from coal, and thereafter petroleum, must be phased out as rapidly as possible. This means helping developing countries to invest heavily in renewable energy sources and to shift to less carbon-intensive forms of consumption. Land must be managed with an eye toward reducing emissions. (This means, for example, finding ways for Brazil to grow without permitting mining interests to deforest the Amazon.)
Finally, we may be able to extend gains in poverty reduction by slowing economic growth among the rich. The most productive economies in Europe compare favorably to the United States, but have lower emissions. In part, this is due to a social choice favoring leisure over consumption — converting productivity gains into longer vacations and shorter workweeks rather than bigger incomes in order to buy more goods. In the United States, this may also mean reducing inequality and addressing the high and rising cost of health care so that the bottom half of Americans see improvements in their standards of living.
This may buy us some time, but the time is now to address climate change head on and give developing countries space to grow and lift their populations out of poverty.
David Rosnick is an economist at the Center for Economic and Policy Research (www.cepr.net) in Washington, DC. He holds a Ph.D. in Computer Science from N.C. State, a B.S. in Computer Science and Engineering Physics from the University of Illinois, and an M.A. in Economics from George Washington.
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The Stock-Buyback Swindle [feedly]
https://www.theatlantic.com/magazine/archive/2019/08/the-stock-buyback-swindle/592774/?utm_source=feed
In the early 1980s, a group of menacing outsiders arrived at the gates of American corporations. The "raiders," as these outsiders were called, were crude in method and purpose. After buying up controlling shares in a corporation, they aimed to extract a quick profit by dethroning its "underperforming" CEO and selling off its assets. Managers—many of whom, to be fair, had grown complacent—rushed to protect their institutions, crafting new defensive measures and lodging appeals in state courts. In the end, the raiders were driven off and their moneyman, Michael Milken, was thrown in prison. Thus ended a colorful chapter in American business history.
Or so it seemed. Today, another effort is under way to raid corporate assets at the expense of employees, investors, and taxpayers. But this time, the attack isn't coming from the outside. It's coming from inside the citadel, perpetrated by the very chieftains who are supposed to protect the place. And it's happening under the most innocuous of names: stock buybacks.
You've seen the phrase. It glazes the eyes, numbs the soul, makes you wonder what's for dinner. The practice sounds deeply normal, like the regularly scheduled maintenance on your car.
It is anything but normal. Before the 1980s, corporations rarely repurchased shares of their own stock. When they started to, it was typically a defensive move intended to fend off raiders, who were drawn to cash piles on a company's balance sheet. By contrast, according to Federal Reserve data compiled by Goldman Sachs, over the past nine years, corporations have put more money into their own stocks—an astonishing $3.8 trillion—than every other type of investor (individuals, mutual funds, pension funds, foreign investors) combined.
Corporations describe the practice as an efficient way to return money to shareholders. By reducing the number of shares outstanding in the market, a buyback lifts the price of each remaining share. But that spike is often short-lived: A study by the research firm Fortuna Advisors found that, five years out, the stocks of companies that engaged in heavy buybacks performed worse for shareholders than the stocks of companies that didn't.
One class of shareholder, however, has benefited greatly from the temporary price jumps: the managers who initiate buybacks and are privy to their exact scope and timing. Last year, SEC Commissioner Robert Jackson Jr. instructed his staff to "take a look at how buybacks affect how much skin executives keep in the game." This analysis revealed that in the eight days following a buyback announcement, executives on average sold five times as much stock as they had on an ordinary day. "Thus," Jackson said, "executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement."
This extractive behavior has rightly been decried for worsening income inequality. Some politicians on the left—Bernie Sanders, Elizabeth Warren, Chuck Schumer—have lately gotten around to opposing buybacks on these grounds. But even the staunchest free-market capitalist should be concerned, too. The proliferation of stock buybacks is more than just another way of feathering executives' nests. By systematically draining capital from America's public companies, the habit threatens the competitive prospects of American industry—and corrupts the underpinnings of corporate capitalism itself.
The rise of the stock buyback began during the heyday of corporate raiders. In the early 1980s, an economist named Michael C. Jensen presented a paper titled "Reflections on the Corporation as a Social Invention." It attacked the conception of corporations that had prevailed since roughly the 1920s—that they existed to serve a variety of constituencies, including employees, customers, stockholders, and even the public interest. Instead, Jensen asserted a new ideology that would become known as "shareholder value." Corporate managers had one job, and one job alone: to increase the short-term share price of the firm.
The philosophy had immediate appeal to the raiders, who used it to give their depredations a fig leaf of legitimacy. And though the raiders were eventually turned back, the idea of shareholder value proved harder to dispel. To ward off hostile takeovers, boards started firing CEOs who didn't deliver near-term stock-price gains. The rolling of a few big heads—including General Motors' Robert Stempel in 1992 and IBM's John Akers in 1993—drove home the point to CEOs: They had better start thinking about shareholder value.
If their conversion to the enemy faith was at first grudging, CEOs soon found a reason to love it. One of the main tenets of shareholder value is that managers' interests should be aligned with shareholders' interests. To accomplish this goal, boards began granting CEOs large blocks of company stock and stock options.
The shift in compensation was intended to encourage CEOs to maximize returns for shareholders. In practice, something else happened. The rise of stock incentives coincided with a loosening of SEC rules governing stock buybacks. Three times before (in 1967, '70, and '73), the agency had considered such a rule change, and each time it had deemed the dangers of insider "market manipulation" too great. It relented just before CEOs began acquiring ever greater portfolios of their own corporate stock, making such manipulation that much more tantalizing.
Too tantalizing for CEOs to resist. Today, the abuse of stock buybacks is so widespread that naming abusers is a bit like singling out snowflakes for ruining the driveway. But somebody needs to be called out.
So take Craig Menear, the chairman and CEO of Home Depot. On a conference call with investors in February 2018, he and his team mentioned their "plan to repurchase approximately $4 billion of outstanding shares during the year." That day, he sold 113,687 shares, netting $18 million. The following day, he was granted 38,689 new shares, and promptly unloaded 24,286 shares for a profit of $4.5 million. Though Menear's stated compensation in SEC filings was $11.4 million for 2018, stock sales helped him earn an additional $30 million for the year.
By contrast, the median worker pay at Home Depot is $23,000 a year. If the money spent on buybacks had been used to boost salaries, the Roosevelt Institute and the National Employment Law Project calculated, each worker would have made an additional $18,000 a year. But buybacks are more than just unfair. They're myopic. Amazon (which hasn't repurchased a share in seven years) is presently making the sort of investments in people, technology, and products that could eventually make Home Depot irrelevant. When that happens, Home Depot will probably wish it hadn't spent all those billions to buy back 35 percent of its shares. "When you've got a mature company, when everything seems to be going smoothly, that's the exact moment you need to start worrying Jeff Bezos is going to start eating your lunch," the shareholder activist Nell Minow told me.
Then there's Merck. The pharmaceutical company was a paragon of corporate excellence through the second half of the 20th century. "Medicine is for people, not for profits," George Merck II declared on the cover of Time in 1952. "And if we have remembered that, the profits have never failed to appear." In the late 1980s, then-CEO Roy Vagelos, rather than sit on a drug that could cure river blindness in Africa but that no one could pay for, persuaded his board of directors to manufacture and distribute the drug for free—which, as Vagelos later noted in his memoir, cost the company more than $200 million. More recently, Merck has been using its massive earnings (its net income for 2018 was $6.2 billion) to repurchase shares of its own stock. A study by the economists William Lazonick and Öner Tulum showed that from 2008 to 2017 the company distributed 133 percent of its profits, through buybacks and dividends, to shareholders—including CEO Kenneth Frazier, who has sold $54.8 million in stock since last July. How is this sustainable? "It's not," Lazonick says. Merck insists it must keep drug prices high to fund new research. In 2018, the company spent $10 billion on R&D—and $14 billion on share repurchases and dividends.
Finally, consider the executives at Applied Materials, a maker of semiconductor-manufacturing equipment. As is the case at many companies, its CEO receives incentive pay based on certain metrics. One is earnings per share, or EPS, a widely used barometer of corporate performance. Normally, EPS is lifted by improving earnings. But EPS can be easily manipulated through a stock buyback, which simply reduces the denominator—the number of outstanding shares. At Applied Materials, earnings declined 3.5 percent last year. Yet the company still managed to eke out EPS growth of 1.9 percent. How? In part, by taking more than 10 percent of its shares off the market via buybacks. That move helped executives unlock more incentive compensation—which, these days, usually comes in the form of stock or stock options.
Corporations offer a variety of justifications for the practice of repurchasing stock. One is that buybacks are a more "flexible" way of returning money to shareholders than dividends, which (it's true) once raised are very hard to reduce. Another argument: Some companies just make more money than they can possibly put to good use. This likewise has a smidgen of truth. Apple may not have $1 billion worth of good bets to make or companies it wants to acquire. Though, if this were the real reason companies are repurchasing stock, it would imply that biotechnology, banking, and big retail—sectors that hold some of the biggest practitioners of buybacks—are nearing a dead end, idea-wise. CEOs will also sometimes make the case that their stock is undervalued, and that repurchases represent an opportunity to buy low. But in reality, notes Fortuna's Gregory Milano, companies tend to buy their stock high, when they're flush with cash. The 10th year of a bull market is hardly a time for bargain-hunting.
Capitalism takes many forms. But the variant that propelled America through the 20th century was, at its heart, a means of pooling resources toward a common endeavor, whether that was building railroads, developing new drugs, or making microwave ovens. There used to be a healthy debate about which of their stakeholders corporations ought to serve—employees, stockholders, customers—and in what order. But no one, not even Michael Jensen, ever suggested that a corporation should exist solely to serve the interests of the people entrusted to run it.
Many early stock certificates bore an image—a factory, a car, a canal—representing the purpose of the corporation that issued them. It was a reminder that the financial instrument was being put to productive use. Corporations that plow their profits into buybacks would be hard-pressed to put an image on their stock certificate today, other than, perhaps, the visage of their CEO.
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Sunday, July 21, 2019
Chris Dillow: UK Centrists' failure [feedly]
https://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2019/07/centrists-failure.html
Simon's claim that Corbyn is the lesser of two evils has had a lot of pushback. Some say Corbyn is more antisemitic than we think, others that we do indeed have other choices*. All this, however, raises the question: how have we gotten into the position where the choices of future Prime Minster are so poor? The worse you think Corbyn is, the more force this question has.
The answer, to a large extent, is that centrists have failed. They had the ball - New Labour and the LibDems were in office for 18 years – and they dropped it. Johnson and Corbyn have risen as centrism has fallen. Centrists show an astounding lack of self-awareness about their own abject failure.
Corbyn is popular – insofar as he is – not because he is a political genius (he's not) nor because many of us have become antisemites or have lost our minds. His popularity – especially with young graduates – rests upon material economic conditions. The degradation of professional occupations and huge gap between the top 1% and others have radicalized young people in erstwhile middle-class jobs; financialization has made housing unaffordable for youngsters; and a decade of stagnant real wages – the product of inequality and the financial crisis - has increased demands for change.
There's nothing inevitable about young people being radical: in the 1987 election the Tories won the 25-34 year-old vote and only narrowly lost among 18-24 year-olds. Young people's support for Corbyn is because capitalism as it currently exists has failed them - and it has done so because centrists have let it.
The same can be said of Brexit. Austerity, at the margin, tipped the balanceagainst Remainers. The marginal Brexit voter wasn't some gammon who thinks Dambusters should the role model for our relations with the EU. It is someone who was cheesed off with living in a run-down area and being ignored by the (centrist) elite.
Centrists are oblivious to all this. The tiggers or cukkers or whatever they call themselves today have no awareness of the reality of capitalist stagnation, let alone have an answer to it. Corbyn became Labour leader because his rivals (with the partial exception of Liz Kendall) had no worthwhile material programme to offer. The LibDems acquiesced in the austerity that led to both Brexit and Corbynism. And the centre right merely wags its finger at voters to tell them they got it wrong, whilst showing no awareness that its own policies are responsible for Brexit, and no appreciation that the slogan "take back control" had so much power for so many voters.
Leftists often accuse centrists of being Blairite. This is a slur upon Blair. His genius was to recognise in the 1990s that the world had changed and that new policies were needed for new times. Centrists today are innocent of such insight. They are stuck in a 1990s timewarp. It is Corbyn who is the true heir to Blair, as he sees – albeit perhaps in the same way that a stuck clock is right twice a day – that our times require new policies. He at least offers a faint shadow of a glimmer of slim hope of an alternative to the neoliberal financialization that got us into this mess. Centrists offer jack-shit.
Even the IMF now acknowledges that inequality is a menace to economies. Whilst some individual centrists get this (I'm looking at you Paddy and Tony) centrist politicians do not.
Now, some might object here that aspects of the LibDems 2017 manifesto were more redistributive that Labour's, which was insufficiently hostile to the benefit freeze. But LibDem manifestos are a soft currency: the 2010 one said nothing about trebling tuition fees or supporting austerity, benefit cuts and the hostile environment policy. Redistribution is part of the soul of the Labour left; the same cannot be said for the LibDems. As I said in another context, if you've got yourself a reputation for laziness you need to work doubly hard if you are to lose it. The LibDems are not doing so.
You might also object that politics is about more than economics, and that the battleground now is about culture and identity rather than a few quid here or there. This misses the point. The great virtue of economic growth, as Ben Friedman showed, is that it creates a climate in which toleration and openness can thrive. Stagnation, by contrast, gives us closed minds, intolerance and fanaticism. If centrists are sincere in wanting a more civilized and tolerant politics, they must create the material conditions for these. In fact, in office they did the opposite.
It's common to claim that Corbyn has enabled antisemitism. But it is centrists who enabled Corbynism by creating the conditions in which he – and indeed the far right – can thrive. A serious politics requires an awareness that political behaviour has a structural basis and offers a way of creating the structures that generate the ideals they favour. Centrists, however, do none of this. All they have is a sense of their own entitlement to rule and a smug moral superiority.
Rather than wag the finger at those of us who feel compelled to make the tragic choice between two deeply flawed potential Prime Ministers, centrists should show more humility and more cognizance that it is their acquiescence in inequality and austerity that got us into this mess.
* I know we do: I voted Green in the euro elections, but Jonathan Bartley and Sian Berry aren't going to be Prime Minister.
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