It was way back in April 2009 that Barry Eichengreen and I first compared the world industrial output collapses of 1929 and 2008. The situation looked pretty alarming at that stage, but it turned out that we were a good leading indicator of recovery: the world economy started turning around almost immediately afterwards, thanks to a coordinated reflationary macroeconomic policy response. Then 2010 happened, reflation turned to austerity in Europe, and the global recovery slowed, to the point where at times it seemed to be petering out almost altogether.
And in August of this year, the inevitable happened: measured in terms of industrial output, our current recovery was overtaken by that of the interwar period. Pretty dismal stuff. Let’s hope that we can at least avoid the famous 1937-38 double dip, visible at the end of the interwar series.
Eduardo Porter, one of the most highly respected economic analysts in the US media, has an interesting, thoughtful new article on European immigration pressures. He argues that European economies and societies need to prepare for large-scale immigration from Africa, the Middle East, and South Asia. These regions are close to Europe, are notably poor by world standards, and have a forecast population increase of three billion in coming decades, on top of the large increases which have already occurred in the recent past. Porter argues that attempts to stop completely this migration pressure will not succeed, and instead Europe should try to adjust to an inevitable large inflow.
Yesterday, the First of July, was Canada Day.
Discussing the crisis in the Eurozone with some visiting Canadian relatives led to the question How stable is the Canadian currency union?
At first sight it seems to be much more stable than its European counterpart. The Canadian banking system is renowned for its solidness. It is dominated by five national banks that operate coast to coast, supervised by the much-admired Bank of Canada. There is a large national budget that includes important elements of inter-provincial fiscal equalization. Internal labour mobility is relatively high.
But on the other hand the provincial governments are not constrained in their borrowing, there are enormous differences between the economic structures of the provinces, and there is always the Quebec question.
In fact, to a surprising extent, the stability of the Canadian union appears to depend on the fact that, as the author of this article puts it,”there are no Greeces here”. He draws attention to flaws in the design of the Canadian currency union that could come home to roost some day.
Michael O’Sullivan’s latest Dublin Review of Books piece is here, and it is well worth reading.
In between grading exam papers I have been wading through the Piketty book. Its a bit like walking through a muddy field. The going is sometimes a bit stodgy, but you eventually get there. There have been many reviews and commentaries on the book – one of the best I think is by Debraj Ray (http://debrajray.blogspot.co.uk/2014/05/nit-piketty.html ), who also wrote what I believe to be the best textbook on Development Economics in 1998, which, alas, I don’t think was ever updated.
Ray is sceptical about Piketty’s “Fundamental Laws of Capitalism”, but believes that the book makes a major contribution in highlighting the concentration of top incomes, arising from both an increasing share of income accruing to capital and also the phenomenon of very high returns to human capital at the top of the wage distribution.
All of this I am sure is very familiar to readers of this blog – Piketty’s must be one of the most reviewed economics books of the last 30 years. But what seems to get less coverage is what has been happening to the approximately 75% of the world population not covered by the Piketty book. A recent World Bank study by Lakner and Milanovic (covered here in Vox http://www.voxeu.org/article/global-income-distribution-1988 ) shows that over the 1988-2008 period, growth for the bottom 75% of the world (with the exception of the very bottom 7% or so) has been well above average, thus contributing to an overall compression of the world income distribution. There have basically been three broad changes in world income distribution over the last 30 years. Yes, the top 1% have seen high growth, while those between about the 75th and 99th percentiles have done relatively poorly – these are the phenomena covered in Piketty. But the vast majority of the bottom 75% have also done relatively well, particularly those just above the median – effectively the Chinese and Indian middle classes are catching up with lower income groups in the OECD countries. The net effect of these three changes is a fall in overall world income inequality. The data stops at 2008 but my guess is that developments since then have probably only accentuated these trends. And further globalisation is likely to have the same effect.
The piece finishes off with some speculation about the political implications of all this, which I am not quite so convinced by. But overall, given that inequality seems to be flavour of the moth these days, it is interesting to get a more global view.
The chairman of the US Senate Finance Committee, Max Baucus (D) has published some proposals for reform of international aspects of the US tax code. There is lots to read here.
This six-page summary is a good place to start. It is probably better to stop before you get to the 85-page technical explanation from the staff of the Joint Committee on Taxation.
One could look for possible implications for Ireland through the references to foreign income, Subpart F, “check the box”, the “same country exemption”, the CFC “look-through rule”, inversions or section 482 (transfer pricing) and other provisions in the US tax code that we have heard about but don’t fully understand. However, there are lots of reasons why this set of proposals may not get very far. Trying to find a word of support in the statement from the chairman of the House Ways and Means Committee, Dave Camp (R) is one and the impending retirement of Baucus in 2014 is another. The point is simply that the debate is not standing still even if actual reform still appears to be a way off.
Here is a report from Bloomberg on the proposals.
Paul Krugman has an interesting and alarming post here, in which a key question that is posed is: “So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures?”.
I have often thought that China may provide a partial answer to the question: an elastic supply of Chinese workers meant an elastic supply of Chinese goods, that were vented onto Western markets at a fixed exchange rate and financed by internationally mobile capital. Presumably many others have said something similar in the past, since it seems like an obvious point to make. I wonder if you could make the case that similar forces were — at least at part — at work in the 1920s, with an overhang of primary products on international markets following the disruptions of World War 1 helping to keep a lid on commodity price inflation. (The international monetary context was obviously very different.)
And, while I’m not a theorist, it has often struck me that it wouldn’t be so surprising if inflationary pressures that don’t show up in commodity prices showed up in asset prices instead.
I was once at an after-dinner talk by Tommaso Padoa-Schioppa in which he said something similar, and then went on to make the point that whereas commodity price inflation is self-limiting — it makes us unhappy, and tends to lead to retrenchment by private agents and/or central banks — asset price inflation makes us happy and encourages expenditure, and is thus a process that feeds on itself (until it goes into reverse).
If there is anything to this, then when China and the rest of Factory Asia eventually hits its “Lewis point“, Western inflationary pressures may once again begin to show up in commodity price inflation. If Western economies were less able to finance imports from Asia, or if their currencies started weakening, then something similar might happen. Perhaps that wouldn’t be such a bad thing.