Tag: recession
Scott Sumner on “The Confusing China Debate”
You should read yesterday’s post before tackling this one. Consider yourself warned!
Scott Sumner, whose post on China we’re discussing today, has a nice excerpt from the WSJ, which I’ll reproduce below:
Economists and investors have been calling on Beijing to make bolder efforts to boost output—especially by promoting consumer spending, if necessary, by offering cash handouts, as the U.S. did during the pandemic.
https://www.econlib.org/the-confusing-china-debate/
Accelerating China’s transition to a more consumer-led economy—such as that of the U.S.—would make growth more sustainable in the long term, economists say.
But top leader Xi Jinping has deep-rooted philosophical objections to Western-style consumption-driven growth, people familiar with decision-making in Beijing say. Xi sees such growth as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse, they say.
Xi believes Beijing should stick to fiscal discipline, especially given China’s deep debt. That makes stimulus or welfare policies akin to those in the U.S. and Europe less likely, the people said.
He goes on to say that Xi is right when he says that welfarism ain’t right for China. But, he goes on to say, the economists are also right when they say that China needs stimulus. So if the government won’t give the meds but China needs the meds, then where do the meds come from? Monetary stimulus should step up to the plate, per Sumner.
GDP, as any first year student of econ will tell you, is C+I+G+NX. Well, any Indian student, at any rate, but that’s a whole other story. Look this up, if this is not familiar to you.
Scott Sumner says that this framing is problematic. Why problematic? Because if we economists see that I (investment) is down, and GDP needs to go up… well then, we’ll say that either C should go up or G should (or both). But Scott says that this is wrong. No policymaker, he says “could realistically have the information required to make that judgment.”
His point is that what we should be saying is that China needs to do less wasteful investment. China has a lot of “white elephants“. Stop building those out, and let the market work out what is needed. The Chinese government should encourage more private investment and discourage public investment.
Well… that’s a bit like saying that an alcoholic should not drink quite as much. Easy to say, difficult to make happen. This is not, to be clear, me making fun of Scott’s argument. I’m simply trying to give you an analogy that might make understanding this easier. In fact, Scott himself later on in his post says that he is describing what ought to happen in an ideal scenario:
Some might argue that my analysis is naïve because China is far from being a laissez-faire economy. Monetary stimulus won’t necessarily go into the most efficient sectors. I agree. I am describing the sort of outcome that China should be aiming for. Determining which policy levers to push requires an in depth knowledge of the current policy distortions that lead to a misallocation of resources. Thus monetary stimulus might be combined with banking reform to reduce moral hazard. The goal would be to reduce lending for nonproductive investments, such as dubious real estate projects. But again, that’s not aiming for “less investment”, that’s aiming for less wasteful investment.
https://www.econlib.org/the-confusing-china-debate/
I find myself in agreement and in disagreement with Scott’s post. Agreement because the advice is sound. Disagreement because there isn’t a snowball’s chance in hell of this happening. How does the Chinese government, of all institutions, credibly show that it will be a passive and benevolent spectator to market-driven investment? Remember, this is XI’s government!
So as a theoretical solution, sure. As a practical solution? Not so much. If you want the Chinese economy to get out of the situation it finds itself in, you have to come up with solutions that take into account the ground reality. And the ground reality is that the Chinese economy works at the pleasure of the Chinse government, and the Chinese economy is never quite sure about what the Chinese government will do next. So for the Chinese economy to muster up the courage to gather funds and deploy them on multi-year investment projects, and to trust that the Chinese government will do nothing to get in the way across all of those years is… well, not happening.
Scott Sumner knows China a million times better than I do, so of course he knows this. Don’t read his blog post as being indicative of what he thinks the Chinese government will do. Read it as what he things the Chinese government ought to do.
The real issues are using monetary policy to assure nominal stability, and moving to a more market oriented economy to insure economic growth and higher living standards for the future.
https://www.econlib.org/the-confusing-china-debate/
You may or may not agree with the first half of that sentence (I personally think there is room for fiscal policy along with monetary policy). Everybody agrees with the second half.
Everybody, that is, except the Chinese government.
More’s the pity.
China is about to live in exciting times
Some might say it is already living in exciting times, and they wouldn’t be wrong.
Elementary, My Dear Economist
“There is an inverse relationship between interest rates and dishonesty,” says Carson Block, a short-seller.
https://www.economist.com/business/2022/11/07/a-sleuths-guide-to-the-coming-wave-of-corporate-fraud
You’d think we would learn, but it is hard to unlearn greed, alas. Whether it is tulips in the 16th century or collateralized debt obligations in the 2000’s – or whatever will be uncovered in the weeks (or months) to come – the underlying phenomenon is as old as humanity: greed.
People, institutions and organizations have been greedy these past few years, says The Economist in a lovely little article, and now that an era of high interest rates is upon us, some of these greed related shenanigans will be uncovered. This will not be a pretty process, and the repercussions will be tough for all of us. Job losses, reduced investments, slowing economies will all manifest themselves, and a familiar story will play itself out all over again.
But how will the tragedy start? What will be the straw that breaks the camel’s back? Which card in this particular house of cards will be the first to slip, bringing the whole edifice down? The Economist points to Environmental, Social and Governance (ESG) investing, or maybe various government schemes across the world to help business during the pandemic. Fintech is another obvious candidate. My own personal favorite pick is that the housing sector in China will be the epicenter, and a lot of things will begin to unravel from there on in. My personal worry is that this is such an obvious pick that I’m missing something else that will seem even more obvious with the benefit of hindsight.
But The Economist, in this article, teaches us how to begin to be an economist-y Sherlock. What facts should we cram our heads with, what story should we start to build, and how should we go about deducing how the collapse will start?
The article talks about a ‘triangle’ of factors: motives, circumstances and rationalization. If you are in charge of a business that seems to be doing well during the ‘good times’, there is pressure on you to keep making a good story better, and that spiral can be ascended with the help of some shady bookkeeping. That’s motive.
Circumstances effectively is shorthand for saying that fraud is likely to be higher in those economies where institutions are of lower quality: regulators not doing their jobs, politicians willing to look the other way. The article mentions China (and in a throwaway sentence, India), but I’d disagree. Institutions can be of poor quality the world over, and it has more to do with incentives and greed than it does with ’emerging economies’ alone. ‘In rich countries, opportunity beckons in the latitude of accounting practices’, says the article, but surely nobody today is under the illusion that rich countries have had institutions and regulators of great quality! If your memories are long enough to go back to Polly Peck, surely they can help one remember 2008 in the US and 2011-12 in Europe? And those, to me, aren’t examples of accounting malpractice, but rather of regulators asleep at the wheel, knowingly or otherwise.
And finally, rationalization. This is simply the “but everybody is doing it, so why shouldn’t I?” argument, and it is, unfortunately, all too common in all walks of life. To expect those involved in high-stakes finance to be immune from it is dangerously problematic.
Combine these three then: motives, circumstances and rationalization, and throw in slowing growth and high inflation, and ugly stories will start to emerge. They already have, of course, so long as you know where to look.
Two additional points: Goodhart’s Law remains underrated, and this article is yet another reason to learn it, and to learn how to apply it and above all, to learn to predict outcomes by using it:
That bosses feel pressure to deliver predictable profits is well documented. Almost all the 400 managers surveyed in the mid-2000s by John Graham, Campbell Harvey and Shiva Rajgopal, a trio of academics, confessed to a strong preference for smooth earnings. Most admitted they would delay big spending line items to meet a quarterly earnings target. More than a third said they would book revenues this quarter rather than the next, or incentivise customers to buy more earlier.
https://www.economist.com/business/2022/11/07/a-sleuths-guide-to-the-coming-wave-of-corporate-fraud
And two: get better at learning the basics of accounting. Among economists, this remains a very underrated skill. Myself included, I should mention!
On Starting Salaries
I joined Genpact as a data analyst in the year 2006, fresh out of college. Genpact was one of the few firms that had visited our campus for recruitment that year, and I was lucky enough to be “placed” along with three other batchmates.
My starting salary? 3.75 lakh rupees, or INR 375,000/-.
I remember thinking how princely an amount this was back then, and I couldn’t for the life of me figure out how I could possibly spend whatever amount I got on a monthly basis. Of course, life very quickly taught me the same lesson that it has taught everybody else – so it goes.
But the reason I bring this up is because of a Finshots write-up that’s been shared with me a fair few times this past week:
₹3.6 lakhs
https://finshots.in/archive/it-firms-great-resignation/
That was the typical salary paid out to a fresher in 2010 when they entered one of India’s top IT companies. Think — TCS, Infosys, HCL, and Wipro.
A decade later, they were still being paid roughly the same sum.
So technically, if you were to take into account inflation, freshers in 2020 were far worse than their counterparts back in 2010. And the salary hikes weren’t particularly enticing too.
I’m not sure where they got the data from, but anecdotally, this sounds about right. I’ve been in charge of placements at the Gokhale Institute, where I work, for about four years now, and while we’ve managed to get firms on campus that pay substantially more, starting salaries for most firms at the entry level are at about this number, more or less.
Which, as the Finshots newsletter goes on to point out, is ridiculously low for 2022. And why might this be so?
Well, two ways to think about it. First, as the newsletter itself points out, it’s simple economics. There’s excess supply.
You see, India produces roughly 1.5 million engineering graduates every year. And IT firms hire around 200,000 people every year. This means the effective pool of applicants remains sizeable and IT companies continue to be spoilt for choice. Even others attributed it to cartelization, alleging that IT companies banded together to deliberately suppress salaries. But despite what you want to believe, the bottom line remains the same — Entry-level salaries simply did not budge a lot in the past decade and IT graduates were getting a bit angsty.
https://finshots.in/archive/it-firms-great-resignation/
It’s worth learning more about economics to help yourself understand what terms such as excess supply, homogenous goods, elasticity, cartelization, inefficient labor markets mean, because they help you understand why starting salaries are so low. Search for these terms online, on this blog, or begin with MRU videos, but help yourself by learning about these concepts if you are unfamiliar with them.
Or watch AIB videos!
If you ask me, do both. It’s a great way to learn econ theory and have a bit of fun.
But as the newsletter goes on to point out, things are changing, and they say this is because of three reasons: increased attrition, greater recruitment by start-ups and burnout from the pandemic. Each of three, I should add are inter-related, but I broadly agree with their explanation.
Average salaries are up, firms are paying more, and it’s a great time to be out there looking for a job. But, as the conclusion of the newsletter points out, it would seem that there is a recession looming on the horizon, and that may drag starting salaries back to square one.
How does one find out about the probability of a recession? Well, there’s lots of ways, but without being too meta, keep an eye out for the kind of questions that are being asked about the macroeconomic situation:
One data point doesn’t add up to much, I’ll admit, but there’s other ways to keep yourself abreast of the situation:
Or, once again, run searches online (this time for macroeconomics), or on this blog, or begin with MRU videos. Or all of the above, if you ask me.
But trust me on this: a good intuitive grasp of basic economics concepts goes a very long way indeed. And when it comes to wages, we all have skin in the game. (Read the book, if you haven’t already).
No?
Scott Sumner on Parasite, Paris as a 15 minute city, and then the Coronavirus!
Five articles that I enjoyed reading this week, and figured you might too:
I’d actually prefer they not allow foreign language films in the best picture category, as they’ll never be judged on a level playing field. Alternatively, have three Oscars; best high-brow film, determined by highbrow critics. best middlebrow film, determined much like the current Best Picture, and best popular film, determined by box office receipts. The same film would be allowed to compete in all three categories.
The Godfather would have won all three, but I’m not sure any other film would have (Birth of a Nation?, Lord of the Rings III?)
Rear Window would have won highbrow and popular, but it wasn’t even nominated for Best Picture. LOL. Middlebrow people are the worst.
Scott Sumner being provocative – but notice that this is kind of how Filmfare Awards work!
Even in a dense city like Paris, which has more than 21,000 residents per square mile, the concept as laid out by the Hidalgo campaign group Paris en Commun is bold. Taken at a citywide level, it would require a sort of anti-zoning—“deconstructing the city” as Hidalgo adviser Carlos Moreno, a professor at Paris-Sorbonne University, puts it. “There are six things that make an urbanite happy” he told Liberation. “Dwelling in dignity, working in proper conditions, [being able to gain] provisions, well-being, education and leisure. To improve quality of life, you need to reduce the access radius for these functions.” That commitment to bringing all life’s essentials to each neighborhood means creating a more thoroughly integrated urban fabric, where stores mix with homes, bars mix with health centers, and schools with office buildings.
In any crisis, leaders have two equally important responsibilities: solve the immediate problem and keep it from happening again. The COVID-19 pandemic is an excellent case in point. The world needs to save lives now while also improving the way we respond to outbreaks in general. The first point is more pressing, but the second has crucial long-term consequences.
Bill Gates on not just how to contain the coronavirus, but how to build better capacity for the next one. Worth two excerpts:
Pandemic products are extraordinarily high-risk investments, and pharmaceutical companies will need public funding to de-risk their work and get them to jump in with both feet. In addition, governments and other donors will need to fund—as a global public good—manufacturing facilities that can generate a vaccine supply in a matter of weeks. These facilities can make vaccines for routine immunization programs in normal times and be quickly refitted for production during a pandemic. Finally, governments will need to finance the procurement and distribution of vaccines to the populations that need them.
Check the info graphic out in the article as well.
Goldman Sachs now forecasts (nowcasts) -6% q/q AR growth in Q1, down from -0.5%.
2020 @PredictIt recession prediction market probabilities are now above 40% amid #Coronavirus concerns.
India: Links for 2nd December, 2019
What else?
- “The non-government part tends to form 87-92% of the economy. In the July-September period, it formed nearly 87% of the economy. If 87% of the economy is growing at 3.05%, the situation is much worse than it seems.”
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Vivek Kaul about the GDP data is worse than it looks.
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.. - “At its core, Indian industry is cooling rapidly, with industries like coal, steel, cement and electricity having contracted in October. Eight core infrastructure industries have not grown in the first seven months of this year. Manufacturing, led by the automobile industry, has contracted, and mining stopped growing in the second quarter. Energy utilities and construction saw their growth rates almost halving from the same quarter a year ago. Another three months of declines will officially qualify as a manufacturing recession.”
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The R-word is being heard, louder and louder.
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.. - “The good news is that GDP growth in the next quarter or the fourth quarter could well be a wee bit higher. The pop thesis is that given the lower base of the previous year, growth could be statistically higher—a bit like standing next to Leonardo DiCaprio, who is six feet tall, and then next to Tom Cruise, who is 5 feet 7. The bad news is that the slowdown is not going away anytime soon. ”
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Shankkar Aiyyar, in top form.
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.. - ““Besides monetary easing by the Reserve Bank of India (RBI), the government needs to simplify the goods and services tax (GST) and introduce a new direct tax code to clear the tax jungle created by our ancient income-tax law and rules,” he says.”
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The “he” in this case being Arvind Virmani.
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.. - This may be behind a paywall for you, in which case, my apologies. But the final link in this set is from TN Ninan over at Business Standard.
ROW: Links for 12th June, 2019
- “Readers will by now be familiar with the list of industries impacted by the US China trade war. These include soyabeans, cars, steel, and semiconductors.But one commodity is increasingly important to how the tensions play out: students. The Chinese state media is now saying the government will issue a warning on the risk of studying in the US”
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The FT reports on how Chinese students will now be discouraged from going to American Universities – in a sense, an expected move, but you would be surprised at just how dependent universities in America today are on foreign students. Interesting times.
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.. - “To summarize, based on the above I doubt that actual Chinese growth is more than 1% below the reported figures, at least up through 2018. Of course it’s possible that things have changed in 2019; if so I expect that to show up in upcoming airline travel data for China.”
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Scott Sumner patiently reminds us that we should look at the data before making a claim, and having looked at the airline data, he rejects the notion that there is a dramatic slowdown in China. The truth, as usual, lies somewhere in the middle.
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.. - “Vietnam, like China really doesn’t import very many manufactures from the United States. That’s partially a function of the fact that the value added in Vietnam is often low, and thus Vietnam cannot afford a lot of top of the line U.S. capital goods (yet). But it is also a function of the fact that many of the global value chains that generate large (often offshore) profits for U.S. firms don’t give rise to that much U.S. production these days. There just isn’t much sign that the Asian value chains stretch back to include U.S. factories and workers. Fabless semiconductor firms that design chips likely export their designs to a low tax jurisdiction before they license their designs to an Asian contract manufacturer. The rise in Vietnam’s exports hasn’t been associated with a commensurate rise in exports from the United States to Vietnam.”
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Brad Setser takes a look at whether Vietnam is the new China, and concludes that it kind of is, and kind of isn’t.
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.. - “It is not surprising that the CPC has worked so hard to extirpate the Tiananmen Square massacre from public memory. History – including the horrors of Mao Zedong’s rule – is too volatile a substance for the Chinese dictatorship. China’s leaders hold up their system of government as a model for other countries. But how can a regime be confident in the sustainability of its values and methods if it is afraid of its own past?”
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Chris Patten (who knows a thing or two about this issue) reviews the Tiananmen square massacre, and ponders on what it means for China and Hong Kong today.
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.. - “Despite a small increase in young and female lawmakers—like Ms Suematsu, who is in her forties—local politics is still dominated by old men. “In these municipalities, candidates are so old they have a hard time putting up election posters,” says Shigeki Uno of the Nippon Institute for Research Advancement, another think-tank. Indeed, three-quarters of town and village assembly members are over 60. The oldest, aged 91, holds a seat on a city assembly in Shizuoka, in central Japan.Young people are loth to stand because local politics is not a financially rewarding profession. The law bans assembly members from holding other jobs concurrently. Their pay averages around ¥300,000 ($2,740) a month, hardly enough to support young families. “It’s basically a job for the retired,” sniffs Mr Uno. And for little pay, the workload is onerous.”
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The Economist reports on Japan, and it’s ageing population – and what that means for democracy on the ground, at local elections.
EconForEverybody 