Global Economics and Management

The State of Things

As I gear up to teach Global Trends again this summer, what better way to introduce some of the themes we will be discussing in class than to link to Niall Ferguson's excellent new column in Blomberg?

America, China, Russia and the Avalanche of History.

Recommended - including the ending!

What I Have Been Reading

Mostly things on Russia and Ukraine but not exclusively. 

1) Robert Kaplan discusses whether the West should tolerate some dictatorships (Bloomberg Opinion). I disagree, broadly, with the content of this article, but it is thought provoking and worth reading. The reason I disagree is that the "exemplary" autocracies that Kaplan describes are actually societies in the midst of the slow and gradual process of graduating to the status of democracy. The West has a moral duty to push along these evolutions rather than adopting a complacent attitude that is tolerant of autocracy for reasons of expediency - thereby risking their entrenchment. Of course, we should remain realistic about the prospects for poor countries to evolve into democracies rapidly. The Isaiah Berlin quote included in the article ("“Men who live in conditions where there is not sufficient food, warmth, shelter, and the minimum degree of security can scarcely be expected to concern themselves with freedom of contract or of the press.”) is spot on - which is precisely why a high income is a precondition for sustained democracy. But dictators should not be lulled into the misconception that their regime constitutes the endpoint of their societies' histories.

2) Andy Mukherjee on India's geopolitical choices (also at Bloomberg Opinion). Here, I agree with the author. But I think India is likely to continue maintaining a sort of middle way, which is in its short term interest. Whether the decades-long gradual untethering of India from Russia - and its concurrent rapprochement with the US - will continue, is the real issue. I hope India chooses alignment with the West, but I am not confident in predicting that it will.

3) An in-depth Wall Street Journal article on the 20-year history that led to the Russia-Ukraine war. The photos are particularly telling, including one of President George W. Bush and Vladimir Putin in Kennebunkport, Maine, and another of Macron, Merkel, Zelensky and Putin in Paris in 2019. Recommended.

4) On Darrick Hamilton and Baby Bonds. An inspiring life story, and a politically feasible proposal to tackle the dearth of wealth that holds back disadvantaged people. Now written into law in Connecticut, and considered in other states as well. Questions that remain are: 1) how to finance a full-fledged program, 2) how to study what people with do with the entitlement, given that (unlike for UBI) any experimenter would have to wait 18 years to find out, and 3) how to create a bipartisan political coalition to support the generalization of the idea. The latter is a particularly daunting problem, not because conservatives would necessarily oppose the proposal (as the article correctly points out, the idea of baby bonds is compatible with conservative principles), but mostly because the proponents have adopted positions that are very politically patterned (on the left) and so are unlikely to be effective in appealing to the other side.

5) Larry Summers on the Ezra Klein Show. This is a listening, not a reading. Readers of this blog know that I am partial toward Larry Summers, and in this podcast he does not disappoint - with wisdom on many subjects including inflation and the other ills that afflict America (I wish he had spoken more about education policy as one of the major solutions to these ills). Ezra Klein's show is one of the very best podcasts out there on all matters political/economic. I have become a regular listener.

6) A Russian perspective on the current conflict. A little too gloomy and pessimistic, in true Russian form. Also full of hubris: Russian elites seem to believe their country can be a great power, despite an economy the size of Spain's, stagnant fertility and a mere 144 million inhabitants that are fast ageing. This remains a mystery to me - the fundamentals just aren't there.

Further Readings on the Ukraine-Russia Situation

1) Over at the New York Review of Books, Fred Kaplan takes us through the post-Cold War history of the events that led to the Russian invasion of Ukraine. The article shows both that the current situation has deep roots, and that the history of Europe could have taken a decisively different turn if President Clinton's Partnership for Peace had taken hold. (Hat tip: Paola Giuliano)

2) In the WSJ, Gerald Seib muses about whether the Ukraine war will lead to US to return to realpolitik. Not that the US ever really departed from realpolitik to start with...

3) Also in the WSJ, Greg Ip discusses the West's chances in the power struggle that increasingly pits it against Russia and China.

As these articles show, big events, like the one we are witnessing in Ukraine, often provide an occasion for commentators to reassess and clarify their thinking on international relations. Trends that might have been hidden come to the fore with greater clarity. Clear strategic choices are made, in a way that rules out certain historical paths and opens up new ones. We seem to be in such a clarifying moment. The US is not the only one facing such a moment - China is, too. As for Russia, it made its choice, and that choice is not likely to end up well for the Russian people - whatever the military outcome of the war in Ukraine.

From Transitory Inflation to Prolonged Inflation?

The Wall Street Journal just published one of the best pieces of economic journalism I have read in a long time. It is a story covering a thesis that Charles Goodhart has been proposing for the last few years among economic policy elites. The thesis is that we are about to enter a prolonged period of elevated wage and price inflation. The theory could be called "the labor theory of the price level". It posits that workers' bargaining power determines the extent of inflation. In an era of rapid technological progress and globalization, workers lost bargaining power, so it was easier to keep their wage growth contained. In an era of rapid population aging and de-globalization, workers will regain some of their long lost bargaining power, leading to higher wages. These higher wages will in turn lead to higher prices (in the familiar wage-price spiral that we discussed in class).

You will notice how much this story contrasts with the view, prevalent in 2021 among US and European central bankers, that the current rise in the inflation rate would prove transitory. Indeed, Goodhart's story implies the opposite.

What do I think of this new story? The diagnosis of an aging population and de-globalization giving workers more bargaining power is well-taken. I am less certain that such enhanced bargaining power will lead to persistent inflation. This depends in part on monetary policy actions: it could be averted with sufficient tightening of the money supply. On a theoretical level, the story also requires more work. The manner in which workers gain more bargaining power, in this story, is because they become more scarce, and face less competition from cheap foreign labor. Yet the purchasing power of the older segments of society do not automatically rise, unless their retirement resources are indexed. So the greater wages that the story implies accrue to a smaller share of the population. We would need a formal model to assess whether this force alone is enough to lead to generalized increases in wages and prices. In sum, I buy the premise of Goodhart's story, but I don't think the conclusion of persistent inflation necessarily flows from this premise. 

If you want to learn more about Charles Goodhart and his life, you can read this. Fun fact: His daughter Lucy was my classmate in graduate school. Lucy now teaches economics at Brandeis University.

UPDATE: Over at Bloomberg, Jonathan Levin adds more data along similar lines.

Guest Blogging: Misha Galashin on the Popularity of the Russia's Invasion of Ukraine

I am happy to again welcome Misha as a guest blogger here - he has unique expertise on the current situation in Russia and Ukraine. Below he opines on a subject we have wondered about in class, namely the issue of the popularity of the war in Ukraine among the Russian population:

We have been discussing how one could gauge the Russian population's attitude toward the war in Ukraine. I have come across a survey commissioned by Maxim Katz, a pro-democratic Russian politician. The study uses a representative phone survey of 2000 Russians and is performed by one of the few reliable firms. 

The first graph shows that an overwhelming majority of Russians (88%) favor maintaining friendly relationships with Ukraine.

The second graph shows the overall support for the war effort as well as the variation of support by other attitudes and by age. When looking at the graphs one should remember that respondents are likely to exaggerate their support. The reason is low trust in the anonymity of surveys and a long history of equating pacifist sentiments with treason. Given this, the reported 58.8% support (Panel A) is actually not that high, but it is way too high given the friendly sentiment expressed above.

The gradients by blame attribution, watching Putin's address, attitude to Soviet borders, and age shed light on this puzzle. The results are consistent with the mechanisms that we have discussed in class: propaganda and nostalgia. One could view watching Putin's address (Panel C) as a proxy for the general consumption of televised news and attributing blame for the conflict to the West as buy-in to the translated position. For example, there is a 51 percentage point difference between respondents who blame the West for the conflict and those who don't (74.7% vs 24.1%). Similarly, the split by question on the USSR borders is consistent with an explanation based on Soviet nostalgia. Finally, Panel E suggests that these mechanisms are least pronounced for younger cohorts (there are similar patterns for education and urbanization). Anecdotally, the propaganda is portraying the invasion as a friendly effort to help the Ukrainian people get rid of corrupt elites and Nazis and them get back home to the Russian camp.

It is extremely hard to say where things go from there. On the one hand, it looks now that the Russian people were not alone in being misguided: as Paul Krugman points out, the invasion decision was delusional even from Putin's selfish point of view. What should have been yet another "splendid little war" turns out to be a human catastrophe unseen in Russian recent history, both for the invaded and for the invaders. One could expect that the support for the war would plummet and the regime collapse as the Russian soldiers' death toll, war crime reports, and effects of sanctions accumulate. On the other hand, the regime hits back hard: the last independent media sources are closed, Facebook and Twitter are blocked (see my friend and colleague Ashley Blum's account at the LA times). A law banning "fake information about Russian armed forces" was passed on Thursday (this post would likely be enough for a criminal charge under the regulation). The threat of repression, as well as the economic decay, is provoking a mass exodus of anti-war, globalist Russians. For example, Maxim Katz, the politician behind the poll above, has left Russia this week. Unfortunately, for Russia, Ukraine, and the world, this struggle between reality and Putin's multiverse might take months or even years to resolve.

Good Readings on the Russia-Ukraine Crisis

Here are a few resources the came across my desk as I try to develop deeper expertise on the situation. These links focus mostly, but not exclusively, on the economic aspects of the crisis.

1) Over at Brookings, my friend Gian Maria Milesi-Ferretti of the IMF writes on Russia's external financial position, and on the likely effects of the sanctions. The upshot: Russia has tried to insulate itself from external sanctions since it was hit with them in the aftermath of the annexation of Crimea in 2014. It is a net creditor to the rest of the world, as attested by its extensive reserves - meaning it has accumulated large current account surpluses in the past. However, the extent the current sanctions is such that its economy will be severely affected. The last paragraph of the essay is particularly recommended, as it distills the article in condensed form.

2) Last week in class we discussed a Bloomberg article by Matt Levine, on the partial "disappearance" of Russia's foreign currency reserves - due to sanctions that prevent Russia's central bank from accessing these reserves. Over at the WSJ, Jon Sindreu follows up with an article that lays out the broader implications of these recent developments for world finance. If reserves aren't really reserves anymore, many rogue regimes will think twice about the manner in which they hold sovereign wealth (of which foreign currency reserves are part). More generally, as the author writes, "[this move] seems set to further the deglobalization trend and entrench two separate spheres of technological, monetary and military power". Has the West opened up a Pandora's box? Worth pondering.

3) In the Wall Street Journal, Tunku Varadarajan interviews historian Robert Service of Oxford University. The article provides great historical background to the current crisis - as well as useful information on President Putin's ideology. Recommended.

4) In the FT, an excellent article on the small number of policy elites surrounding Vladimir Putin, and their ideology, interests and incentives. Worth reading.

5) Francis Fukuyama's predictions on the war in Ukraine. I think these points are too "optimistic" (from the West's perspective), and perhaps somewhat tainted by Fukuyama's classical liberal aspirations. History is messier than that. But the author is a very serious scholar whose views should always be taken seriously, even when wrong.

6) A Chinese elite's view of how the Russo-Ukrainian war will change the world. An amazing read, well worth the short time it takes. Also pretty full of wishful thinking, I doubt that Chinese leaders will follow the author's policy prescriptions.

7) Matthew Yglesias on the effect of the war on globalization. I wonder if this conflict will, ultimately, create the conditions for a return of globalization, at least among Western countries - by coalescing them around common goals. 

War and Relatedness

I am told that the economics commentator Noah Smith linked to a 2016 paper of mine on Twitter today. I am not on Twitter and likely will never be on Twitter, so I can't link to this thread. Yet the paper is quite relevant for the current situation between Russia and Ukraine, so I can't resist commenting on it here.

In "War and Relatedness", Enrico Spolaore and I argued that societies that are more closely related in terms of culture,  religion, ancestry, and language, are more likely to go to war with each other. This contrasts with a view that interstate wars feature a "clash of civilizations", a hypothesis articulated by political scientist Samuel Huntington in a 1996 book. This view implies that societies that differ in terms of religion, language, values, and common ancestry are more likely to fight. It is starkly at odds with the empirical evidence, which strongly supports the opposite view. Using a dataset of interstate conflict between 1816 and 2001, Enrico and I showed that a simple measure of relatedness between countries strongly predicts the likelihood of interstate conflict. This is a very robust relationship, which holds across the world, within Europe, and across the world after excluding Europe. It holds in different periods, and after controlling for an exhaustive list of geographic proximity measures. This is not about geography, but about human relatedness.

Why might there be a greater propensity to fight with culturally closer societies? Enrico and I articulated two mechanisms. First, closely related societies are likely to care about more similar resources. Many wars are over the control of good land or of natural resources such as oil. More similar societies are more likely to have preferences for the same rival goods, and to develop conflicts over goods or issues they both care about. Second, interstate wars are often about territorial disputes. When a country wishes to conquer territory from another, it cares about its ability to manage the new territory in the event of victory. It is easier to administer and integrate a more similar population after conquest, than a very different one.

The example of Russia and Ukraine (very closely related societies in terms of ancestry and culture) provides a very nice example of our theory. Moreover, Russia seems mostly interested in regions of Ukraine (Crimea, Donbas) where a strong presence of ethnic Russians will make post-conquest administration easier. In fact, in our 2016 paper, Enrico and I explicitly mentioned the case of Crimea:

"For instance, the recent conflict between Russia and Ukraine over Crimea and the Eastern region of Ukraine (not included in our sample, which stops in 2008) is consistent with our prediction that states with closely related populations are more likely to engage in conflict over control of rival goods and populations." (p. 937)

The thesis of this paper has held up quite well in light of recent events - if I may say so myself!

Niall Ferguson on Conflict and Asset Prices

Over at Bloomberg, Professor Ferguson warns us not to ignore the lessons of history when it comes to the possible conflict in Ukraine. Large-scale conflicts historically have led to higher interest rates and higher gold prices. The article draws useful parallels between the situation that we face now and the situation that prevailed both in 1815 at the end of Napoleon's run, and in the immediate period before the First World War. It is both a great lesson in history as well as a thought-provoking reflection on the current situation. Money quote: "As an investor, you may not be interested in war, but war is interested in you".

There will be important implications for investors from a Russian invasion of Ukraine. The heightened tension will lead investors to seek safe havens. This could have ambiguous effects on interest rates but my guess is that, in the context of tightening monetary policy and rampant inflation, we won't see the usual downward trend in Treasury yields that tends to accompany flights to safety. Sanctions against Russia are likely to be biting, especially when it comes to hydrocarbons, implying spikes in the prices of oil and gas. Stock markets have yet to fully price a full-fledged invasion, since there is residual uncertainty on whether one will take place - volatility is almost surely assured. How the Fed and ECB will handle this shock as they are about to raise rates to fight inflation will be very interesting to watch: in a context like this, releasing more liquidity is the usual reaction, but this may not be desirable with inflation where it is now. A combination of heightened geopolitical risk and rampant inflation looks a lot like the 1970s.

More Wisdom from Larry Summers

Larry Summers is again being the voice of reason in the context of a current economic policy discussion that is, to say things mildly, getting completely ridiculous. Here is Summers making strong statements against a gas tax holiday and against price controls as means to rein in inflation. His comments are spot on in both cases. Watch the short 3-minute video that accompanies the article.

Economics is a discipline. This means it should discipline people's thinking. Politicians can propose policies that poll well or sound good on TV, but economists have a duty to think of the broader ramifications and of the incentive effects that these policies will have. Tax holidays and price controls are not only going to be ineffective at curbing inflation - they will also backfire in ways that will hurt consumers, and won't help politicians. For example, price controls almost always result in shortages, and while people dislike inflation, they also dislike shortages. These ideas are both bad ideas and self-defeating ideas. Thankfully, Larry Summers still has enough of a platform to strongly push back against bad policy ideas.

The State of India's Reform

Over at Foreign Affairs, Arvind Subramanian and Josh Felman take us through India's tortuous history of reforms. It is a far-ranging piece that give a bird's eye view of India's reforms. The article points to the last decade as a lost decade, and identifies several factors that could lead Indians to turn against market-oriented reforms. One is the protectionist stance that the Modi government has recently adopted (import tariffs are rising steeply in India), and another is the state's explicit support of two big industrial conglomerates (the 2As - Ambani' Reliance Industry and Adani's Adani Group). 

India's growth rate since 1991 has closely tracked the intensity of the reforms pursued by its government. There are still many areas for improvements - labor markets, agricultural markets, retail, and many aspects of foreign trade and investment policies are all ripe for some reforms. Many of these initiatives are stalled, slowing down India's progress toward modernity. Despite this, the progress is real, as the natural momentum of this dynamic country supports relatively high average growth rates. As my friend Gurcharan Das is fond of saying "India grows at night" (he even wrote a book with that title!). Some transformations are organic, and happen in spite of the government rather than because of it. This causes me to be overall very optimistic about the Indian economy over the medium run.