Global Economics and Management

An Interview with UCLA's Oleg Itskhoki

Bloomberg today features a great interview with one of UCLA's rising stars in economics - Oleg Itskhoki. Oleg won the Clark Medal this year, an award given annually by the American Economic Association to the best economist under the age of 40 - and a frequent harbinger of a future Nobel Prize. The interview touches on many themes that we discuss in Global Trends - maybe I should ask Oleg to co-teach the class with me!

UCLA is fortunate to have economists of Oleg's caliber on its faculty.

Are We in a Recession?

A debate is currently raging in political and policy circles as to whether the US is in a recession. A recession is conventionally defined as two consecutive quarters of negative growth in real GDP. The first quarter of 2022 showed real GDP growth at -1.6% (at an annualized rate), and the second quarter had real GDP growth at -0.9%. So by this definition, the US is in recession.

However, this is not the only definition of recessions. A more wonkish definition is that of the National Bureau of Economic Research (NBER). The NBER has a Business Cycle Dating Committee. This is not an online dating service for economists (!), but a group of top economists charged with pinpointing the months when a recession begins and ends. The committee looks at a variety of indicators, including labor market indicators, to make this determination. It is not in a hurry, so we usually find out about the precise dates several months after a recession begins. For instance, the last time the committee called a peak in economic activity was on June 8, 2020. It did not call a trough until July 19, 2021. That was for the recession that spanned February-April of 2020 (the shortest recession on record for the US). So it took the committee 3 months after the peak to call a peak, and 15 months after the trough to call a trough. And of course, since the committee looks at many indicators, everything is subject for debate: it is not as clear-cut a definition as that based on two quarters of negative real GDP growth. See here for details, especially the sentences: "The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers (PILT), nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions."

[Full disclosure: I have been a member of the NBER for 20 years; though of course I do not sit on the Business Cycle Dating Committee!]

Bloomberg recently looked at 6 indicators mentioned in the quote above. Based on these indicators, it is unlikely that the NBER will determine that we are currently in a recession, because only one of the six indicators (wholesale-retail sales adjusted for price changes) has shown signs of a sustained decline in the first 6 months of 2022. Instead, it is probable that we are seeing a divergence between the conventional definition of a recession and the NBER's definition.

If I had to guess, I would probably venture that we are not yet in a recession. I think the conventional definition is likely to be misleading in a time of inflation. Small errors in the measurement of inflation, or in the measurement of nominal GDP growth, when inflation is around 9%, can have big effects on real GDP. Recall that real GDP growth is, roughly, nominal GDP growth minus the rate of inflation (as measured using the GDP deflator). If both nominal GDP and inflation are mismeasured in some ways, small mistakes in their rates of growth can put you slightly above 0% real growth or slightly below (see here for details). We will see what the BEAs revisions to both nominal GDP growth and the GDP deflator end up being in the months to come. Even small revisions could change the picture from recession to expansion (or make the negative numbers even worse). This is why the NBER waits so long to decide, and looks at various indicators rather than just one: one needs reliable data to make these kinds of calls.

In the end, these expert debates aren't really that important. What is clear is that real growth has slowed considerably. And, with the Fed aggressively raising interest rates, it would not be surprising if we ended up in a true recession over the next few months. In fact, the whole point of raising interest rates is to slow down demand, and therefore growth.

The Rise of New Technologies

On Sunday in Global Trends, we will discuss the rise of new technologies. This part of the class affords an opportunity to discuss a wide range of topics related to disruptive technologies. We start with a discussion of monetary and financial innovations, including crypto. We then move to a discussion of automation and AI. And we conclude the day with a wide-ranging discussion of inequality trends around the world, and the possible solutions to rising inequality in many countries. So this is the perfect opportunity to bring to your attention additional resources on these matters:

1) On cryptocurrencies. I highly recommend a new episode of Allison Schrager's Risk Talking podcast. In this podcast episode, Dr Schager interview Perry Mehrling, a professor at Boston University who is an unabashed skeptic when it comes to cryptocurrencies. I am not quite as negative on the prospects for useful functions of crypto, but I have to say that Professor Mehrling brings up good points (some of which are echoed in recent posts on our Global Trends discussion forum). More generally, Risk Talking is a welcome addition to the growing list of good economics-oriented podcasts now on offer.

2) On automation. Self-driving trucks, which will form the subject of our case discussion for Module 5, are in the news again. One of the remaining players in this space, TuSimple, is in the hot seat because of an accident involving one of its trucks, last April. The WSJ has all the details. Whenever an autonomous vehicle is involved in an accident, it becomes the subject of a huge amount of public scrutiny. Of course, no comparable public scrutiny is applied to accidents that occur when a human is driving, despite evidence that these accidents are much more common, per mile driven (this evidence, however, is still contested). Such a bias against novelty is quite common, and applies to many new technologies (more so even outside the US, which has a culture more accepting of technological disruption than most other countries).

3) On inequality. As the module makes clear, many countries around the world have experienced increases in income inequality over the last few decades. The US is a case in point. But the evidence is not without its critics, because inequality is hard to measure: do you use pre-tax or post-tax inequality? How to you take into account the changing quality of goods that a dollar of income affords? Are the price indices that apply to rich and poor people the same (the rich tend to consume more of the goods and services whose prices have risen steeply in recent times, such as healthcare, education and housing)? From the Journal of Political Economy comes the latest salvo in this debate. The authors of this study argue that while income inequality has risen in the US, consumption inequality has not, at least not to the same degree - when you measure things right. Other good news on this front include data from Thomas Piketty's World Inequality Database (WID). I blogged about this a few months ago. Of course, these two resources are about the US, and trends in other countries, particularly fast-growing emerging markets like China and India, may differ. Data for these other countries are easy to find on the WID website.

Trash, Methane, and Global Climate Change

Bloomberg today features a sobering report on the problem of methane emissions from the piles of untreated trash that are accumulating in several South Asian countries. As I prepare for our module on the environment in this summer's offering of Global Trends, as well as for the global immersion class to India that I will conduct in Winter/Spring, this is well-timed reading. We focus a lot on carbon dioxide emissions, but methane (and hydrogen) are in many ways more powerful greenhouse gases. Substantial progress could also be achieved by focusing on these sources - with many local pollution benefits also obtainable in tandem.

What I Have Been Reading this Weekend

1) The Financial Times on Europe's woes. There is a real danger that the Eurozone could implode, if different governments continue to face very different borrowing conditions. The article states that the yield spread between German government bonds and Italian ones is very high right now: investors demand a premium for buying up the public debt of Europe's economic laggards. In response, the ECB has announced a new bond buying program directed at countries with high public debt borrowing costs. This amounts to monetization of the debt of Europe's slower-growing countries. Such a goal conflicts with the ECB's other pressing objective - that of tamping down inflation. This is a situation that deserves close monitoring, as the repercussions of a new European debt crisis would be global.

2) Over at the WSJ, Gwynn Guilford provides a useful update on the inflation situation in the US. I agree with the gist of the article - inflation may have settled at a 7-8% level, i.e. prices may have stopped accelerating. Getting inflation down back to the Fed's 2% target is another matter altogether. Also at the WSJ, Senator Elizabeth Warren criticizes the Fed's approach to fighting inflation. It is a useful counterpoint to the conventional wisdom on the subject, but I am afraid I cannot agree with Senator Warren. Demand management is an essential - perhaps the essential - component of an inflation-fighting strategy. And her proposed enhancement of antitrust policy stringency, while perhaps desirable for other reasons, would do almost nothing to tamp down inflation at the horizon that is required: antitrust enforcement entails court proceedings that take years to come to fruition - assuming they ever do. It is true that a recession would more severely impact the most vulnerable in society - recessions always do. But continued high inflation would also hurt the more vulnerable disproportionately. Raising interest rates will slow down growth and perhaps generate a recession. Instead, a rapid end to our inflationary outburst would create the conditions for a resumption of growth on a healthier, broader basis - as it did in the early 1980s. Finally let me point (via Bloomberg) to the latest pronouncements by Larry Summers on Fed policy. These strike me as right on the mark.

3) Adrian Wooldridge on Henry Kissinger's new book and the current crisis of leadership. There is much to like in this article, and also much to take issue with. For instance I am not sure it is correct to imply that President Nixon "[rose] to the challenge of [his] times" - at least not all the time! But there does seem to be a crisis of leadership around the world - and it is not at all clear how to solve it. Food for thought. (Hat tip: Marginal Revolution)

4) Stephen Roach on globalization and how China fits into it. In an ideal world, the policy of engagement with China that was a staple of the 1990s would have continued unabated, and we would have had a chance to see if the forces of rising incomes and greater international integration ended up facilitating political and social modernization in this great country. Instead, events both in China and in the rest of the world conspired to interrupt and reverse the policy of engagement. The world is worse-off for it.

The Sanctions on Russia

Prior to our first class, I made a quick trip to France. Some of my friends there were voicing hopes that the West's robust reaction to Russia's invasion of Ukraine - economic sanctions coupled with arms shipments and aid to Ukraine - would finally bear fruit in weeks to come. I have more doubts. The arms shipments and aid seem to be too little too late, as Russia has made some progress militarily in the Donbass region. And the sanctions in many ways have hurt the West more than Russia. Witness the energy crisis which is particularly pronounced in Western Europe due to the shortfall in Russian oil and gas shipments, contributing to a worldwide rise in the price of these essential energy sources. 

Recently The Hill published a very cogent article by Brahma Chellaney on this very theme. The author goes through the many ways these sanctions have hurt Western economies while having a relatively small effect on Russia's. Part of the reason for the latter fact is that Russia was able to redirect much of their energy exports to other countries (China, India). Even at discounted prices, given the increases in the prices of crude oil and natural gas, these can be highly lucrative sales. This article is recommended reading, on themes we will discuss throughout this summer's iteration of Global Trends.

The Future of Populism

Over at Bloomberg, Adrian Wooldridge discusses the recent fall of Boris Johnson as Britain's PM. The article raises interesting questions about the future of populism. On Sunday, at the first in-person meeting of the Global Trends class, we will discuss the structural factors that led to the emergence of populist movements in multiple countries around the world. Wooldridge is correct to point out that these movements have witnessed setbacks in recent months - first with Donald Trump's failure to get reelected, and now with Boris Johnson's resignation. Macron's reelection in France is also a case in point. It is true that, in many ways, populist movements are self-defeating: the sorts of policy prescriptions that they offer are unlikely to deliver the results that their electorates hope for, and their lack of experience in government makes for, shall we say, rocky tenures. Wooldridge does a great job describing this self-destructiveness.

But, like Wooldridge, I would not read too much in these recent events. The underlying factors that are associated with the success of populist political movements have not drastically changed: rising inequality, stagnant economic opportunities, continued globalization in terms of trade and immigration, and a reaction against progressive value change (highlighted in the readings for Module 3) - among other factors. It is possible that electorates will realize that populist movements do not have magical answers to their concerns. But until these concerns are addressed in meaningful ways by the political system, the systematic rejection of incumbents that we tend to see in country after country will likely continue.

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.