Global Economics and Management

Research Update

The month of July has been a productive one for my research agenda:

1) My long-in-the-making paper on the modernization of a French village in the 18th and 19th centuries, written with my PhD student Guillaume Blanc, is finally forthcoming in published form, at the excellent Explorations in Economic History. This is a very unusual paper for me, as it studies the modernization of a single village over a long period of time (I usually adopt a more macro - and more contemporary - approach to studying economic issues). We gathered very detailed data on individuals living in this village between 1730 and 1895, to trace out in great detail the sequencing of demographic, educational and economic change. A little known secret, not revealed in the paper, is that the village in question is the ancestral village of my mother. The oldest ancestor I can trace there was born around 1661. It was a lot of fun to work on this project over the last few years, as I was able to learn a lot not just on my own lineage but also on the context in which my ancestors lived, and the changes that they experienced over the generations.

2) My paper on the link between preferences for Trump and social capital is finally presentable, and has been submitted to a journal. WIth my colleague and coauthor Paola Giuliano, we argue that locations that have lower social capital tended to support Trump to a greater degree in the 2016 election. It is a straightforward paper, but if you believe our result, it suggests that one way out of the populist wave is to work to rebuild civil society. Easier said than done, especially in times of social isolation and impersonal social media.

3) My new paper with Klaus Desmet on spatial variation in COVID-19 severity across counties of the United States has been revised, and submitted to a journal. In this paper, we show that there are vast and persistent differences in disease severity across the US, identify the factors that explain this variation, and suggest that public policies should be tailored to local circumstances. We also show that counties favorable to Trump in 2016 experience lower disease severity, but that this association disappears when controlling for factors like population density and racial composition that are associated with both Trump support and disease severity. Once accounting for these factors, Trump-leaning counties actually have worse disease severity - perhaps because the policies they put in place or the behaviors their inhabitants adopted to fight COVID were less aggressive than in other areas.

The Situation in India

This evening I will be moderating a Center for Global Management event that will include several alumni of the 2017 and 2019 Global Immersion Course to India. This is a course that is dear to my heart and that I have led for about 5 iterations so far. I was eager to conduct a similar course (an EMBA residency) to India this September, but the pandemic intervened and we had to postpone it.

At any rate, the meeting is an opportunity to take stock of the situation in India. I plan to discuss the state of the pandemic, the state of the economy, and the geopolitical issues surrounding India, China and the US. I will be joined by Avi Agarwal (MBA 2010), the co-founder and CEO of CreditVidya, a leading fintech startup based out of Hyderabad. Both groups of students met with Avi on the occasion of the immersion courses, so it will be a great reunion for all concerned.

Here are a few resources that I will rely on in my discussion. I post them here for reference, in case I do not have time to go through them during the session, and also for my current Global Trends students, many of whom have an interest in all things related to India. I hope they are helpful!

• To learn about the state of the COVID pandemic in India, you can do no better than... Wikipedia!
• A major COVID hotspot in India was Mumbai. This WJS article tells the amazing story of the pandemic in that amazing city.
• The IMF's June World Economic Outlook forecasts a 4.5% GDP contraction in 2020 in India. That would be the first year of negative growth since the reforms began in 1991.
• The pandemic and the resulting lockdown imposed in late March 2020 have led millions of migrant workers, now out of work, to seek a return to their villages of origin. This return migration involved unimaginable hardship and heartbreak. A pair of WSJ and NYT articles illustrate this tragedy vividly.
• In the latest edition of The Economist, one of the leading stories deals with the frayed relationship between the US and China. Does this deterioration create the conditions for a rapprochement between the US and India? I think so, especially because India-China relations are not going so well either. I recently wrote about the latter subject here, and discussed the broader issue of India-US relations at a recent event of the Asia Society.

A Few Global Trends Links

In Part III of Global Trends, we learn about some broad geopolitical trends. Lately, I have come across various articles that discuss some of these salient global issues. It won't surprise you to learn many of them concern India and China! Here it goes:

1) The Wall Street Journal recently had a detailed report of the state of the India-China dispute on their border. The pictures and infographics are particularly recommended. This is one of the world's major hotspots and an unfolding crisis. I previously blogged about it here and here. 

2) India in 2018 passed an unprecedented law providing medical coverage ("Modicare") to 500 million Indians. Health care costs are low in India, but the law's reimbursement rates are not very generous, which will force providers to lower costs even more. This Bloomberg article describes the law through the lens of a single provider, Dr. Shetty, who must confront the challenge of providing health services under Modicare. It is a fascinating, real-world account of the challenges faced by the health care sector in India. Highly recommended.

3) Nick Eberstadt of AEI wrote a great article over at Foreign Affairs on the role of demographics as a source of power. The article is one year old, but still very topical (demographics don't change that fast!). This is one of the major themes of Part III of Global Trends. The article discusses how demographic trends will favor India and other developing countries, but not China and Russia, countries with declining demographics. The US is somewhere in between, thanks to immigration, but this relative demographic dynamism is under obvious threat. I particularly like how the article gives a general overview of global demographics.

4) Back in the realm of geopolitics, the issue of Huawei's standing to contribute to the development of 5G technology is back in the news (WSJ). Indeed China is threatening to retaliate against Western communications equipment companies like Nokia and Ericsson in the wake of moves to ban Huawei from 5G development in several countries (most recently the UK). Yet another example of the disintegration of international linkages that had been growing ever since China started opening up to the world in the late 1970s. Now all this is being threatened. Whose fault it is - I will let you decide. What I do believe is that China has more to loose from these sorts of threats than the countries to which they are directed.

Arvind Subramanian on Thomas Piketty

In the latest issue of Foreign Affairs, I bring you Arvind Subramanian's review of Thomas Piketty's latest book. Arvind was a former IMF economist and a former chief economist of the government of India. Recommended (the review - not necessarily the book!).

COVID-19, Technological Progress and Automation

I know many of you are thinking about how the trend toward greater automation will be affected by the COVID-19 pandemic. In my own life, I have experienced an accelerated pace of technological change in the few months since the onset of the pandemic in the US. As a professor, I had to accelerate the move toward online teaching. Classes that were either fully on campus (one section of Global Trends in the Spring) or hybrid (like this summer's section) had to move to a fully online format. All our research seminars now take place via Zoom, which creates the potential to vastly increase the size of the audience (some predict this will create a "winner-take-all" academic market, where only the best scholars with the most compelling papers will attract any interest, the other speaking to empty virtual auditoriums). And we in academia are all learning to improve our remote work habits, using all the features of Zoom and Skype to best effects. It is fair to say that, as a result, my research productivity has surged since the beginning of the pandemic. Moreover, I have more time, because I no longer need to bother with offline distractions - travel, coffee with colleagues, PhD students barging into my office... (Just to clarify - I greatly value, and miss, those aspects of academic life - but they are gone for now, freeing up time to think, read and write).

Recently my colleague Nick Bloom showed that an astonishing 42% of the US workforce now works from home full-time. This is a change that will have profound consequences. It is unlikely to continue to the same degree once the pandemic is gone, but we are experimenting with new ways of producing value, and those innovations will surely have persistent effects.

Remote work is one aspect of the technological changes that COVID-19 has accelerated. Another is that the pace of automation and the speed of adoption of artificial intelligence are likely to accelerate. The WSJ has a great example today related to the meat packing industry.

UPDATE: A new NBER working paper takes a deeper look at the likely effect of COVID on automation.

US Tech Companies and the Hong Kong National-Security Law

China's imposition of a national-security law in Hong Kong, which is likely to curtail freedom of speech in the autonomous region, is causing quite a headache for US tech companies like Twitter, Google and Facebook. These companies, until recently, operated in Hong Kong under a model very similar to that which applies in industrial democracies. But now, they face a trade-off identical to that faced in the Google in China case that we discussed in class: Leave Honk Kong to refuse to be part of China's censorship regime, or stay there and risk the ire of their more liberal* constituencies in the US and elsewhere, not to mention compromising their core principles. 

The Wall Street Journal has the details. This is a case to follow, as it illustrates many of the themes we cover in Global Trends, in a way that is of direct relevance to the tech sector.

(I employ the term "liberal" here in its European sense rather than the meaning commonly understood in the US).

On the Relationship between India and China

In Global Trends, I make a big deal of India and China. Jointly, these countries represent over one third of the world's population. They have experienced rapid economic growth in recent decades, and can rightfully be said to belong to the world's major powers - and rising.

The bilateral relationship between India and China is not discussed as often as it should in the media. But given what I just mentioned, we really should be paying more attention. This relationship has been deteriorating as of late, due to a border dispute in the Sikkim region. We will discuss the specifics of this border dispute later in class, but things seem to be degenerating. In retaliation for the killing of 20 Indian soldiers (little is known about what truly transpired), India has banned all Chinese apps from the country. The Modi government seems to be contemplating other possible steps, though these would likely be quite costly not just for China but also for India. 

These developments are yet another example of the disintegration of international ties that we are witnessing in this period of retrenchment. I don't expect anything good to come out of it, however legitimate India's reasons for taking these actions. Most likely, it will hurt both China and India. The only silver lining I see is that the deterioration of China-India relations will bring India closer to the US. I have been puzzling at why, for decades, the world's two largest democracies have not had closer ties. That could well change.

Where Has All the Cash Gone?

In Module 4 of Global Trends we will be discussing monetary innovations. For instance, we will study the unprecedented monetary policy tools that the FED (and other Central Banks) developed in response to the 2008 Global Financial Crisis. During that event, the FED not only brought interest rates close to zero, but in tandem it made very large amounts of liquidity available to the financial system and to the economy. These injections of liquidity took sometimes unconventional forms, such as purchases of many kinds of assets (beyond Treasuries) that the FED previously did not purchase. For instance, the FED ended up with large quantities of mortgage-based securities on its balance sheet. The result of all this was a massive expansion in the FED's balance sheet, from about $870 billion in August 2007 to $4.5 trillion in early 2015 (source). In the aftermath of the crisis the FED tried to shrink its balance sheet, but all it ever managed was to bring it down to $3.8 trillion (August 2019) - still much higher than pre-crisis levels.

As soon as September of 2019, the FED started to expand its balance sheet again. In the aftermath of the COVID-19 crisis it exploded, and now stands at over $7 trillion. Where is all this money?

One answer can be found on the FED's own website. If you go here, and choose the chart entitled "selected liabilities of the Federal Reserve", you will see that there has been a recent jump in deposits of depository institutions at the FED. These are the reserves that the banking system holds at the FED. Bank are required to hold a certain percentage of their deposits as reserves at the FED, but they can choose to hold more than the legally required percentage. This, clearly, is what they have been doing - not just recently, but also during the aftermath of the 2008 financial crisis. Instead of loaning out the extra cash that the FED created through its asset purchases, they chose to hold it at the FED, so that these money balances were never actually put in circulation. Banks wanted to do this because, since October of 2008, the FED started to pay interest on bank reserves. This is a major new tool that allows monetary policymakers to fine-tune cash in circulation. Banks still have a cushion of cash they can use if they need to lend or if they get in trouble, but with the FED paying reserves they don't feel a strong urge to lend (especially when the interest they would earn on these loans is so low). And if they do, which could result in inflation, the FED can always pay a higher rate of interest, to rein banks in.

(Another category that seems to have increased steeply are the balances that the US Treasury holds at the FED. I don't want to dwell on this here, but you can find a clear explanation of what is going on at this link).

On the same chart you will see a steeper-than-usual recent increase in currency in circulation (which is a liability of the FED because anyone with dollars can redeem them for real goods and services). It pales in comparison to the near doubling of the FED's balance sheet since September 2019, but still - it does represent an increase. Combined with a steep rise in the the private sector's savings rate, it means that US firms and households are cash rich.

This is where a great recent article in Bloomberg comes in. The article explains that Americans are hoarding much of the excess cash that has actually been put in circulation. Here is one of the stunning charts in the article:

In other words, not only are banks holding excess cash reserves at the FED, but households (and some firms) themselves are flush with cash that they are not spending. Of course, they can't really spend it, since they are either under forced or voluntary lockdowns due to COVID.

In this context, should we worry about inflation? I don't. The cash balances that households have can be mobilized when the health crisis abates, to fuel a recovery in demand. We are not there yet, and when we are, this could create inflationary pressures. But the FED knows quite well how to manage the amount of money that is actually in circulation. They can cool things down if they get overheated. But we are no where near that point now. Indeed inflation expectations are at an all time low.

In general, the above-referenced Bloomberg article is a truly excellent (and short) way to gain a good understanding of where the US economy stands, and of the main trade-offs that economic policy-makers face. Recommended.