Global Economics and Management

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.