Global Economics and Management

Some Items We Discussed Today

In class today I mentioned a few news items relevant to the topics we discussed:

1) The debt forgiveness plan announced by President Biden last week comes with a reform of Income Based Repayment (IBR) plans. These plans open the door for universities to game the federal student loan programs to their advantage. I first read about this in Marginal Revolution. This linked to an excellent article by Matt Bruenig. This article itself linked to a 2013 post in a law blog that goes through the example of Georgetown Law School, which I mentioned in class. So you have to dig a bit to get all the details. I want to be totally clear that I do not favor this behavior. In fact, I think the steep rise in tuition that institutions of higher learning have imposed in recent decades is a big problem - one major theme of Global Trends is that a lot of the world's problems problems would be alleviated if we increased access to education. But people and institutions respond to incentives, and the debt forgiveness plan does nothing to address the fundamental problem of college affordability. On the contrary it is likely to exacerbate these problems, by making students more price insensitive.

2) Senator Warren said today that Fed policies (raising interest rates) could tip the US into a recession. She is correct. As I mentioned in class, that is the point of these policies - to tamp down demand so that price increases moderate. More precisely, it would be nice if we could tame 9% inflation without throwing the economy into recession, but the lessons of history suggest that would not be possible, because the slowdown in demand that would be required to reduce inflation from 9% to (say) 3% is likely to be big enough to imply a recession. When Paul Volcker took a similar policy decision in 1979-1980, the US experienced a very severe (though short-lived) recession. To this day we refer to it as "the Volcker Recession". The alternative might be sustained inflation for a period of time - choose your poison.

3) Relatedly, I mentioned an academic article presented at the Jackson Hole central bankers' symposium, pointing to the fact that a successful taming of inflation would likely require action on both the monetary and fiscal fronts. Here is Bloomberg's coverage of this paper. Here is the paper itself. Here is broader coverage of the Jackson Hole symposium.

Two Geopolitical Updates from Foreign Affairs

The latest issue of Foreign Affairs features two excellent articles providing updates and analysis of some salient geopolitical issues. Both are relevant for our discussion at the next meeting of Global Trends. 

1) The first article is on US-China relations, by Jessica Chen Weiss. This article seems to me to carry the voice of reason. It calls for a more measured and intelligent approach, on the part of the US foreign policy leadership, to its relationship with China. US policy is too reflexively anti-China. China-US economic relations are characterized by much interdependence - most of it for the good of both countries. China-US strategic relations feature numerous points of contention that could degenerate into conflict and will require consultation and discussion. Placing the US in a mode of systematic opposition to China carries dangers from the perspective of its own national security - and economic prosperity. The US needs to tread carefully - and of course, so does China. The article provides a great opportunity to learn about the myriad issues that characterize the most important bilateral relationship in today's world.

2) The second article is on the status of the Russia-Ukraine conflict, by Dara Massicot. The article highlights the difficulties faced by the Russian military as it tries to advance in Eastern and Southeastern Ukraine. I am sure people will disagree on the extent of the challenges faced by Russia, given the fog of war. And I have yet to see a similar assessment of the difficulties faced by the Ukrainians. What seems increasingly clear, however, is that this conflict is likely to drag on for many more months, if not years. Time will tell if both sides have the stomach for such a protracted conflict.

Business in an Age of Political Polarization

Module 8 of the class deals with the rise of new interests. Unusually for Global Trends, the focus will be mostly on the US, though the lessons apply more broadly. We will discuss the emergence of new voices in a society that is growing more diverse. We will discuss whether there is a growing cultural divide in the US - along lines of gender, race, national origin, religion, political affiliation, etc. The answers may sometimes surprise you. But when it comes to politics, there is an undeniable increase in political polarization. This polarization is most pronounced in Congress, for reasons that have to do in part with the manner in which candidates are selected. But it is also visible among the population itself. Growing political polarization in the US has profound ramifications for politics, but it also has major consequences for business.

This is to introduce a far-ranging article on the politicization of business, which appeared in Newsweek recently. It's a fascinating read and deals with many issues we have discussed in Global Trends in the past. The article focuses on the rise of "right-winged" business, and in this sense it may seem a bit one-sided. My view is that in a polarized society, there is growing pressure for businesses to align with one or the other side of the political spectrum - this is a pretty symmetric game. As some businesses align more with either side, there is growing social pressure by the other side to create brands and services tailored to their political preferences. Hence the fascinating example of Harry's razors versus Jeremy's razors that the article describes. 

Is it a good idea for companies to take political positions? My personal view is that they have to tread carefully. There are issues of basic social justice and environmental responsibility that companies cannot avoid getting drawn into - justifiably so. But when corporations become perceived as too politically aligned, the risk of a backlash exists. The business world runs the risk of becoming politically bifurcated. Personally, I would not want to live in a society where all my consumption choices are politically patterned - where I have to choose between a right-winged razor or a left-winged razor. Razors should not have a political alignment. Neither should blue jeans, coffee, fried chicken, or sporting goods. Beyond consumers, corporations themselves should not want to be backed into a political corner: whatever your point of view, about half of society aligns with the other point of view! It seems problematic for companies to give up on half of their potential customer base, which is what we would end up with if all of business became politically patterned (look at what happened to cable news for instance - with CNN now trying to extricate itself from this self-defeating equilibrium). This is a great debate, and one that I am sure we will have a chance to revisit in class.

PS: The Newsweek article cites two UCLA Anderson affiliated scholars: my colleague Valentin Haddad, who teaches finance at our school, and Vanessa Burbano, who obtained her PhD with us. 

The Coming War in Taiwan?

This is the first of several posts I plan to write on the themes of Part III of Global Trends. The first module of this part of the course concerns the rise of new powers, and the concurrent geopolitical uncertainties that will result. In the past, we discussed China's territorial claims in the South China Sea as an example of the growing clout of new powers. Last February, I switched the case to the Russia-Ukraine conflict, for obvious reasons. Right now, that conflict is still very much in the news as Ukraine launches a counteroffensive. But the issue of a possible invasion of Taiwan by mainland China is at the forefront of observers' concerns. 

Is China likely to make a move on Taiwan anytime soon? A pair of articles in the WSJ and in Bloomberg make the case for alternative points of view. In the WSJ, Hal Brands and Michael Beckley, two academics, argue in the affirmative in the journal's latest Saturday Essay. They point to the urgency of making plans for the worst - in particular to help Taiwan build up its military capabilities, to prepare for a war involving the US in the Pacific, and to start designing economic sanctions against China in case of an attack. 

Over at Bloomberg, Admiral James Stavridis, a former supreme allied commander of NATO, thinks instead that we are years away from a conflict involving Taiwan. He goes through five major reasons for why this is the case. 

These two articles illustrates the old Latin adage "si vis pacem, para bellum": if you want peace, prepare for war. They both agree that aggressive contingency planning needs to occur now to deter a conflict. They agree that a reunification with Taiwan is resolutely part of China's ambitions. They agree that if such a reunification occurs through conflict, it will be an immensely costly affair for China, for the US and for the world. Their disagreement is mostly over the timing of a possible attack, and over the urgency of the situation. However your views align, there is no doubt that this issue should be a major source of concern for the months and years to come.

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.