Here are a few articles that caught my eye and provide useful recent information that will affect our discussions in class:
1) The great Paul Krugman on how to think about inflation in a world of zero nominal interest rates. The article is complete with an erudite reference to Richard Strauss (can you spot it?). Krugman is at his best when he brings his vast knowledge and understanding of economics to bear on the great issues of our times.
2) One likely effect of the COVID pandemic will be to accelerate automation. From The Guardian, here is a fascinating article on efforts to reduce inter-personal contacts in South Korea, using automation - to build a so-called "untact" society.
3) Sent to me by my former student James Y. Kim (FEMBA 2023), a superb article from Foreign Affairs, authored by two political science professors, on the current state of liberal democracy. The article covers many themes of the Global Trends class, and as such would make excellent introductory reading for the course. Thank you, James!
4) One the biggest environmental issues facing India is the annual burning of crop waste ("stubble burning") in the region near New Delhi. This results in off-the-charts urban air pollution in winter months, with enormous health consequences. Now, it appears that a clever technological solution may help limit the problem. Bloomberg Green has the details. As I strive to cover more environmental issues in Global Trends, this article and the good news that it contains could not come at a better time.
What is striking about images like these is how much they reveal about underlying autocratic instincts in human nature: men are prone to arbitrarily abuse their power when given the least excuse to do so. COVID gave closet autocrats around us the very excuse they needed to succumb to their worst instincts. Australia is a case in point, as I discussed before.
I hope Australian voters will severely punish their leaders at the next election, but I am not so sure they will. As Senator Amidala famously said, "this is how liberty dies...with thunderous applause."
1) Via the excellent Bari Weiss, an article from ProPublica and the New Yorker, on the devastating effects of COVID-related school closures on children, especially the poorest and most vulnerable of them. The effects on US inequality will be profound and will last for decades.
Is the situation similar in other countries? I would guess the tendency is there, but less pronounced. China recently cracked down on gaming. Such a dramatic policy would not be feasible in Western democracies. In fact, it is not clear what policy intervention could address the issue effectively.
2) What are the geopolitical consequences of America's withdrawal from Afghanistan? They may not be as obvious as one would think, argue Yaroslav Trofimov and Jeremy Page in a wide-ranging WSJ article.
3) Relatedly, Harvard's Joshua Kertzer penned an insightful article in Foreign Affairs, on the credibility and reputation costs of the Afghanistan withdrawal. I learned a lot from this article - in particular that credibility and reputation are not the same thing. Credibility is context-dependent so world powers should not interpret the US withdrawal from Afghanistan as necessarily representing a lack of commitment to pursuing other goals. In that sense, the US may not have necessarily lost credibility. Reputation is a more all-encompassing concept and Professor Kertzer argues that the US did indeed suffer a loss of reputation, especially in terms of perceptions of its competence. Just semantics? You be the judge.
4) A recent randomized controlled trial (RCT) in Bangladesh is the most convincing evidence that I have seen that masks reduce the spread of COVID. Other evidence cited in favor of mask mandates until now relied on observational studies, from which causal inference is dubious. And existing RCT studies on the effectiveness of masks in preventing the transmission of respiratory diseases tended to find weak effects, though most of these studies were not about COVID per se. Note however that the Bangladesh study finds considerable heterogeneity in the effectiveness of masks, especially across age groups and mask types. And it is not clear that the findings apply to the Delta variant, as the intervention occurred from November 2020 to January 2021. Details of the study can be found here.
5) Senator Manchin (D-WV) on why he won't support the $3.5 trillion reconciliation package now being crafted in Congress. In this summer's offering of Global Trends I predicted that this package would not pass (a recording exists!). I hold to that prediction. Moreover, let me specify things more precisely: I did not predict: "this specific package will not pass, but some watered-down version will pass". I predicted that nothing would pass. The infrastructure package that already passed the Senate is another matter, but if I had to bet I would wager that this one won't become law either. I think it will die in the House, from lack of support from the progressive wing of the Democratic Party. But I am much more confident of the first prediction.
It is Friday so I'm going to start compiling my weekend reading list!
1) Yesterday in Global Trends, someone mentioned the EU's plans to take the carbon emissions generated by imported goods into consideration when setting tariffs. The proposal amounts to a tariff on products with a high carbon footprint (in policy jargon, this is called a "carbon border adjustment", which in plain language means a tariff). Here is a primer on the issue. Reuter's recently covered the US reaction. My view is that, while well-intentioned, this will backfire. The EU needs its trading partners to be on board with reductions in carbon emissions. Slapping tariffs on their products risks antagonizing many of them (see here for instance). The potential for retaliation means that this will amount to just another ratcheting up of protectionist tendencies worldwide. What is needed is more cooperation on climate policy - not more antagonism.
2) One implication of COVID that we have not much discussed in class is how it will change urban landscapes. The WSJ recently covered this very issue, in an essay written by Richard Florida and Adam Ozimek. Recommended.
3) Freedom House recently downgraded India's democracy rating from "Free" to "Partly Free". You can see the report here, and the specific India rating here. As I suspected, the decline in the score is a relatively modest 4 points (out of 100), from 71 to 67, but this makes India cross the threshold between "free" and "partly free". From the Washington Post, here is one take on the issue, by Rana Ayyub. From the Modi government's Chief Economist, KV Subramanian, here is another take. So now you see both sides of the debate...
4) Beeple's digital artwork (or collection of artworks) sold for $69.3 million to Singapore based Metakovan, who paid with cryptocurrency (Ether). Bloomberg has the goods. Does Christie's willingness to be paid in crypto represent a step forward in the broader acceptance of this currency?
5) Over at NPR.org, a report on the Quad - a grouping of the US, India, Australia and Japan that recently held a virtual summit. The geographic position of these powers is telling - they are disposed on a ring around China, and the Quad is rather transparently an attempt for form an alliance to counter China's advance. Here is a recent Washington Post Op-Ed by Anthony Blinken and Lloyd Austin (respectively, US Secretary of State and US Secretary of Defense). I hope you notice the pattern in these articles: containing China seems to be a main emphasis of the Biden Administration's foreign policy. Here is a further article on the Quad, also from the Washington Post.
The European Union is in a funk. The project of building an ever closer union of European nations began shortly after the Second World War, in a gradual process of integration and expansion. The hope Europe could achieve peace and prosperity through greater integration initially bore great fruit. But since the late 1990s, a series of setbacks and reversals placed the project in greater doubt. A major landmark was the rejection of the EU constitution by the French and Dutch electorates in 2005. Later, during the Global Financial Crisis, European monetary policy functioned adequately, but the lack of a fiscal union led to much rancor when some members, like Greece, were revealed to have spent too much, taking advantage of low common interest rates. More frugal, richer partners like Germany placed painful conditions on aid to Greece, and the episode led to strains in the union, which demonstrated a clear reluctance to transfer resources across borders. And in 2016, we had the Brexit vote, which led to the UK's exit from the bloc.
The EU needs a major win. But none is forthcoming. The COVID pandemic offered an opportunity for EU member states that they could work in solidarity. But things started with a very nationalistic approach to securing basic protective equipment. There was then an attempt to source vaccines centrally for member states, But this has now proven to be a complete failure. The EU nickel and dimed the pharmaceutical companies, and these in turn found it more beneficial to serve other markets first. Now the EU lags far behind the US and the UK in vaccinations. Indeed the UK, until recently a member of the EU, did much better going its own way.
This is the broad context for a recent Bloomberg Opinion article by Andreas Kluth. The piece elaborates on the themes I outlined above, and describes how the EU seems to be failing on a number of fronts: in fighting the pandemic effectively; in preventing some member states to answer the sirens of autocracy; and in formulating common stances on matters of foreign policy, for instance vis-à-vis Russia. The bottom line:
Since its beginnings in the 1950s, European integration was always at heart a vision for addressing the continent’s internal squabbles, especially the ancient enmities between member states such as France and Germany. In this sense — as a peace project — it has succeeded.
But along the way, the bloc has failed to turn itself into what French President Emmanuel Macron calls a “Europe that protects.” The EU cannot credibly defend its citizens against external threats, neither a military one from Russia or an epidemiological one from wherever the next virus jumps species.
2) Over at the WSJ, the excellent Jon Hilsenrath discusses the long term effects of the COVID pandemic, with a particular focus on lost human capital. Lost schooling due to lockdowns and school closures is likely to have lasting effects, especially for younger children, and to affect income levels and income inequality for a long time.
3) Bloomberg covers the new chief economist of the US Labor Department. Janelle Jones has a remarkable life story, and some very powerful ideas on how to make the recovery from COVID equitable. Recommended.
4) Bloomberg covers the Markus Academy - brainchild of Princeton economist Markus Brunnermeier. These events are one of my go-to places to stay appraised of current debates in macroeconomics.
5) As we embark next week on a discussion of the impact of population aging on the world economy, a pair of articles highlights the challenge of low fertility in two East Asian countries. The first, from Bloomberg, discusses how South Korea now has the lowest fertility rate in the world, at 0.92 children per woman. The second, from the WSJ, discusses how low fertility constitutes a major challenge in China's quest to become the world's largest economy.
6) The WSJ’s Greg Ip on current debates over inflation. This is, of course, the subject of our upcoming case discussion this Thursday... the article provides a very balanced view of the state of the policy controversy.
7) In the long history of bad policy ideas, rent control stands out as one of the worst. It distorts housing markets without helping those it is meant to help. Here is a particularly egregious example, from Berlin.
I may add more as I discover noteworthy articles over the weekend!
Starting tomorrow in Global Trends, we will begin to study risks and imbalances in a multipolar world. We will start with the rise of new geopolitical actors, move on to the emergence of new voices and interests, then study economic risks stemming from debt and aging, and conclude with a module on global environmental and health risks.
One aspect of risks and imbalances that has recently emerged at the forefront of the economic debate in the United States is inflation. Inflation worries have been present ever since the Fed started its unprecedented program of monetary easing in the aftermath of the Global Financial Crisis of 2008, and since the US Federal Government started running historically large budget deficits in the same period. These worries never materialized. In fact, if anything, inflation remained mostly below the Fed's guideline of 2%.
Recently however, new worries have emerged. In my view, the circumstances justify these worries. As of early 2020, the US economy was operating at or close to full employment, with pretty solid GDP growth. Then the pandemic hit. The pandemic was not your typical demand shock, where people suddenly curtailed demand. Rather, it was akin to a supply shock, where production was ordered halted (at least in some sectors like travel, entertainment, etc.). People wanted to consume these goods, but it was forbidden. In the wake of this situation, the US government did what it knows best: the Fed injected massive amounts of liquidity, and Congress authorized massive amounts of public spending, financed by debt. While this did not prevent some businesses from shuttering, it at least preserved the banking sector's access to liquidity and also supported consumer disposable income. The issue is what happens once the pandemic eases and people's pent-up demand becomes manifest. In supply and demand terms, there will be a shift outward in aggregate demand, but with a lot of business shuttered and capacity having become restricted, supply will be for a time inelastic. This is a recipe for rising prices. The broad availability of liquidity may render this inflation possible, and politicians will have enabled the increase in aggregate demand by making sure that household's spending power was preserved - even perhaps increased.
This is the nature of the debate. Some argue there is no sign of inflation. Others see the first indications of rising prices: businesses seem less inclined to offer discounts, which is not crazy since consumers' spending power seems very robust. Others point to the lessons of history. This excellent Bloomberg article by Ferdinando Giugliano makes the point eloquently (if you must click on only one link from this post, let it be this one; the article is very close to my own thinking on the matter). The issue is not what we see in the price data now; we are still largely in lockdown mode. The issue is what will happen when we reopen. Don't you want to go shopping, to the restaurant, and take a lavish trip somewhere? I sure do! If many do that, combined with lax monetary and fiscal policies and mounting public debt, all the conditions for a return of inflation will be fulfilled.
It is in this broad context that two leading economists, Larry Summers and Paul Krugman, recently debated the Biden administration's efforts to pass a $1.9 trillion stimulus package. Summers is worried this is too large, and will fuel inflation while crowding out future spending requirements (particularly on public investment in infrastructure and health). Krugman was initially more dovish, but as the conversation evolves you will see that the two economists are not that far apart. What is notable, of course, is that they are not known as being particularly skittish about monetary accommodation and fiscal profligacy. But they are first and foremost good economists, and I think they understand we are entering uncharted territory.
I came across several articles today looking into the accelerated pace of automation that exists nowadays. The first was from the Wall Street Journal, and covers the likely effect that Andy Jassy, the incoming CEO of Amazon, will have on the pace of automation at Amazon: he may well accelerate an already extensive reliance on automation and AI. A quote from the article:
Throughout the supply chain of Amazon’s e-commerce operation, humans are onboarded rapidly into jobs that require almost no training. This is possible because of how directed and constrained by algorithms and automation these roles have become. In Amazon’s more advanced fulfillment centers, for example, employees who pick items for orders from robot shelves are surveilled by AI-enabled cameras. A cloud-connected scanning gun monitors the rate at which they pick items, the number and duration of their breaks and whether they’re grabbing the right items and putting them in the right places. Managers need only step in if software reports a problem, such as a worker falling behind. (...)
Software, too, has already replaced the humans who would usually handle the accounts of retail partners. Even big brands that decide to sell on Amazon are for the most part dealing with the company’s automated systems. AI almost entirely governs how sellers are treated on Amazon’s marketplace, and it isn’t always easy to work with, says Jason Boyce, who was for 17 years a top-200 seller on Amazon, and who subsequently founded Avenue7Media, which helps companies sell on Amazon’s marketplace.
There was also a pair of Bloomberg articles that looked at the effects of COVID on automation. Apparently, the number of orders for robots is at an all time high. And the acceptance of automation, despite its effects on jobs, may have become greater in the age of COVID since people understand that automation has the potential to help limit human contact, allowing more social distancing.
I previously blogged here about the effect of COVID on automation. I also had a few outstanding Global Trends presentations on this topic in the the 2020 iterations of the course. The accelerated pace of automation we are witnessing is one reason COVID likely will contribute to further increases in inequality around the world.
1) The WSJ featured an article on how the COVID crisis is accelerating the decline of cash as a method of payment. It is worth clicking on the links embedded in the story. It is closely related to what we discussed last Thursday, and also very much in line with a general theme we will repeatedly see in Global Trends: the COVID crisis is most likely to accelerate trends that were already in motion before its occurrence, rather than to represent a reversal. This is the case for income inequality, social strife, political polarization, the retreat from globalization, the mounting tension with China, the trend toward automation, the generalization of easy money policies, and the decline of cash...
2) Also in the WSJ, Greg Ip opines on the role of easy money in fueling, at once, record stock valuations and mounting government debt. Both worry me greatly - more than they seem to worry other economists. That is especially the case for mounting government deficits and debt, as we will discuss in Module 9. If the massive injections of liquidity that we have witnessed ever lead to inflationary pressures, the FED may have to start raising rates. A huge stock of public debt could make this very expensive for the government. The very demand for loanable funds that emanates from the public sector may in itself put upward pressure on rates, ultimately. Remember - interest rates have nowhere to go but up. I expressed these concerns last August. My concerns have not eased since, though the scenario I described could be quite removed from us in time.
UPDATE: People from both sides of the political spectrum seem to be voicing the same concerns as I have on the possible inflationary effects of current US macroeconomic policies: Michael Bordo and Mickey Levy do so over on the Wall Street Journal opinion page, while Larry Summers expresses similar worries in the pages of the Washington Post.