Global Economics and Management

Wage Convergence?

An important part of labor market dynamics over the last few decades has been the faster wage growth for white collar workers relative to blue collar workers. But this trend has recently reversed, as we discussed in class. In the excellent video below, the WSJ explains why, The answer: supply and demand, of course. Will this reversal prove durable? I have my doubts, because the fundamental forces that caused divergence between low and high pay workers in the last 40 years - technological progress without a commensurate growth in the supply of skills, as we discussed in class - are here to stay. Only time will tell whether something more fundamental is at play.

The Prospect of a US Fiscal Crisis

At our last Global Trends class, I was asked what major risk factors afflict the US economy. My answer was: the possibility of a fiscal crisis. Indeed, in the aftermath of the Great Recession and more recently during the COVID pandemic, there was an explosion of fiscal spending. More fundamental factors like the ageing of the population are also putting long-term strain on public finances, at both the federal, state and local levels, as entitlement spending is expected to rise steeply. And the recent increase in interest rates (initiated by the Fed to fight inflation) is raising the fiscal cost of public deficits, because interest payments on US public debt are rising on the portion of the debt with low maturity (for longer maturity debt, low rates were locked in, and the cost won't change until these bonds need to be rolled over). These various developments largely explain the recent downgrade of US public debt by Fitch.

Recently the Wall Street Journal ran a short feature on this situation. This includes an interesting graph projecting the amount of interest owed by the Federal government under various interest rate scenarios. What the article does not say is that this problem is almost entirely political. Indeed, a fiscal consolidation would entail either cutting spending growth (including entitlement spending growth) or raising taxes. The political will for either simply does not exist on either side of the political spectrum: within the Republican Party, there is disagreement on what is needed on the fiscal front, which may lead to yet another government shutdown (also at the WSJ, the great economist Alan Blinder tells this story effectively). As for the Democratic Party and the Biden Administration, they do not support reforming entitlement spending, and have set a very high income threshold for tax increases (it will be impossible to meaningfully address the fiscal situation simply by raising taxes on those making more than $400,000 - because there are too few of those).

If I could waive a magic wand, I would implement something along the lines of the 2010 Simpson-Bowles bipartisan report. That is, I would work on the spending side (for instance by indexing the retirement age to life expectancy and by working more aggressively to cut healthcare spending), and on the revenue side (for example by moving to a carbon tax and by implementing a consumption tax that could replace the current income tax). But there is simply zero prospect that this could happen in the polarized political environment that prevails now. When countries with big fiscal imbalances cannot get their act together, what often happens is that a fiscal crisis forces the reform upon them: lenders become reluctant to lend, borrowing costs rise, a recession follows, requiring deep structural reforms. For decades, the US has been protected from such a scenario because it was considered a safe haven and the dollar reigned king: the US government had not trouble selling and rolling over its debt, and was issuing this debt in its own currency. How long this can continue is anyone's guess, and it is true that fiscal doomsayers have been proven wrong time and time again. But that does not mean they will be wrong forever...

Political Obstacles to Technology Adoption

The most obvious obstacle to the adoption of new products is the absence of the requisite technology. Peter Thiel complained that we have been promised flying cars, and all we got were 140 characters. We can’t adopt flying cars as long as the technology to make cars fly hasn’t been invented !

Often, however, the main obstacle to the adoption of advanced technologies is not the fact that they don’t exist, but political and cultural barriers to their adoption. The Wall Street Journal today had a front page story on the case of self-driving cars. By most accounts, the technology to operate self-driving cars is quite mature. Companies like Google’s Waymo or GM’s Cruise have been testing their prototypes for years, and over millions of miles, with much success (you can often spot Waymo test vehicles driving around in Santa Monica, albeit with someone inside). But they have failed to make much headway in getting local and federal regulators to approve a more widespread use and commercialization of their technologies, and they face resistance from local populations. Even in tech-savvy San Francisco, a group called Safe Street Rebel is resisting the diffusion of self-driving cars, arguing that they are hazardous (of course, human drivers are also hazardous !). This is likely to slow down the adoption of this specific technology, but I believe that its potential benefits are so large that this resistance will fade with time - and with improvements in the technology.

I wrote a lot on the cultural and political barriers to technological adoption, earlier in my career. I was worried mostly about international technology diffusion, to poor countries, but the lessons apply just as well domestically, within advanced industrialized countries. Don’t underestimate the political and cultural barriers to technology adoption - just because you come up with a great product or technology does not mean it will be readily adopted!

Update on 8/10/2023: Cruise and Waymo got the approval they sought from the California Public Utilities Commission to operate more extensively in San Francisco. Time will tell whether they are similarly able to overcome regulatory barriers elsewhere.

AI in the Fast-Food Industry

Reporter Joanna Stern has a fantastic feature on AI in the fast-food industry in the Wall Street Journal today. The 6-minute video in the article is hilarious - the reporter tests the AI-powered ordering system at a Hardee's in Maryland, to see how adaptable the bot is. This involve honking, a barking dog, and baby screams. It also involves asking the bot complex nutrition questions, changing one's mind on the order - and other human traits that can confuse a machine. Of course, these wrinkles will be sorted out in due course.

The main economic issue with AI is whether it will augment or replace human labor. It is hard to see the particular use of AI as labor augmenting - it is almost certain that AI-powered fast-food ordering will reduce total labor - notwithstanding strong denials by the manager at Hardee's. The video - and the article - discuss just this point in ways closely related to what I expect we will debate in class at our next meeting.

Recommended.

Harlan County, USA

On Friday I was happy to speak with two Washington Post reporters who plan to cover my new paper, "Does Anger Drive Populism?", coauthored with Omer Ali and Klaus Desmet. This paper uses a unique dataset from Gallup which asked people about their emotional states on the day before the interview - including anger, sadness, worry, stress, and subjective well-being. The dataset comes from a daily survey of hundreds of individuals, so it contains millions of observations over the 2008-2017 period. We find that a county's average anger level is predictive of voting for Donald Trump (and Bernie Sanders) in the 2016 primaries and general election. We also find, however, that this correlation vanishes once we control for other dimensions of "negative affect" (worry, stress, sadness) as well as subjective well-being. Our conclusion is: "Our results indicate that a complex sense of malaise and gloom, rather than anger per se, may drive the rise in populism."

This is a short, straightforward paper, so my coauthors and I were surprised that it seems to be attracting so much interest from commentators. We have already been covered in the New York Times and in Marginal Revolution (a leading econ blog) - and now, of course, we are expecting a feature in the Washington Post. I think the paper hit a nerve, because people understand that there must be something to the idea that malaise and anger can feed political protest voting.

In the course of the conversation with the two WaPo journalists, interesting tidbits emerged. In our sample, one of the angriest counties in the US is Harlan County, Kentucky - in the heart of coal country in Appalachia. This county is famous for being the setting of repeated and violent coal miner strikes going back to the 1930s. The strikes that occurred in the early 1970s were the subject of a brilliant documentary by Barbara Kopple, entitled "Harlan County, USA". This documentary won an Oscar. On the lighter side, the TV series "Justified", starring Timothy Olyphant, takes place in Harlan County. This county represents a remarkable laboratory for social scientists trying to understand numerous trends in the US economy: rising of deaths of despair, the realignment of the working class from the Democratic Party to the Republican Party, and of course the rise of Donald Trump. Here is some striking data on Harlan County, from Wikipedia: 

• "By 2016, more than half of the county's income came from transfers from the Federal government such as Social Security, Medicare and Food Stamps."

• "It voted Republican for the presidential candidate in every election from 1880 to 1932. However, with increasing unionization in the coal industry, it became a Democratic stronghold for six decades (...), it voted blue in every election from 1936 to 2000. (...) In the 2004 Presidential election, Harlan County voted for the Republican Presidential nominee for the first time in 32 years; Republican incumbent George W. Bush received 60.2% of the vote. This rightward trend continued in 2008, when Republican Presidential candidate John McCain received 72.3% of the vote (...), Republican Presidential nominee Mitt Romney won the county over the Democratic incumbent Obama by a 64% margin (81.2% to 17.2%). In the 2016 election, its voters supported Republican nominee Donald Trump over Democrat Hillary Clinton by a 72.12% margin (84.87 to 12.75).

• "Mining employment in Harlan County rose to 13,619 in 1950. The number of employed miners had declined to 764 by June 2016. During the same period, the population of Harlan County declined from 71,000 to less than 28,000."

If you want to understand the rise of populism, you should try to understand what happened in places like Harlan County.

The Politicization of Business and Finance

The US is increasingly politically polarized. This will come as no surprise to those who have been following US politics for a long period. The consequences of this trend, which we explore in Module 8 of Global Trends, extend in very visible ways to the business world. Companies have increasingly become embroiled in political controversies. For instance, Bud Light's recent hiring of Dylan Mulvaney, a transgender social-media star, as a spokesperson seems to have backfired. On the shareholder front, activists have used their positions as partial owners of firms to push for changes in the ways these corporations pursue their objectives - either arguing for the adoption of ESG (Environmental, Social, and Governance) considerations, or on the contrary pushing back against them. Some of these involvements in political hot-button issues have caused some companies to have second thoughts, and to try to withdraw from controversial topics. 

Another notable change in the nature of corporate involvement in politics has to do with the changing political alignment of corporations. In the past, corporations were often aligned with the policy goals of the Republican Party, because of the latter's emphasis on low taxes and deregulation. In more recent times, however, corporations have more often aligned with the priorities of the left. In my view, this reflects their growing alignment with coastal, educated and higher income interests, both as employees and as customers. It also reflects the growing and concurrent rise of populism within the right side of the political spectrum.  A fuller, and much deeper, treatment of this topic can be found in an excellent recent feature by Brody Mullins in the Wall Street Journal, a sort of preview of the book that he is writing on this topic (I am fortunate to have been interviewed for this article, and make a short appearance in it).

A Détente with China?

US Treasury Secretary Janet Yellen just returned from a trip to China which was hailed by both sides as productive and cordial. Bloomberg and the WSJ have useful reports. This of course happened in the context of a relationship that, over the last decade or so, has been gradually deteriorating both on the economic and strategic fronts. We will examine these issues in some detail in this summer's offering of Global Trends. Suffice it to say that the 1990s policy of engagement with China (which actually goes back to President Nixon's 1972 visit to that country) had largely been abandoned, with the Trump administration's trade war with China a significant escalation in this process. The attempt to "decouple" the US and Chinese economies is now the subject of bipartisan consensus.

Or so it seems on the surface. In my view, the "decoupling" was always going the be an uphill battle. Entanglements that come from globalization are rarely easy to walk back from using the mere tools of policy, because the incentives that gave rise to these interactions to start with have a lot of staying power. Tesla, Apple, GM, Walmart - all these companies have deep and long lasting ties with China that result from that country being either a crucial supplier, or a crucial export market (or both). So when one looks at the data, one is often hard pressed to see any evidence of decoupling. A recent post by Chad Bown at the Peterson Institute makes this point eloquently: "US goods and services imports from China last year [2022] were the highest ever recorded."

This discussion illustrates the staying power of globalization even in the context of the very serious headwinds that it faces. Personally, I am not unhappy about this. I am now in the minority, but I have always thought that the policy of engagement with China - which had its heyday during the Clinton Administration and culminated with China's accession to the WTO in 2001 - was the correct policy. True, it has not yet yielded fruit in terms of that country's democratization, causing some to call engagement a failure. But the process of political modernization is a slow one. We just did not give globalization and modernity enough time to assert themselves in China. Secretary Yellen's trip is a welcome development, as is the sort of détente that may perhaps result from it - at least on the economic front.

Fareed Zakaria on Ezra Klein's Podcast

Last week Ezra Kein of the New York Times welcomed the great Fareed Zakaria on his podcast. The conversation was wide-ranging, and included virtually all of the major global issues of the day, with a particular emphasis on China and India. In sum, the podcast was a perfect introduction to Global Trends, which I am now gearing up to teach one more time this Summer. I recommend this podcast heartily!

Weekend Readings / Listenings

1) In Foreign Affairs, we are given a review of Ashoka Mody's recent book, "India is Broken". Many commentators often profess strong enthusiasm for India's prospects in terms of economic development, geostrategic clout, and political liberalism. Mody's book brings us back down to earth and provides a sobering look at some aspects of India's development - such as growing illiberal tendencies in the political realm, the trouble India has had in creating jobs for its enormous and fast growing population, and the permanence of many aspects of underdevelopment, including environmental degradation. But in the end, a glass that is half empty is also half full, and this is a somewhat futile debate. There is no doubt that in recent decades India has modernized in unprecedented ways. With modernity come good things, even if they don't come immediately. An India with a per capita income of $15,000 (which it should reach in about 15 years on current trends) will look nothing like the India of the early 1990s, with a per capita of around $2,000 (in constant 2017 PPP dollars). Sure, there are challenges, but the future is bright for India.

2) Over at The Good Fight, Yascha Mounk's excellent podcast on political economy, Timothy Garton Ash of Oxford offers penetrating observations on the past, present and future of Europe. Recommended.

3) At Bloomberg, Niall Ferguson discusses the often-predicted demise of the US Dollar as the world's reserve and transactional currency. Bottom line: the USD may be fading a bit, but it will take a very long time for its main competitors (the Euro, the renminbi) to lay claim to its dominance.

Three Items of Note

1) Bloomberg has a comprehensive assessment of where India stands in its development process, with an explicit comparison to China. This article could have been a session of Global Trends!

2) The Economist gushes on the performance of the US economy. It is true that the US economy is a thing of wonder: still the dominant engine of knowledge and therefore wealth creation in the world, still one of the fastest growing countries, especially among industrialized ones - leaving Europe in the dust in terms of per capita income. It is all too easy to focus on the negatives (political polarization and gridlock, deaths of despair, income and wealth inequality, environmental challenges) - but there will come a point when international differences in these respects will be dwarfed by differences in per capita income - and these are likely to increasingly favor the US.

3) Over at Calmatters, a sober look at California's energy transition. Stated goals of decarbonization will much harder to achieve than is generally acknowledged. Just transitioning fully to electric cars will involve unrealistically large increases in electric generation capacity. One thing that stands in the way is regulation - including, ironically, environmental regulation - which hinders California's ability to quickly bring new power generation capacity online. The article extensively cites my friend David Victor, a professor at UCSD.