New Economist

China: From T-shirts to T-bonds

Today's Economist has a special feature article on China and the world economy: From T-shirts to T-bonds. Like the accompanying leader (subscribers only), the central argument is that "global wages, profits, prices and interest rates are increasingly being influenced by events in China".

China is not the main cause of the American trade deficit. On the other hand, China is behind almost everything else going on in the world economy. For China is beginning to drive, in a new and pervasive way, economic trends that many countries assume to be domestically determined.

...To view China's global impact mainly in terms of its exports and its trade surplus is to misunderstand, and to underestimate, the profound forces behind China's growing influence. Everyone knows that most TVs and T-shirts are made in China. But so, in some ways, are developed countries' inflation rates, interest rates, wages, profits, oil prices and even house prices—or at least they are strongly influenced by what happens in China.

Accessing Congressional Research Service reports

John Irons at Argmax has drawn my attention to a very useful online resource: the Open CSR Network. This website posts reports by the Congressional Research Service, which are provided to members of Congress but not to members of the public:

CRS Reports do not become public until a member of Congress releases the report. A number of libraries and non-profit organizations have sought to collect as many of the released reports as possible. Open CRS is a centralized utility that brings together these collections to search.

So far 8,558 reports are available from this site, covering a vast range of subjects. A great service - though far from comprehensive. If you can't find a report at this site, try a Google title or key word search via the zFacts.com CRS search page. Alternatively, you can buy any report since 1995 from Penny Hill Press.

Interviews with economists via podcasts

Ben Muse alerts us to Radio Economics, a website which conducts "telephone interviews with economists worldwide", including leading econobloggers, and then posts them as MP3 files online. A great idea. I have added it to my Economic Resources links.

It is produced by Dr. James Reese, an economics professor at the University of South Carolina Upstate. The most recent interview is with Gary S. Becker and Richard Posner of The Becker-Posner Blog. As Ben comments, "this is well worth a stop". (Hat tip: Newmark's Door)

Another economic idiot

Oh dear. Charles Clover at The Daily Telegraph does not understand that when supply increases, prices usually fall - and so wins Tim Worstall's Economic Idiot Award IV. Here's the offending text:

The amount of farmland on the market has increased for the first time in three years, but the price of land is falling, the Royal Institution of Chartered Surveyors said yesterday.

Tim comments: "Masonic handshakes and lashings of ginger beer all round I think."

Mea culpa

Forbes magazine's list of economic blogs has recently added New Economist. In his review, Adam Freedman says the blog "offers a slightly different look at economics", and "focuses on less academic economics and more practical economics". Its good points include "an extensive list of links, including links to other economic blogs and links to helpful economic resources". But there are some negatives too. In particular:

One drawback is the blog's layout; while some blogs offer previews of each post on the main page and then the full post on a separate page, the New Economist puts its full, lengthy posts all on the main page, making the page convoluted and difficult to navigate.

I agree, and have started to amend recent posts accordingly. Adam also doesn't like "an undue reliance on quotations" (also agree), and "a robotic color scheme make the blog difficult to read" (huh?). Expect some changes around here folks. Suggestions on a new design and colour scheme are also most welcome.

What is the UK worth?

On Monday the Office for National Statistics issued a press notice (PDF) claimed that the UK was worth £5.8 trillion at the end of 2004, and the total value had increased by 7.4% (or £404 billion) on the previous year. The gain in 2004 was entirely due to a 12% rise in the value of housing, which accounted for almost three-fifths of the total. The estimate of total net worth comes from a new ONS report Capital Stocks, Capital Consumption and Non-Financial Balance Sheets 2005. A big, bold attention grabbing claim that someone was bound to take issue with. Sure enough, Chris at Stumbling and Mumbling (via Tim Worstall) has:

This is plain wrong. To see why, remember that GDP last year was £1.19 trillion, and will be over £1.2 trillion this year. If our total capital assets are just £5.8 trillion, this means we'll earn a return on them of over 20 per cent.  That's absurdly high, especially considering that £3.4 trillion of this £5.8 trillion consists of a consumer good, housing, most of which yields little direct income.

What's missing from this estimate is the economy's biggest asset - its human capital. Last year wages were £648.7bn. We can think of this as the income yielded by our asset, human capital. If we assume, heroically, that the yield is 5 per cent, then our human capital stands at £13 trillion. Add this to our £5.8 trillion and the UK is worth £18.8 trillion. That's over £300,000 per person.

There are some problems with this interpretation. First and most obvious is that the ONS estimate is of total net worth (after depreciation), not gross like GDP. You can't compare the two unless you use gross net worth, which would be considerably higher. (The total cost of replacing all capital assets in their current condition is estimated at £2,607 billion).

Second, if one reads Table 5.2 in the publication it is clear that almost all of the £5.8 trillion consists of tangible, non-financial assets: housing, land, plant and equipment, vehicles and stock. These alone account for £5.5 trillion or 94% of the total.

Where are the shares, bonds, savings accounts, pensions and other financial assets? Well,net financial assets actually detracted £141 bn from the total, as financial liabilities in the UK are slightly higher than financial assets. Following the standard identity Savings = Investment, surely this is what one would expect?

As to the point about human capital, it doesn't show up in the GDP numbers except as wages and other compensation (income) and education and training (production). Both are partial and imperfect measures. For example, unpaid labour is not included in GDP as it does not have a market value. And education and training expenditure cannot capture skill and work experience.

When the ONS claim to have a measure of "the total value of the UK" what they actually have is an estimate of the net market value of the UK's non-financial assets. The press notice dubbed this "a measure of the country's wealth", but it's a pretty narrow one. Looks to me like the ONS news team have simply been trying to 'sex up' their press notices. Faced with a scintillating title like Capital Stocks, Capital Consumption and Non-Financial Balance Sheets 2005, I can undertand why! 

NBER Summer Institute - Week 3

Week 3 of the National Bureau of Economic Research's Summer Institute 2005 began on Monday.

This week's seminars and workshops cover a huge range: the Economics of National Security, Social Insurance, Social Security, Economics of Children, Education, Labor Studies, Empirical Personnel Economics, Aging, Health Economics, a Productivity/Health Care/Aging Joint Meeting, the Economics of Real Estate & Local Public Finance, the Economics of Taxation, Public Policy and the Environment, Law and Economics, Corporate Governance, and the Conference on Research on Income and Wealth.

Readers clicking on these links will find many of the workshops are joint or overlapping. About half the papers delivered are posted online.

"The economy is social". Discuss

Who would have thought Virginia Postrel would have nice things to say about sociologists? But she does. Writing in Sunday's Boston Globe, she notes that "while economists continue to probe into social life" - al la Gary Becker, say, or Steve Levitt of Freakonomics fame - "a growing academic subfield known as economic sociology is doing just the opposite - bringing tools and concepts from sociology to bear on the economy":

''The economy is social. It's a set of social relations. The economy is as social as a family or religion," says Viviana A. Zelizer, a Princeton University sociologist who studies how cultural attitudes and consumption patterns influence each other.

...Real human beings, she argues, don't divide their rational and emotional, or personal and commercial, lives that way. So, contrary to both the simplified models of some economists and the anti-commercial zeal of many social critics, she and other economic sociologists argue that the marketplace and social relations aren't separate spheres. They're completely entangled.

Quite. As just about anyone who has studied the economics of labour markets, complex organisations, markets and institutions would likely acknowledge. Economic sociology is a well organised and quite lively area, though one can't help feeling there is less dialogue between this discipline and the burgeoning institutional economics crowd than there ought.

For recent examples of work check out some of the papers given at the Frontiers of Sociology conference in Stockholm, or at Centre for the Study of Economy and Society events. Also of interest is the Winter 2005 issue of the Journal of Economic Perspectives, which features five papers on the subject, including such luminaries as George Akerlof and Mark Granovetter. The introductory piece by Robert Gibbons at MIT, What Is Economic Sociology and Should Any Economists Care? (PDF), is well worth reading.

Demography booms as populations shrink...

European population growth may not be booming, but demography certainly is. Blame those naval gazing boomers, I'd say. Edward Hugh attended the massive (164 sessions!) 25th International Population Conference in Tours, France, last week and has been blogging about some of the more interesting papers, as well as posting on specific issues such as life expectancy in East and West Germany, and something called the low fertility trap:

I suppose by-now every right thinking and reasonably well read adult knows what the ’poverty-trap’ is, even if most of us aren’t too clear about what there is to do about it. Being stuck in one of these traps could be thought to be like being stuck in a (not necessarily very deep) well with a slimy surround wall. The more you struggle to get out, the harder it gets: your strength disippates, and the walls get to be even more slippery. This could also be called a negative feedback loop.

Well now there is the suggestion that something similar may exist in the world of fertility. As Wolfgang Lutz suggests ...the critical level may be 1.5. No society which has fallen below this level has - to date - returned above it. One of the details which becomes rapidly apparent viewing the presentation relates to the remarkable differences which exist within the EU in terms of fertility regimes. Basically Northern Europe is by-and-large above the critical threshold, whilst Southern Europe, and Central and Eastern Europe are almost entirely ’under water’.

If these kinds of debates interest you then I'd also recommend looking at the papers given at the 19th annual conference of the European Society for Population Economics, held in France from 16-18 June.

Why is inflation so persistent in the Eurozone?

Despite four years of sluggish growth, inflation has mostly been above 2% since the Eurozone's inception in January 1999. This puts it above the European Central Bank's operational definition of price stability. Why?

A new OECD Economics Department working paper by Boris Cournède, Alexandra Janovskaia and Paul van den Noord, Sources of Inflation Persistence in the Euro Area, argues that this lack of inflation responsiveness to economic slack reflects the Eurozone's structural policy settings:

The main finding is that more stringent product and labour market institutions are associated with a smaller decline in inflation when output drops below potential than is the case with more flexible institutional settings. More flexible structural settings are therefore desirable in the euro area not only to underpin the goal of lifting potential growth but also for their added benefit of providing more leeway for monetary policy.

More flexible structural settings are associated with lower sacrifice ratios for monetary policy since less of an output deceleration is needed to curb inflation. Besides, the data indicates that moving to a lower inflation environment implies higher sacrifice ratios.

As noted here (and also in the recent OECD report on the Eurozone):

..pursuing structural reforms as envisaged in the Lisbon strategy would not only boost trend growth, but also raise the speed at which cyclical slack in the euro area is absorbed.

This is something I, along with many others, have advocated. However though the ECB may share that view, it is clearly still not a palatable message for many European politicians.