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Is There a Future for FDI?—Update

by Joseph Joyce

Is There a Future for FDI?—Update

The Organization of Economic Cooperation and Development (OECD), which recently reported on foreign direct investment (FDI) in 2019, has released a new study on the impact of the pandemic on future FDI. The OECD points out notes that FDI flows before the pandemic have been on a downward trend since 2015, and FDI flows in 2018 and 2019 were lower than any years since 2010, suggesting that the decline in FDI will not be reversed when the pandemic eases. This comes as policymakers in the U.S. and elsewhere show concern over Chinese acquisition of domestic firms, and the Chinese government clamps down on Hong Kong’s autonomy.

The OECD report’s authors have optimistic, middle and pessimistic scenarios on the effectiveness of public health and economic policy measures, and their impact on FDI flows in the medium term. Under the optimistic scenario, public health measures are effective in controlling the spread of the virus and economic policies successful in restoring economic growth in the latter half of this year. FDI flows would fall between 30% to 40% in 2020 before rising by a similar amount in 2021 to their previous level. Under the middle scenario, public health and economic policy measures are partially but not completely effective, and FDI flows fall between 35% to 45% this year before recovering somewhat in 2021, but would remain about one-third below pre-crisis levels.  The pessimistic scenario is based on the need for continued measures to contain the virus and repair extensive economic damage, which would lead to drop in FDI flows of over 40% this year and no recovery in 2021.

The impact of an extended decline in FDI will be particularly severe for emerging market and developing economies, which have already seen the reversal of portfolio capital flows. The OECD report points out that the primary and manufacturing sectors, which account for a large proportion of FDI in these economies, have been particularly hard hit during the pandemic. Moreover, the corporate earnings that are a major source of the funding of new FDI expenditures by multinational firms fell in 2019 and will decline further this year.

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It didn’t happen overnight

by Ken Melvin

3rd World

It didn’t happen overnight.

The nightly news, when talking about the effect of the pandemic on the populace in, say, Southeast Asian, African, South American, … countries, invariably refer to the tenuous hold on life of their working poor; they don’t really have a job. Each day they rise and go forth looking for work that pays enough that they and their family can continue to subsist. It is, in some countries, a long-standing problem.

Sound too familiar? Sometime in the late 80s (??) Americans began to see day labors line up at Home Depot and Lowe’s lots in numbers not seen since The Great Depression. Manufacturing Corporations began subbing out their work to sub-contractors, otherwise known as employees without benefits; Construction Contractors subbed out construction work to these employees without benefits; Engineering Firms subbed out engineering to these employees without benefits; Landscapers’ workers were now sub-contractors/independent contractors; … Here, in the SF Bay Area, time and again, we saw vans loads of undocumented Hispanics under a ‘Labor Contractor’ come in from the Central Valley to build condos; the white Contractor for the project didn’t have a single employee; none of the workers got a W-2. Recall watching, sometime in the 90s (??), a familiar, well dressed, rotund guest from Wall Street, on the PBS News Hour, forcefully proclaiming to the TV audience:

… American workers are going to have to learn to compete with the Chinese; Civil Service employees, factory employees, … are all going to have to work for less …

All this subcontracting, independent contractors, … was a scam, a scam meant to circumvent paying going wages and benefits, … to enhance profit margins; a scam that transferred more wealth to the top.

 

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Meanwhile, As Minneapolis Burns

Meanwhile, As Minneapolis Burns

So now we are all focused on the recent horrific murder in Minneapolis and now the subsequent events that are happening in many parts of the nation, with Minneapolis the epicenter.  This is serious, and I have an idea how it will end.  This has even distracted us from the usual pandemic and economic issues, which are historically serious.

But while all this has been going on, just in the past week or so our president has been engaging in a series of serious actions that will have long run serious consequences people are barely aware of if they are not undone.  It is almost as if he is just outright melting down his presidency and taking the nation with him, although we are too busy looking at the flames in Minneapolis to notice.

Here is a list without comment. The US will withdraw from the Open Skies  agreement, first proposed by President Eisenhower, that has 35 other signatories.  The administration claims the Russians are breaking the treaty, although the specific offenses publicized seem to have nothing to do with this treaty at all.  This follows Trump withdrawing us from the Intermediate Nuclear Forces Agreement, the Paris Climate Accord, the the TPP, and the Iran JCPOA nuclear deal that Iran was adhering to.  Today it was announced that the US will withdraw from the World Health Organization. The administration is proposing changing the status of Hong Kong in connection with the US as well as possibly forcing Chinese corporations to leave the New York stock exchange, not to mention that the daughter of the CEO of Huawei is about to be extradited to the US to be prosecuted for fraud in connection with violating US sanctions against Iran. Another round of EPA regulations are to be ended. Trump refuses to provide aid to the US Postal Service, which might go bankrupt later this year, with Trump declaring that voting by mail is a rigged fraud. He has also issued an executive order to allow the FTC to make social media subject to lawsuits by his conservative allies. And then also today it was announced that his official pandemic task force is now effectively not functional.

There  is more, but all that is more than quite enough.

Barkley Rosser

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April personal income and spending: considering the extreme circumstances, a good report

April personal income and spending: considering the extreme circumstances, a good report

April personal income and spending, reported this morning, showed the impact of both the lock downs and the stimulus that was passed by the Congress.

To cut to the chase, spending in real inflation-adjusted terms declined -13% (red), while real income rose 11%(blue):

Unlike the recent jobs report, this is not a byproduct of the layoffs that were concentrated in the lower wage sector, which changed the composition of the labor force. Rather, this is an aggregate number, meaning that total income for everybody, adjusted for inflation, rose 11%

 

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Death And The Pandemic Economy

Death And The Pandemic Economy

The relation between death and the pandemic economy is a fraught one that has become hotly debated, although with not much clear empirical evidence.  I note that recently over on Econbrowser Menzie Chinn has had a series of posts on this matter in various forms.  Obviously a big issue has been the claim by the anti-lockdown crowd that not reopening the economy quickly will lead to an increase in suicides by the increasingly large numbers of unemployed people out there.  There certainly have been many studies in the past showing a variety of bad social outcomes from high unemployment, including suicides, domestic abuse, drug abuse, depression, and more. There does seem to be some strong evidence of several of these notably higher domestic abuse and depression.

When it comes to suicide and death more broadly, the empirical picture is very murky.  Menzie in one of his recent posts reported on a regression he ran covering monthly data from 1998 to very recently that used dummies for months and then unemployment rates and suicides (in the US) and found the an unexpected “wrong sign” with lower suicides correlated with higher unemployment, although this was not a statistically significant result. He provides no explanation for why this odd result seems to be there, but it does show that this is not a simple matter.

Regarding current data on the main question, so far there does not seem to be any data showing a noticeable rise in suicides in the US since the pandemic, with only reports of some increases among medical personnel, who have suffered from overwork, stress, and even guilt, along with fear.  That we might be seeing that out of them is completely understandable.

So why might we not be seeing much increase in suicides so far despite all the things going on such as increased depression as well as unemployment and more that would suggest we might expect to see it?  Some have suggested a “wartime” effect: people are suffering, but they know others are as well and so rally around the flag to hang in there. This rally around the flag effect even worked for awhile to boost Trump’s polls for a few weeks in late March and early April until people saw how we was botching things, and now his polls are lower than they were before, even as those of some generally unpopular leaders in other hard hit nations like Italy, France, and Spain have seen their poll numbers continue to be noticeably higher than they were previously.

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Ezra Klein is mad at the Democrats over automatic stabilizers

The HEROES act passed by House Democrats did not include a formula that would keep expanded unemployment insurance benefits in place until the economy has recovered.  The always thoughtful Ezra Klein is very critical of this omission.  His argument can be boiled down to two points:

  1. If Biden wins the presidency, Republicans will predictably try to destroy Biden politically by refusing to extend economic supports needed to protect families and promote an economic recovery. Automatic stabilizers are critical to protect a possible Biden presidency from Republican sabotage.
  2. Republicans need an economic stimulus package in the run up to the November elections more than Democrats do. This gives Democrats the bargaining power they need to force Republicans to accept automatic stabilizers.

According to Klein, moderate and progressive Democrats all support automatic stabilizers, and the idea polls well, but House leadership backed off when the CBO said the stabilizers for unemployment would cost $1 to 2 trillion dollars.  At the same time, Pelosi emphasized that the money would be spent if needed, so there is no actual savings from refusing to include automatic stabilizers, it’s political posturing all the way down.

I agree with Klein on point 1 above.  Automatic stabilizers are critical to protect a Biden presidency from Republican sabotage.  (It would be foolish to count on winning a working majority in the Senate and repealing the filibuster.)

I am less sure that Klein’s analysis of bargaining power (point 2 above) is correct, although I am sympathetic to his position.

Suppose that July rolls around and states are laying off workers and expanded unemployment benefits are about to expire.  The Republicans can agree to aid state and local governments and to extend UI benefits for a few months.  Democrats can reject this and hold out for automatic stabilizers.  Republicans will paint them as obstructionist.  It is not entirely clear who wins this public relations war, and with the election approaching the Democrats may not be willing to gamble if Biden appears to be leading.

Even more important, failure to agree to a package will lead to immense suffering as UI benefits expire.  Faced with this human catastrophe, Democrats may not be willing to play hardball with Republicans.  It’s like a real mother and an imposter mother bargaining over a baby:  if the no agreement point is cutting the baby in half, and the real mother is unwilling to do this, the imposter mother gets the baby.

Should the Democrats be willing to play hardball against the Republicans?  Should they be willing to inflict tremendous economic damage on innocent people to protect a Biden presidency?  I understand why the Democrats are reluctant to do this.  It is tempting to think that Democrats should respond to Republican hostage taking and hardball politics in kind, but the short-run humanitarian costs are very real, ratcheting up the level of inter-party conflict is bad for our democracy, and there is a legitimate question about whether the Democrats should wait and hope that the political environment shifts in a way that moderates the Republican party (e.g., perhaps demographic replacement will force Republican elites to change tactics).  On the other hand, perhaps the Republican party is so authoritarian that hardball is inevitable and necessary, despite the short-run suffering it will cause and the potential damage to our democracy from further escalating partisan conflict.

Finally, it is not clear from Klein’s article exactly how the bargaining inside the Democratic party went down.  It is possible that members from swing districts opposed automatic stabilizers for narrow careerist reasons, even if the inclusion of automatic stabilizers would have had only a small effect on their re-election prospects.  In this case, the real problem here is not the democrats as a group, but the careerism of a small group coupled with the weakness of parties in the American political system (that is, the inability of parties to discipline wayward members).

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Lawrence Summers discovers bargaining power

Lawrence Summers discovers bargaining power

Mainline macroeconomics pretends to be “value neutral,” by which practitioners mean that they assign no moral value to the supply or demand curves to the participants in the economy: they simply exist. The question of *why* participants in the economy have particular supply and demand curves is simply not even in the universe of parameters.

But in my experience “why” participants in an economy are willing to pay x amount for y good or service most often comes back to bargaining power. My ability to coerce if necessary a particular outcome comes down to the financial ability to walk away from the transaction. Or, as I have quoted a few times before, “Thems that has, git’s.”

Yesterday the following abstract of a new economic paper, “The Declining Worker Power Hypothersis,” from Lawrence Summers and Anna Stansbury came across the transom:

Rising profitability and market valuations of US businesses, sluggish wage growth and a declining labor share of income, and reduced unemployment and inflation, have defined the macroeconomic environment of the last generation. This paper offers a unified explanation for these phenomena based on reduced worker power. Using individual, industry, and state-level data, we demonstrate that measures of reduced worker power are associated with lower wage levels, higher profit shares, and reductions in measures of the NAIRU. We argue that the declining worker power hypothesis is more compelling as an explanation for observed changes than increases in firms’ market power, both because it can simultaneously explain a falling labor share and a reduced NAIRU, and because it is more directly supported by the data.

Hoocoodanode?!?

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Conspiracy Theories: How to Pick Out the Plausible Ones

Conspiracy Theories: How to Pick Out the Plausible Ones

This is an age of rampant conspiratorialism.  Bill Gates is behind the pandemic because he wants to shoot you full of vaccines.  No wait, it’s all those 5G cell towers.  Or maybe it’s bioterrorism from China.  Or just a hoax perpetrated by international capital to undermine Donald Trump, the people’s tribune.  The right wing disinformation machine cranks out this stuff constantly, but paranoid fantasies also emanate from the left/alternative world.

So to counter the conspiracy pandemic, mainstream experts have come forward to advise us on how to detect and puncture unfounded rumors.  The problem I see is that sometimes there really are conspiracies, and it isn’t immediately obvious how to separate the ones that might be true from the purely crazy.

In the public interest, I offer the following rule of thumb.  A conspiracy, of course, is an agreement by a group of insiders to keep something important secret from the public.  If the group is tightly organized, motivated and able to operate separately from those on the outside, it is capable of waging a conspiracy.  If you relax these assumptions, however, you need additional groups to hide the initial conspiracy—in other words, secondary conspiracies.  And if the secondary conspirators aren’t tight enough a third ring of conspiracies is required.  As soon as you find yourself imagining lots of interlocking conspiracies to keep the central one secret you’ve wandered over the line.

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BOND YIELDS AND MONETARY VELOCITY

I have been monitoring  the close relationship between bond yields and monetary velocity ( personal income/zero maturity money) for years without coming to strong conclusion about what to make of it.  In particular, it displays the long term secular rise and fall of bond yields before and after 1980..

 

I do not know of any other economic variable that parallels bond yields so tightly for such a long period.  OK, first question.  Which way does the causal relationship work?  Is it rates driving velocity or velocity driving yields?  Or is it some other variable driving both?  I use to think velocity was a function of real interest rates.  At least that was consistent with the monetarist school of economic thought, especially in explaining the 1930s depression.  But now we are back to negative real interest rates and it does not yet  appear to impact this relationship.  If we are at a long term secular bottom in yields I would expect to see monetary velocity start to rise. But it has not happened yet. But now that we are back to uncharted waters, I would be interested in hearing what others have to say about velocity and bond yield

 

 

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“Dr. Doom” At It Again: Predicts 10-Year Depression

“Dr. Doom” At It Again: Predicts 10-Year Depression

That would be Nouriel Roubini of NYU who got his moniker back during the Great Recession, which he called pretty well in 2006.  He did this clearly yesterday in an interview in The Intelligencer, although he has been pushing something like this for some time now, bringing in all sorts of things like climate change and more pandemics to reinforce this long run forecasr, although he thinks in a decade there may be a sufficient restrucuting of the economy to improve the situation.  While he mostly does not talk about what should or could be done in the US, he seems to improve of a German type economy where the unemployment rate has risen only 1% in comparison to the massive increase towards 20%  we have sseen in the US.  Of course, Germany has managed the coronavirus much better than has the US, but they also have their Kurtzarbeit labor system that tends to preserve employment better during downturns, not to mention a broader social safety net as part of its social market economy.  He says things might have been better if we had Bernie Sanders as president, but then notes that compared to Merkel in Germany and even Boris Johnson in UK, Sanders is a right winger.

 

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