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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.


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More On “Obamagate!”

More On “Obamagate!”

Just three items.

1) Today (or yesterday late?) AG William Barr appointed yet another Special Counsel to investigate “Obamagate!” John Bash of the Texas Western District of the DOJ. He has been assigned to investigate the various unmaskings of Michael Flynn that happened between the election of 2016 and Flynn’s interrogation by the FBI after Trump became president in January, 2017. The full absurdity of this is that even Barr in making this assignment recognized that there is nothing illegal about unmasking, not even anything improper.  Nevertheless, he thinks this particular set of unmaskings needs further investigation by the Department of Justice.

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Trump Issues an Executive Order and . . .

Yea, Trump Issuing another Executive Order is a big so-what. What else is new?

This one is a little different and concerns social media websites.

“In a country that has long cherished the freedom of expression, we cannot allow a limited number of online platforms to hand pick the speech that Americans may access and convey on the internet.  This practice is fundamentally un-American and anti-democratic.  When large, powerful social media companies censor opinions with which they disagree, they exercise a dangerous power.  They cease functioning as passive bulletin boards, and ought to be viewed and treated as content creators.

The growth of online platforms in recent years raises important questions about applying the ideals of the First Amendment to modern communications technology.  Today, many Americans follow the news, stay in touch with friends and family, and share their views on current events through social media and other online platforms.  As a result, these platforms function in many ways as a 21st century equivalent of the public square.

Twitter, Facebook, Instagram, and YouTube wield immense, if not unprecedented, power to shape the interpretation of public events; to censor, delete, or disappear information; and to control what people see or do not see.”

The Executive Order then goes on to complain about;

  • Flagging” content as inappropriate, even though it does not violate any stated terms of service,
  • making unannounced and unexplained changes to company policies that have the effect of disfavoring certain viewpoints, and
  • deleting content and entire accounts with no warning, no rationale, and no recourse.

Trump complains about Twitter placing warning markers on comments favoring his agenda and ignoring commentary on Russian collusion which everyone knows is a hoax??? Good thing he does not come to Angry Bear we would spam him for the loon he actually is.

Fear of Getting COVID-19 Can’t Be Used As An Excuse To Vote Absentee

The Texas state supreme court reversed lower courts decisions declaring coronavirus a valid excuse to vote absentee. The lower courts had ruled a lack of immunity to Covid 19 is an adequate reason to be able to vote absentee. While the Texas SC did levy some leeway to their decision, voters suffering  additional health conditions making them vulnerable to the virus could still cite the “disability” excuse to vote absentee. Several justices filed concurrences, but none wholeheartedly adopted the Democrats’ and voter groups’ arguments.

On the federal level, a federal trial court judge sided with the Democrats, but that decision has temporarily been put on hold while the conservative U.S. Court of Appeals for the 5th Circuit hears the case.

Of course, the Texas AG has stated he will still go after those he believes violated state election law.

And “when looting starts, shooting starts

And with a wee bit of urban poetry, Trump tosses out his wisdom  jive to warn rioting protestors in Minnesota who are angry over the perceived murder of an African American by the Minneapolis police officers. The 3rd Precinct of the city’s Police Department and the base for the four officers involved in the incident was broken into and set on fire by protestors after they broke into the building.

I think I would have used “the” before shooting and looting.

Trump drops another pearl  at our feet tweeting; “These THUGS are dishonoring the memory of George Floyd, and I won’t let that happen.” If anyone can believe this, let me know. Trump had no qualms about displaying his racism pre-presidency and afterwards. You can tell it is an election year.

Mayor Jacob Frey responded to Trump’s usual deflections; “Weakness is pointing your finger at somebody else during a time of crisis. Donald Trump knows nothing about the strength of Minneapolis.”

It will be interesting to see how the DOJ responds to Trumps call for an investigation as AG Barr has already shown his prejudice against people who are perceived to be disrespectful of police officers.


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