Ryan Avent On The BIS

The Bank of International Settlements (BIS) is the oldest multilateral financial institution currently in existence – it acts as a clearing house for national level central banks, much as central banks perform the same function within their own jurisdictions. What the BIS says tends to resonate as well as reflect what central bankers think – unfortunately.

The analysis accompanying the latest BIS annual report has Ryan Avent (prolific blogger and The Economist magazine’s economics correspondent for the US) up in arms (excerpt):

The twilight of the central banker

THE Bank for International Settlements is known as the central bank to central banks. It shouldn't be surprising, then, if the misjudgments common to central bankers are occasionally distilled in BIS analysis into a somewhat curious view of the global economy: one in which heroic, blameless central banks have done their utmost to keep the world economy afloat, in the face of ceaseless governmental incompetence and despite a constant bombardment of baseless outsider criticism. The ability of central bankers to bandage over the harm inflicted by bumbling politicians is limited, warns the BIS in its latest annual report. Unless the world embraces the sober leadership of the wise central banker disaster looms.

The annual report is a remarkable document, one which might well come to serve as the epitaph for an era of central banking spanning the Volcker disinflation and the Great Recession—the epoch of the central banker as oracle, guru, maestro. If the end of this era is upon us, we can credit a series of revelations: that central bankers learned the lessons of economic history less well than they'd thought, that they displayed an unfortunate tendency to set aside economic rigour in favour of an obsessive focus on price stability, and (perhaps most importantly) that they are in more need of democratic accountability than is often assumed. Above all, the report captures what may be the most critical error of the modern central banker: eschewing a focus on his proper domain—demand stabilisation—in favour of an arena in which he has no business sticking his nose—the economy's supply side...

This is one of the longest posts that I’ve seen RA write, and the resulting commentary much more thoughtful than the usual. Recommended as a good read, and a summary of the current debate on the role of central banks in an economy.

(H/T Brad De Long)

Reviewing Gender Equality

Women’s issues take centre stage in the latest issue of the IMF’s Finance and Development magazine (excerpt):

Women at Work
FINANCE & DEVELOPMENT, June 2013, Vol. 50, No. 2

Reductions in gender disparity don’t translate to equal opportunity

One of the most dramatic developments in the 20th century was the entry of women into economic and political spheres previously occupied almost exclusively by men. Although women are making progress in eliminating gender disparities, they still lag men in the workplace and in the halls of government. These gaps are found throughout the world, but are particularly pronounced in developing economies. So far, the greatest success has been in reducing education and health disparities and the least in increasing women’s economic and political influence. Renowned scholars, leading institutions, global businesses, and a growing range of nongovernmental organizations stress the benefits of further reducing gender inequality to allow women to realize their full potential in economic activities and in civic life.­

This issue of F&D examines women at work. It analyzes various aspects of women’s work experience—the gains that women have made in equalizing job opportunities and leadership roles and the challenges they still face to achieve genuine equality...

...These articles suggest that women are making progress in closing gender gaps in the economic and political spheres but that they are still far from achieving equity. These studies provide guidance for the design of policies to tap the full potential of women.

You can access the table of contents here.

Personally, I found the article on women economists the most interesting – a study of economist attitudes found that women tended to favour government intervention more than men do, especially on social issues. That leads to some interesting speculation – would overall policy direction and economic philosophies change when more women economists come into positions of influence?

April 2013 Employment Report

Employment continued to strengthen in April 2013, with the economy creating 173k jobs (‘000):

That puts the employment growth figure at about 2.4 million jobs since the beginning of 2009. This helped absorb 137k new entrants into the labour force and 40k from the ranks of the unemployed. As a result, the unemployment rate has fallen again:

Despite what seems to be a much more challenging business environment this year, job generation appears to be intact even if the numbers were poor for February-March. As far as the labour market is concerned, things are about as tight as could be – the numbers for both retrenchment and active job seekers are down in 1Q2013. So far so good.

Technical Notes:

April 2013 Employment Report from the Department of Statistics (warning: pdf link)

The Biggest Risk To The World Economy

No, it’s not European debt; rather it’s Chinese deflation (excerpt):

Chinese monetary policy failure

“Fed tapering” seems to be repeated in every single story in the financial media over the last couple of days. However, I am afraid that the financial media – as often is the case – is overly US centric. We might want to look at another central bank than the Fed. We should instead pay some (a lot!) of attention to the People’s Bank of China (PBoC)...

...It seems to me that the PBoC is just continuing the excessive tightening and that seems to be the real culprit behind the stream of bad economic data we have got out of China recently. It looks like Chinese monetary policy failure.

So yes, Bernanke might have a communication problem, but at the moment it seems like the biggest monetary policy failure is Chinese rather than American.

The article Lars quotes shows some pretty worrying developments in the Chinese interbank market – rates have spiked, indicating a liquidity crunch that the PBoC is not accommodating.

To corroborate this info, watch gold…I’ve always felt the runup in gold prices this past decade was more a story of Chinese (and Indian) monetary policy than the Fed’s. As of yesterday, spot gold is at its lowest level since January 2011 – today’s price has fallen to levels not seen since September 2010, before recovering a bit.

That aside, this is not good news for anybody, especially commodity exporting nations such as Malaysia. I’m afraid weakness in the Ringgit is going to be much more persistent that I expected, and growth harder to come by.

The Changing Face Of Education

Universities are like soooo last century:

IMF Launches Online Economics Learning for Global Classroom

In the virtual classroom of tomorrow, central bank and government officials will be able to supplement what they learn in physical IMF classrooms by tapping into an online network of economics and financial training courses.

And courses that have thus far been restricted to IMF member country officials will be available to students, bankers—anyone who’s interested and has an internet connection.

Thanks to a new partnership with edX, the nonprofit online learning initiative founded by Harvard University and the Massachusetts Institute of Technology, the IMF will soon start offering economics courses online to officials from around the world to complement its traditional training delivery. Free public access, through so-called massive open online courses (MOOCs), will follow in 2014.

The Ubiquity Of Market Failure

Mark Thoma on keeping the public sector involved in markets (excerpt):

7 Important Examples of How Markets Can Fail
By MARK THOMA, The Fiscal Times

Many people on the political right believe that free markets are the solution to most any problem. For example, Senator Pat Roberts (R-KS) introduced yet another attempt to repeal Obamacare with a call to “start over … with true, market based reforms.”

​Free, unregulated markets are not always the answer, however. It’s true that competitive markets have desirable properties, but very special conditions must be present for competitive markets to emerge. When these conditions are not met, as is often the case in the real world, free markets can perform very poorly. In these cases – as illustrated in the following examples – government intervention that eliminates troublesome “market freedoms” can often be used to move these markets closer to the competitive ideal...

He’s absolutely right, in principle anyway. Some of the examples quoted won’t have any meaning to Malaysians, but the idea that government regulation are an evil necessity doesn’t always hold true – sometimes, it is only government intervention that makes having a “market” possible in the first place.

In fact, at least one source I have read claims that government procurement in ancient times resulted in the first organised markets, perhaps a precursor of how government debt today forms the foundation of private debt capital markets.

Nevertheless, agree or disagree, Prof Thoma’s thoughts are always worth a read, and the comment debate on his blog is an education in itself.

May 2013 Consumer Prices

Consumer price inflation continued to accelerate in May, rising to 1.8% from 1.7% in April (log annual and monthly changes):

For once, its neither food nor petrol costs driving up prices. This time, and rather unusually, it was a 1.2% jump in house rents over April (2.5% in annual terms). Food prices did increase as well, though not nearly as much. As a result, consumer price inflation in May came mainly from movement in the core index, and not from the usual causes of wallet squeezing.

The Promise Of Economic Development: Convergence

Guess which is the fastest growing region in the world after East Asia? Would you believe Sub-Saharan Africa?

The “dark” continent isn’t as dark as its reputation (excerpt):

Africa: Second Fastest-Growing Region in the World
By Antoinette M. Sayeh

Sub-Saharan Africa is the second fastest-growing region of the world today, trailing only developing Asia. This is remarkable compared to the current complicated state of the global economy, with Europe still struggling and the United States slowly on the mend.

In 2012, Sub-Saharan Africa maintained solid growth, with output growth at 5 percent on average. The factors that have supported the region through the Great Recession—strong investment, favorable commodity prices, and generally prudent macroeconomic management—continued to be at play.

Home Ownership: Beware What You Wish For

I’m ambivalent on the issue of home ownership – on the one hand, I recognise that society acknowledges the basic human right to adequate shelter. On the other hand, the economist in me sees the opportunity and financial costs involved…and doesn’t think that the right to shelter is equivalent to the right to own it.

And here’s one paper that supports the latter view, looking at the costs to society as a whole (abstract):

Does High Home-Ownership Impair the Labor Market?
David G. Blanchflower, Andrew J. Oswald

We explore the hypothesis that high home-ownership damages the labor market. Our results are relevant to, and may be worrying for, a range of policy-makers and researchers. We find that rises in the home- ownership rate in a U.S. state are a precursor to eventual sharp rises in unemployment in that state. The elasticity exceeds unity: a doubling of the rate of home-ownership in a U.S. state is followed in the long-run by more than a doubling of the later unemployment rate. What mechanism might explain this? We show that rises in home-ownership lead to three problems: (i) lower levels of labor mobility, (ii) greater commuting times, and (iii) fewer new businesses. Our argument is not that owners themselves are disproportionately unemployed. The evidence suggests, instead, that the housing market can produce negative ‘externalities’ upon the labor market. The time lags are long. That gradualness may explain why these important patterns are so little-known.

Fiscal Policy Committee

This was announced yesterday at the 2014 Budget Consultation Session:

2014 Budget To Be Tabled In Parliament On Oct 25

PUTRAJAYA, June 18 (Bernama) -- The 2014 Budget will be tabled in Parliament on Oct 25, Prime Minister Datuk Seri Najib Tun Razak, announced here Tuesday.

Najib also announced the setting up of a Fiscal Policy Committee aimed at reducing fiscal deficit, strengthening public finances and ensuring nation's long-term fiscal sustainability.

Najib, who is also Finance Minister, said he would chair the committee which would include selected Cabinet ministers and heads of departments.

"This committee will be served by a fiscal policy office at the Treasury. This is to underline the seriousness in terms of managing our fiscal position and reducing our fiscal deficit," he said in his opening speech at the 2014 Budget Consultation sessions.

Bankruptcy Malaysian Style

As a rule, I don’t allow guest posts or posts on behalf of other sites, but in this case I’m making an exception because I think financial literacy is a terribly important life skill that too many Malaysians aren’t equipped with.

iMoney.my requested if I could feature their infographic on bankruptcies in Malaysia here, so without further ado:

Bankruptcy in Malaysia – A Reality Check (Infographic)

To most folks in Malaysia, “bankruptcy” is a term synonymous with “having no money” – used commonly to describe a situation where a person has exhausted his monetary resources and has next to nothing to survive on.

In reality, however, bankruptcy is something that is far more serious than simply having no money to survive the month. It is a status declared by a court order, which effectively eliminates certain rights that we take for granted everyday. And despite common perception, you do not need to owe millions to be bankrupt; you can be one with just a debt of RM30,001.

In this infographic, iMoney shows you what bankruptcy is, how it affects a person, and what the true scenario is when it comes to bankruptcies in Malaysia.

Hit the link for the infographic, and you might want to check out the rest of the iMoney.my site while you're at it.

Piling On–Further Evidence Of The Desirability of Universal Pre-School Education

In the last round of NBER papers, Heckman and Raut find more evidence that pre-school education has a significant pay-off and worth putting public investment into (abstract; emphasis added):

Intergenerational Long Term Effects of Preschool - Structural Estimates from a Discrete Dynamic Programming Model
James J. Heckman, Lakshmi K. Raut

This paper formulates a structural dynamic programming model of preschool investment choices of altruistic parents and then empirically estimates the structural parameters of the model using the NLSY79 data. The paper finds that preschool investment significantly boosts cognitive and non-cognitive skills, which enhance earnings and school outcomes. It also finds that a standard Mincer earnings function, by omitting measures of non-cognitive skills on the right hand side, overestimates the rate of return to schooling. From the estimated equilibrium Markov process, the paper studies the nature of within generation earnings distribution and intergenerational earnings and schooling mobility. The paper finds that a tax financed free preschool program for the children of poor socioeconomic status generates positive net gains to the society in terms of average earnings and higher intergenerational earnings and schooling mobility.

It seems like I’ve been harping on this issue for the longest time, and this paper brings together a couple of threads of thought on the debates over education and inequality.

How Much Would Car Prices Come Down If Excise Duties Were Abolished?

I’ve made no secret of the fact that I’m leery of the notion that cars in Malaysia should be made cheaper. The negative externalities arising from fossil fuel use, which would be exacerbated by cheaper cars, would be a social and public cost that wouldn’t be accounted for in the retail price of cars.

But leaving that aside for the moment, how much should car prices fall if the currently high rate of excise duty levied on the production and sale of cars be reduced or abolished?

It’s not as much as you think.

The Impact Of The Minimum Wage

We’re a few months into Malaysia’s experiment with a minimum wage, and there’s we’re already seeing some effects, at least for the manufacturing sector:

April 2013 Industrial Production: Green Shoots

After some fairly unenticing numbers in 1Q2013, industrial production in April showed some signs of life (log annual and monthly changes; seasonally adjusted):

April 2013 External Trade

April trade data offers little hope for any improvement in external demand (log annual and monthly changes; seasonally adjusted):

Exports have continued to deteriorate, falling 3.4% in log terms in April, but imports have picked up again, rising 8.8% in log terms.

RSS Feed test (please ignore)

Solving The Problem Of Imported Low Cost Labour

While I don’t always fully agree with some of Mr Menon’s views, I think this article is spot on (excerpt; emphasis added):

Can the new members of ASEAN catch-up without domestic polarisation?
Jayant Menon

ASEAN is divided. So how many ASEANs are there? Most separate the newer, less developed members (such as Cambodia, Laos, Myanmar and Vietnam; known as CLMV) from the older ones (Brunei, Indonesia, Malaysia, Philippines, Thailand and Singapore; known as ASEAN6). As high-income countries, some would even put Singapore and Brunei in a separate, third category…

…In addition to market-oriented reforms, the fact that convergence is taking place should not be surprising. One reason to expect catch-up is the difference in the marginal efficiency of capital between poor and richer countries. With little access to capital, workers in poor countries have relatively low levels of productivity that can be raised substantially by increasing the amount of capital available to them by even small amounts…

University Education Is Expensive; But The Returns Justify The Investment

It’s a fairly long paper, but it reviews the current state of knowledge about the payoff to college education (abstract):

Making College Worth It: A Review of Research on the Returns to Higher Education
Philip Oreopoulos, Uros Petronijevic

Recent stories of soaring student debt levels and under-placed college graduates have caused some to question whether a college education is still a sound investment. In this paper, we review the literature on the returns to higher education in an attempt to determine who benefits from college. Despite the tremendous heterogeneity across potential college students, we conclude that the investment appears to payoff for both the average and marginal student. During the past three decades in particular, the earnings premium associated with a college education has risen substantially. Beyond the pecuniary benefits of higher education, we suggest that there also may exist non-pecuniary benefits. Given these findings, it is perhaps surprising that among recent cohorts college completion rates have stagnated. We discuss potential explanations for this trend and conclude by succinctly interpreting the evidence on how to make the most out of college.

There’s a little something here for everyone: for current and prospective university students, there’s a discussion about how to weigh the decision to go to college; which major to pursue (if maximising lifetime earnings is your goal); and the returns to education (double-digit increases for every year completed). There’s stuff for policy-makers and educators as well, e.g. how the “framing” of student financial aid matters as much as its value in terms of encouraging enrolment, to why student debt shouldn’t matter, to the changes in the labour market that have increased the value of a college education.

All in all, a useful overall survey and summary for anyone curious about this particular topic.

Technical Notes:

Oreopoulos, Philip, and Uros Petronijevic, "Making College Worth It: A Review of Research on the Returns to Higher Education" NBER Working Paper No. 19053, May 2013

What Makes The 1%

From last week’s round of NBER papers (abstract):

The Top 1 Percent in International and Historical Perspective
Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty, Emmanuel Saez

The top 1 percent income share has more than doubled in the United States over the last thirty years, drawing much public attention in recent years. While other English speaking countries have also experienced sharp increases in the top 1 percent income share, many high-income countries such as Japan, France, or Germany have seen much less increase in top income shares. Hence, the explanation cannot rely solely on forces common to advanced countries, such as the impact of new technologies and globalization on the supply and demand for skills. Moreover, the explanations have to accommodate the falls in top income shares earlier in the twentieth century experienced in virtually all high-income countries. We highlight four main factors. The first is the impact of tax policy, which has varied over time and differs across countries. Top tax rates have moved in the opposite direction from top income shares. The effects of top rate cuts can operate in conjunction with other mechanisms. The second factor is indeed a richer view of the labor market, where we contrast the standard supply-side model with one where pay is determined by bargaining and the reactions to top rate cuts may lead simply to a redistribution of surplus. Indeed, top rate cuts may lead managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment. The third factor is capital income. Overall, private wealth (relative to income) has followed a U-shaped path over time, particularly in Europe, where inherited wealth is, in Europe if not in the United States, making a return. The fourth, little investigated, element is the correlation between earned income and capital income, which has substantially increased in recent decades in the United States.

For me, this paper just confirms some of the stylised facts about income inequality – marginal tax rates are an important tool against income inequality; lower tax rates lead to a higher incentive to supress wage incomes (costs) in corporations; inherited wealth makes a mockery of “equal opportunity”; and the ability to invest in riskier but better returning assets increases wealth disparity.

I hardly need to add more to that.

Technical Notes:

Alvaredo, Facundo and Anthony B. Atkinson, Thomas Piketty & Emmanuel Saez, "The Top 1 Percent in International and Historical Perspective", NBER Working Paper No. 19075, May 2013

The Financial Literacy Test

How many of you can get all three of these following questions right (answers at the bottom of the post):

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow:
   1. …more than $102?
   2. …exactly $102?
   3. …less than $102?
   4. Do not know.
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:
   1. …more than today?
   2. …exactly the same as today?
   3. …less than today?
   4. Do not know
3. Do you think that the following statement is true or false? ‘Buying a single company stock usually provides a safer return than a stock mutual fund.’
   1. True
   2. False
   3. Do not know

If you got all three correct, congratulations – you’re in a global minority. In a US survey, less than half could answer the first two questions correctly, less than a third were able to answer all three. And this was for people aged 50 and over, who are generally more financially literate than the average population. The same questions have been used in international surveys, and the results are pretty depressing: across the globe, financial literacy is low, and especially low among the young. It doesn’t appear to matter whether you’re in a developed

The questions come from an NBER working paper released about a month back (abstract):

The Economic Importance of Financial Literacy: Theory and Evidence
Annamaria Lusardi, Olivia S. Mitchell

In this paper, we undertake an assessment of the rapidly growing body of research on financial literacy. We start with an overview of theoretical research which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision-making in the United States and elsewhere. While the literature is still growing, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.

The paper is really a survey of the current state of research into financial literacy and its wider economic implications. Study after study finds that financial illiteracy is common, and in fact the norm.

Yet literacy in financial matters – especially in an increasingly complex and noisy financial system – and is what I would class as a life skill. I suspect that one reason why wealth inequality is so persistent, is through the uneven distribution of financial literacy.

Generally speaking, higher income (and wealthier) individuals possess greater degrees of financial literacy. There remains the question of causality (does literacy come first, or does greater wealth create the desire for greater literacy?), but there’s hardly anything controversial about investing in knowledge.

If there’s one thing that’s definitely missing from our education system – and from virtually everyone else’s – it’s mandatory financial literacy courses. This should be part of at least the secondary/high school curriculum. As it stands, financial literacy is almost entirely up to the parents, who might not be all that literate either.

[Answers: 1,3,2]

Technical Notes

Lusardi, Annamaria, and Olivia S. Mitchell, "The Economic Importance of Financial Literacy: Theory and Evidence", NBER Working Paper No. 18952, April 2013