WORÞY READS: For 2021-04-16
A preview of my weekly read-around for the Washington Center for Equitable Growth...
Worthy Reads from Equitable Growth:
1) Susan Helper has plans for making outsourcing, offshoring, and other transformations that create very high-bandwidth links between firms in value chains win-win as opposed to win-lose: to have ringmaster firms find it more advantageous to partner with high-productivity firms to raise the surplus, rather than with firms able to find workers with little market power in order to redistribute the surplus. I think it will be very interesting and informative—well worth watching:
Equitable Growth: Webinar: Transforming U.S. Supply Chains to Create Good Jobs: ‘When: May 3, 2021 1:30PM–2:30PM. Where: This event is virtual and not held in person, The Washington Center for Equitable Growth, 15th Street Northwest, Washington, DC, USA…. Large firms shifted from doing many activities in-house to buying goods and services from a complex web of other companies. Sometimes this restructuring can lead to innovation if supplier firms specialize in producing complex technologies or processes. But in other cases, firms outsource so they can offload production onto firms with weak bargaining power and thus little ability to compete except by aggressively holding down wages… [a] “low-road” model…. High-road supply networks…benefit firms, workers, and consumers alike. High-road outsourcing, however, requires overcoming both market and network failures…. Susan Helper, the Carlton professor of economics at the Weatherhead School of Management at Case Western Reserve University… on… a set of policy proposals that directly address each of the reasons that outsourcing increases wage inequality…
LINK: <https://equitablegrowth.org/event/webinar-transforming-u-s-supply-chains-to-create-good-jobs/>
2) We economists often take too narrow a view of poverty and of societal well-being. Here Mark Rank provides an excellent remedy for that. And I think we at Equitable Growth are going to cross-examine him again soon:
Alix Gould-Werth: In Conversation with Mark Rank: ‘How to usefully measure poverty in the United States. The actual causes of poverty. Poverty and race and ethnicity. Poverty and the broader U.S. macroeconomy. Myths about poverty and their consequences. Poverty and policymaking. Poverty and inequality in the United States. Alix Gould-Werth: "I am here today with Mark Rank, and I am so glad that you are able to join us. Thanks for being here.…
LINK: <https://equitablegrowth.org/in-conversation-with-mark-rank/>
3) What my faction of economists thinks about the strong need for more public investment:
Hilary Hoynes, Trevon Logan, Atif Mian, William Spriggs, & al,: Seize “Historic Opportunity to Make Long-Overdue Public Investments” to Boost Economic Growth: ‘Dear Senate Majority Leader Schumer, Senate Minority Leader McConnell, Speaker Pelosi, and House Minority Leader McCarthy,… Policymakers have an historic opportunity to make long-overdue public investments in physical and care infrastructure to boost economic growth and productivity. The share of our GDP invested in federally-funded research and development has fallen from around 2% in 1960 to just 0.6% today; this means less knowledge creation, fewer good jobs, and a harder time boosting employment in new sectors. Research—and common sense—tell us that this disinvestment is damaging for U.S. communities and our economy as older infrastructure depreciates and economic and social challenges go unaddressed…. In addition to federal research, physical infrastructure needs must be addressed. The private sector alone is not capable of making the large-scale investments needed to address the overlapping structural challenges currently facing the country…
4) I really do not understand where and how those who are forecasting “overheating” over the next twelve months are getting their numbers for their estimates:
Brad DeLong: I Do Not See “Overheating” This Year…: ‘Yes, there will be some inflation—base effects and sectoral shifts and simply the speed of reopening will create bottlenecks in the system, and those with pricing power will take advantage. But—unless the coronavirus plague has done a lot more damage to the economic division of labor than I believe—it will not be because production and employment are in any manner above stable-inflation “potential”. Think of whatever inflation might happen as skidmarks and burning rubber, rather than any form of boilover…
LINK: <https://braddelong.substack.com/p/i-do-not-see-overheating-this-year>
Worthy Reads from Elsewhere:
1) I confess it is remarkable—the extent to which a great many in the insular Washington DC media establishment ecosystem have learned little from the Age of Trump, and either do not share or feel that their career requires that they pretend not to share core American democratic values:
Dan Froomkin: The National Journal: ‘“Both parties are trying to game the election rules to their advantage. But the Democratic effort in the House is being hailed as a reform, while GOP efforts are slammed as voter suppression.” @HotlineJosh’s latest ”Against the Grain“ <https://buff.ly/3ritIRv>”. The twittersphere screamed in agony. Politics professor Brian Klaas offered a translation: “Both the arsonist and the firefighter interact with fire. But the firefighter’s efforts are being hailed as anti-fire, while the arsonist is being slammed as pro-fire.” MSNBC host Mehdi Hasan called it “one of the worst, most dangerous, most inaccurate ‘both sides!’ takes of 2021.” And history professor Thomas Zimmer wrote: “This is obviously written in bad faith. But even if it weren’t, think about how little you must value democracy to argue that ‘saving and extending voting rights’ and ‘curtailing the right to vote for specific groups’ are equally legitimate forms of ‘gaming’ the rules.” But Kraushaar is not alone in wanting to treat this simply as a partisan dispute…
2) It is very difficult to understand what is going on in the Senate—the extent to which Republican senators seek to be highly obstructive partisans while avoiding accepting the blame and obloquy that comes from being highly obstructive partisans. The fact that there is no faction in the Republican House caucus that is even trying to play a positive role in legislation is a negative sign:
Haley Byrd Wilt: Welcome Back to Infrastructure Week: ‘“Let’s just say, notionally: The president and our caucus, we are trying to get $2 trillion worth of infrastructure and job investments moving ahead,” Delaware Democrat Sen. Chris Coons told reporters Thursday. “Why wouldn’t you do $800 billion of it in a bipartisan way and do the other $1.2 trillion Dems-only through reconciliation? Why wouldn’t you do that?”…. West Virginia Republican Sen. Shelley Moore Capito, who is also involved in the conversations, has indicated she would not mind if Democrats proceed on that path. In an interview with CNBC earlier this week, she said Republicans and Democrats should first pass items that have bipartisan agreement… LINK: <https://uphill.thedispatch.com/p/uphill-welcome-back-to-infrastructure>
3) Yes, the economy will be substantially different as a result of adjustment and failure of adjustment during the coronavirus plague year. But we are not yet quite sure how:
Rani Molla: What Data on Money Spent on Travel, Grocery Shopping Tells Us About the Pandemic Recovery: ‘How dramatically the pandemic affected our spending…. While certain types of clothing spend have recovered, the physical stores at which they were once purchased haven’t. Earnest Research data on foot traffic by category—which is different from their spending categories because it tracks entities like malls—shows that people haven’t completely returned to clothing stores. In conjunction with the elevated spending data, this suggests that online sales have taken a bigger portion of clothing sales in a move that’s likely to be permanent… LINK: <https://www.vox.com/recode/22379584/spending-foot-traffic-earnest-research-data-pandemic-recovery>
4) The shift of smartphone component design and manufacture industrial leadership is accomplished. Not it looks as though the shift of central processing unit and system-on-a-chip industrial leadership in manufacture and perhaps design is well-accomplished as well. This was not something I foresaw twenty years ago:
Tae Kim: Intel’s Plan to Take On TSMC & Win Big in Chips Has Big Risks: ‘Intel’s strategic pivot to chip making comes at an ideal moment, but that won’t make its task any easier…. Intel will spend $20 billion to build two new factories in Arizona, vastly expanding capacity for both internal use and for customers of its new program, called “Intel Foundry Services," or IFS…. Here’s the biggest question for the chipmaker: Can it win a large chunk of business away from market leader Taiwan Semiconductor Manufacturing Co.? During his strategy presentation, Gelsinger confirmed for the first time that the company will be using TSMC to manufacture some of its top-of-the-line CPU processors in 2023. This is a result of years of Intel delays in moving to the latest chipmaking technologies. With Intel compelled to use TSMC for some of its leading products, it’s going to be difficult at least in the near term for the company to argue that its services are significantly better than its Asian rival…. There are some tailwinds for Intel’s manufacturing business… security concerns… future subsidies and tax incentives from the Biden administration…. While it is easy for Intel to talk a big game about building a “world-class” foundry business, it will be much harder to create a viable and profitable one… LINK: <https://www.bloomberg.com/opinion/articles/2021-04-07/intel-s-plan-to-take-on-tsmc-and-win-big-in-chips-has-big-risks>
5) The very smart Dan Wang on the complexities, contradictions, and antinomies of China in technology and organization: simultaneously more advanced and more retarded, the future and the past:
Dan Wang: China, the U.S., & Technology: ‘China has become a lot more brutal than I expected and then second of all, China looks a lot more successful than I expected…. You have to be able to recognize that things in China are getting worse, and then things in China are also getting better, just depends on the particular segment. China last year looked especially brutal, as it was able to control the virus fairly successfully. I think the lived experience to all of us in Beijing where I was based, right now I’m in Shanghai, was that China was able to control everything more or less by April of last year and it was really able to get its factories restarted by then…. China was really, really good at figuring out these short-term problems. The central government, the local governments, but especially the companies themselves were able to organize production effectively and what I’m now hearing from so many companies now is that China is still the world’s best growth story. That was the case in 2020, and that might still be the case for the next 10 years relative to a lot of other emerging countries. In addition to that, China is the world’s best place to manufacture so many different types of goods and they’re more or less doubling down a lot more on China as a major market and also as a producer…. I’ve come to the view now that… we have to spend much more time taking a look at what’s going on with the leading companies…. There are some areas of Chinese technological success, I would cite areas like solar panels, high-speed rail, mobile telephony equipment, so this is the 5G stuff that Huawei has become really good at. But if you take a look at a much bigger ticket items, things like semiconductors or aviation technologies, China has been a manifest failure…
LINK: <https://stratechery.com/2021/an-interview-with-dan-wang-about-china-the-u-s-and-technology/>
6) The extent to which the technocrats of the Trump administration—such as they were—failed to understand the difference between the structure of the world economy and the shadows cast by various forms of tax arbitrage is absolutely stunning. Never mind that the policies would not have been very likely to be successful if the world had been as they thought it. The world was simply not as they thought it was:
Paul Krugman: Trump’s Corporate Tax Cut Was a Flop: ‘I want to talk about… why even many critics, myself included, thought the Trump tax cut was less bad than the usual Republican tax plan, followed by three reasons we were, it turned out, too kind…. Republican tax cuts are usually concentrated on high-income individuals, and are justified with the claim that cutting marginal tax rates will lead to an explosion in individual effort, entrepreneurship, and so on…. There have been many debunkings…. The rationale for the corporate tax cut was, however, quite different. It wasn’t about individual work effort; instead, it was about incentives to invest in the United States as opposed to other nations. That’s clearly a real issue in a world of mobile capital…. I accepted this logic, at least as a qualitative matter. I still thought the tax cut was a bad idea, but that was because I believed that the inflow of capital would be smaller and take much longer than the plan’s advocates claimed, and as a result wouldn’t be enough to compensate for the loss of revenue. But I was, it turned out, being too generous. As a 2019 analysis by the International Monetary Fund found, the Tax Cuts and Jobs Act ended up having no visible effect at all on business investment…. How can we understand this abject failure? I see three reasons, one of which I missed completely back in 2017, two of which I knew about but didn’t give sufficient weight…. The corporate profits tax isn’t a tax on capital, it’s a tax on a particular aspect of corporate financial structure. Analyses—mine included!—that treat it simply as raising the cost of capital are being far too generous to tax cutters. Business investment isn’t that sensitive to the cost of capital, anyway…. Most business assets are fairly short-lived…. And demand for short-lived assets isn’t very sensitive to the cost of capital. [It’s] the demand for houses [that] depends hugely on the interest rate borrowers have to pay…. Monopoly: Financial industry types often talk about the FAANGs: Facebook, Apple, Amazon, Netflix, Google — tech companies that loom large in the stock market. These companies look very different from past market leaders like General Motors in its heyday; it’s much harder to link their value to the tangible assets they own…. The profit tax is at this point largely a tax on monopoly or quasi-monopoly profits…. Naïve calculations of the effect of tax cuts on business investment have to be “geared down”…. But why did anyone ever believe that corporate tax cuts would do great things for the economy? The big argument for cutting corporate taxes has long been that if we don’t, corporations will move capital and jobs to lower-tax nations…. What we’ve learned over the past 7 or 8 years, however, is that we’re mainly looking at accounting tricks rather than real capital flight…. The Trump tax cut is that it didn’t reverse capital flight because the capital flight never happened in the first place…. The U.S. government gave up hundreds of billions of dollars to fix a nonexistent problem. Now the Biden administration wants to go after the real problem, which was always tax avoidance, not loss of jobs to foreigners. Will they manage to pass the necessary legislation? We’ll just have to wait and see.
7) It was very strange, the Obama administration: so many people who were very interested in accomplishing technocratic long-run policy goals, but not in doing the foundation work to make those accomplishments durable. Obama progress on rebalancing federal finances melted away the moment his second term ended, the Affordable Care Act barely survived, and those were the two most notable accomplishments. The Biden people seem aimed at a better reinforcing structure of policy, political credit, and societal support:
Ezra Klein: The Best Explanation of Biden’s Thinking I’ve Heard: ‘With the $2 trillion American Jobs Plan, the economic theory that is Bidenomics is taking shape. It’s big. It puts climate at the center of everything. It is more worried about political risks—losing the House, giving Donald Trump a path back to power—than some traditional economic risks, like wasting money and bumping up inflation. It prefers to err on the side of spending more and making sure people know they got a bridge or a job than doing less and having people question whether government is working for them. But I still have a lot of questions about Bidenomics…. Brian Deese is the director of the National Economic Council…. I asked Deese to join me on the podcast to talk about how his economic policymaking and thinking have changed since 2009…. "Growing economic inequality… was laid bare during the pandemic…. Climate change; we’ve also seen the impact accelerating… [and] having an economic strategy that is unresponsive or agnostic to those issues is no longer a viable option…. One of the important things politically is making sure that the ultimate beneficiaries of the things you are trying to accomplish know and understand what you’re trying to accomplish…. The president is thinking…. When he’s thinking about the infrastructure investments necessary, a lot of it is in contraposition to what he is seeing China doing in terms of strategic investments…. There is a big question…. Can the United States deliver for its own citizens? Can the United States competently govern and invest in things that are obviously beneficial to its own welfare, its economic strength, its economic resilience? Because the world has watched now for a couple of years where the United States operated in a way that was very difficult for our international counterparts to fathom. That is really the dominant question…. Can the U.S. get its house in order? And that question is inevitably framed vis-à-vis China…
LINK: <https://www.nytimes.com/2021/04/09/opinion/ezra-klein-podcast-brian-deese.html>
8) When you buy an option from somebody who then delta-hedges it, what you really have done is: (a) taken a very small position in the underlying, and (b) committed to a positive-feedback trading strategy that will continually plow a very large share of notional profits you may earn on your position back into the underlying by massively raising your leverage:
Robert Armstrong: The Nope Theory to Explain Volatility in Equity Markets: ‘One factor in many of the strangest market episodes is the shadow cast by the equity options market…. Options to buy and sell shares have to be hedged by the dealers which offer them. When options-related volume is a significant portion of the market, this makes the market unstable…. The delta of an option changes with the price of the underlying stock. So if a stock really starts to run up, dealers of options in it have to buy more of it to hedge the options they have sold. This adds to the upwards price pressure…. This kind of snowball was behind the more violent spikes in GameStop, a name retail option buyers piled into heavily. The punchline is that the state of the equity options market at any given moment tells you something about pressures that will be subsequently felt in the equity market itself—and it should be possible to trade on this fact…. Francus’ core concept is an indicator called Nope… a rough-and-ready… gauge of the weight the options market is exerting on the stock market. It estimates the amount of the liquidity available in a certain stock or index that is being sopped up by options dealers’ hedging… the delta of all the outstanding “call” options to buy stocks, less the delta of all the “put” options to sell them, divided by the total daily volume trading of the shares. When Nope gets unusually high, Francus says, “the market has a strong tendency to reverse”…. This volatility-encouraging character of options is a nice iteration of a familiar Wall Street irony: a financial instrument designed to manage risk is turned into a speculative device, making the market riskier. Credit default and total returns swaps are two other good examples…
LINK: <https://www.ft.com/content/dd3b8f7b-ff0c-4887-b730-52a0fb0a11d2>