Smorgasbord

Laurence Boone, Joachim Fels, Òscar Jordà, Moritz Schularick, and Alan M. Taylor discuss Debt: The Eye of the Storm (Geneva Reports on the World Economy 24, Centre for Economic Policy Research, 2022, https://voxeu.org/content/debt-eye-storm).

"The world economy today is characterised by a larger quantity of debt, relative to its level of income, than at any time in recorded history.… In the advanced economies, the average total debt of the household, business and government sectors has grown steadily and now exceeds 250% of GDP. In the emerging markets, the same average has risen more quickly in recent years and now stands at about 150% of GDP. The world is therefore highly levered in terms of its overall debt-to-income ratio … The economic dislocations caused by the Covid-19 pandemic have jolted debt ratios even higher, raising even more concerns about future debt burdens and their potential dangers, but in many respects this crisis has only served to accelerate preexisting debt trends.… In sum, the picture that this report paints is one of cautious and perhaps unexpected optimism. As long as credit supply remains plentiful relative to debt issuance, and thus interest rates remain low, higher levels of debt are sustainable. We are not blind to the challenges policymakers will have to face. Nor are we blind to the possibility, in a world awash with debt, that negative shocks will generate more bouts of instability, which will inevitably spill over onto innocent bystanders in a globalised economy. However, the trends behind the oversupply of credit will likely continue for a long time. Debt should not be ignored. But neither should it be feared."

The World Development Report is an annual flagship report of the World Bank, and the 2022 version focuses on “Finance for an Equitable Recovery” (February 2022, https://www.worldbank.org/en/publication/wdr2022).

"Economic activity contracted in 2020 in about 90 percent of countries, exceeding the number of countries seeing such declines during two world wars, the Great Depression of the 1930s, the emerging economy debt crises of the 1980s, and the 2007–09 global financial crisis … In 2020, the first year of the COVID-19 pandemic, the global economy shrank by approximately 3 percent, and global poverty increased for the first time in a generation.… As the economic effects of the pandemic continue, policy makers aim to strike a balance between providing enough support to mitigate the human costs of the crisis, while limiting the longer-term financial and macroeconomic risks that could emerge from higher debt levels resulting from the crisis. These risks are likely to arise more quickly in emerging economies and especially in low-income countries, where the public and private debt-carrying capacity is much lower than in advanced economies, and where economic conditions were, in many cases, challenging even before the pandemic.… Past crises have revealed that without a swift, comprehensive policy response, loan quality issues are likely to persist and worsen over time, as epitomized by the typical increase in loans to ‘zombie firms’—that is, loans to weak businesses that have little or no prospect of returning to health and fully paying off their debts. Continued extension and rolling over of loans to such firms (also known as evergreening) stifles economic growth by absorbing capital that would be better directed to loans for businesses with high productivity and growth potential."

Ulrike Malmendier delivered the 2020 JEEA-FBBVA Lecture to the European Economic Association, now published as "Exposure, Experience, and Expertise: Why Personal Histories Matter in Economics" (Journal of the European Economic Association, December 2021, 19:6, pp. 2857–94). From the abstract:

"Personal experiences of economic outcomes, from global financial crises to individual-level job losses, can shape individual beliefs, risk attitudes, and choices for years to come. A growing literature on experience effects shows that individuals act as if past outcomes that they experienced were overly likely to occur again, even if they are fully informed about the actual likelihood. This reaction to past experiences is long-lasting though it decays over time as individuals accumulate new experiences. Modern brain science helps understand these processes. Evidence on neural plasticity reveals that personal experiences and learning alter the strength of neural connections and fine-tune the brain structure to those past experiences ('use-dependent brain')."

India's Ministry of Finance has published its annual Economic Survey 2021-22 (https://www.indiabudget.gov.in/economicsurvey), with an overview of the current state of India’s economy.

"The default mode of policy-making in India and most of the world has traditionally been to rely on a pre-determined 'Waterfall' approach—an upfront analysis of the issue, detailed planning and finally meticulous implementation. This is the framework that underpins five-year plans and rigid urban master-plans. The problem is that the real world is a complex and unpredictable place buffeted by all kinds of random shocks and unintended consequences. The response of traditional economics was to create ever more detailed plans/regulations, and elaborate forecasting models despite more than adequate evidence that this did not improve outcomes. In his Nobel Prize acceptance speech, economist Friedrich Hayek dubbed this 'The Pretence of Knowledge'. This Economic Survey sets out to explain the alternative 'Agile' approach that informed India’s economic response to the Covid-19 shock. This framework is based on feed-back loops, real-time monitoring of actual outcomes, flexible responses, safety-net buffers and so on. Planning matters in this framework but mostly for scenario analysis, identifying vulnerable sections, and understanding policy options rather than as a deterministic prediction of the flow of events.… Some form of feedback loop based policy-making was arguably always possible, but the Agile framework is particularly relevant today because of the explosion of real-time data that allows for constant monitoring. Such information includes GST [goods and services tax] collections, digital payments, satellite photographs, electricity production, cargo movements, internal/external trade, infrastructure roll-out, delivery of various schemes, mobility indicators, to name just a few."

Elroy Dimson, Paul Marsh, and Mike Staunton have co-authored the annual Global Investment Returns Yearbook published by the Credit Suisse Research Institute (February 2022, https://www.credit-suisse.com/about-us/en/reports-research/csri.html). This edition includes a special topics chapter on "Diversification."

"Conventional wisdom is that a small number of stocks—say 10 to 20—is sufficient to provide market-mimicking returns. That interpretation is misleading … Many more stocks are needed to create a well-diversified portfolio.… From 1980 onward, US investors made increasingly large investments in overseas equities. However, in risk-return terms, they would have been better off staying at home.… Moreover, this is before taking account of the higher costs of investing internationally in the earlier part of this period.… Stock-bond correlations have now been mostly negative in major world markets for some 20 years. This negative correlation means that stocks and bonds have served as a hedge for each other, enabling investors to increase stock allocations while still satisfying a portfolio risk budget.… In recent years, much research has focused on why the sign of the stock-bond correlation flipped in the late 1990s. What was different about the period before and afterwards? … Despite the volume of research, neither theory nor empirical studies point to a single or clear explanation for the negative stock-bond correlation."

As a policy-focused complement to the "Symposium on Early Childhood Interventions" in this issue—a bipartisan group of academics under the moniker of the "AEI-Brookings Working Group on Childhood in the United States" has produced a report on "Rebalancing: Children First" (February 2022, https://www.brookings.edu/research/rebalancing-children-first/).

"The working group proposes, in short, rewriting the generational contract. In 2019, the share of the federal budget spent on children was 9.2 percent and the share spent on the adult portions of Social Security, Medicare, and Medicaid was 45 percent.… This allocation is a statement of national priorities—priorities that the working group agrees need to change."

Innovations in Money?

The Federal Reserve offers a framework, without committing to any policy choices, in a discussion on "Money and Payments: The U.S. Dollar in the Age of Digital Transformation" (January 2022, https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf).

"For the purpose of this paper, a CBDC [central bank digital currency] is defined as a digital liability of a central bank that is widely available to the general public. In this respect, it is analogous to a digital form of paper money.… A CBDC could potentially offer a range of benefits. For example, it could provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expand consumer access to the financial system. A CBDC could also pose certain risks and would raise a variety of important policy questions, including how it might affect financial-sector market structure, the cost and availability of credit, the safety and stability of the financial system, and the efficacy of monetary policy.… The Federal Reserve will continue to explore a wide range of design options for a CBDC. While no decisions have been made on whether to pursue a CBDC, analysis to date suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified."

Dirk Niepelt has edited an e-book of 19 short and readable essays on Central Bank Digital Currency: Considerations, Projects, Outlook (CEPR Press, November 2021, https://voxeu.org/content/central-bank-digital-currency-considerations-projects-outlook). Some of the essays focus on overall conceptual questions; others provide some detail on what CBDC experiments some central banks around the world are already carrying out. Niepelt writes in the introduction:

"Many central banks have concluded that private sector initiatives have taken the status quo option off the table. And as a consequence, more and more monetary authorities have morphed from observers into active contributors, albeit often sceptical ones. While the discussion about the 'right' CBDC choices—no, or yes and how—is far from settled, the arguments have become sharper and the trade-offs clearer. It has become evident that the implications of CBDC extend far beyond the realms of payments, monetary policy and financial stability. And consequently, there is growing awareness that parliaments and voters—not only central banks—should actively join the debate."

The President's Working Group on Financial Markets (PWG), joined by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), released a “Report on Stablecoins” (November 2021, https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf).

"Stablecoins are digital assets that are designed to maintain a stable value relative to a national currency or other reference assets. Today, stablecoins are primarily used in the United States to facilitate trading, lending, or borrowing of other digital assets, predominantly on or through digital asset trading platforms. Proponents believe stablecoins could become widely used by households and businesses as a means of payment. If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options.… Speculative digital asset trading, which may involve the use of stablecoins to move easily between digital asset platforms or in decentralized finance (DeFi) arrangements, presents risks related to market integrity and investor protection. These market integrity and investor protection risks encompass possible fraud and misconduct in digital asset trading, including market manipulation, insider trading, and front running, as well as a lack of trading or price transparency. Where these activities involve complex relationships or significant amounts of leverage, there may also be risks to the broader financial system.… Stablecoins also pose illicit finance concerns and risks to financial integrity, including concerns related to compliance with rules governing anti-money laundering (AML) and countering the financing of terrorism (CFT) and proliferation."

Interviews

Noah Smith serves as interlocutor in "Interview: Emi Nakamura, macroeconomist" (Noahpinion, February 21, 2022, https://noahpinion.substack.com/p/interview-emi-nakamura-macroeconomist).

"The recent increase in inflation is much more than historical experience would have predicted (which is about an increase in inflation of 1/3% for every 1% decrease in unemployment). I think several factors have been important. First, after a long hiatus from playing a major role in inflation, supply shocks are back! The most dramatic of these is the disruptions to the labor market. US labor force participation is down by roughly 1.5%, and so far the decline is pretty persistent.… There have also been other important supply shocks: it’s more expensive to operate a daycare or a factory than it used to be due to safety restrictions due to COVID. It used to be hard to come up with good examples of negative supply shocks in teaching undergraduate economics classes, but COVID certainly counts as one! Second, there has been a historic shift in demand from services to goods. In the Great Recession, the fraction of expenditures spent on goods fell. The opposite happened during COVID: the fraction of spending on goods rose pretty dramatically. This is another tectonic shift in the economy that I think is putting enormous pressure on supply chains among other things.… Third, there has been a very rapid recovery and a lot of government support for spending. Households have a huge buildup in savings, and spending this down is no doubt contributing to demand.… One thing that hasn’t contributed much to inflation so far is an unhinging of longer run inflation expectations. Both survey and market-based measures of longer run inflation expectations look pretty stable.… It's one of the Fed’s primary goals these days to keep it that way." 

David A. Price conducts an "Interview" with Pinelopi Goldberg, subtitled "On developing countries, measuring economies by satellite, and the learning crisis" (Econ Focus, Federal Reserve Bank of Richmond, Winter 2022, pp. 22–26, https://www.richmondfed.org/publications/research/econ_focus/2022/q1_interview). At one point, Goldberg discusses her research (with Tristan Reed) on why COVID death rates seem so much lower in low-income countries:

"Most people's reaction was that this result was just because poor countries are not connected, so COVID-19 had not arrived there yet.… [But] capitals of low-income countries are not as isolated as people think; many of these cities are global cities. They are connected to the rest of the world.… Another reaction was that this was all measurement error.… But the differences in deaths are huge—orders of magnitude apart. Just to give you one striking example, in the United States right now, the deaths per million are around 2,500. In Nigeria, the number is 14; in India, it’s 340. And it’s not easy to hide deaths. Yes, there is measurement error—probably deaths and hospitalizations are much higher in low-income countries than the statistics show—but still, there is a big difference between low-income countries and richer ones. I think there are three reasons at work.… First, everyone agrees that two of the risk factors for a serious reaction to COVID-19 leading to hospitalization and death are age and obesity. The age distribution in many low-income countries is very different from that in the United States. To mention a striking case, in Niger, the median age is 15; there, COVID-19 would probably not have very severe health effects on the population. On top of that, in low-income settings, obesity is much lower.… In addition, many epidemiologists talk about what they call "trained immunity" for low-income countries. The idea is that people in those countries are exposed to disease all the time, so their immune systems have learned how to cope. An alternative interpretation is that there has been selection; the ones who have managed to survive the various diseases they’ve been exposed to have very strong immune systems.… It's still the case that the poorer the country, the lower the per capita COVID-19 deaths so far. We’ll see whether this holds in the future."

Ilan Goldfajn and Eduardo Levy Yeyati have edited an e-book, Latin America: The Post-Pandemic Decade—Conversations with 16 Latin American Economists (CEPR Press, December 2021, https://voxeu.org/content/latin-america-post-pandemic-decade-conversations-14-latin-american-economists). As one example, here are comments from Ricardo Hausmann:

"Over the past 60 years, the [Latin America] region has not shown a capacity to narrow the huge income gap it has with the advanced countries … The region's income per capita at market prices is less than 1/7th that of the United States, 1/4th when adjusted for purchasing power parity.… This lack of progress in closing the income gap is surprising in light of the fact that gaps in education, health, life expectancy, infant mortality, urbanisation, fertility rates and female labour force participation have narrowed dramatically or even reversed, while gaps in investment effort are either small or negative.… Policies have also become more market friendly: inflation is way down in the single digits (except in Venezuela and Argentina), credit ratings have improved, trade has been liberalised, public enterprises have been privatised and many other indicators of market-friendly structural policies have all been moving in the right direction … My interpretation of this state of affairs is that there is a growing technology gap: Latin America is particularly bad at adopting and adapting technology.… For the region as a whole, the rate of patenting is 1/70th that of the United States, with the best performers—Brazil and Chile—at about 1/40th of US levels. This is not a typical feature of middle-income countries: China's patenting rate per capita is higher than the United States and Korea holds the world patenting record per capita, while Turkey, Eastern Europe and the former Soviet Union dwarf the best Latin American performers.… A final piece of evidence is the dearth of new exports in Latin America: while the export basket of fast-growing countries in East Asia and Eastern Europe shows rapid diversification and sophistication—from garments, to electronics, to cars, to machinery, to chemicals and beyond—Latin America has been stuck in a narrow set of exports. Even Latin America’s own positive deviance—blueberries, soybeans, avocadoes and other fruits—speak about technological developments adapted to local conditions that allowed the region to deploy physical and human capital into new 'ideas'."

Discussion Starters

Keith Fuglie, Jeremy Jelliffe, and Stephen Morgan of the Economic Research Service at the US Department of Agriculture discuss "Slowing Productivity Reduces Growth in Global Agricultural Output" (Amber Waves, December 28, 2021, https://www.ers.usda.gov/amber-waves/2021/december/slowing-productivity-reduces-growth-in-global-agricultural-output/).

"After the 'Green Revolution' of the 1960s and 1970s increased crop yields, growth rates in agricultural output peaked and then started declining until the 1990s. In the 1990s and 2000s, growth rates in global agricultural output began trending upward again. Driven by more rapid TFP [total factor productivity] growth, world agricultural output increased fast enough to meet food demand from growing global populations and incomes, and reduced the need to use more land, labor, and other resources. However, … global agricultural productivity growth slowed in the 2010s. Output grew at an average annual rate of 2.08 percent during 2011–19 compared with 2.68 percent during 2001–10 … Average TFP growth during these decades fell from 1.96 percent annually to 1.31 percent annually.… At the same time, the rate at which agricultural land was expanding increased.… The slowdown in agricultural output growth over the past decade occurred primarily in developing countries … The growth rate in agricultural production in developing countries declined from an average of 3.56 percent in the 2000s to 2.37 percent in the 2010s. A decrease in the rate of TFP growth was responsible for most of this decline."

Dorte Verner, Nanna Roos, Afton Halloran, Glenn Surabian, Edinaldo Tebaldi, Maximillian Ashwill, Saleema Vellani, and Yasuo Konishi have written a book on Insect and Hydroponic Farming in Africa: The New Circular Food Economy (World Bank, December 2021, https://openknowledge.worldbank.org/handle/10986/36401). From the Executive Summary:

"While current agri-food production models rely on abundant supplies of water, energy, and arable land and generate significant greenhouse gas emissions in addition to forest and biodiversity loss, past practices point toward more affordable and sustainable paths.… Frontier agriculture includes insect farming and hydroponic farming.… Insect farming is the process of producing insects for human food and animal feed, and hydroponic farming is the process of growing crops in nutrient-rich water solutions instead of soil. These technologies do not require great access to land, water, or wealth—all limiting factors in Africa … The technologies use organic waste, including agricultural or certain industrial waste, to quickly produce nutritious and protein-rich foods for humans, fish, and livestock and biofertilizers for soils. This improves food and nutrition security while reducing waste, strengthening national accounts, replenishing the environment, saving hard currency reserves by decreasing food and feed imports, and promoting green, resilient, and inclusive development.… Within a year, African insect farming can generate crude protein worth up to US$2.6 billion and biofertilizers worth up to US$19.4 billion. That is enough protein meal to meet up to 14 percent of the crude protein needed to rear all the pigs, goats, fish, and chickens in Africa, according to the report’s modeling of the annual production of black soldier fly larvae (BSFL) in Africa."