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Newsletter: Not Enough Workers or Not Enough Jobs?

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This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here.

Economists debate the cause of a hiring slowdown, it’s still not entirely clear what a U.S.-China phase one deal would look like, the Fed is putting a price on climate change and the California dream may be dying. Let’s head into the weekend with a look at today’s top economic news.

Economists Split on Cause of Hiring Slowdown

The data is clear: Hiring in the U.S. is slowing. But is that because of a shortage of workers or softening demand for labor? In The Wall Street Journal’s latest survey of economists, 45% blamed the slowdown on the tight labor market, which has made it harder for many employers to find enough workers; 38% of respondents said the issue was ebbing desire to expand payrolls. The first explanation would suggest the economic expansion can continue at a solid pace if more potential workers can be drawn off the sidelines and into the labor force. The latter could indicate employers are becoming more cautious about hiring—perhaps because of slowing global growth or other uncertainties, or because they see weakening domestic demand for goods and services—which could portend a loss of U.S. economic momentum in the months ahead, Harriet Torry reports.

WHAT TO WATCH TODAY

The University of Michigan’s consumer sentiment index for November is expected to tick down to 95.3 from 95.5 at the end of October. (10 a.m. ET)

U.S. wholesale inventories for September are expected to fall 0.3% from the prior month. (10 a.m. ET)

The Baker Hughes rig count is out at 1 p.m. ET.

The San Francisco Fed’s Mary Daly speaks at a research conference on the economics of climate change at 11:45 a.m. ET, the New York Fed’s John Williams speaks in New York at 8 p.m. ET, and governor Lael Brainard speaks at a conference on the economics of climate change at 8:35 p.m. ET.

China’s consumer-price index for October is out at 8:30 p.m. ET.

TOP STORIES

Unfazed

Beijing’s announcement that the U.S. and China agreed to roll back tariffs as part of a “phase one” trade accord lifted financial markets. The Trump administration’s response, however, was more cautious, Josh Zumbrun, William Mauldin and Chao Deng report.

  • Chinese Commerce Ministry spokesman Gao Feng on Thursday said the two sides agreed to “remove the same proportion of tariffs simultaneously” if they finalize a phase one pact. 
  • One U.S. official concurred. “If there’s a phase one trade deal, there are going to be tariff agreements and concessions,” White House economic adviser Larry Kudlow told Bloomberg.
  • Others disputed that. “There is no agreement at this time to remove any of the existing tariffs as a condition of the phase one deal,” White House senior trade adviser Peter Navarro said on Fox Business Network.
  • The U.S. has hit about $360 billion of Chinese imports with tariffs, in four tranches, and it was unclear Thursday how many of these tariffs could be affected or under what timeline.

 

Heard on the Street’s Nathaniel Taplin: Investors may be reading too much into a Chinese Commerce ministry statement about an agreement to lift tariffs in phases. Chances are, there will be some kind of agreement this year, including some initial tariff relief. Beyond that, the future of Sino-U.S. trade relations remains as opaque as ever.

The latest reports on Chinese and German exports, meanwhile, beat expectations, an early sign that global demand may be picking up as trade tensions ease.

The Cost of Climate Change

A top New York Fed official put a price tag on climate- and weather-related events and said financial firms need to take seriously such dangers in their risk-management decisions. “The U.S. economy has experienced more than $500 billion in direct losses over the last five years due to climate and weather-related events,” said Kevin Stiroh, an executive vice president at the New York Fed. “Climate change has significant consequences for the U.S. economy and financial sector through slowing productivity growth, asset revaluations and sectoral reallocations of business activity.”

The San Francisco Fed on Friday will hold a conference on climate change and economic risks, a first for the central bank. The Fed has been taking increased interest in how a changing climate will affect the economy and the financial system, Michael S. Derby reports.

Brexit Boost

The Bank of England said it expects the U.K. economy to pick up modestly over the next three years if lawmakers back Prime Minister Boris Johnson’s Brexit deal and the country pursues a free-trade accord with the European Union. The forecast marks the first time the central bank has assessed Mr. Johnson’s Brexit plan. While it said the deal would create new barriers to trade with a bloc that currently buys around half of U.K. exports, it added the removal of uncertainty could boost investment, which has stalled since mid-2016, Jason Douglas and Paul Hannon report.

Ain’t No Sunshine

Does anyone still want to live in California? Long known as the home of easy living, with its beaches and year-round sunshine, the state is increasingly seen as a perilous and unlivable place where the government and corporate institutions can’t reliably offer basic services. California has the highest gas prices in the country. Housing prices are the second-highest in the nation. Homelessness is surging in major cities. A drought left some towns without clean water. And now, more than two million people have lost power in Northern and Southern California in the past month and hundreds of thousands have evacuated their homes to avoid fire danger, a number likely to grow before the year ends, Ian Lovett reports. “It’s like living in a third-world country,” said Marilyn Dalton, 78, a resident of Potter Valley, Calif.

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

Are we headed for another Victorian era of income inequality? Research by J. Rodrigo Fuentes and Edward Leamer finds that from 1980 to 2016, U.S. incomes rose only for those with advanced degrees working more than 40 hours a week. The loss of manufacturing jobs, meanwhile, wiped out a key opportunity for high school grads to put in the effort and pile up the hours needed to get ahead. What’s left are low-wage service jobs, akin to the work performed by servants in the 1800s. “We suggest we may be returning to the income inequality of the Victorian age but with talent replacing land as the source of inherited wealth and power,” they write in a National Bureau of Economic Research working paper.

Trade war? Phooey. “Nearly three quarters of U.S. businesses feel that protectionism is increasing in their key markets, but it’s a growing trend that’s viewed quite positively in the United States. In fact, more businesses feel they’ve gained more than they’ve lost,” HSBC finds in its latest Navigator Report.

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Three Reasons Why More Secession Means More Freedom

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When we hear of political movements in favor of decentralization and secession, the word “nationalist” is often used to describe them.

We have seen the word used in both Scottish and Catalonian secession movement, and in the case of Brexit. Sometimes the term is intended to be pejorative. But not always.

When used pejoratively — as was the case with critics of Brexit — the implication is that the separatists seek to exit a larger political entity for the purposes of increasing isolation, throwing up greater barriers to trade, and pursuing a more autarkic economic policy. In other words, we’re supposed to believe that efforts at decentralizing political systems leads to states becoming more oppressive and more protectionist.

But there’s a problem with this claim, and with connecting protectionist nationalism to decentralization and secession: the act of breaking up political bodies into smaller pieces works contrary to the these supposed goals of nationalism.

That is, when a political jurisdiction is broken up into smaller independent units, those new units are likely to become more reliant on economic integration and trade, not less. This dependency increases as the country size becomes smaller. If the goals of the nationalists include economic autarky and isolation, nationalists will quickly find these goals very hard to achieve indeed.

This is true for at least three reasons.

One: Economic Self-Sufficiency Is Costly and Difficult

Economic self-sufficiency — i.e., autarky — has long been a dream of protectionists. The idea here is that the population within a given state benefits when the residents of that state can cut themselves off from other states while still maintaining a high standard of living. Fueled by the false notion that imports represent economic losses for an economy, protectionists seek policies that block or minimize the importation of foreign goods.

Large countries can pull this off — for a little while. For countries with vast agricultural hinterlands, large industrial cities, and innovative service sectors, it is possible to move toward economic reliance on only domestic food stuff, domestic raw materials, and domestic industry.

Over time, however, protectionist states begin to fall behind the rest of the world which is presumably still engaging in international trade. It will become increasingly clear that the protectionist states are not keeping up in terms of their standards of living. This will have geopolitical implications as well, since protectionist countries will become relatively impoverished and relatively less innovative compared to other states. Protectionist states thus lose relative power both economically and militarily. We saw this at work in Latin America, for instance, when it was in the thrall of “Dependency Theory” during the mid-twentieth century. The idea was that countries could become wealthier and more politically independent by reducing trade. The strategy failed miserably.

The process is the same with small countries, but the effects of protectionism become more apparent more quickly. After all, a small country that lacks a diverse economy or a large agricultural sector will quickly find itself running out of food, skilled labor, and raw materials. Moreover, a small country without close ties to other nations will quickly find itself in a very dangerous geopolitical position.

Perhaps not surprisingly, empirical studies have found that small countries tend to be more open to international trade than larger countries, and that “[c]eteris paribus, small nations … become more trade-focused than large ones.”

Indeed, this is the only way for them to prosper. As Gary Becker noted during the period when new post-Soviet states were entering the global marketplace, “[s]mall nations are proliferating because economies can prosper by producing niche goods and services for world markets.”

Small countries can’t offer the world a wide variety of goods and services. But they can specialize and offer at least some goods or services for which there is global demand. Without this, small states have little hope of raising their standards of living. This is why economists Enrico Spolaore and Alberto Alesina concluded in 1995 that “smaller countries will need more economic integration.” in order to benefit from independence.

This all suggests the need to integrate becomes greater the smaller the state, and the need for economic openness and integration are even greater for microstates — the smallest of the small states. William Esterly and Aart Kraay found in 1999, for example, that in spite of the “widely held view that small states suffer from their openness,” financial “openness may help microstates insure against the large shocks they receive.” This is in part due to the fact financial openness “allows countries to share risks with the rest of the world.”

The impetus for small states to pursue open trade policies exists even in the presence of potentially threatening larger states. As noted in his study of how trade is affected by state size, Stephen Krasner notes “[s]mall states are likely to opt for openness because the advantages in terms of aggregate income and growth are so great, and their political power is bound to be restricted regardless of what they do.”

Two: Smaller Countries Seek Tax Competition and Tax Arbitrage

Trade barriers aren’t the only place where small states look to lessen regulatory burdens and tax burdens.

Smaller states also have a habit of competing with larger states by lowering tax rates. As recounted by Gideon Rachman in The Financial Times, numerous small states were integrating into the European economy in the late 1990s and early 2000s. Accoridng to Rachman:

Small and nimble nations slashed taxes and regulation to attract foreign capital and business. The Irish set some of the lowest corporation tax rates in Europe; the Balts and Slovaks went for flat taxes; Iceland became an improbable financial centre. International capital flooded into the smalls.”

Did this mean smaller states in general — at least those with easy access to Europe — tended to embrace lower tax tax rates? The answer appears to be yes. In a 2012 study author Franto Ricka concludes “capital tax rates in the EU countries are positively related to their size partly because small countries “choose a lower tax on capital than larger countries, with which they compete.” While large states can rely on economies of scale to keep capital from defecting in response to tax incrases, small states have no such advantage. Thus, small states, must be, as Ricka puts it “tougher competitors for scarce capital.”

Moreover, Ricka found that the presence of small countries — and the tax competition they provided — drove down tax rates in the larger countries.

Not surpringly, large states have attempted to pressure small states into raising tax rates and embracing so-called “tax harmonization.” In early 2019, for example, European Commission president Jean-Claude Juncker pushed the idea of ending the ability of EU members to veto changes in tax policy so as to make tax rates across EU countries more equal. The relatively small states of Ireland and Hungary have long opposed such efforts . Malta has vehemently objected as well.

Europe isn’t the only place with small states looking to attract capital with low tax rates. Small island nations in the Caribbean also function as tax havens and have earned the ire of the European Union’s leadership.

When it comes to tax rates, it’s the large states — and especially unions of large states like the EU — that are the drivers behind efforts to raise global taxes worldwide.  The efforts threaten to end the havens offered by smaller states looking to attract capital that would likely ignore small states otherwise.

Three: Small States Actually Perform Better

Finally, as an added motivation to small states to lower trade barriers and tax rates, there is the empirical evidence showing that small states can achieve higher growth rates and higher standards of living through more liberal economic policy.

Economist Gary Becker noted in 1998, ” since 1950 real per capita GDP has risen somewhat faster in smaller nations than it has in bigger ones .” Becker concluded that “the statistics on actual performance show that dire warnings about the economic price suffered by small nations are not all warranted….Smallness can be an asset in the division of labor in the modern world, where economies are linked through international transactions.” Of the fourteen countries with populations over 100 million, only the US and Japan are wealthy .

Moreover, Easterly and Kraay write:

controlling for location, smaller states are actually richer than other states in per capita GDP. … microstates have on average higher income and productivity levels than small states, and grow no more slowly than large states”, the only “penalty of smallness” being the relatively higher GDP growth rates volatility due to trade exposure.

Nor are the indicators favoring small states based only on numbers like income and productivity. Nick Slater at Current Affairs observes

[People] tend to live longer [in microstates]: out of the top ten countries in terms of life expectancy , nine could be considered microstates (of these, Switzerland is a bit of a stretch, but its population is still smaller than New York City’s). It can also be good for your bank account: the quality of life in European microstates like Luxembourg, Lichtenstein, and San Marino is perhaps the highest in the world.

Now, this isn’t to say smallness is a foolproof strategy for economic success. There’s a reason Easterly and Kraay control for location in their comparisons. Other research suggests that small and remote countries tend to be uncompetitive.

But even in Africa, small states outperformed large states in economic growth. According to a 2007 report from the World Bank, the resilience of small states was likely due to greater economic flexibility observed in small states, and thanks to political stability. This stability, it is believed, stemmed in part from the fact smaller African countries are less “ethnically fractionalized.”

Unilateralism Doesn’t Mean Protectionism

All too often, opponents of decentralization and secession insist that whenever a region, member state, or nation is allowed to go its own way, it will immediately raise trade barriers, raise taxes, and pursue forget the benefits of international cooperation. Yet, in recent decades, there is scant evidence to suggest this is a likely outcome in practice. It appears far more likely that seceding countries and territories are more likely to move away from economic nationalism and toward a more open economy.



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Why my purchase choices have the kiss of death

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Steve Eisman, the investment manager made famous by Michael Lewis’s The Big Short, did a lot of homework in his quest for terrible assets to bet against. But when he was introduced to another investment manager — Wing Chau — he saw the opportunity to accelerate the decision-making process: “Whatever that guy is buying, I want to short it.”

For Mr Eisman, Wing Chau was the equivalent of a watch that is six hours off: a perfect guide, as long as you realise that you need to look at the opposite side of the deal — or the clock face.

A few years ago, four business school academics won attention for the discovery that the same logic may work for retail products. Eric Anderson, Song Lin, Duncan Simester and Catherine Tucker found what they called “harbingers of failure” — consumers who simply adored the Ford Edsel, the Betamax video format, or those squeezy bottles loaded with Heinz EZ Squirt ketchup in bright blue, green and purple, a kind of edible paint. These people thought nothing cried out “sophisticated lady” more loudly than a packet of Bic disposable knickers.

Product development teams have long prized the idea that “lead customers” could give them insight into where the mass market might be going. A celebrated example is the mountain bike, a product assembled by enthusiasts who, starting in the early 1970s, modified old bikes by adding balloon tyres and motorcycle brakes to cope with demanding off-road conditions. Fifteen years later, the mountain bike was a mainstream retail product.

Pointing to such examples, Eric von Hippel, a professor at MIT, argued that companies shouldn’t just show product ideas to focus groups made up of generic, average consumers. They should find the early adopters and the trend setters, and pay particular attention to them.

But the “harbingers of failure” study reminds us that we could equally seek customers with the opposite quality: an unerring nose for products that the mass market will despise. Perhaps it shouldn’t be a surprise that such people exist. Prof Anderson and his colleagues suggested that companies could identify harbinger customers by examining their purchase decisions, and then use them as a guide to what not to stock in future. They also concluded that these customers provided a strong signal of a product’s prospects: “The more they buy, the less likely the product will succeed.”

Recently, the plot thickened like a glob of EZ Squirt: a research paper from professors Simester and Tucker and Clair Yang reported on “The Surprising Breadth of Harbingers of Failure”. This study found that “not only are there customers who are harbingers, but there are also harbinger zip codes”.

People in these accursed neighbourhoods buy doomed products, and also niche products that nearby zip codes don’t find attractive. The tendency is broad-based: they buy unpopular products at a big-box warehouse store, but they also buy unpopular garments at a clothing retailer. This is rather convenient for market researchers — Prof Simester and colleagues argue that zip codes provide all the information needed to learn from the harbinger effect. The harbinger zip codes are even losing propositions in electoral campaigns: they are more likely to donate money to political candidates who lose, and less likely to donate to popular ones.

And then I realised: they’re talking about me. While I’d prefer not to reveal too much about my voting habits, it has been a very long time since I was on the winning side: I didn’t vote for Boris Johnson, I didn’t vote for David Cameron and I didn’t vote for Tony Blair. I was on the losing side in all the referendums, too. Politically, I am Crystal Pepsi. I am Colgate ready meals.

Come to think of it, as a student I did go through a phase of drinking the monumentally unsuccessful soft drink, Tab. I’ve never owned an iPhone and when my wife bought me an iPad, I sent it back because I couldn’t figure out how to make it work. In the pool, I wear Speedos. I am the Wing Chau of retail and politics: come study me, oh trendspotters and psephologists, for a glimpse into what the future does not hold.

All this makes me wonder: what makes a harbinger of failure, and why is our taste for the unpopular so wide-ranging? Why would someone who admires Clairol’s Touch of Yogurt shampoo feel the same way about the Liberal Democrats’ Vince Cable? Perhaps we harbingers are open-minded, happy to take a risk on something new and unusual? Perhaps; but harbingers don’t just try Frito-Lay lemonade, we swig it down and then come back for more.

Perhaps the answer is that ordinary, well-adjusted people notice what other people are doing, and fit in. In contrast, we harbingers are simply oblivious. Jacket and jeans? Socks and sandals? Why not? I have yet to see a completely convincing explanation — or even to be fully persuaded that the whole idea isn’t one big statistical fluke. But if anyone in market research would like to follow me around a supermarket, get in touch.

 

Written for and first published in the Financial Times on 17 January 2020.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Quotation of the Day…

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… is from page 51 of my late Nobel-laureate colleague Jim Buchanan’s 1978 paper “From Private Preferences to Public Philosophy,” as this paper is reprinted in James M. Buchanan, Politics as Public Choice (2000), which is volume 13 of the Collected Works of James M. Buchanan; the original published version of this paper is available here):

Little or none of the empirical work on regulation suggests that the pre-public choice hypotheses of regulation in the “public interest” is corroborated.

DBx: More than four decades later this observation remains descriptive.

This reality is – or ought to be – unsurprising. Everyone who graduates from kindergarten understands that incentives matter: if the ease of gaining at the expense of strangers rises relative to the costs of seeking such gains, we expect that more people will attempt to gain at the expense of others. Widespread understanding of this reality is why there is universal support for laws against slavery, theft, fraudulent conveyance, and other attempts to gain at the expense of those who do not consent to being exploited. Put differently, no one would be surprised to learn that empirical studies of a society in which people are free to steal each other’s stuff will be a society filled with an unusually large number of attempts by people to steal each other’s stuff.

And yet very many people toss this common sense aside when pondering regulation by government. (Many people who do this tossing aside of common sense call themselves “progressive.” Strange, that.) Empowered to proscribe and to prescribe actions by strangers, government officials should be expected routinely to exercise this power in ways aimed at seizing private benefits for themselves at the expense of the strangers whom these officials ‘regulate.’ Why is anyone surprised by this reality? Why do so many people assume that the holding of office called “public” or “government” somehow changes individuals fundamentally?

Or perhaps even more realistically: why are so many people blind to the fact that if there are available in society opportunities to gain at the expense of others, individuals who are especially interested in, and adept at, gaining at the expense of others will generally succeed in filling those positions?

By telling ourselves the tale that government, if it is democratic, is at least semi-divine, we dupe ourselves into being duped and pillaged by others. The fact that we humans can imagine matters turning out otherwise – that we can imagine public officials somehow gathering godlike knowledge and then using that knowledge as angels would us it – is not (contrary to popular presumption) a sufficient reason to trust government officials with a great deal of power to “regulate” the affairs of peaceful people.

The post Quotation of the Day… appeared first on Cafe Hayek.



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