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October 24, 2009

Economist's View - 4 new articles

South-South Trade Tensions

Brian Hoyt of the World Bank's Crisis Talk blog says increasing trade tensions between the emerging markets of the Global South may prove to be problematic:

South-South Trade Tensions, by Brian Hoyt: John Authers argues that the newsworthy economic story of late isn't dollar weakness; rather, it is the weak renminbi:
Many, if not most, hopes for global recovery are pinned on China buying goods from countries such as Brazil. Commodity prices, a key driver of equities and forex rates, also move in response to the new orders received by China's manufacturers.
This currency regime makes it far harder for such countries to sell to China. So it is no wonder that currencies are back at the top of the agenda.
...China has been building stronger trade relations with the Global South for quite some time. It is now South Africa's top export destination. But many of these partnerships are built around China purchasing commodities, and selling manufactured goods. With a weakening currency, China is likely to purchase fewer non-commodity goods from its trading partners. This may lead to growing trade tensions, particularly with countries who are not endowed with commodities.
Much attention has been paid to the importance of the economic relationship between China and the United States, or "Chimerica" (See this week's Economist cover story. Or Paul Krugman). Rising trade tensions between the two economic powers could spell doom for the global economy.
Yet, one should not discount the importance of emerging market trade relations, and the possible tensions that may arise. Today's Wall St Journal reports of Indian grievances toward China's trade practices:
Trade friction is growing between India and China. India leads all members of the World Trade Organization in antidumping cases against China. India has banned imports of Chinese toys, milk and chocolate, citing safety concerns...
Heavy industries minister Vilasrao Deshmukh recently told reporters, "We don't want India to be turned into a dumping ground". Yet, India's actions have had little effect on the growing trade imbalance between the two countries:
Alas, trade tensions are not only worrisome between the West and the East. They may prove problematic between the emerging markets of the Global South.


"Increasing the Social Mix"

Why do some countries exhibit more social mobility than others?:

Getting ahead of ourselves, by Peter Browne, Inside Story: Last month, after Barack Obama invoked the American Dream at Wakefield High School in Virginia, Inside Story looked at what the statistics show about social mobility in western countries. ... In France, Italy, Britain and the United States, family background plays a very significant role in determining adult income; in Denmark, Norway, Finland and Canada the effect is much smaller. ... This puts the United States among a group of countries that are regarded as class-bound and stifling of individual initiative.
Our main source was a report by Anna Cristina d'Addio, a researcher in the OECD's Directorate for Employment, Labour and Social Affairs. Now, two researchers in the organisation's Economics Department, Orsetta Causa and Asa Johansson, have released a new report... Their broad conclusion is very similar to d'Addio's. The more equal the socioeconomic and educational backgrounds of children in a given country, the greater the degree of social mobility...
Causa and Johansson identify education as the key factor. "Across European OECD countries covered by the analysis there is a substantial wage premium associated with growing up in a higher-educated family, whereas there is a penalty with growing up in a less-educated family, even after controlling for a number of individual characteristics."...
But parents' socioeconomic status obviously plays a vital role in school performance. ... Interestingly, it's not necessarily only the child's parents' status that counts: "In over half of the OECD countries, including all the large continental European ones, students' cognitive skills are more strongly influenced by the average socioeconomic status of parents of other students in the same school… than by their own parents' socioeconomic status."
This leads into what seems to me the most interesting of the report's findings. According to the authors, the evidence suggests that "increasing the social mix within schools may increase performance of disadvantaged students with neutral or in some cases with positive effects on overall performance. Thus, policies aimed at encouraging such mix in neighborhoods may, therefore, play a role in mitigating inequalities." This means that policies to encourage students from a range of backgrounds to attend the same schools ... will not only improve the performance of the least able students without lowering average performance, but could increase the overall performance of a classroom or a school. ...
Government policies have added to the problem in some cases, and helped to alleviate it in others, and not necessarily intentionally. Where enrolments in childcare and early childhood education are high, for instance,... students are less bound by their socioeconomic background. On the other hand, grouping students into different programs according to their proficiency correlates ... with less mobility. ...
Causa and Johansson ... see a role for urban planning and housing. "...policies aimed at increasing the social mix in neighbourhoods (for instance, by improving housing quality in deprived areas in order to attract middle-class families) could be instrumental for improving social mobility, especially in countries where the influence of the school socioeconomic environment on student performance is relatively large."
Finally, two more observations that might be causing consternation among the authors' colleagues in the OECD Economic Department:
More progressive income taxation and higher short-term unemployment benefits are associated with a looser link between parental background and both teenager's cognitive skills and wages. This may reflect the tendency of well-targeted redistributive and income support policies to lower cross-sectional income inequality and poverty rates.
Labour market institutions that tend to compress wage distributions, such as a higher degree of unionisation and a greater coverage of collective wage agreements, appear to be associated with a looser link between parental educational achievement and children's wages.
Causa and Johansson are saying that any measure that reduces inequality will make it easier for individuals to break free of the constraints of their backgrounds. It's an enormous challenge for the United States and another warning for Australia.


"Why State and Local Governments Need More Stimulus Funds"

Several days ago, Aaron Pacitti, an assistant professor at Siena College in NY, emailed this attempt to strengthen the case for providing more stimulus funds to state and local governments. A key part of the argument is the claim that "state and local government employment lags that of the private sector by approximately one year." I wasn't fully convinced by the evidence given for why there was a one year lag (the case for more help can be made in other ways and is relatively strong even if this doesn't hold), so I emailed back asking if there was any way he could strengthen his case by providing additional evidence on this point. He responded with the amended version below, and while I'm still not sure this link in the argument has been securely nailed down, I thought I'd let you decide for yourselves:

Why State and Local Governments Need More Stimulus Funds, by Aaron Pacitti: Casey Mulligan disputes the idea that stimulus funds should be directed toward state and local governments because they are not shedding jobs as rapidly as the private sector. His analysis is generally correct—state and local government employment has not fallen as precipitously as private employment. This can be seen in Figure 1, which shows the year-over-year change in private, and state and local government employment from January 2007 to September 2009.

Figure 1: Year-over-Year Change in Employment

Pacitti1

However, there is one major problem with Mulligan's claim, and thus his conclusion regarding the use of stimulus funds. A close inspection of Figure 1 indicates that the year-over-year percent change in state and local government employment lags that of the private sector by approximately one year. This makes intuitive sense: state and local government revenues—from which they pay their employees—is largely derived from income and sales tax revenue, which is directly related to changes private employment and aggregate economic conditions. As private payrolls decline, so too will state and local governments tax revenue, and thus state and local employment, but not instantaneously: the decline in tax revenue won't be realized until approximately one year and thus changes in government employment will not manifest themselves for one year.

The recent State Revenue Report by the Rockefeller Institute of Government confirms this hypothesis. In the second quarter of 2009, income and sales taxes—the two primary sources of state and local tax revenues, which are directly related to changes in private employment and aggregate economic conditions—have fallen for the third consecutive quarter (State Revenue Report, p. 1). More related the analysis of employment changes is that state and local tax revenues registered their first year-over-year decline since the start of the recession in the fourth quarter of 2008—the period at which state and local government employment begins its sustained fall (State Revenue Report, see Table 1, p. 3). Additionally, the drop off in state and local tax revenues has been accelerating since then and has decreased 16.6% since this time last year. Further, the June 2009 Fiscal Survey of States puts the one-year lag hypothesis into historical perspective. During the 2001 recession, "the peak years of reductions to enacted budgets occurred in fiscal [year] 2002 and fiscal [year] 2003…These years of peak cuts occurred after the national economic downturn ended in 2001" (Executive Summary, emphasis added).

This analysis suggests that the overall fiscal health of state and local governments—and thus employment changes—responds to economic conditions with approximately a one-year lag. When one accounts for this lag, as in Figure 2, an entirely different picture of the likely future growth path of state and local government employment emerges.

Figure 2: Year-over-Year Change in Employment with One-Year Lag

Pacitti2

Thus, the future magnitude and direction of state and local government employment appears ominous. However, this is not to say that state and local government employment will fall an additional five percent over the next twelve months. Indeed, there is a lower bound to how far governments can trim their workforce and no shortage of accounting legerdemain that can preserve a few jobs here and there. But there is clear evidence that, absent stimulus funds, the rate of employment losses in state and local government will accelerate from its current pace.

The conclusion that stimulus money should not continue to flow to state and local governments seems misguided. Although these sectors are not engines of sustained job growth, government jobs can easily be preserved through additional stimulus funds. Increased federal funding to state and local governments would at worst mitigate the fall in employment and at best prevent additional job losses. [apacitti@siena.edu]


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