Chinese Financial Scandals

Mike Smitka, Economics, Washington and Lee University

We'll continue to see media coverage of financial scandals in China. For example, the FT Alphaville blog has a "Bezzle Watch" on financial institutions there. This should not surprise us on three levels.

First, under the Stalinist planning system that dominated the urban sector in China there were no banks as we understand the concept. Zero. Similarly in the rural sector communes were expected to fend for themselves – even when that meant privation – so again there was no role for finance, though there were institutions that accepted small individual deposits. Reforms began in the early 1980s that opened up space for "modern" financial institutions to operate, though the legal and institutional foundations weren't put into place until 1994-95. That means that no bank has more than 20 years operating experience. Young institutions that have no experienced staff – and cannot hire from elsewhere because such individuals simply did not exist – have control and monitoring issues. It takes time to set up accounting systems, operating standards, and checks and balances against individual behavior. If global institutions have problems restraining rogue traders, then China's challenges are worse.

...with lower growth, many who operated in the shadows will find their operations cast into the light...

The Topology of US Elections: why politicians must lie, er, flip-flop to be elected

Mike Smitka, Economics, Washington & Lee Univ

Under the US primary system for Congress and the White House, politicians must flip-flop in order to be elected. Now candidates may be dishonest in the normal sense of the word. But if a candidate truly wishes to be elected – surely most do! – then they must change their positions during the course of a campaign. That's not healthy for our political system.

China's Auto Industry Meltdown: The Last Shall Be First?

Mike Smitka, economics / Washington and Lee

First to exit, that is. The rush to enter China has led to a market with too many players with too many products and too many assembly plants that are too scattered in geography. The logic is reminiscent of the dot.com era, a combination of optimism unbounded by reality tinged with a belief that, in a market where most consumers are first-time purchasers, buying "clicks" today is essential for future profits. (It's also a predictable consequence of China's policies toward the industry, a topic for other posts.) Most of the new entry and the additions to capacity over the past 10 years took the form of a 50:50 joint venture between a Chinese automotive firm and a global producer. It takes two to tango, and "domestic" players were just as eager to dance as latecomers. But 10% GDP growth and 20% industry volume growth weren't going to continue forever.

Methodology for Calculating Demographics-Corrected Normal Employment Level

reposting from my no-longer-active US and Economics blog, original was November 2012

The Great Recession entailed a huge rise in unemployment; that is easy to track, as it is prominently featured in the monthly Bureau of Labor Statistics releases and is soon thereafter up on the St. Louis Fed FRED data site. Almost as well known is the rise in workers on (involuntary) short hours. That sort of correction is standard, reflected in the "U-6" series of "alternative measures of underutilization."

During the current US recession workers also dropped out of the labor force in unprecedented numbers. While that is a major component of adjustment to business cycles in Japan (and unemployment a smaller component), that has not been the case for the US. During the 2001 recession, employment as a share of the population for the middle of the labor market (ages 30-54) fell by 1.7 points. In contrast, between January 2007 and January 2010 the ratio fell by 5.1 points.

During the past decade, however, the age composition of the population shifted markedly; above all, the baby boomers are now entering retirement. This makes it more difficult to summarize in a single number. But it also turns out that the dynamics across different cohorts are quite different. My own prior was that the Great Recession led to a wave of early retirements, which would show up as a drop in the ration of employment to population. In fact, the ratio rose rather than fell.

This brief note focuses on presenting the data.