Radio Show: Looking Backward, Looking Forward

Mike Smitka

Professor of Economics, Washington and Lee University

WREL Lexington (VA) is changing its format, so today is my last regular radio show. So looking back, what have we talked about, and what then should we think about moving forward? First and foremost there's the slow but steady growth of the US economy. Because most observers are parochial, unfamiliar with the experience of other countries and of our own history, that slowness continues to be treated as a surprise. More in a moment. Looking forward I see four long-run economic issues facing the US: education, infrastructure, population aging and fiscal health. While it's a bit of a straw man, can we make America great again? More properly, will our children face a future of falling incomes and rising social tensions? I fear the answer is "no." I don't want to end my regular radio presence without a reminder that I'm a practitioner of the dismal science.

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.

Cheap Oil Forever? – Disaster for the (Auto) Industry!

Mike Smitka, Economics Dept, Washington and Lee University

The global auto industry is placing very large bets on the value of lightweighting and vehicle electrification. They may lose these bets.

...the industry may lose its expensive bet on new technologies...

In a previous post from April 2014 I argued that we were seeing "peak oil" in economic terms, as extraction costs (and hence the base price for petroleum) were rising. Again, this was an economic definition, because improvements in exploration technology has led to a steady increase in known "physical" reserves. To reiterate: my main point-cum-assumption was that, whether or not the level of reserves continued to rise, the cost of extracting those reserves would. Energy prices will remain cyclical, affected by swings in demand and the impact of short-run surges in drilling. But the underlying trend would be for each peak (and trough) to be higher than the last. That was overall good news for the auto industry: regulators in the main markets were pushing for a combination of higher fuel efficiency, lower emissions and enhances safety, for none of which had consumers in the past been willing to pay. So absent high prices, the industry was headed to producing a mix of cars (and, in the US, light trucks) that consumers would be reluctant to purchase.

Really, now: the Fed and "Breaking News"?!

Mike Smitka

I was having lunch at a brewpub in Kokomo IN last Wednesday (Dec 16) as the multiple screens over the bar proclaimed "breaking news." Really? How is it that it is "news" that the FOMC voted to raise its short-term interest rate target to 0.25%?

The FTC Opens the Hood

Ruggles December 2015

I hadn’t intended to write this as a standalone piece. And I am guilty of using the title to the post, published on the Federal Trade Commission website: The FTC Opens the Hood

I wrote a lengthy piece on their site rebutting some of the assertions made by authors Tara Isa Koslov, Office of Policy Planning, and James Frost, Bureau of Competition. For some reason, as of this writing, the FTC has chosen not to publish my comments in reply to their original post. So here we go, point by point.

The FTC: For many of us, the holiday season involves at least one loooong automobile ride. We travel over the river and through the woods in our beloved cars, our trunks stuffed with presents for family and friends. Today, the way we buy those presents and the way we buy the car that carries them look very different. While the retail landscape has changed dramatically in the last 50 years, the system of automobile sales in the United States has stayed mostly the same. Are consumers benefiting from the current distribution system for automobiles or are changes needed? In an upcoming public workshop, FTC staff will explore this question and related issues, with a focus on the regulatory environment governing automobile distribution.

Frost and Koslov seem to be saying they are puzzled by the fact that a consumer can buy Christmas gifts, toys, jewelry, gadgets, etc. while buying a vehicle involves having to go to a car dealer, a process they seem to think is “antiquated.” One wonders if they realize that buying a vehicle involves trade-ins with negative equity, complex financing issues based on a myriad of credit scores and the associated “tiering,” debt to income ratios, loan to value issues, state inspection and registration issues that impact state sales tax issues, not to mention service after the sale issues. One can’t exactly package up one’s new car and mail it back to the factory to get a window leak repaired.

Real Effective Exchange Rates vs Market Rates: the RMB (Chinese yuan)

Mike Smitka, Washington and Lee University

Here's a chart I created for my China's Modern Economy class showing the appreciation of the Chinese RMB / yuan [人民币·元] relative to the rest of the world. I put in the US$/yuan rate, inverted so that higher means stronger. But the core series is the monthly real effective exchange rate from the Bank for International Settlements. This the average value of the yuan with the exchange rates of the world's 61 largest countries, weighted by the amount of trade China conducts with each. In addition, the BIS corrects for inflation in each country, because if for example there's deflation in Japan, then at the same exchange rate US$1.00 buys more goods and services. Again, higher means stronger. At the bottom I append the most recently available (2013) trade data from the China Statistical Yearbook, to highlight the need to view China through lens with a wider perspective than the US bilateral relationship.

China's One-child Policy: redundant and now go

Mike Smitka, Prof of Economics, Washington and Lee

Here I discuss the end of China's one-child policy. In my weekly WREL economics segment I also discussed , the auto industry in China, Yellen and the Donald and interest rates, and gave an update on the United Way of Rockbridge. I provide only a paragraph one each at the end.

This past week China announced the end of its policy that limited most families to one child. Now it never was a strict limit, rural residents could have a second child if the first was a girl, and minorities were exempt altogether. But when it was first implemented in 1980, most women still wanted more than the permitted number, and the policy was draconian, indeed horrific, with women dragged away to undergo forced abortions and (slightly less horrific) forced sterilizations. For a decade, though, it's been irrelevant, as Chinese women are no longer farmer's wives who marry early and view multiple children as an inexpensive source of labor. Now urban women see children as an interruption to earning money, and costly to raise and educate.