Inequality from a trade perspective

Stiglitz news article has argued that the increasing inequalities in the U.S. is alarming, and harming the most useful resources in the country - its people. Thomas Piketty and Janet Yellen has also raised the topic of inequality onto the table. This is my reactions to the Stiglitz arguments for inequality from trade emphasized perspective.

Joseph Stiglitz argued that the most clear trend in America is the alarming expanding inequality - "concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom". It is difficult to attribute this completely to one reason that leads to the exacerbating inequality, from the global perspective however, one can find several possible sources this income inequality can stem from.

As America is well endowed with capital and America trade based on its comparative advantage, naturally the main American exports are capital-intensive goods, which benefits the capital owners. Since most capital owners in America are the richest people in the country, the international trade will benefit the richest people who are the top 1% of the population, while make the working people worse off. The reallocation and condemnation of wealth is exacerbated by the cycle in which the richest people can invest more capital and export capital-intensive goods which bring them more wealth. The globalization makes the world much more tightened in trade, which also incentivize American capital owners to more heavily rely on trade to increase welfare and income, which benefit the richest American people. Moreover, severe rent-seeking in economy makes the inequality more deteriorated -- companies use monopoly powers and CEOs use political connections to influence policies and maximize their earnings.

It is not surprising that inequality rises during economic development. Growth and trade induces rent-seeking which distort the economies, also the market plays a role in resulting in inequality - the market is influenced by policies, policies are affected by politics and government, which eventually is shaped by money. Growing inequality is not inevitable. It is argued that there are some countries that are doing better in terms of both GDP and living standards while reducing the inequalities. This inequality triggers a higher economic growth thanks to the rich and superrich and everyone can get a larger share of the economic benefits. However, while the economy is growing together, the economy is also starting to grow apart.

To resolve the inequality in the U.S. is a difficult task. Helpman in his book suggested that reducing the price of the most commonly consumed goods, are redistribute tax income to the poor is a method to mitigate the situation of inequality. This government lump-sum tax regime ensures the individuals are equally well off in the trade regime as in autarky. This lump-sum tax can also bring a budget surplus according to Dixit and Norman, a necessary condition for a policy to be implementable. With this policy in place, every individual faces in the trading equilibrium the same opportunities and tradeoff as in autarky, and therefore every individual ends up choosing the autarky consumption that yields the autarky welfare level. Compared to trading situation where the rich and superrich get the most benefit of trade, the lump-sum tax regime makes the poor people relatively better off. The Dixit-Norman policy involves substantial distortions stemming from collecting tax, which shrinks the amount available for distribution. Nevertheless, this benefit amount is large enough for people to consume more than in autarky. As this policy suggested that the tax is collected as extra amount from the trading situation, the redistributed amount is the increase in welfare compared to autarky. Thus the poor people have increased opportunities and welfare, and this welfare will additionally generate more economic growth through consumptions by the people receiving this tax transfer.

Stiglitz alarmed the U.S. for its pressing social inequality problems. I analyzed the causes of this issue from trade perspective and provided a proposal to alleviate this inequality.

Trading partner of Germany

In my recent research of relationship between trade and currency. I study the effect of settlement currency on the trading volume, specifically I measure how much the uniform settlement currency will increase or decrease the trading volume. 

I come up with this graph.

I'm currently studying the trading partners of Germany only. 

DUE-CHE and DUE-GBR are the control groups.

My regression results are bit counter-intuitive and reverse to my assumptions. Can anyone make an educated guess of if a uniform settlement currency can increase or decrease trading volume on the countries?

USD going strong

NYTimes blog post Upshot has really informational interpretations on the US dollars lately appreciation. Upshot posts really really funny and nice information about politics, economies, sports etc., that is really easy to read and entertaining. I extremely highly recommend to follow it.


The NYTimes article listed two graphs: one is USD vs. major currencies values since July; and the other is economic growth outlook for major economies.

In the first graph, USD is appreciating against all major currencies with the exception of CNY. The appreciation is almost 8% for the major currencies in 3 months. (For CNY, it is depreicating by about 2%). On the economy side, US GDP growth is increasing by more than 0.5% compared to expectations. Other economies such as EU is growing slower by -0.3% compared to expectations, Germany, France are below expectations and Japan is the slowest with -0.7% relative to expectations.

This has true economic impact. USD is now becoming the most sought after currency in the world lately. This means investors are having better prospect for the US economy. In addition, the US economies are expanding at 4.5% qoq and believed to be stronger than expectation. NY Fed Chairman William Dudley for the first time confirmed the real impact on the economy.

US exports statistics since July is here. Stronger USD should lead to a mitigated exports. But data in July and August hasn't show any slow down in exports. I predict that exporting business is definitely getting affected in contract volume. Perhaps it is going to take some time to show this trend in data and this trend will appear in the next few months.

A more in depth analysis can be found on this blog.

Week Ahead The week of 9/29

The recently signed EU-Canada FTA is likely to run into choppy waters in the coming weeks when it goes to ratification at the European Council. The sticking point being a clause for investor protection which could see companies drag sovergin governments to court and sue them. One expects that for the bill to survive this clause would have to be severely watered down or scrapped all together. On evidence the European law makers have grounds for concern as earlier this year hedge funds won the legal dispute against Argentina and seized control of one of its warships. (In any case laws that can allow a bunch of investors to seize warships seems like a terrible idea)

Much Ado about nothing. That's the reference to the UN summit. Where leaders from around the world are given a chance to unleash their angst on some other drowsy and equally angsty other leaders.

On economic indicators the US consumer spending shows signs of improvement. Though the thing everyone will be looking at is the employment figures expected at the end of the week. The US dollar likely to appreciate against the whole basket of currencies given persistent weak business confidence in Europe.

Interestingly the central bank of China initiated a massive stimulus last week (around $81 billion) in loands to the country's 5 biggest banks. The interest rates for these loands are...interesting in that no one knows what they are. In a sense the govt. seems to be printing money.

Brazllian elections around the corner and no its not good news. The race seems quite tight too tight for most to predict, but since I am a betting man here's what I think is likely (No direct majority which means a run off later in Oct. Rousseff to sneak the win there as her main opponent Ms. Silva seems to need quite a bit off support from the other contenders - Just don't bet the farm on this.)

In Europe frantic efforts to secure a gas deal between Russia and Ukraine look set to continue as the proposed deal of Ukraine paying Russia $3.1 billion by the end of the year and sourcing gas at $385/1000cubic meters, understandably has Ukrainian lawmakers unimpressed. Expect Russia to get what it wants here, it is holding all the cards.


Speculation:

Equity Markets to have a poor week, at least until the employment figures come through. (Likely to bounce around in a narrow window)
Bond Markets +ve
Commodities to retreat further
USD to strengthen further

-By Akshay

Week Ahead 9/15/2014

Fed meet. Interest rates, as is tradition, means a jittery market leading to announcements vis a vis interest rate rise. Cue in a dip in equity markets all around.

Europe takes yet another step forwards in its game of chicken with Russia. Expectation of asymmetric steps, my guess is closing airspace and perhaps clothing. (Short on airline stocks?)
Despite the slide of the ruble, think it's unlikely to persuade the central bank to raise rates.

Short Euro as well. If pushed too much Russia might just leave the spectre of a very cold winter as a bargaining chip. Which is to say this mini trade war will not last halfway through the winter, expecting Europe to withdraw the sanctions before Nov and Russia responding in kind.

A tense referendum at the end of the week to weigh on Europe. I've got 10$ on the No (I suspect the HMS treasury has a bit more on the line) (Pound to take a further beating at the start of the week? am betting for Scotland to stay, it will see a recovery.)

Scotland does poses most of britian's oil reserves, however that's a pithy compared to oil run econonmies like Norway. With the chancellor ruling out the possibility of a currency union and major banks shifting bases to London. Scotland would very likely be looking at a big recession.

If Scots(pro EU) do manage to breakaway, we could see England snap its ties with Brussels a couple of years down the line.

India surprisingly posts industry growth below expectations. Massive rains. (Will perhaps ease food inflation? Nudge to the reserve bank perhaps later. Also could be the cause of stalled construction and manuf.) Accompanied by the Fed's comments of the fin sector underestimating the impact of the pull back of QE. The bombay index along with EM could slide downwards at the start of the week.



-Posted by Akshay

M2 money market for US and China

I came across this article that I thought informational and interesting. It is saying that China's M2 money supply is increasing at 12.8% in August yoy. It is still considered as "stable" and "sustainable".

Now look at the above  two graphs. From Sept 2013 to Aug 2014, the M2 market for China drastically increased( if you can't see, it is from 108 trillion RMB to 121 trillion RMB; conversion rate to USD is around 6RMB= 1USD) by 12%. US M2 market is only increasing from 10.8 trillion dollars to 11.5 trillion dollars, where the rate of growth is 6.4%. 

M2 level is a measure of total money in the economy, including the most liquid cash (M1) and checks, and less liquid capital such as money market mutual funds, and saving deposit. 

With this in mind that money demand in China grows much faster than the US, this may reflect the China's warm investment atmosphere and business prosperity. Capital outflow is still having low pressure. US GDP is roughly twice as large as China's, but Chinese M2 market is larger than the US. It means the investment is the unique driving force for China. In this regards, Chinese economic growth outpace the US and will last in the long run.

- Zhipeng

Some thoughts on Scotland referendum

Scotland will hold a referendum on this Thursday, deciding if it will separate from the Britain after 307 years of union.



There are many repurcussions of Scottish independence. Scotland is currently in the Great Britain's union with tight economic and political association.

First, Scotland is in the economic union with England and Wales, and using the uniform currency - British Pound - which is a huge plus for them. As next to England, who is one of the largest economies in the world, Scotland benefits much from this proximity and economic ties. EU is basically a structure that tries to mimic the economic union of the Great Britain - having a uniform currency, uniform monetary policies, and enhanced labor and capital mobility. So does many other economic unions that trying to work toward this way. So if Scotland separates from the Britain, they will probably lose all these advantages.


Secondly, the Great Britain runs under one constitution. Commerce and trade happened under one identical rules, and almost there is no excessive regulations. If Scotland were to become independent, Scotland would have to establish a new Constitution - said to take effect in March 24, 2016. A whole new political system will prevent fully smooth economic interaction.

Many people think Scotland's independence is very risky.  Economists seems divided in their opinions. Paul Krugman disagree with Scotland's decision of independence and thinks it's a big mistake. Nobel Prize Laureate Joseph Stieglitz actually supports Scotland's independence from economic perspective.

 I believe the political reason is bigger than the economic reason for the Scottish separation. For separatists, an independent Scotland will offer more power to the Scottish people, whose population is roughly 5 million. The form of government for Scotland is still unclear, whether they will form a federalism like the US, a constitutional like the UK, or a republic like Italy and Ireland. Such there are many many more things Scotland needs to figure out if they become independent.


On a economic side, Scotland will probably not benefit from this unhooking. England and Scotland combined is now the 6th largest economy in the world. If Scotland leaves, it will become the 43th largest economy, while England only slips from 6th to 7th. Scotland will probably lose the close linkage with England, and become more vulnerable to the economic instability. England will probably not suffer too much, as their GDP is some more than 2 trillion dollars, almost ten times the size of Ireland. However, three major parties' leaders of the UK all express their will to retain Scotland on board, surprisingly, and have promised more political power for Scotland if Scotland stays.After all, the Queen of England remained neutral, and  said it's the choice of the Scottish people.

The separation is" risky, and will not be reversible" said David Cameron.  In the end it comes to the decision of Scottish people - all citizens 16 years old or above. They need to trade off between economic risks and political independence, and that's how democracy works.


-Zhipeng
 

Useful Idea Sources Links

Econbrowser: econbrowser.com

Paul Krugman on NYTimes: http://krugman.blogs.nytimes.com

Greg Mankiw's Blog: http://gregmankiw.blogspot.com


News Sources:


NYTimes:  nytimes.com

Wall Street Journals: wsj.com

Financial Times: ft.com

Welcome

This is the Blog spot for students at UW-Madison to journal their thoughts on current economic events. This blog will mostly focus on, but not limited to, topics on International Economics, International Finance, and International Trade. Current regular contributors are Zhipeng Zhu and Akshay Bardia, both economics students at University of Wisconsin-Madison.


Purpose of this blog is to provide students a way to exchange thoughts on the focused topics and generate new ideas for future research. We welcome any body interested in writing and this international topics to actively participate in reviewing, commenting and contributing. You can contact us via iefcuwmadison@gmail.com


Thank you for reading.

9/9/2014