Krugman’s blog, 10/31/15

There were three posts yesterday.  The first was “Explaining Trade Weakness (Wonkish):”

And now for something completely different — or anyway not the kind of thing I’ve been writing about lately. But I have been keeping my eye on the ongoing debate over the world trade slowdown, and wanted to weigh in on one issue.

For those who don’t know about it, there seems to have been a break in the trend of world trade. Between 1990 and the 2008 crisis, trade grew much more rapidly than world GDP; this “hyperglobalization” brought trade shares of income to levels unprecedented in previous history. Trade then plunged, as was to be expected, in the slump — most trade these days consists of durable goods, which are very cyclical. It bounced back when the world started to recover. But while it’s more or less at the pre-crisis level relative to GDP, it hasn’t gone beyond, suggesting that hyperglobalization has reached some kind of limit. And many of us are talking about things like supply chains, logistics, and so on to explain why.

But a new piece from the Bank of England suggests a seemingly simpler explanation: it’s just a composition effect, as world output shifts toward countries that have relatively low income elasticities of demand for imports. So is that really the story?

I’d say no, because I don’t believe that the income elasticity of imports is a structural parameter. You need to look underneath to the underlying economic logic — and this pushes you back to stories about supply chains etc..

The notion that income elasticities in trade aren’t structural is one I’ve been pushing for a very long time. Way back when I noted that there seems to be a systematic relationship between estimated income elasticities and national growth rates, what I called the 45-degree rule, which suggested that we were really looking at supply-side, not demand-side effects; a lot of later research seems to support that suggestion.

So how should we think about income elasticities for the purpose of understanding the trade slowdown? I’d argue that other things equal, we should expect trade to grow at the same rate as the world economy. If it grows faster, that’s something to explain with changes in trade policy, transportation costs, and so on. To a first approximation, this says that for any one country we’d expect to see a relationship along the lines

Trade growth = GDP growth + x

where x is the common factor — containerization, say — causing overall world trade to grow faster than income.

This in turn says that the “income elasticity” — actually just the ratio of trade growth to GDP growth, not necessarily a structural parameter — should look like this:

Elasticity = Trade growth / GDP growth = 1 + x/GDP growth

So fast-growing countries should appear to have low income elasticities, but that’s not saying anything about the underlying causes of trade growth.

Let’s take the data on elasticities and growth given in the BoE analysis, and plot it:

That’s China in the lower left corner. It looks pretty good to me. And the clear implication is that China isn’t really a “low trade elasticity” economy. It’s just a fast-growing economy, which more or less mechanically means that it has a low ratio of trade growth to GDP growth. And its rising share of world trade should not be viewed as an explanatory factor in the trade slowdown.

I still think it’s about those supply chains.

Yesterday’s second post was “On Being Against Secular Stagnation Before You Were For It:”

OK, nobody told me that this was being released. I am, however, grateful for the reminder that I have indeed lost weight.

More substantively, what’s interesting about that debate is that I was essentially making the case for secular stagnation, while Larry Summers was making the case against. That’s not a criticism! Changing your views in the face of evidence is what you’re supposed to do, and kudos to Larry both for being willing to revise his views and for being so effective in laying out his new case.

And that was a pretty good debate — unlike, say, this one.

The last post yesterday was “The Hamptons Hyperinflation Endorsement:”

As a public service, some background to Marco Rubio’s latest campaign coup. As the Times reports, Paul Singer — a huge contributor to Republican causes — has thrown his support behind Rubio.

What it doesn’t mention are two facts about Paul Singer that are, I think, relevant.

First, he’s most famous for his practice of buying up distressed debt of Third World governments, then suing to demand full repayment.

Second, he’s an inflation truther — with an unusual twist. Inflation truthers in general insist that the government is understating the true rate of inflation, even though independent measure like the Billion Prices index closely track the CPI. The trick, usually, is to pick and choose items whose price has gone up a lot — e.g., beef — while ignoring those whose price has gone down — e.g., gasoline.

But Singer has taken a different tack: he knows, just knows, that inflation is running away because of what it’s doing to the prices of the things he cares about:

Check out London, Manhattan, Aspen and East Hampton real estate prices, as well as high-end art prices, to see what the leading edge of hyperinflation could look like.

But remember, Rubio is a regular guy in touch with the concerns of ordinary Americans.



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