EconVue Spotlight May 13, 2018 China's New Era?

I agree with a Twitter commentator today who said that US-China trade relations was giving him  whiplash after President Trump’s volte-face on ZTE.  For context, I recommend two new books with a longer view on the changes taking place in China.  The first, “The End of an Era” by Carl Minzer is truly a must-read for any China watcher. Devin Stewart at the Carnegie Council conducted a wonderful interview with Prof Minzer, which I’ve included below. 

Monday night, Council on Foreign Relations China scholar Elizabeth Economy will be in Chicago to discuss her new book, “The Third Revolution”.  As she says “One of the great paradoxes of China today is Xi Jinping’s effort to position himself as a champion of globalization, while at the same time restricting the free flow of capital, information, and goods between China and the rest of the world.” If you cannot make her lecture, The Chicago Council on Global Affairs will be streaming it live on the evening of May 14th here.

My conclusion from reading both books is that despite the twitter theatrics, changes in the US-China relationship are being driven more by fundamental reforms in China’s system of governance than they are by US politics.

In addition to some really excellent reports by our EconVue experts on corporate tax cuts, Japanese corporate governance, China in Latin America, and reform of the US Post Office, my favorite link is about the persistence of the Roman network of roads across Europe today and its role in economic development. It is worth clicking on the first graphic, which shows the Roman roads in 117 CE compared with nighttime light intensity in this decade.

Happy Mother’s Day to all!

RESEARCH BY ECONVUE EXPERTS

Corporate Tax Cut to Yield More Investment & Wages, Gradually
Michael Lewis

How long do we have to wait for this fiscal stimulus? Or should we heed Nancy Pelosi as she channels her inner Gerschwins, and “let’s call the whole thing off?”

The short answer, FMI believes, is that stimulus is already occurring, but it will take a while to garner all the economic benefits. That it would happen instantly is wildly optimistic. Yes, Trump and Co. over-promised -- they are politicians -- but the end results will be significant.

Public Comment to the Proposed Revisions to Japan’s Corporate Governance Code
Nicholas Benes 

As the one who proposed this governance code in the first place...an English translation of my public comments. I hear the Keidanren would not let FSA use the word "Code" after "stewardship", even though both codes are the FSA's. (!!) And in the age of AI, the JPX/TSE still have not made the disclosure items in CG Reports machine-readable. They remain machine-UN-readable. 

China Recognizes Dominican Republic — We Should Worry
R. Evan Ellis 

Dr. Ellis' work on the Dominican Republic's recent establishment of diplomatic relations with the PRC.  He examines the activities which are likely to follow, based on other countries which have changed their diplomatic posture toward China in recent years. 

Venezuela’s Election, the Day after: A Handover of the Nation’s Oil Riches to Russia and China?
R. Evan Ellis 

Dr. Ellis argues that the deepening political and economic crisis of the Venezuelan regime, and its associated need for resources from Russia and the PRC to maintain itself in power, make it likely that after its almost inevitable victory in this month’s “elections,” it will use its “honeymoon period” to modify laws (and possibly the constitution) to give Chinese and Russian companies the expanded presence, control and safeguards they require before providing a significant new inflow of capital.  Such a move would change Russia and China’s position just across the Caribbean from the US in important ways, and present the US government with important questions regarding how to respond.

The Case for Reforming the United States Postal Service
Robert Shapiro

Economist Robert Shapiro presents the results of his new study evaluating the subsidies the USPS receives to provide universal first-class and bulk mail deliveries, and how much of those subsidies are used by the USPS to support its business division that competes with FedEx, UPS, and others. Amazon uses the USPS to deliver packages, especially over the “last mile” from a local depository to its customers’ homes and offices, because those “cross subsidies” lower the rates the USPS charges Amazon and others. The source of the problem that spurred Trump’s tweets lies with the USPS, not with Amazon.

STORIES IN OUR SPOTLIGHT

World

On Roman roads and the sources of persistence and non-persistence in development
Carl-Johan Dalgaard, Nicolai Kaarsen, Ola Olsson, Pablo Selaya 4/10/2018 Vox

Although spatial differences in economic development tend to be highly persistent over time, this is not always the case. This column combines novel data on Roman Empire road networks with data on night-time light intensity to explore the persistence and non-persistence of a key proximate source of growth – public goods provision. Several empirical strategies all point to the Roman road network as playing an important role in the persistence of subsequent development.

Modern slavery
5/9/2018 Council on Foreign Relations Infoguide

A sober read. Slavery, long banned and universally condemned, persists in many corners of the world, victimizing tens of millions of people. Much of it is debt bondage.

"End of an Era" in China
Podcast with Carl Minzner 5/4/2018 Carnegie Council

Best podcast of the past week. Interviews with Carl Minzner about his new book "End of an Era". Minzer's thesis is that China's recent prosperity and 40-year ascent was due to its open reform policies and political stability - and that this era has come to an end with unpredictable consequences for China’s future.

A record 22% surge in international debt securities issuance pushed up annual growth in US Dollar credit to emerging economies to 10% in 2017, hitting $3.7 trillion
4/30/2018 Bank for International Settlement

What could possibly go wrong? Much of this emerging market dollar debt is not related to financing trade, but is unhedged speculative investment. If the dollar really strengthens, we could be heading towards a 1998 moment.

U.S.

Fed unwinding the Bernanke experiments: Progress report
Bluford Putnam & Erik Norland 4/30/2018 CME Group

This is intriguing from the CME - is it time for a change in the Fed policy that goes back to 1951 and the Truman Accord? Will the Fed target the Secured Overnight Funding Rate (SOFR) instead of the Federal Funds Rate?

The US employment rate has returned to its pre-recession level adjusted for aging
Harris Eppsteiner , Jason Furman  and Wilson Powell III  

People are both living and working longer. Are wages depressed because older workers have savings, pensions, and social security benefits which enable them to take lower paying jobs? Looking for answers to low wage growth.

FinTech

World’s second most valuable cryptocurrency under regulatory scrutiny
Dave Michaels & Paul Vigna 5/1/2018 Wall Street Journal

The SEC could decide that Ethereum is a security and Bitcoin is not. But would Bitcoin be insulated from the shock to cryptomarkets? Or could regulatory certainty help Ethereum?

The State of Cryptocurrency Mining
David Vorick 5/13/2018 Sia

Absolute tour de force from David Vorick. Your understanding of ASICs and mining is incomplete if you don't read this. "At the end of the day, cryptocurrency miner manufacturers are selling money printing machines...The buyer needs to understand why the manufacturer is selling the units instead of keeping them for themselves."

Coinbase is allowing customers to make big trades in the shadows in attempt to lure big Wall Street traders to its exchange
Frank Chaparro 5/1/2018 Business Insider

Coinbase said to be opening a Chicago trading office.

Illinois

How to mislead Illinoisans into accepting higher tax cuts
Orphe Divounguy, Bryce Hill & Joe Tabor 5/3/2018 Illinois Policy

A new report would have Illinoisans believe that a progressive income tax means tax cuts and economic growth. Illinois lawmakers’ tax-and-spend tendencies and evidence from all 50 states say otherwise.

Historical Lincoln items could go on auction block amid presidential museum foundation money woes
Ray Long 5/13/2018 Chicago Tribume

Oh Illinois, Land of Lincoln. Selling the family jewels.