The US appears to be in recession, but not everyone is suffering. Yesterday we argued that the effects of the recession on China, for example, depend on the kinds of goods and services that China exports to the United States. If these exports are mostly necessities, there will be minimal effects.
Walmart may also buck the trend, as this Slate article suggests.....
Thursday, February 28, 2008
Tuesday, February 26, 2008
China Trade and US Recession...
"If the US experiences a recession, might that not be good for China's exports? After all, China exports low-priced goods, and US households may consume more of these during a recession" - DuOo
You raise a good point. During a recession, consumption of luxury goods falls dramatically, while consumption of necessities may barely change. Thus depending on the kind of goods China is exporting, a US recession may not necessary hurt China's economy. I expect that a US recession will negatively impact on China, for two reasons:
1) There's a difference between low priced goods and necessities. Yes, demand for necessities is relatively resillient during a recession, but necessities are items like food and medicine. These are not the largest part of Chinese exports to the United States. Instead China's exports are mostly made up of consumer goods that, while (relatively) cheap, are not essential consumption items to US households.
2) China's exports are increasingly in the "luxury" and durable goods sector, which are highly vulnerable to the business cycle. There are very few cars, for example, that do not contain some parts that were made in China. An anecdote that I heard recently from a friend in the watch industry is that the mechanisms in nearly all "Swiss" watches are made in China. The watch is still assembled in Switzerland, so that it can still be claimed to be "Swiss" for marketing reasons, but much of the actual manufacturing is now taking place in China.
For these reasons, I expect that a US recession will negatively impact on China.
You raise a good point. During a recession, consumption of luxury goods falls dramatically, while consumption of necessities may barely change. Thus depending on the kind of goods China is exporting, a US recession may not necessary hurt China's economy. I expect that a US recession will negatively impact on China, for two reasons:
1) There's a difference between low priced goods and necessities. Yes, demand for necessities is relatively resillient during a recession, but necessities are items like food and medicine. These are not the largest part of Chinese exports to the United States. Instead China's exports are mostly made up of consumer goods that, while (relatively) cheap, are not essential consumption items to US households.
2) China's exports are increasingly in the "luxury" and durable goods sector, which are highly vulnerable to the business cycle. There are very few cars, for example, that do not contain some parts that were made in China. An anecdote that I heard recently from a friend in the watch industry is that the mechanisms in nearly all "Swiss" watches are made in China. The watch is still assembled in Switzerland, so that it can still be claimed to be "Swiss" for marketing reasons, but much of the actual manufacturing is now taking place in China.
For these reasons, I expect that a US recession will negatively impact on China.
Thursday, February 21, 2008
The US Recession will be Bad....
.... by Martin Feldstein, Harvard Professor and current head of the NBER, the organisation that dates US recessions. See this link on Calculated Risk for more.
Here's an earlier take by me on the US business cycle.
Here's an earlier take by me on the US business cycle.
Wednesday, February 20, 2008
China's inflation... good news or bad?
Is inflation procyclical or countercyclical? In China now, the inflation rate is too high so that some people predict it could be a sign of recession. Can you explain? -Amy
At it's base, increasing inflation can be good or bad. Thinking of the standard supply and demand diagram: prices rise when there is either too much demand or too little supply. Too much demand would tend to reflect a rapidly growing economy, which is good; too little supply would reflect a slowly growing (or even shrinking) economy, which is bad.
In the case of China, it's hard to tell. Yes, prices are increasing at the fastest pace for 12 years, and inflation now stands at over 7%. But prices have been pushed up partly by the recent bad weather, which reduced supplies. Now that the bad weather is passing, its effect on inflation should diminish as well.
But there's another sense in which China's inflation is bad. Much of China's recent growth has come from growing net exports. China, the "world's factory," has churned out huge quantities of manufactured goods for world markets, where demand has been growing based primarily on low prices.
But China will not be the lowest cost producer of these goods for much longer. Price inflation directly drives up the price of exports, and the increasing value of the RMB increases the price when converted to other currencies still further. Additionally, the cost of producing goods in China is increasing rapidly, with migrant wages increasing and workers able to be more particular about their working conditions.
But lets not overstate the threat here. The effects I've outlined above are likely to slow that rate of growth of the Mainland economy. In future, more of China's growth will have to come from producing higher valued products, as they will no longer be the world's cheapest source of manufactured goods. But don't expect the economy to completely stagnate anytime soon.
At it's base, increasing inflation can be good or bad. Thinking of the standard supply and demand diagram: prices rise when there is either too much demand or too little supply. Too much demand would tend to reflect a rapidly growing economy, which is good; too little supply would reflect a slowly growing (or even shrinking) economy, which is bad.
In the case of China, it's hard to tell. Yes, prices are increasing at the fastest pace for 12 years, and inflation now stands at over 7%. But prices have been pushed up partly by the recent bad weather, which reduced supplies. Now that the bad weather is passing, its effect on inflation should diminish as well.
But there's another sense in which China's inflation is bad. Much of China's recent growth has come from growing net exports. China, the "world's factory," has churned out huge quantities of manufactured goods for world markets, where demand has been growing based primarily on low prices.
But China will not be the lowest cost producer of these goods for much longer. Price inflation directly drives up the price of exports, and the increasing value of the RMB increases the price when converted to other currencies still further. Additionally, the cost of producing goods in China is increasing rapidly, with migrant wages increasing and workers able to be more particular about their working conditions.
But lets not overstate the threat here. The effects I've outlined above are likely to slow that rate of growth of the Mainland economy. In future, more of China's growth will have to come from producing higher valued products, as they will no longer be the world's cheapest source of manufactured goods. But don't expect the economy to completely stagnate anytime soon.
China and the Industrial Revolution...
Why did the Industrial Revolution (the original one, that started in Britain shortly before 1800) bipass China? See this link on Marginal Revolution.
Thursday, February 14, 2008
Unintended Consequences...
Yesterday I discussed the unintended consequences of making it difficult for firms to fire workers: increased unemployment, especially among youth. There are many other examples of unintended consequences as well- see the links below for examples:
Policies to reduce global warming may in fact cause global warming
Increased rights for people with disabilities hurt people with disabilities; and laws to protect the environment hurt the environment.
Policies to reduce global warming may in fact cause global warming
Increased rights for people with disabilities hurt people with disabilities; and laws to protect the environment hurt the environment.
Wednesday, February 13, 2008
Protecting Jobs...
"If a country passes laws that make it difficult for firms to fire workers, why will that generally increase the unemployment rate?" - Louis
That's an excellent question! Consider the problem of the firm. They face uncertainty about the future demand for their output. Suppose demand increases today. The employer may wish to hire additional workers, but must take into account that future demand will also vary. In particular, future demand may fall sufficiently that the firm may wish to lay off the worker that they've just hired.
Suppose the Government passes a law that states that firms cannot lay off workers under any circumstances. Now let's work backwards from this. The employer knows that if he hires a worker today he will need to pay that worker tomorrow, whether he needs the worker tomorrow or not. Because there is a non-trivial chance that he would want to fire the worker tomorrow, he will be more hesitant to hire the worker today.
Legislation the makes it difficult for firms to fire workers therefore result in higher unemployment, as employers in general will be more hesitant to hire workers. But not everyone losses: people in existing jobs are better off (they currently have jobs, and therefore cannot be fired), but people who currently do not have jobs but may wish to enter the labour market in future (like my students) are worse off: employers will be mush more hesitant to hire them.
This suggests another problem resulting from firms being unable to fire workers. Younger people already have the highest unemployment rates (for example, in Hong Kong the unemployment rate for 15-19 year olds is 16.6%; it falls to 4.4% for 20-29 year olds and 2.4% for 30-39 year olds). Also younger people are more likely to be freshly entering the work force. Thus restricting firms' ability to fire workers is likely to exascerbate youth unemployment. This is both socially and economically costly.
That's an excellent question! Consider the problem of the firm. They face uncertainty about the future demand for their output. Suppose demand increases today. The employer may wish to hire additional workers, but must take into account that future demand will also vary. In particular, future demand may fall sufficiently that the firm may wish to lay off the worker that they've just hired.
Suppose the Government passes a law that states that firms cannot lay off workers under any circumstances. Now let's work backwards from this. The employer knows that if he hires a worker today he will need to pay that worker tomorrow, whether he needs the worker tomorrow or not. Because there is a non-trivial chance that he would want to fire the worker tomorrow, he will be more hesitant to hire the worker today.
Legislation the makes it difficult for firms to fire workers therefore result in higher unemployment, as employers in general will be more hesitant to hire workers. But not everyone losses: people in existing jobs are better off (they currently have jobs, and therefore cannot be fired), but people who currently do not have jobs but may wish to enter the labour market in future (like my students) are worse off: employers will be mush more hesitant to hire them.
This suggests another problem resulting from firms being unable to fire workers. Younger people already have the highest unemployment rates (for example, in Hong Kong the unemployment rate for 15-19 year olds is 16.6%; it falls to 4.4% for 20-29 year olds and 2.4% for 30-39 year olds). Also younger people are more likely to be freshly entering the work force. Thus restricting firms' ability to fire workers is likely to exascerbate youth unemployment. This is both socially and economically costly.
Tuesday, February 5, 2008
Winners and Losers...
At every stage of the business cycle, there are both winners and losers. The standard example I use is bankruptcy lawyers. They do well when the economy is tanking, but risk requiring their own services when the economy is doing very well! The linked Freakonomics article considers the winners and losers of the housing crisis in the United States.
Discrimination is Costly in Football...
An excellent article by Tim Harford on the economic cost of discrimination....
Zimbabwe inflation... again
Another in a continuing saga.... inflation in Zimbabwe officially hits 24,000%, although it may actually be far higher....
For the previous installment, see here.
For the previous installment, see here.
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