Geography and Mobility

A former student, M. Daniele Paserman, who is now a professor at Boston University, sends me the following email, which I thought was interesting enough to share (with permission, of course):

I bumped into your blog post on the Great Gatsby curve, and I was happy to see you raise the point about the arbitrariness of imposing geographic boundaries in measuring intergenerational mobility (why should one lump Connecticut and Mississippi together?)

Claudia Olivetti and I raise a similar point in our recent paper on the evolution of intergenerational mobility in the US between the end of the 19th and the beginning of the 20th Century. We measure a large increase in the intergenerational elasticity between the the cohort of children born in the 1850s and those born in the 1910s, but almost all of it can be explained by income divergence across regions. In fact, within the Northeast and the Midwest, the intergenerational elasticity was flat, or maybe even falling (it was rising in the South, though).

Private Banking: When Will Asia Overtake Europe?

As more fortunes are being built with each passing day in Asia than in Europe, it is inevitable that the former will overtake the latter as the world's top region for HNWI (high net worth individual) accounts. Remember, the Forbes Rich List already had more Asian billionaires than European ones last year. Yet for historical reasons, it appears that assets under management (AUM) in Europe exceed those in Asia still. To be sure, there is some way to go before Singapore overtakes Switzerland, or Hong Kong overtakes London in country-country / city-city comparisons. From the Financial Times:

Singapore could yet overtake Switzerland as the word’s biggest wealth management centre, marking another landmark shift in the economic balance of power between east and west. Yesterday, the MAS [Monetary Authority of Singapore] revealed that the value of assets under management in the city-state had jumped by 22 per cent last year to a record S$1.63tn ($1.29tn), from S$1.34tn a year previously.

Earlier in the month, consultancy PwC predicted that Singapore could dislodge Switzerland as early as 2015. According to the Swiss Bankers Association, which draws on data from the SNB, there were SFr2.8tn ($2.99tn) of foreign assets under management in Switzerland in 2012. The reasons for such a projection are clear. For some years, and especially since the 2008 crisis, more wealth has been created in Asia, and faster, than in any other region at any other time.

The "supercharger" for Singapore is apparently rapid wealth creation in Southeast Asia which it is a part of. Rather than leave their money at home with the accompanying political and financial risks--remember the Asian financial crisis--many in the region prefer the relative "safe haven" that is Singapore with its sounder and better-regulated financial services industry:

While North America and Japan continue to be home to huge amounts of private wealth, Asia is accumulating wealth faster because it is being created by a new generation of entrepreneurs in the rapidly growing economies of southeast Asia...Singapore has also made a virtue of its position in the centre of southeast Asia to attract wealth from families in Indonesia, Malaysia, Thailand and the Philippines.

And what I find particularly amusing is that there is a lack of (qualified, private) bankers in Asia, when most Europeans probably believe that their countries would be better off with rather fewer of them:

In addition, banks say that they struggle with a shortage of qualified “relationship managers” to attract and keep clients. That job is made harder by the fact that wealthy entrepreneurs in southeast Asia typically like to hand their business to more than one bank at a time. Unlike in Europe, loyalty is low. UBS has tackled this by training its own managers at a local “wealth management campus”, housed in former British colonial-era military headquarters. But, for many players that lack the scale of UBS, they are forced to deal with significant costs.

It's a whole 'nother ball game in Asia as the Yanks say: the names may be familiar--UBS, Credit Suisse, etc.--but the rules of play are certainly different. Perhaps the mobility of the industry's big names to Southeast Asia is a reason why Switzerland itself is not too concerned about the Orient's rise.

Capital Income Taxation

Alan Viard offers his perspective on this key debate.

PRC TV Drama Viewership: The Int'l Pecking Order

Popular culture has a way of reflecting preferences and biases, especially when taken from an international perspective. Commercial implications aside, the WSJ's China Real Time blog has an interesting feature on TV drama viewership habits in China, with British dramas such as Downton Abbey gaining an increasingly large audience in the mainland. As in Western nations, certain demographics are more sought after than others. Their measure? The number of threads started on discussion boards per various demographics:

Comparing levels of discussion on different social media sites, a recent study from entertainment research company Entgroup (in Chinese) found that British dramas were catching on among China’s wealthy and well-educated youth. While virtually unknown on the Chinese Internet a few years ago, British dramas now account for more than 9% of foreign TV discussion across Chinese social media sites, compared to around 28% for Korean soap operas, according to the study.

On websites that cater more exclusively to white collar workers and college students, the number for British shows jumps to more than 13%, versus less than 1% for Korean soaps, according to the Entgroup report, which found that more than half of those who followed British dramas held at least a bachelor’s degree.

Using this measure, there appears to be a "snob appeal" phenomenon at work:

That puts British shows at the top an increasingly snobbish pop-cultural hierarchy in China — described by local media as the “disdain chain.” (鄙视链 in Chinese) – in which British drama fans look down on fans of American shows, who themselves look down on Korean soap fans, who in turn look down on fans of domestic dramas.

So we have a viewership hierarchy that goes: Great Britain > United States > South Korea > China.

What determines this hierarchy is certainly up for debate: Is it storyline quality? If you watch some of the Korean dramas, the writing is really superb even if they are not watched so much outside Asian cultures given plotlines that revolve around filial piety alien to Westerners. Is it a historical continuation of an inferiority complex? The British forced China to open its markets and took over Hong Kong besides, while China successfully invaded Korea more than once. Is it production values? American dramas remain the slickest, while Korean ones are not that far behind.

My preferred explanation--and one that is consistent with the logic of snob appeal--is that cultural distance determines this hierarchy. Being steeped in historical periods, British dramas require more background knowledge about others' histories than more readily accessible US/Korean/Chinese fare that typically have contemporary settings. Add the harder-to-understand British accents to the Olde Worlde settings and you have all the ingredients of snob appeal.

The AEA executive is still not representative

A year ago, I modestly called on the AEA to open its ranks officers to those who are not at (mostly private) elite universities. They are not representative of the profession, as many of us work at lower ranked research universities, liberal arts colleges, government, industry and think tanks. They all deserve some representation as their interests differ quite a bit from big shots with almost guaranteed grants and easy access to top journals and conferences.

At the time, I suggested to write in Gregory Burge (link corrected) on the election ballot. As the AEA did not disclose election results (if it did, please tell me where), I have no idea whether it had any impact. I suggest to try again this year. Last year, I posted about this when I got the ballot, which may have been too late. This year, I make the call earlier, so that more people can adjust their vote. Indeed, the candidates this year are:

For President-elect:
Richard Thaler, The University of Chicago Booth School of Business

For Vice-Presidents:
David Card, University of California, Berkeley
Judith Chevalier, Yale School of Management
N. Gregory Mankiw, Harvard University
Jeffrey Wooldridge, Michigan State University

For Executive Committee:
Dora Costa, University of California, Los Angeles
Guido Imbens, Stanford Graduate School of Business
David Laibson, Harvard University
John Williams, Federal Reserve Bank of San Francisco

While there is at least someone for a non-university environment and three candidates from public universities, which is an encouragement, this is still far from representative. Vote for Gregory Burge (write-in) for every position.

In Detroit We Glimpse America's Future

Just a city boy, born and raised in south Detroit
He took the midnight train goin' anywhere...

I have been to Detroit and it is not an experience I fondly remember. So, I do not question the motives of the protagonist in the Journey song above in leaving. Still, it was with some sadness that I heard this once-great American city declare bankruptcy only yesterday. In many respects it was the conclusion of the inevitable: years of outmigration and industrial decay had taken their toll on municipal finances. Contrast its decrepit state today with what it used to be. Despite the occasionally dodgy (non-)narrative, the documentary Detropia does a fine job of visually contrasting the city in its heyday with its present state. (PBS also has a neat photo essay on its faded grandeur.)

From a broader perspective, Detroit is also a microcosm of what ails America. Some will of course say that it's inevitable for unattractive cities to decay as these people forever on the move seek better fortunes elsewhere--such as in the non-unionized South. However, I would argue that removing yourself from Detroit only rewinds the clock by a few years from an inescapable American fate. That is, you can take the "midnight train" elsewhere, but you'll still end up in the US of A with all its woes. Let us now count the ways "Detroitification" is a portent for this country's future...

1. Decrepit infrastructure is a nationwide phenomenon - I enjoy video games featuring post-apocalyptic wasteland,and one of the best remains Fallout 3.  (With one of its expansion packs already set in Pittsburgh, perhaps Fallout 4 should be set in Detroit instead of Washington, DC.)  In real life, though, crumbling infrastructure is not isolated to Detroit but is a daily reality for most Americans. The American Society of Civil Engineers give the nation an overall mark of D+ [!], which is an unbelievably crappy mark in this age of grade inflation merited only by the most apathetic of students. The ASCE further estimates that the United States needs $3.6 trillion in infrastructure spending to maintain it in acceptable standards.

Given the current economic state of America--where economic growth is an oxymoron--it is hard to imagine massive federal or state outlays on the scale civil engineers believe is necessary. So, no matter how bad things are now, they are only likely to get worse. And, if everything everywhere is plain awful, there will not be an easy solution alike taking the "midnight train" out of Detroit when every other town looks like Dodge as the Yanks say.

2. Unfunded (and unpayable) liabilities keep mounting - One of the things which surely led Detroit to fess up to its fiscal depravity was a recent requirement for state and local governments to recognize unfunded liabilities, Depending on the assumptions you make--setting discount rates, life expectancies and so forth--local governments have a shortfall in what they owe pensioners ranging somewhere between $1 and $4 trillion. That sounds pretty dire already, but consider that the United States at the federal level has at least $61.9 trillion in unfunded liabilities by one fairly conservative estimate. Again, based on different assumptions, a former Fed governor put these at $85.6 trillion--in 2008.

Assuming no major tax increases or spending cuts are forthcoming--a most non-heroic assumption given the current state of American political paralysis--the only real cures at the federal level are effectively reneging on unfunded liabilities under some flimsy legal cover (unlike municipalities, the US government like all others cannot declare bankruptcy though) or eating away at them via inflation. Either way, the reputational damage will be huge.

It is also worth pointing out that there is this American proclivity for dumping unfunded liabilities on Uncle Sam. (As it turns out, estimates of corporate unfunded liabilities are also fairly huge.) The "GM solution" for dealing with them has of course been the government bailout, which leaves America on the hook for even more than already massive federal liabilities. Already there are suggestions that Barack Obama should fund another federal rescue a la GM for Detroit.
* * *

There will be much interest in seeing whether another federal rescue--this time of a city instead of a company--is forthcoming. Doing so would risk further bloating federal liabilities as all similarly troubled companies and municipalities resort to US government succour in the future. It will not be a pretty picture if and when the federal government is treated as a limitless dumping ground for corporate and municipal IOUs that cannot be honoured.

At present, nation-states do not have to report unfunded liabilities as corporations and now US local governments do. Still, who do they think they're fooling? Like America itself, Detroit has seen better days. The question for the rest of us is how to free ourselves of US-style misery before it drags us down to its level. Are we really as foolish as Detroit's lenders to believe that the US represents a good credit risk? Its problems are similar and differ only in terms of magnitude, where national problems are obviously far greater.

Not even RoboCop will save Detroit now...or the rest of America from "Detroitification."

UPDATE: French photographers Yves Marchand and Romain Meffre have an extensive photo collection entitled "The Ruins of Detroit."

When the IMF [Hearts] Capital Controls: PRC Case

My, my, how things have changed. As late as September 1997--with the Asian financial crisis already underway--the IMF was still arguing for amending its Articles of Agreement to include regulatory powers over opening up members' capital accounts:

Last September [1997] in Hong Kong, the Interim Committee of the IMF’s Board of Governors agreed that it was "time to add a new chapter to the Bretton Woods agreement." Thus, it invited the IMF’s Executive Board to complete work on a proposed amendment of the Fund’s Articles of Agreement to make the liberalization of capital movements one of the purposes of the Fund and extend its jurisdiction over capital movements.

Understandably, though, the aforementioned financial crisis hardened attitudes of developing countries to the suggestion of wealthier countries' representatives on the IMF's Board of Governors to further liberalization. As "sour grapes" perhaps, the IMF then declared this goal infeasible because of poor economic governance on the part of developing countries:

Indeed, the problem in Asia was not that countries had opened their capital accounts. In fact, the economies in the region with the most open capital accounts—Hong Kong and Singapore—have been among the most successful in contending with the crisis. Nor was the problem so much one of the speed of reform: the countries most affected by the crisis— Korea, Indonesia, and Thailand—had taken quite distinct approaches to capital account liberalization, which in some cases had been rather gradual. Rather, their difficulties arose from the macroeconomic environment and institutional setting in which they opened their capital accounts and the way in which measures to open their capital accounts were sequenced with other reforms. 

This idea--that Asian financial crisis demonstrated that premature liberalization of capital controls would expose a country's underdeveloped financial system to outsized risks--remains the IMF conventional wisdom. Nevermind that the IMF's (Western) leadership was obviously gung-ho on forcing other countries to open their capital accounts by enshrining this objective in IMF strictures during the onset of crisis, but we are where we are.

The irony is that, for a number of years now, the IMF has been discouraging China from liberalizing its capital account due to its perceived lack of financial reform necessary to obtain the benefits of such liberalization. You know what these include: market-determined exchange and interest rates are near the top of the list. In their absence, China could suffer from catastrophic capital outflows. With the PRC vowing to make major moves towards capital account liberalization in the near future, the IMF is now sounding yet more alarm bells, the contrast to its nonchalance pre-Asian financial crisis is striking:

While Chinese leaders are putting final touches on a plan to allow capital to flow more freely into and out of China, the International Monetary Fund has warned that such changes could lead to a massive exodus of money from the country if not handled properly.

Foreign investors have long clamored for greater access to China's financial markets, in part to benefit from future yuan appreciation. The IMF says financial-sector liberalization, especially for interest rates and currency, is necessary to keep China growing at a healthy clip over the coming decades. But it is wary about whether China is ready for significant capital-account liberalization.

According to IMF calculations, a speedy liberalization of cross-border capital movements could produce over several years net outflows from China equal to as much as 15% of the country's GDP, roughly $1.35 trillion [my emphasis]. Of that sum, the Chinese would send as much as $2.25 trillion overseas, while foreigners would invest $900 billion in China.

"The estimates assume a fairly large 'Big Bang' style adjustment," says Markus Rodlauer, the IMF's China mission chief. "We wouldn't advise doing this in one step. We'd advise continuing with a gradual approach." There is no indication Beijing plans a big-bang approach to liberalization. Though it isn't yet clear how it will proceed.

Given the IMF's track record on Asia, I wouldn't bet against them making a Type I error here by saying there is something amiss when there really isn't with regard to China. Prior to the Asian financial crisis, it was the other way around (Type II error)--they did not warn something was amiss when there was. (I'll leave it to you if premature regional capital account liberalization was due to IMF instigation. I believe so.)

Nevertheless, knowing the IMF's fallibility on such matters, I guess there's only way to find out Hu's right and Hu's wrong. Thankfully, the IMF cannot meddle with Chinese policy in this respect when and if it decides to open the floodgates to a yet-unspecified extent.

UPDATE: We now receive news that China will allow its banks to set interest rates below PBoC guidance. I guess that's a step towards interest rate liberalization so desired by IMFers, no matter how minor.