A tale of two halves

Published by Anonymous (not verified) on Fri, 21/02/2020 - 10:22pm in


investment, trade, UK

When the banks fell over, they knocked the stuffing out of the British economy. The UK’s productivity has been dismal ever since. Unemployment has fallen to historic lows and wages are rising, but productivity growth remains near zero. This “productivity puzzle,” as it is known, has had economists scratching their heads for best part of a decade.

But UK productivity is a tale of two halves. Experimental statistics recently released by the Office for National Statistics (ONS) reveal widely varying productivity levels across the UK. “Productivity grew in half of the 12 regions and countries of the UK in 2018,” says the ONS, “with output per hour increasing in both Scotland and the East Midlands by more than 2%; in contrast, output per hour fell in Yorkshire and The Humber and in Northern Ireland by at least 2%.”

 It would be easy to ascribe this stark divergence in productivity growth to the dominance of financial services and decline of manufacturing. Financial services are centred on London and to a lesser extent Edinburgh. The South East and the Midlands benefit from spillovers from London, and Scotland similarly benefits from spillovers from Edinburgh. The places losing out are traditional manufacturing and mining areas, which were gutted in the 1980s and have never recovered. It’s a neat explanation that fits well with the theory that the UK’s relative decline is due to the “finance curse,” a form of Dutch disease: an over-dominant financial services industry draining investment and talent from other industrial sectors and hampering exporters with an unnecessarily strong exchange rate. There is some support for this “finance curse” theory from IMF research showing that an over-large financial sector can be a drag on economic growth.

 Those who subscribe to the “finance curse” theory say that if the financial services industry is cut down to size, manufacturing industries will recover, productivity growth will be restored, and Britain will be Great again. Or perhaps German again. Some people, particularly on the Left, seem to want the UK to become an export-led heavy manufacturing powerhouse like Germany.

 At first sight, the ONS’s figures appear to support this theory. London and the South East are by far the most productive areas of the UK, exceeding average output per hour by (respectively) 36.1% and 9.1%. They are the only areas where output per hour exceeds the UK average. If this is entirely due to financial services, then cutting the financial services industry down to size would have a disastrous effect on UK productivity, at least in the short term. I suppose you can’t make an omelette without breaking eggs, but trashing the UK’s most productive industry doesn’t seem a great strategy for reversing the UK’s relative decline. Surely a better approach would be to find ways of raising investment, wages and productivity in other sectors?

Fortunately – or unfortunately, depending on your point of view – the “finance curse” theory doesn’t stand up to close analysis, at least in these statistics. The ONS analyses UK productivity growth by industrial sector in two example regions, one dominated by financial services and the other a traditional manufacturing and mining area. The map above shows that the South East (financial services) is storming ahead, while Yorkshire & the Humber (manufacturing & mining) is declining.

In both regions, financial services is the most productive industry, so the fact that the South East has a far larger financial services industry than Yorkshire & the Humber could explain the difference in output per hour. But between 2016 and 2018, output per hour in financial services fell by over 4% in the South East. There, the fastest productivity growth is in information & communication, and in arts, entertainment and recreation (which increasingly are technology led). The South East’s productivity growth seems to be led by technology, not financial services.

And Yorkshire & the Humber’s falling productivity isn’t primarily in manufacturing & mining, as might be expected. No, it seems to be technology. Information & communication output per hour dropped by over 6%.  However, “arts, recreation and entertainment” was a bright spot, so perhaps technology growth isn’t quite as dismal in this region as the collapse of the information sector suggests.

This chart shows that Yorkshire and the Humber is suffering from falling productivity across most industries, including sharp falls in transportation and storage and in non-manufacturing production and agriculture. Productivity has fallen in these industries in the South East, too, though not as much. This could speak of an aggregate demand shortage, not so much within the UK (since wholesale and retail trade seems to be holding up) but outside it. When the external sector struggles, so does the transportation industry. If so, then the UK's "productivity puzzle" might be partly due to the slowdown in global trade that has been evident since the financial crisis - and is now worsening because of trade frictions, rising protectionism and the strong US dollar. But this doesn't explain the divergence between the regions. Why would Yorkshire and the Humber be more affected by a global trade slowdown than London, one of the largest trading hubs in the world?

No, there is something else going on. And to understand it, we need to look more closely at these charts. The yellow dots indicate that in certain sectors productivity growth is much lower than was expected, and in others it is much higher than expected. And there is regional divergence in these figures. Productivity in financial services, for example, is far worse in the South East than was expected, but in Yorkshire and the Humber financial services are performing as poorly as expected. Productivity in transportation and storage is far worse in Yorkshire and Humber than was expected, but in the South East is better than expected. And the most stark divergence is in information, where the forecasters appear to have completely misread the direction of travel.

This speaks to me of a supply-side slowdown due to investment collapse, particularly since the UK voted to leave the EU (hence poor performance relative to the pre-2016 trend). The investment axe seems to have fallen particularly hard on those areas that voted for Brexit. Belligerence towards the EU in those areas hasn't gone unnoticed. Investors are unforgiving, and attitudes matter. 

The UK’s “tale of two halves” may in the past have been about over-dominant financial services and declining manufacturing & mining. But now, it seems to be more about technology. Technology is important in all industries. When there is inadequate investment in technology – perhaps coupled with over-reliance on cheap labour - productivity falls. So the UK’s productivity puzzle won’t be solved by cutting financial services and resurrecting the heavy manufacturing industries of the past. Substantial investment in technology and associated skills will be needed, particularly in the regions where productivity is falling across the board.

But investment alone will not be enough. Equally important will be openness to trade and labour mobility. Sadly popular opinion not only in the UK, but around the world, seems to be pushing governments towards protectionism and closed borders. I fear that even with the investment that the Government is talking about pouring into the North, it will remain depressed relative to London, the South East and Scotland for the foreseeable future. Rejuvenation of the North may prove to be yet another beautiful but unfortunately evanescent dream.

EU and UK economic prospects post-Brexit - the impact of investment

Published by Anonymous (not verified) on Thu, 30/01/2020 - 9:57am in


investment, UK

Analytical Considerations

As Brexit is finalized we find considerable speculation about the likely consequences for the UK and EU economies after the end of January.  Because this event has no clear precedent, much of the speculation derives from political predilections and opinion without an analytical anchor.  Since private investment plays a major role in both growth and diversification of economies, beginning with the motivation to invest might provide that anchor.

As Keynes argued, private investment has both a long run underlying technical link to production while driven by the expectations of capitalists (Keynes 1936, Chapter 12).  In the long term, the economy’s investment share adjusts to the technical requirements of production, the amount of capital input needed to achieve the level of output sought by businesses (the technical term is the “capital-output ratio”). 

Expectations intervene in two ways.  First, expectations of future economic expansion will strongly influence the planned output of businesses.  Low expectations for sales growth will prompt modest investment plans, which will fulfil the expectation of slow expansion.  Second, short term pessimism provoked, for example, by recession, can cause a collapse of investment as occurred in the developed economies during 2008-2010.

The first chart below shows GDP growth for five large developed economies.  It begins with 2007, the last year of expansion before the Global Financial Crisis.  I do not include the two largest developing economies, China and India, because factors strongly influence their growth that do not affect the five countries in the chart.  Perhaps most notable are the growth-enhancing productivity gains associated with large scale transfer of labour from rural to urban activities.

Because my focus is on the effects of the UK leaving the European Union, I divide the years into three periods, the great contraction (2007-2010), the period of EU and UK fiscal austerity (2010-2016), and the quarters following the unexpected defeat of the UK referendum on EU membership.  The most obvious inference from the chart is the slow recovery from the deep recession of 2008-2010.  These slow rates of recovery would in themselves tend to provoke pessimistic expectations for business investment.

Second, only two countries show a negative impact of the UK vote on EU membership.  As expected, the UK itself has a drop from an annualized rate of 2.0% to 1.5.  Negative though less pronounced is the change for Germany, from 1.8% to 1.6.  For France an increase appears substantial.  The results are consistent with what we would anticipate, an apparent negative impact for the major EU trading partners UK and Germany, and no negative impact for the USA and Japan.

Chart 1: GDP Growth for Five Large Developed Economies, 2007.1-2019.3

  OECD .

Notes: Numbers in legend are growth rates for 2010.3-2016.3 and 2016.3-2019.3. Base is 2008.1 = 100. Source: OECD.

Investment Impact

Two more charts switch from GDP to private investment for the same five economies as in the previous.  The first shows amounts at constant prices, all countries set to the base period at the start of the great contraction, 2008.1 =100. The initially striking result is that investment by UK companies has increased consistently below the level of the other countries except for a few quarters after the EU referendum.

The recovery of UK private investment after the great crash matched that of France and Germany into 2016, though below the US recovery.  However, in late 2016 and early 2017 UK investment peaked then declined slightly.  In the four other countries investment continued to grow, except for the mid-2019 declines in USA and Germany.  Thus, we have evidence of UK investment stagnation soon after the EU referendum.

Chart 2: Total Investment for Five Large Developed Economies, 2007.1-2019.3

(constant prices, 2008.1 = 100)

  OECD .

Source: OECD.

In 2017 the UK Office of National Statistics published a study of private investment shares that included the five countries in our previous tables.  The statistics end in mid-2017, but have the advantage of cross-country consistency.  The results, shown in the third chart,   place the apparent UK investment stagnation in context.  The UK economy for two decades and longer has had the lowest private investment share among the five countries.

The low UK investment share has in part a technical explanation.  Of the five countries, the UK economy has the lowest share for industrial production.  The reasonable assumption that investment-output ratios are lower in services (including finance) than mining, manufacturing and construction helps explain the long term UK pattern, avoiding subjective judgements about investment motivation by UK capitalists.  

The chart shows for the UK a steady investment share, which began over a year before the EU referendum.  It is extremely unlikely that UK capitalists could have anticipated the referendum vote so far in advance.  For all five countries the investment share in 2017 had recovered to its pre-crash level, suggesting an underlying relationship determined by the composition of production by sectors.

 Chart 3: Investment-GDP Share for Five Large Developed Economies,

constant prices, 2007.1-2017.2

  ONS .

Source: ONS.

The final chart focuses on UK investment, dividing it into manufacturing and non-manufacturing, for the period 1997-2019, in constant prices and set to 2008.1 as the base quarter.  The stronger cyclical character of manufacturing investment jumps off the chart.  While we must be hesitant to draw conclusions from one quarter's behaviour, the decline in the third quarter of 2019 suggests the possibility a longer downturn in wake of exiting the EU as many have predicted. 

 A possible mitigating factor is the large UK trade deficit with Germany and the rest of the EU.  Whether imports or exports would suffer more and the net effect on domestic output is difficult to foresee.  Too often discussion of the trade impact of leaving the EU focuses on exports and "market access" without reference to imports.

 Anticipating post-EU investment consequences becomes more complex with the comparison of manufacturing and non-manufacturing investment after the 2016 referendum.  While the former declined in the last quarter shown in the chart (2019.3), it had substantially increased in several quarters during 2017 and 2019.  By contrast, non-manufacturing investment shows no increase after the referendum.

 Chart 4: UK Manufacturing and Non-manufacturing Investment,

1997.1-2019.3 (constant prices)

  ONS .

Notes: Base is 2008.1=100. Source: ONS.

Looking to the Future

One certainty of the post-EU period, especially while trade negotiations proceed, is uncertainty.  Speculators thrive on uncertainty while it undermines the expectations of investors.  Developments in the global economy largely unrelated to UK membership in the European Union could increase that uncertainty.  Both the OECD and the IMF anticipate weak growth of output implying sluggish global trade in 2020 and beyond.  OECD goes so far as to cite risk of global recession, in part due to slowing of the Chinese economy.

In the EU itself the slow expansion over the last two decades is unlikely to change if global growth is weak.  The likelihood of a fiscal expansion by the government of any large country, especially Germany, remains remote.

This context gives obvious implications for UK economic performance in 2020.  The uncertainty arising from an unprecedented change such as leaving the EU in itself would depress investment in the short and medium term.  When we add the possibility of global recession and near certainty of slow EU growth, stagnant or falling investment seems the likely outcome for 2020 and 2021. 

The expansion-depressing effect of low private investment may be in the modest range that could be counter-balanced by fiscal expansion. Expecting the current UK government to embark on a well-designed expansion would be excessively optimistic.  On the continent the combination of Brexit uncertainty and fiscal restraint should yield continued economic stagnation for Germany.

SSRN Top 10 Papers 2019

Published by Anonymous (not verified) on Wed, 08/01/2020 - 2:50am in

Top 10 Papers 2019 SSRN

Abstract Title

A Brief Introduction to the Basics of Game Theory
Matthew O. Jackson
Stanford University – Department of Economics

151 Trading Strategies
Zura Kakushadze, Juan A. Serur
Quantigic Solutions LLC University of CEMA

Summary of Social Contract Theory by Hobbes, Locke and Rousseau
Manzoor Laskar
Symbiosis International University

Pulling the Goalie: Hockey and Investment Implications
Clifford S. Asness, Aaron Brown
AQR Capital Management, LLC New York University (NYU) – Courant Institute of Mathematical Sciences

‘A Diamond is Forever’ and Other Fairy Tales: The Relationship between Wedding Expenses and Marriage Duration
Andrew Francis-Tan, Hugo M. Mialon
National University of Singapore (NUS) – Lee Kuan Yew School of Public Policy Emory University – Department of Economics

Day Trading for a Living?
Fernando Chague,Rodrigo De-Losso, Bruno Giovannetti
Getulio Vargas Foundation (FGV) – Sao Paulo School of Economics University of São Paulo (USP) – Department of Economics Getulio Vargas Foundation (FGV) – Sao Paulo School of Economics

‘I’ve Got Nothing to Hide’ and Other Misunderstandings of Privacy
Daniel J. Solove
George Washington University Law School

Big Other: Surveillance Capitalism and the Prospects of an Information Civilization
Shoshana Zuboff
Berkman Center for Internet & Society

Huawei Technologies’ Links to Chinese State Security Services
Christopher Balding
Fulbright University Vietnam

Global Factor Premiums
Guido Baltussen, Laurens Swinkels, Pim van Vliet
Erasmus University Rotterdam (EUR) Erasmus University Rotterdam (EUR) Robeco Quantitative Investments


The Fixer: Water under the Bridge

Published by Anonymous (not verified) on Wed, 01/01/2020 - 7:00pm in

Welcome back to The Fixer, our weekly briefing of solutions reported elsewhere. This week: farmers and nomads in Darfur find common ground. Plus, coal country students go solar and Wall Street takes a step back from fossil fuels.

United by water

Two hardships of life in rural Darfur are the lack of water and the threat of violence, both exacerbated by climate change and a brutal war that has dragged on since 2003. As the available land — and with it, water — grows ever scarcer, conflicts have flared between settled farmers and camel-herding nomads competing for resources. An attempt to solve both problems at once is showing promise: community-built dams along a seasonal river near El Fasher, the capital of Sudan’s North Darfur state.

The dams, built in collaboration between the two groups, have created water sources that the nomads use along their 600-mile migrations, and that the farmers use to irrigate their fields. By giving the nomads clear routes through the farmland, the project has also brought cooperation as the passing herders sell milk and meat to the farmers, and the farmers offer the herders refuge and harvested crops.

“It was an opportunity to rebuild the old relations,” said one of the farmers of the face-to-face contact. “The government fueled us to fight against each other, but we have realized we were being misused,” said another. In a sign of progress, last September the nomads invited a group of the farmers to one of their weddings. The fields, for their part, have reached new heights of productivity: land that used to support 150 farmers now supports 4,000.

Read more at the Guardian

Studying solar

Many a graduating high school senior in Colorado’s Delta County used to take a job in the local coal industry. That was before two of the county’s three mines closed. Now, they’re either forced to look further afield for coal work, or often, set their sights on a local, lower-paying service industry job.

So several years ago, one of the area’s science teachers began teaching a class on solar arrays: how to build them, install them and make money from them. Described as having a “mad scientist vibe,” teacher Ben Graves wanted to get more of his students on a path toward the electrical trades, where they can earn a living in the area’s fast-growing solar industry. 

Former President Barack Obama and Vice-President Joseph Biden visit a solar array in Colorado. Credit: GPA/Flickr

His efforts have benefitted not just his students, but the school’s budget. In the past four years, Graves’ classes have installed two solar arrays behind the high school. (This year, for their final project, they’ll disassemble one of them and rebuild it.) These arrays now provide 10 percent of the school’s weekday energy demand. “The facilities folks at first waved it away as a class project,” Graves said with a laugh. “Now, maintenance sees it as a real way to reduce demand charges.”

Read more at High Country News

Banking on the climate

Will Wall Street save the climate? Let’s not go overboard, but according to an article in the Atlantic, some of America’s biggest banks are beginning to act a little more responsibly. 

Last month, Goldman Sachs changed its protocols around under-writing fossil fuel projects. Among those changes were a refusal to finance oil exploration or drilling in the Arctic. It follows other banks like Barclays and Societe Generale. It also committed to spending $750 million on what the magazine calls “clean energy and climate-adjacent areas” over the next ten years.

Time will tell if the big investment firms are willing to make the changes that will make a real impact, but any shift away from fossil fuels is a positive development.

Read more at The Atlantic

The post The Fixer: Water under the Bridge appeared first on Reasons to be Cheerful.

SSRN Top 5 Papers December 23 to 29, 2019

Published by Anonymous (not verified) on Mon, 30/12/2019 - 1:40pm in



Top 5 Papers, based on downloads from 12/23/2019 to 12/29/2019

Abstract Title

The Big Market Delusion: Valuation and Investment Implications
Bradford Cornell, Aswath Damodaran
Anderson Graduate School of Management, UCLA New York University – Stern School of Business

151 Trading Strategies
Zura Kakushadze, Juan A. Serur
Quantigic Solutions LLC University of CEMA

The Cross-Section of Expected Returns: A Non-Parametric Approach
Enoch Cheng, Clemens C. Struck
University of Colorado at Denver – Department of Economics University College Dublin

Collusion by Blockchain and Smart Contracts
Thibault Schrepel
Harvard University (Berkman Center)

A Brief Introduction to the Basics of Game Theory
Matthew O. Jackson
Stanford University – Department of Economics



The 2019 SASE’s Alice Amsden Book Award goes to ‘The Specter of Global China’ by Ching Kwan Lee

Published by Anonymous (not verified) on Thu, 26/12/2019 - 5:44am in

The winner of the inaugural Alice Amsden Book Award of the Society for the Advancement of Socio-Economics is The Specter of Global China: Politics, Labor, and Foreign Investment in Africa, by Ching Kwan Lee, Professor of Sociology at the University of California, Los … Continue reading →

Short Guardian Video of Corbyn’s Election Promises

Labour launched its manifesto yesterday, as did the Tories, and the newspapers and TV were full of it. The Guardian, however, produced this little video in which Corbyn presents the party’s manifesto promises in just a minute and a half.

The Labour leader says

‘Labour’s manifesto is a manifesto for hope. That is what this document is. We will unleash a record investment blitz. And it will rebuild our schools, our hospitals, care homes and the housing we so desperately need. Every town, every city and every region. So a Labour government will ensure that big oil and gas corporations that profit from heating up our planet will shoulder the burden and pay their fair share through a just transition tax. We’ll get Brexit sorted within six months. We will secure a sensible deal that protects manufacturing and the Good Friday Agreement. And then put it to a public vote alongside the option of remaining in the EU. And yes, be clear, we will scrap university tuition fees.’ 

At this point there is massive cheering from his audience. He goes on

‘We are going to give you the very fastest, full fiber broadband for free. That is real change. And Labour will scrap Universal Credit.’

More cheering and applause. Corbyn’s speech ends with

‘It’s time for real change. Thank you!’

The crowd rises to give him a standing ovation.

Okay, so this is a very short, very edited version of Corbyn’s speech, just giving the briefest outline of the party’s policies. But it shows that Corbyn’s policies offer real change after forty years of Thatcherism, which has decimated our schools, NHS and public services and destroyed people’s health and lives through savage welfare cuts intended to punish the poor so that the rich could profit. All of which was also carried out by the smarmy face of Blair’s New Labour, who tried presenting themselves as some kind of caring alternative to the Tories, while taking over their odious policies and actually going further.

And as Corbyn says, this is a manifesto of hope. Zelo Street has written a post comparing it with the radical changes that set up the welfare state by Clement Attlee’s 1940s Labour government and their manifesto, Let Us Face the Future. The Sage of Crewe describes how Attlee’s reforms, which set up the post-war consensus, were destroyed by Thatcher, leaving nothing but poverty and run-down, struggling public services, including the NHS, so that the rich 1% can get even richer.

But he writes

Today, Labour brought something to the General Election campaign that recalled the message of 1945, and that something was hope. Hope that students of whatever age would not be saddled with tens of thousands of Pounds of debt for years after graduating. Hope that the punitive benefit sanctions régime would no longer target the sick and disabled. Hope that a living wage really would be enough to live on.

Hope that those out-of-towners without cars would not be effectively trapped in their homes at weekends and in the evening because of public transport cuts. Hope that the NHS would be able to cope without leaving emergency admissions on trolleys in corridors. Hope that someone would, at last, take the Climate Emergency seriously. Hope that the scourge of Universal Credit would at last be consigned to the dustbin of history.

Hope that the victims of press abuse would finally see the long-overdue completion of the Leveson Inquiry, so shamelessly ducked by the Tories in exchange for favourable coverage. Hope that bad housing, and bad landlords, would finally become a thing of the past. Hope that the Police and Fire services will be able to cope, giving security and peace of mind to everyone. Hope of an end to homelessness.

Hope that education will be resourced properly, that teachers will be supported in their work, that pupils will not have to ask parents or guardians to help pay for what should be classroom essentials. Hope of real action to challenge racism in all its forms. Hope for 1950s women that pension injustice will be acknowledged – and tackled. Hope that the divisions caused by the 2016 EU referendum can finally be healed.

He goes on to predict how the people, who have profited from the poverty and misery Thatcherism, and particularly the austerity imposed by the Tories and Lib Dems over the past 9-10 years, will fight to prevent these hopes being realised. He points out that

that alone tells you whose interest is served by the decade of decay that has ravaged so many towns and cities across the country.

And concludes

‘Labour has promised us hope. Let Us Face The Future Once More.’

This is all precisely what we need, which is why the establishment will do everything they can to prevent ordinary people getting the government, a Labour government, that they deserve. Because, as the Galaxy’s dictator Servalan once said in the BBC SF series Blake’s 7, ‘Hope is very dangerous’.



Trudeau’s proposed speculation tax

Published by Anonymous (not verified) on Thu, 26/09/2019 - 11:45am in

I’ve written a blog post about the Trudeau Liberals’ recently-proposed speculation tax on residential real estate owned by non-resident, non-Canadians.

The full blog post can be accessed here.

Trudeau’s proposed speculation tax

Published by Anonymous (not verified) on Thu, 26/09/2019 - 11:45am in

I’ve written a blog post about the Trudeau Liberals’ recently-proposed speculation tax on residential real estate owned by non-resident, non-Canadians.

The full blog post can be accessed here.

Supportive housing for persons with serious mental health challenges

Published by Anonymous (not verified) on Mon, 24/12/2018 - 7:00am in

I’ve recently written a ‘top 10’ review of a new book on supportive housing—i.e., subsidized housing with social work support—for persons with serious mental health challenges. The book’s an anthology that was edited by three Ontario-based researchers.

A key questions that emerges in the book is: Should such housing be owned and operated by for-profit providers, or by non-profit providers? An advantage of non-profit ownership, in my opinion, is that a non-profit entity eventually owns the asset.

My full review can be found here.