Oh, The Humanity...

When I first read this, I checked the calendar.


Nope, not the first of April.

I went to the NBER to double-check: apparently this is a real research paper from two people at the Kellogg School of Management at Northwestern and a researcher in Hyderabad, in India.

I'm not about to spend the $5 for the paper. I can imagine a lot better things to do with that five bucks.

Globalization has brought a sharp increase in the developed world's labor supply.

One could say that: it would be sloppy to do so. The labor supply didn't increase due to globalization. Not at all: as a matter of fact, increases in the labor supply are almost always a family decision, and I can't think of too many who say "hey, globalization is cool, let's have a bunch of kids that can grow up and ruin the world economy!"

Uh: no.

Rather, what the authors are trying to say is that the pool of skilled labor has increased dramatically as developing countries develop: duh.

Labor in developing countries – countries with vast pools of underemployed people – can now more easily augment labor in the developed world, without having to relocate, in ways not thought possible only a few decades ago.

It's not so much that labor is being "augmented" and rather much more that unskilled labor in the industrialized countries is a commodity that can be replaced by unskilled labor elsewhere for a fraction of the cost. Skilled labor? Not quite the same. The argument is based on the drops in shipping costs for individual units: when you buy that plush animal from China at your local toy store, the individual shipping cost from China was a tiny fraction of what the domestic shipping was from the wholesaler to the retailer. If so, then following the authors' arguments, the real cause for the world recession is cheap shipping. The Panamax* is the root of all evil!

We argue that the large increase in the developed world's labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession.

Sigh. A classic error: because supply increased, demand increased. Really?

Geo-politics here is the decision by China to open up and try to retain Party control of a capitalist economy (that one's still being worked out: good luck on that idea, Chinese Communists!); technological innovations would probably be the simplified usage of technological equipment in the means of production. While both exist, they aren't the underlying cause of global macroeconomic imbalances: these have everything to do with political decisions taken in the US and elsewhere that blew up.

Further, who has the savings? You do have local savings, but what the authors really are referring to are the financial imbalances that occur when one country exports and the other imports over a very long period of time: the exchange rate is supposed to adjust to cancel this (and left to its own devices usually does, albeit a tad...unpredictably), but since the Riminibi is kept artificially low by the Chinese to ensure competitiveness, the imbalance remains...

The "real" owners of the large currency reserves held by China is the Chinese central bank, not the Chinese workers (unless, of course, you accept the convenient fiction that the Chinese central bank has only the best intentions towards the workers that generated these reserves...).

The inability of existing institutions in the US and the rest of the world to cope with this shock set the stage for the great recession: The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives; and the inability of the US economy to adjust to the perverse incentives caused by huge money inflows leading to a breakdown of checks and balances at various financial institutions.

That's a long, run-on sentence. Let's parse that out:

Because shipping got cheap and all sorts of poor people got jobs making plush animals and the like for the industrialized world, this shock - that production could happen elsewhere - was something that existing institutions in the US and the ROW were unable to cope with.

Right.

Now, those workers apparently, nasty little capitalists like they are, saved portions of their income instead of consuming it all (after all, when they poor it was much better: they consumed everything they produced and hence were unable to shock the industrialized countries), and because there was no where for this money to go, it went overseas. Exchange rates didn't adjust to stop this, and all that money made the US go weak at the knees and forget about everything.

So, if the US economy had found better ways of spending all that money, we'd be okeydokey? That crazy idea that the US government should help people who can't afford a house buy them nonetheless didn't have anything to do with that? That the ratings agencies which confused risk with revenue (hey, they both start with "r") didn't have anything to do with that? That the idea that huge leverage was a cool thing didn't have anything to do with that?

Oy vey. Checking the calendar: still not 1 April...

The financial crisis in the US was but the first acute symptom that had to be treated.

Oy vey. Talk about confusing cause and effect...

A sustainable recovery will only occur when the natural flow of capital from developed to developing nations is restored.

Wait a second...

Okay: let's see if I understand what the authors are really saying...

As long as the industrialized countries could keep developing countries under control (wages down, make sure that the workers couldn't save money), things were fine. Once those workers were able to increase their wages and enter the middle class - defined as that class of workers who have excess income to needs, but who are not yet in the position of living off interest and rents - they ruined everything because they ... invested where the best returns around.

And that once this is reversed, everything will become okay. The imbalances are removed and the right and proper order of things will be restored. Equilibrium rules.



Right.

Nope, still not April 1st.


* Panamax= largest ship that can move through the Panama Canal, sort of a standard for large-volume container shipping vessels that move quickly and efficiently to get goods transported. Sort of the backbone of world trade...