The Unassuming Economist

From a new VoxChina post:

“Many developing countries adopt industrial policies favoring upstream sectors. Liu (2018) shows these policies might enhance aggregate production efficiency. When sectors form a production network, market imperfections generate distortions that compound through input demand linkages, accumulating into upstream sectors and creating an incentive for well-meaning governments to subsidize these sectors. The study proposes the measure “distortion centrality,” which is a sufficient statistic that can guide policy interventions in arbitrary networks. Distortion centrality predicts sectors that were promoted in South Korea in the 1970s and modern-day China, suggesting that these policies might have generated positive aggregate effects.”

“I find that the heavy and chemical sectors promoted by South Korea in the 1970s were upstream (as visibly evident from Figure 2E) and had significantly higher distortion centrality than non-targeted sectors, suggesting that government interventions contributed positively to aggregate economic performance.

In modern-day China, non-state-owned firms in sectors with higher distortion centrality have significantly better access to loans, receive more favourable interest rates, and pay lower taxes. These sectors also tend to have more state-owned enterprises, to which the government directly extends credit and policy subsidies.

My quantitative analysis reveals that in China, differential sectoral interest rates, tax incentives, and funds given to state-owned enterprises all generate positive aggregate effects and, taken together, improve aggregate efficiency by 4.8%. Moreover, distortion centrality correlates negatively with sectoral size, suggesting that promoting large sectors would lead to aggregate losses.”

From a new post by Timothy Taylor:

“Each year the Environmental Protection Agency produces an Inventory of U.S. Greenhouse Gas Emissions and Sinks. The draft version of the report for 1990-2017 was published in February 2019.

Here’s a figure showing gross emissions of greenhouse gases in the US. Emissions that are not carbon dioxide have been converted to its “equivalent.”

Several themes jump out from the figure. One is that the overwhelming share of emissions are plain old carbon dioxide, rather than methane or other gases. Another is that the total emissions have been dropping in the last few years, and are more-or-less back to 1990 levels, which one can interpret either through the lens of “could be worse” or “should be better,” as you are so inclined.

Given the predominance of carbon dioxide emissions, let’s dig into those a little deeper. Most of the carbon dioxide emissions come from burning fossil fuels. This table shows the breakdown into a few main sectors.

Total US emissions of greenhouse gases in 2017 were 6472 million metric tons of carbon dioxide-equivalent.  Thus, transportation and the electric power sector combined account for more than half of all emissions. It seems to me both appropriate to focus on reducing emissions in those sectors, but also to remember that, combined, they are only about half of the problem. Emissions from industrial, residential, and commercial activities are also pretty significant.

Moreover, methane emissions landfill, leakages in natural gas systems, and the digestive tracts of livestock make up the equivalent of 449 million metric tons of carbon dioxide emissions in 2017. Agricultural soil management released nitrogen oxides that are the equivalent of 266 million metric tons of carbon dioxide in 2017, roughly equivalent to fossil fuel-related carbon emissions from the residential or the commercial sector. Hydrofluorocarbons that are being used to to replace ozone-depleting substances account for another 152 million metric tons of CO2-equivalent emissions.

From the IMF’s latest report on Belgium:

“Private sector indebtedness, primarily associated with household debt, and sustained increases in housing prices pose additional challenges. Strong growth in mortgage lending (9 percent in 2018) has contributed to a sizeable increase in household debt and housing prices. Models, however, point to only a modest house price overvaluation, depending on location. Meanwhile, the share of loans with a loan-to-value (LTV) ratio below 80 percent has declined by about 10 percentage points during 2014–2017. Although default rates are currently low, households have substantial assets in the aggregate, and household debt-to income is in line with peers, a sharp housing (and asset) price correction could result in rising defaults for some groups of the population and affect banks’ solvency, with second round effects on investment, consumption, and growth. 12 Belgian unconsolidated corporate debt has also increased over the last few years to a relatively high level, although, the level is more in line with peers after accounting for intragroup loans. Nonetheless, its dynamics warrant close monitoring, given recent strong bank credit growth to the corporate sector (…).

Staff welcomed the authorities’ recent macroprudential measures to address risks in the housing market and encouraged the authorities to remain proactive. To guard against a correction in housing prices and discourage banks from taking excessive credit risk, the National Bank of Belgium (NBB) introduced in May 2018 an add-on to risk weights on bank mortgage exposures as a new macroprudential measure. In view of the robust overall level of credit growth (5.9 percent in 2018) and credit gap (the NBB estimates this at 2 percent at end Q3-2018), staff recommended that the NBB continue to closely monitor the build-up of cyclical risks in both the household and corporate sectors and stand ready to tighten macroprudential policy further, including through the use of a countercyclical capital buffer. The authorities could also consider revising the framework for macroprudential decision-making to ensure the ability to deploy a broader range of macroprudential policies in a timely manner, as recommended by the 2017 Financial Sector Assessment Program (FSAP) mission.”

From the IMF’s latest report on Malaysia:

“The authorities continue to closely monitor risks emanating from the housing market, although the risks are deemed manageable (…). House price growth has declined from 6.5 percent in 2017 to 3 percent in 2018H1, and the volume of transactions has also declined. The number of unsold housing units that have been completed or are currently under construction is increasing and is mostly concentrated in high-rise buildings. Banks’ direct exposure to developers remain small and is closely monitored by the BNM. According to BNM stress tests, potential bank losses originating from a possible sharp real estate price adjustment and shocks to income and interest rates are small relative to the banks’ capital buffers. The BNM, MOF, and Ministry of Housing and Local Government have introduced new measures that help reduce the cost of property or of contracting a mortgage loan, with the objective to strengthen the demand for housing and facilitate leasing, and therefore gradually reduce the supply overhang. The impact of these measures should be evaluated on an ongoing basis to ensure effectiveness and correct potential distortions.

As systemic risks from the housing market dissipate, the residency-based differentiation in the real estate measures introduced in 2014 should be gradually phased out. Given banks’ sizable exposure to mortgage lending and to the construction industry, a real estate market price correction, through a reduction in household and corporate wealth, and these agents’ debt servicing capacity, could have a significant impact on growth and financial stability as NPLs rise. During 2012–13, the Malaysian House Price Index (MHPI) grew by a cumulative 24 percent, well-above its long-run annual average of 6 percent and, in 2014, amid further significant price increases, the number of transactions by non-citizens surged by 30 percent (…). The measures introduced in 2014 helped cool down the market (cutting growth in property purchases by non-citizens by over 50 percent in 2015 and by another 38.9 percent in 2016, and slowing the growth rate of MHPI to 9.4 and 7.4 percent in 2014 and 2015, respectively), avoid significant price adjustments, and reduce the rate of future debt build-up, thus reducing the probability of systemic distress. In the absence of a capital inflow surge for the time-being, but still high household  leverage, gradually removing the residency-based differentiation in both measures is recommended as systemic risk dissipates. Carefully calibrated changes to the measures could have the additional benefits of helping to reduce the excess supply of high-end housing where nonresident buyers are concentrated and thereby the probability of a sharp downward price correction. Should the activity in certain segments again threaten financial stability, the authorities may consider macroprudential measures that target the specific segments, without a differentiated treatment of non-residents.”