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Sunday, August 19, 2018

Weekend reading links

1. The power of being Amazon, and how economic heft invariably spills over into political capture,
On May 14th the Seattle city council passed a “head tax” of $275 per employee for firms with more than $20m in annual revenue, in order to fund services for homeless people. Amazon, which employs more than 40,000 people in Seattle, promptly halted construction on one office tower and suggested it would sub-let another. A month later the city council tucked tail and repealed the tax.
2. Another less discussed feature of Chinese capitalism is its tolerance of ambiguous arrangements. The most classic example is property, which while legally owned by the government, is virtually vested with private individuals. Transactions of various kinds which effectively transfer the leases are common place, and though questionable is tolerated. Another example concerns Variable Interest Entities,
Variable interest entity (VIEs) are ubiquitous, especially among the country’s internet firms, which have a total market capitalisation of over $1trn. The structure dates back to the early 2000s, when Chinese technology companies wanted to tap global capital markets in New York and Hong Kong and to set up international holding companies domiciled outside of mainland China. Yet their sensitive internet assets, such as licences, may not be owned by foreign entities, according to Chinese law. To get around this, tech firms opted to avoid owning these mainland assets outright, and instead to bundle them into legal entities called VIEs, in turn owned by individuals in China (usually the bosses of the firms and their associates). The VIEs and these individuals sign contracts with the international holding company, handing over to it control of the VIE as well as its profits... There are three problems with VIEs. First, key-man risk. If the people with nominal title die, divorce or disappear, it is not certain that their heirs and successors can be bound to follow the same contracts. Second, it is not clear if the structure is even legal. China’s courts have set few reliable precedents on VIEs and the official position is one of toleration rather than approval. Third, VIEs allow China’s leading tech firms to be listed abroad, preventing mainlanders from easily owning their shares and participating in their success.
3. Richard Baldwin has contrasts rising inequality in developing and developed countries, 
It’s true that China is one of the places where inequality rose most rapidly, depending upon how you measure it. But it’s a totally different thing when average incomes are going up by 10 percent. The poorest people are going to be able to buy their parents’ houses. Here in America, middle-class people can’t afford the house they grew up in. That’s a completely different type of inequality. I do think inequality in the developing world will rise, but it will be all boats rising. Just some people have bigger boats.
As this blog has repeatedly pointed out, the concern is not so much the widening inequality per se, but the consequent inevitable capture of political power. 

And he has this very insightful point about the likely persistence of political-economy based resilience,
I think what people who don’t follow trade very deeply, or they follow it too theoretically, they think that tariffs are something abstract. Instead, there are always people wanting higher or lower tariffs inside every single country. The agreements we have are its balance of power. That balance of power is not fragile. It’s based on long-term, slow-moving things, and that’s what I’m confident will prevail.
4. The Economist draws attention to an unsustainable boom in property prices in developed country cities. It compares house prices with rents and median household incomes,
If prices rise faster in the long run than the revenue a property could generate or the earnings that service mortgages, they may be unsustainable. Or, at least, incomes or rents will eventually have to rise. Taking the average ratio over the past 20 years (or more if data exist) as “fair value”, national house prices in Australia, Canada and New Zealand have been more than 20% above fair value compared with income and 30% above fair value compared with rents for the past three years. They have now hit 40% above fair value for both metrics. Data for rents at the level of cities are lacking. But compared with long-run median incomes, prices appear even bubblier at city level than nationally.
5. In this context land value tax becomes attractive,
House prices there are 34% higher, on average, than five years ago, freezing young people out of home ownership. Windfall gains should be an obvious source of revenue, yet property taxes have stayed roughly constant at 6% of government revenues in rich countries, the same as before the boom.
This is the briefing article on LVT. Here is one of my first opeds making the case for Land Value Tax for India. 

6. Negative externalities from Amazon second head quarters,
Later this year Amazon is due to announce the site of its second headquarters. Cities have been competing to attract the firm. But local residents who do not own property could be forgiven for hoping that Amazon goes elsewhere. Its headquarters will employ perhaps 50,000 rich workers, who will bid up rents and land values, all the while crowding local public services and infrastructure. The chosen city will need to invest to accommodate the workers, but the costs of doing so will be unfairly spread across existing residents, because in their bid to lure the firm, cities are offering Amazon discounts on local business taxes.
7. Shang Jin-Wei and co-authors examine US imports from China and questions the conventional wisdom (David Autor etc) about its negative effects on job creation in the US,
US imports of intermediate inputs from China rose from about 1⁄4 of total imports in 2000 to more than 1/3 in 2014. Those US firms using imported inputs can improve efficiency and potentially expand their employment. Firms that use these imported inputs (e.g., computers, printers, telecommunication equipment, and parts and components of various office machinery) include those in what are traditionally labeled as “non-tradable sectors” such as banks, business services, research and educational institutions... 
this paper explicitly considers downstream and upstream effects of imports from China, and uses more precise information on how imported intermediate inputs from China are allocated across US sectors... Using a cross-regional reduced-form specification but differing from the existing literature, this paper (a) incorporates a supply chain perspective, (b) uses intermediate input imports rather than total imports in computing the downstream exposure, and (c) uses exporter-specific information to allocate imported inputs across US sectors... 
In contrast to the existing literature, we find strong evidence that the downstream effect is positive (i.e., the use of imported Chinese inputs raises US employment) and the effect is greater than the combined negative impact of a direct import competition channel and an indirect upstream channel. In addition, the US labor market is flexible enough that non-manufacturing employment is systematically stimulated by trading with China. The net employment effect from trading with China is found to be positive. As important, once a supply chain perspective is applied, we find that American workers as a group experience an increase in real wage from trading with China. The effect is not the same across all workers; most college educated workers gain substantially, whereas many non-college- educated workers experience a decline in real wage. Still, even without redistribution between capital owners and workers, every worker can be made better off if the total wage bill can be redistributed.
8. Finally, a stunning graphic which shows that the global equity market is shrinking at the fastest pace in two decades on the back of a continuing surge in share buybacks.

Even as buybacks are expected to top a record $1 trillion this year, their volume exceeds new issuances.

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