Trade in the real world — Jared Bernstein and Simon Johnson

MIT Sloan Prof. Simon Johnson

MIT Sloan Prof. Simon Johnson

From The Washington Post

Supporters of the Trans-Pacific Partnership (TPP), a trade agreement under negotiation between the United States and 11 other countries, make this case: Trade between countries is always good, and more trade with more countries is even better. Harvard economist Greg Mankiw goes further in a recent New York Times piece, arguing that anyone opposed to trade deals does not understand elementary economics.

The arguments made by these advocates do not match the reality of the modern world and are not helpful for thinking about what is at stake in the TPP. It’s not a question of understanding economics. It’s a question of knowing precisely what we’re agreeing to when we sign the TPP.

In the simple models of introductory textbooks, countries improve their respective economic outcomes by specializing in their “comparative advantage” — the goods they produce more efficiently than their trade partners — thereby increasing the supply of goods and lowering prices. No government subsidy is involved, nobody cheats, everyone is well-informed about the nature of the deal, and pretty much all parties come out ahead. If anyone loses their job, in those models either they get another good job or they can be fairly compensated by the people who gain extra income.

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The end of China’s growth model — Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From The Boston Globe

Stock markets continue to respond strongly to China’s economic woes, fearing a crippling slowdown since China suddenly devalued its currency two weeks ago — a move widely interpreted as a desperate attempt to support growth.

But Chinese growth in the future will be limited until the government makes fairly substantive structural reforms.

China’s growth model is one in which the role of the state in the economy has become more intrusive. For years, many US observers hailed China’s government-led and investment-heavy model as a pillar of strength. Their favorite comparison is between the spunky new airports in Beijing and Shanghai and the supposedly dilapidated New York JFK and Los Angeles airports. While comparison has an element of convenience to it — you have to depart from a US airport and arrive at a Chinese airport when you visit China — the “airportology’’ is flawed, because it doesn’t take into account that China has clearly overbuilt, and at a considerable cost to its middle class.

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Keystone Pipeline Foes Should Face Reality — Chris Knittel

MIT Sloan Prof. Christopher Knittel

From Bloomberg

Opponents of the Keystone XL oil pipeline warn of its potentially catastrophic consequences. Building it, climate scientist James Hansen says, would mean “game over” for the climate.

New York Times columnist Thomas Friedman hopes that, if it’s given a green light, “Bill McKibben and his 350.org coalition go crazy.” And he means “chain-themselves-to-the-White-House-fence-stop-traffic-at-the-Capitol kind of crazy.”

Are they all just crying wolf and using Keystone XL as a proxy battle against oil?

I hope so, because the economics behind laying a pipeline from Alberta, Canada, to the U.S. Gulf Coast would make it difficult for the pipeline to have any effect on greenhouse-gas emissions. I trust that if opponents dug a little deeper into the issues and the market for oil, they would agree — at least privately.

Three things would need to be true for Keystone to lead to more emissions. Otherwise, the pipeline could actually reduce them. Read More »

Securities trading by banks crowds out traditional loans during crisis — Rajkamal Iyer

MIT Sloan Associate Professor Rajkamal Iyer

MIT Sloan Associate Professor Rajkamal Iyer

From The Street

During the economic crisis, we saw an interesting pattern of activity among commercial banks. As prices of securities dramatically dropped, banks purchased the securities, looking to make profits when the prices later increased. This had an effect on lending, as banks used their capital to buy securities rather than make loans. This despite the banks taking billions at the time from the Federal Reserve in liquidity support.

Now, regulators around the world are debating whether banks should be allowed to trade in securities. In the U.S. we have the Volcker rule, which prevents banks from proprietary trading. In Europe, they have the Liikanen Report. But an important question in these discussions is what are the benefits and costs to not having banks trade securities?

Answering that question has been difficult due to a lack of comprehensive micro data at the security level on banks’ trading activities. However, in a recent study, my colleagues and I were given access to a unique, proprietary dataset from the Bundesbank (the German central bank) that provides information on security-level holdings for all banks in Germany at a quarterly frequency for the period between 2005 and 2012.

So we were able to analyze whether, during a financial crisis, banks with higher trading expertise increase their investments in securities, especially in securities that had a larger price drop, to profit from the trading opportunities. Further, we examined how this impacts lending.

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C2C: The next frontier in mobile payments is all about trust — Lou Shipley

MIT Sloan Lecturer Lou Shipley

MIT Sloan Lecturer Lou Shipley

From The Conversation

Mobile payments will be one of the hottest businesses in 2015 as consumers increasingly swap cash and credit cards for their smartphones. How fast the mobile payment market segment grows, however, will depend on consumer trust, security and ease of use.

While consumer-to-business (C2B) payments have taken off with companies like Apple Pay and PayPal, consumer-to-consumer (C2C) payments are the next frontier.

Reliable statistics on C2C mobile transaction growth are hard to come by. But according to Gartner Research, by 2017 the total worldwide mobile payments market is expected to reach 450 million users (18% growth a year) and be worth $721 billion (35% a year).

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