Demographic Consequences of US Economic Stagnation

US Labor Force Participation Rate

In development theory, there is thing called the "demographic transition" which argues that birth rates should diminish as a country becomes wealthier and more urbanized. Instead of "spreading their bets" by having many children in the hopes that at least one will succeed and be able to take care of them in their old age, wealthier folks believe that having fewer children endowed with high "human capital" via education and so on will better guarantee their success. It is also more difficult to have large families in households where both parents work and in cities where living costs and living space are at a premium. Moreover, the introduction of social safety nets such as pensions lessened the need for privately planning for retirement.

OK, so that's the theory, and it's held up quite well over the years. However, many developed countries are now entering a twilight zone characterized by vanishing economic prospects and diminished expectations for the future where most believe that the standard of living of future generations will be lower than current generations for obvious reasons. In the face of such difficulties, could a "reverse demographic transition" occur in which parents have more children again to assure them that at least one will make it and help provide for them in their old age?

Well, no. The United States provides some insights. Actually, the total fertility rate--the number of children a woman bears--fell to 1.89 in 2012. This is well below the replacement rate of 2.1 children per woman. In other words, if this trend continues, the United States will indeed suffer from depopulation, "Detroitification," unless migration can compensate. Looking into Census figures, it is indeed the case that current projections the US population will reach 420 million in 2060 are predicated on large-scale increases in migration. (Read the fine print.) In the absence of migration reform, though, I am not certain that the politics will necessarily be in place for that to happen.

All this brings us to the likely culprit for birth decline. Simply put, there are few jobs out there in America right now, and most of those which are available are of the low-skilled variety. Yes, the US has become a nation of burger flippers--employment statistics amply demonstrate that. With low-paying, short-lasting jobs becoming the norm, couples do not have enough security in raising families. Wages have been falling for over a decade, and there is little reason to believe they will rise significantly anytime soon. I disagree with Paul Krugman about the causes of this poor job situation--which is actually much worse when you account for women joining the labor force in large numbers in recent decades. Still, we can agree that America is, well, doomed.

How exactly a nation of burger flippers whose young people struggle just to find jobs of ever-decreasing remuneration is going to support droves of greedy seniors is beyond me. So is the point of higher education if all you will do is flip burgers for that matter.

Let us end with migration: something the Census does not sufficiently account for IMHO is the rising affluence of any number of traditional migrant-sending countries and other LDCs. Given better prospects of finding work there compared to the US (where there are few), I would expect net migration to move closer to zero. As bad as things are now, they can get worse.

Oh by the way, do you want fries with that?

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Spain, 'Russian Galacticos' & Soccer (Un-)Economics

I nearly forgot to make this post as the transfer deadline for trading players has ended, but as they say, better late than never. So, there are two parts to this story dealing with the economics of soccer in relation to the "real economy": Spain's Real Madrid and the dismantling of the "Russian galacticos." Never heard of them? Well, read on...

First, I am astounded by the spending of Spain's largest football team Real Madrid considering that there are now "financial fair play" regulations that are supposed to limit what teams spend relative to what they earn. They are supposed to be penalized for spending more than what they earn, but Madrid is supposedly the world's largest football club in terms of revenues. So, Real Madrid may actually afford their latest star signing, Gareth Bale, formerly of Tottenham Hotspur, for an astronomical (and unprecedented) EUR 100 million. Legendary French player Zinedine Zidane has even said that no player is worth that much money.

More importantly, the optics of Bale's transfer do not favor Real Madrid. After all, the unemployment rate in Spain is 26.3%. Also consider that the youth unemployment rate in Spain is at a similarly inconceivable 56.1%. At age 24, Bale would still belong in the "youth" age group (15-24). What exactly does his signing say to an increasingly inequitable society beset by very limited employment opportunities for Spain's young people due to structural factors? Let me put it to you this way: the transfer fee excludes wages, but EUR 100 million alone would be the equivalent annual household income for 4,376 Spanish households. As I said, the optics are quite bad in recession-hit Spain. That he's even a "migrant worker" of sorts makes things worse since there are so many jobless at home.

*** 
Next, did you hear the one about the Russian galacticos? Real Madrid popularized the term when they had stars such as Zinedine Zidane, Luis Figo, Ronaldo (de Lima), Roberto Carlos (the only Brazilian player of note using his surname?), David Beckham, Raul, and Iker Casillas in the early Noughties. Unbeknownst to many, Russian club Anhzi Makhachkala recently spent a similar fortune attempting to assemble a team for the age that is now disposing of in a fire sale. I am not making a specious analogy: Roberto Carlos himself played for Anzhi for a while. during his twilight years. Mind you, there were marquee players in their prime as well in the  $400M spending spree including 3-time Champions League winner Samuel Eto'o and Christopher Samba.

Never heard of Anzhi Makhachkala? It is owned by Russian billionaire Suleyman Kerimov who made his fortune through his participation in the phosphate cartel (phosphate is a key component of fertilizer). With the recent demise of this cartel, let's just say Kerimov's future revenue streams to fund his dream team have disappeared. With this team underperforming by its own admission in the Russian league, there was no reason to keep it intact besides:

But this was no joke. In the hours that followed a series of announcements, each more puzzling than the other, confirmed "The Anzhi Project", at least as we previously knew it, was coming to an end. Suleyman Kerimov, Anzhi's billionaire backer since January 2011, was no longer happy to finance a gravy train. The club's budget, officially quoted at an extravagant £116m per season (second only to Zenit St Petersburg in Russia), was to be reduced to between £32m and £45m.

There have also been comic signings of buying and selling players for the same amount in quick succession as the phosphate cartel and a large part of Kerimov's fortune went away:

On July 4, Anzhi sign Russian starlet Aleksandr Kokorin from Dynamo Moscow for $25 million. Thirty-three days later, he's sold back to Dynamo for the exact same amount. On July 15, Anzhi buys veteran midfielder Igor Denisov from Zenit St Petersburg for $20m. A month later, he goes to Dynamo Moscow for ... exactly $20m.

This after hiring and firing coaches Roman Abramovich-style and the rest of that circus. They say that the best way to make a small fortune in football is to start with a big one, and that joke apparently holds in Russia. Simply put, the economics were dubious from the start. Not only is Kerimov trying to unload football players but even the potash business as prices drop. As for Real Madrid, even if Gareth Bale's signing does not impose significant financial hardships on the club, the very act of signing him does not bode well in a most austerity-hit nation.

But then again, whoever said that football finances had anything to do with economic reality?

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China: #1 in Shale Gas Reserves, Paltry Production

Much has been made of the United States growing energy independence as it taps shale gas reserves at home. A salutary effect has been reducing the trade imbalance America is legendary for. However, the US is far from the only country with a lot of shale gas reserves. China purportedly has the most, but it has been quite slow in tapping these reserves. The numbers tell the story of China's backwardness:

Beijing has struggled to find a way to emulate the frenetic exploration and production activity of the shale gas boom in the United States, and the latest setback makes reaching even a modest 2015 output target of 6.5 billion cubic metres (bcm) unlikely. This is only a fraction of the 224 bcm of shale gas the United States produced in 2011, and would amount to just 6 percent of China’s total current output of natural gas.

Why this sloth? There are environmental concerns over fracking in places such as Europe, but let's just say they are outweighed in China's case by the more immediate cause of energy security. Others would even argue that shale gas is less polluting than burning coal. So China lags behind despite its even larger dependence on imported energy. It's a combination of various things, with less readily accessible reserves and uncertain land ownership featuring large:

When [Shell] began a multibillion-dollar effort to tap China shale gas a few years ago, it seemed like a can't-miss wager. China has the world's most extensive shale gas reserves, biggest energy market, and a government pushing for expanded gas production.But for Shell and its state-controlled partner, China National Petroleum Corp. the reality on the ground makes its bet look riskier.

The region's rough terrain, poor infrastructure and deeply buried gas formations present tough technical challenges. The area is so densely populated and intensely farmed that drilling sites are being built within 360 feet of homes in villages like Maoba—upsetting residents who complain of noise, dust and environmental concerns. To ease the way, Shell and its partners are compensating local residents and local government officials for using their land and roads and other inconveniences.

You would have thought that in an authoritarian regime alike China, it's easier to excavate since the state owns more land and can evict people if it is deemed necessary, but no: it's proven easier to pay US (private) landowners for mining for shale gas. By contrast, in China you have militant residents who do not want to deal with the mess of fracking since they will not benefit directly from state-owned resources. I argue that a lot of their environmental complaints would be mitigated otherwise. Such difficulties are compounded by rudimentary infrastructure in parts of China with lots of shale and an unclear regulatory framework:

Some shale-rich countries, including China, are short on developed roads, water and drilling contractors trained in modern safety standards. Others like France and Bulgaria have put up legal barriers to the hydraulic fracturing needed to extract shale gas. And unlike in the U.S., where landowners generally own rights to gas beneath their property, minerals in many countries are owned by the state, giving residents little financial incentive to support drilling near their homes [...]

Regulatory concerns also heighten China risks. The country hasn't finalized fracking regulations. And to fight inflation, the government controls prices at which gas may be sold, which could weigh on profits.

So there are still areas China is falling behind the United States. Good governance champions will highlight that the unclear regulatory framework for this industry in China is harming prospects for mining shale reserves.

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Is US Suing S&P Payback for Ratings Downgrade?

In run-of-the-mill stories, there are heroes and villains: I've been in this town so long that back in the city I've been taken for lost and gone and unknown for a long, long time. Today, however, we instead have two major baddies duking it out: the US government and credit rating agency Standard & Poors. It's the political economy equivalent of Aliens vs. Predator. Apparently, the US government was, like many, suckered into buying securities of dubious creditworthiness by inflated ratings slapped on them by S&P and its peers. So many years after the global financial crisis hit its peak, the United States sued S&P for misrating these securities earlier in 2013.
 
The plot is not that straightforward, though. Recall that S&P is the only major credit rating agency to have downgraded US debt from Triple-A status exactly two years ago. I argue that action was too little, too late anyway in that America's debt problems are only going to get worse due to fiscal mismanagement unmatched by any other country in absolute terms: anyone else owe $16.7 trillion?

It appears that S&P is now trying to absolve its past actions by accusing the US government of using the suit as revenge for its ratings downgrade:

Standard & Poor's Ratings Services escalated its legal battle with the U.S. Justice Department, accusing it of filing its $5 billion lawsuit against S&P in "retaliation" for the company's downgrade of America's debt in 2011. S&P's defense, made in a court filing on Tuesday, shows that the world's largest credit-rating company is digging in as it fights the Justice Department's Feb. 4 lawsuit, which accused S&P of misrepresenting its rating process in the years before the financial crisis [...]

The Justice Department "commenced this action in retaliation for [S&P's] exercise of their free speech rights with respect to the creditworthiness of the United States of America," lawyers for S&P wrote in court documents filed Tuesday in the U.S. District Court for the Central District of California. A Justice Department spokeswoman said in a statement that "the allegation is preposterous." S&P referred questions back to its Tuesday response to the U.S. lawsuit [...]

While this tactic is not unusual for those sued by the Feds, proving it is ludicrously difficult:

It isn't unusual for companies sued by the federal government to claim political payback, said some lawyers who have been following the lawsuit. S&P could eventually decide to drop the payback argument, they said, depending on what documents are unearthed during the discovery process or if the judge overseeing the lawsuit indicates that line of defense doesn't hold water [...]

[L]awyers also said that proving retaliation will be difficult for S&P. It will be an uphill battle to prove that there was direct communication between different government agencies [i.e., Treasury and Justice] and to indicate any such goal, as of the alleged retaliation by the government, the lawyers said. 

As with most half-truths, both villains are partly correct. I, of course, would state the facts of the matter thusly which casts both in a negative light: 

• The United States deserves an even bigger downgrade than what S&P made given the true extent of its future liabilities. 
• S&P provided deliberately misleading ratings since it was financially beneficial for it to do so.

In the end, that's all there is to it. The S&P conspiracy theory is too elaborate and veers too far away from coherence to be admissible. For this round, the US government villains at least have a logical case against the ratings villains. Besides, if the US government really wanted to hurt S&P, it could easily put it out of business. 

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MEDSploitation: Pol Eco of Cuban Doctor Exports

A longstanding fixture of Cuba's outreach has been sending physicians to fellow Latin American nations. Witness the still-ongoing Venezuela-Cuba oil-for-doctors scheme: 90,000 barrels per day for 30,000 doctors. Despite its proto-communist economy being in shambles for decades now, Cuba still retains a reputation for training physicians--in quantity if not necessarily in quality. With a surplus of them at home and a perpetual shortage of foreign exchange, it was perhaps inevitable that they became one of the island nation's top exports. TIME talks about the current controversies over Cuban doctor exports to Brazil and the differentials in terms of physicians to population:

According to the World Health Organization (WHO), Brazil — despite its recent economic boom and constitutional guarantee of universal health care — has only 1.8 doctors per 1,000 people. (Cuba, despite its endless economic bust, has 6.7.) Almost two-thirds of all health care spending in Brazil is private, even though three-fourths of the population depends on public medical services.

Coming from a self-styled worker's paradise, what exactly is in it for the Cuban physicians working in Brazil? Unfortunately, it appears the ratio of wages paid to these doctors relative to Cuba's remuneration from host states is very low:

But Cuba’s medical-diplomacy mission, which currently has 40,000 doctors serving abroad and brings the Cuban government some $6 billion a year (of which the doctors themselves get only a tiny fraction), is a fixture in the third world, and was generally praised for its work in Haiti after the 2010 earthquake. And it points up the fact that Brazil’s problems are hardly unique. In fact, six of Latin America’s seven largest economies have two or fewer doctors per 1,000 people. (The exception is Argentina, which has 3.2.)

The Havana Times complains about this opaqueness over how much Cuba receives relative to what the physicians do:

In different comments, we read of “new slaves”, that the Cuban State is a kind of “foreman” and that Cuban doctors are “sheep” denied the right to demand their rights, individuals subjected to that which Jose Marti, when writing of a certain form of socialism much spoken of in his time, called “modern slavery.” Unfortunately, I do not know how much money will be paid directly to the doctors under the agreement entered into with the pertinent agencies of Cuba’s Ministry of Public Health. Our local and biased press has not published this detail, and we will have to find out from the doctors themselves [...]

It is both just and necessary for the Cuban State to take in a reasonable part of the money paid by Brazil, in order to re-invest it in Cuba’s public health programs. This money represents investments in many areas, including the country’s educational system, capable of creating a highly qualified labor force. It is also both just and necessary to respect the individual rights of our medical professionals, to pay them a percentage of the earnings that will guarantee their professional and personal dignity, as well as that of their families (without which they will not be able to practice their profession adequately).

What we need is transparency, on the basis of broader democratic, socialist concepts, throughout the selection, hiring and other processes related to the work of our professionals beyond Cuban borders. If Cuban doctors working in Brazil, for instance, were entitled to openly discuss their payment conditions and to arrive at an agreement with public health authorities that isn’t simply imposed on them, then we would be wrong to speak of any kind of slavery.

Call it Transparency, ah, Internationale. I too would love to know exactly what these Cuban physicians earn relative to the amount of treatment they give to better calculate the rate of exploitation, but alas, the Cuban government is perhaps not the best model of public transparency [!?] Rest assured though that economic necessity drives this increasingly controversial trade.

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Can 'Impact Investing' Whitewash JP Morgan Malfeasance?

Financial services titan JP Morgan is many things to many people given its vast size. Bank regulators currently know it best for the nefarious activities of the so-called 'London Whale' whose losing bets have caused the firm billions of dollars in losses. There's also this new controversy over the House of Morgan hiring Chinese princelings or offspring of Chinese elites to curry favour among PRC movers and shakers. When you're as large as they are, you cannot but help attract attention

More recently, I came across someone from this same bank writing about 'impact investing' or socially aware investing. Now this idea has several similar terms. Some call it 'philanthrocapitalism' which is a mouthful. Regardless, the question is raised: given the scale of corporate malfeasance JP Morgan stands accused of--especially with the 'London Whale' brouhaha--does impact investing help whitewash bank malfeasance?

Attached to all this fervor is a fair amount of confusion about what impact investing actually represents.  Is it investment, philanthropy or both?  Simply put, impact investing is the deployment of capital with an expectation of financial return, where the success of the investment is also contingent upon achieving a stated social or environmental goal.  For example, at JPMorgan Chase we are committing capital—more than $50 million to date—to private equity funds that will deliver us an appropriate financial return while simultaneously improving livelihoods for underserved populations around the world.  If we are not successful in both ambitions, then we do not consider it a successful investment.  Impact investing, therefore, represents an innovative way for socially and environmentally-conscious individuals and organizations to invest their capital to improve their communities while earning a return that meets their financial objectives.

There is a central theme underpinning the potential of impact investing: the creation of economic value and social value are not necessarily mutually exclusive.  Market-based approaches to critical social and environmental challenges do exist or can be developed, and those interventions can attract private sector capital.  This provides a significantly larger, complementary source of capital alongside of philanthropic budgets and increasingly limited public sector resources.  Financeable interventions can satisfy a range of objectives—from mitigating climate change to creating jobs in agricultural communities to providing health care for underserved people—attracting a broad population of investors interested in creating change.

Obviously, $50 million is a drop in the bucket compared to the incidences of bank malfeasance JP Morgan is accused of. Still, it's a good start. What you'd like to see is for 'impact investing' to move more into mainstream banking activities, especially as it conducts more business in the developing world. That said, it is unlikely that bank regulators will call off their scrutiny of this bank. So no, this newer and more honourable ethos  has yet to filter down in the future. For now, it is whitewashing whose efficacy is limited by reams of bad press.

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S China Sea: PRC Unwelcomes Philippine President

All China's hard work building economic ties with Southeast Asia is now in peril: Hot on the heels of the Philippines taking China to the International Tribunal on the Law of the Sea (ITLOS) against China's wishes--the PRC has constantly reiterated that it wants to solve the maritime dispute bilaterally--comes this latest blow to China-Philippine relations. Not only are there obvious legal complications to the Philippines unilaterally calling for arbitration which is usually called for by both parties, but rousing the ire of China may have negative economic repercussions.

China has what I call a petulant brand of diplomacy over maritime disputes. If it doesn't get its way, it throws a tantrum seemingly unbecoming of a would-be challenger to American hegemony. Simply, it doesn't stay cool. This is especially true in China's willingness to let security-related tussles spill over into the economic sphere. Witness it boycotting last year's annual World Bank/IMF meetings which were being held in Tokyo as trouble over the East China Sea resurfaced.

Now to the snub: Since 2003, part of China's charm offensive aimed at Southeast Asia aside from concluding an FTA with ASEAN has been hosting the CAExpo trade fair for encouraging Chinese foreign investment in Southeast Asia (see image above). In past years it has been customary for the head of state of the "country of honour" to go to China. This year the Philippines has this designation, and its president scheduled a trip to the Middle Kingdom despite strained ties. However, the Chinese recently rolled back the red(s) carpet, telling him he has was not welcome:

When Malacañang [the Philippine president's residence] got word on Wednesday that it was not a “conducive time” to set foot in Chinese soil, President Aquino, who was supposed to attend a trade fair and business conference in the southern Chinese city of Nanning, changed his mind and backed off. “The President has decided not to proceed to Caexpo (China-Asean Expo), taking into consideration China’s request for him to visit the country at a more conducive time,” said Raul Hernandez, spokesperson of the Department of Foreign Affairs...

China’s request was relayed to Secretary of Foreign Affairs Albert del Rosario late Wednesday, he said.Amid China’s apparent snub of President Aquino, Del Rosario is choosing to stay calm. Del Rosario yesterday opted to hold back in reacting to China’s decision to virtually uninvite Mr. Aquino from attending the regional trade expo as he still hoped to save the relationship between Manila and Beijing.

He admitted, however, that exercising such restraint is tough, considering the gravity of what happened. “For the sake of preserving our relations with China, I think it is best to limit our remarks to what had previously been stated,” Del Rosario told the Inquirer via text message yesterday. “As may be evident, we are all having the greatest of difficulties in exercising restraint for what they had done to our President,” said the official.

It's partly a demonstration of China's growing economic clout that the Philippines is still sending a sizeable delegation hoping to drum up business, but how exactly would you interpret your president being declared persona non grata in China affecting prospects for attracting investment? The symbolism is not promising.

UPDATE: The Associated Press reports that Philippine officials were aghast at China's two conditions for allowing Aquino to visit China, including withdrawal of its arbitration case at ITLOS:

Two Philippine officials told The Associated Press that China wanted Manila to withdraw a U.N. arbitration case over disputed islands in the South China Sea. The officials spoke on condition of anonymity because they were not authorized to speak to reporters.

Chinese officials have also cited a new standoff between China and the Philippines over the Second Thomas Shoal, which is called Ayungin Shoal by Filipinos and Ren’ai Reef by the Chinese, the Philippine officials said. China has asked Manila to remove a navy ship that ran aground on the shoal years ago, but the Philippine officials said the area was well within their territorial waters.

This could be true or hearsay; at the end of the day, the fact remains that the Chinese told the Philippine president to stay home.

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