DeLong: Capital and Its Complements

J. Bradford DeLong (2008), "Capital and Its Complements: International Capital Mobility and Economic Growth in the Twenty-First Century" http://www.j-bradford-delong.net/2008_pdf/20080521_capital.pdf

The old "write a paper to figure out what you think about an issue" trick has gone wrong: I still don't know what I think about the issues at hand...

Comments

[Cosma]

Typo watch, p. 18: "an enormous flow of capital from the periphery to the poor" - for "poor" read "core".

[gorobei]

So, we implement macro policies hoping they produce good outcomes. Then find we get unexpected outcomes.

The whole "rich seeking a safe haven" reminds me of the rise of mutual funds in the seventies - high fees and lots of cash crossing borders as some US firms essentially marketed dollar-denominated savings plans to third-world investors.

If there are outcomes we want, why not just directly implement policies that try to achieve those outcomes? E.g:

1. Promise $1/day to any person over 40 who has less than 4 children?
2. Create "education booths" around the world where a child can pass a math/English, etc, test and get $.05 a day (rising as they pass more advanced tests.)
3. Sell 'US protected individual accounts for rich foreigners,' add a by-country tax, and use the tax to fund negotiated improvements in the country of origin.

[gorobei]

Oh, and maybe:

4) The 'sing for your supper' program. You show up at the soup kitchen, sing a song there, and get a plate of rice and beans. Maybe it's uploaded to youtube, too, and viewers can kick in a micropayment if they feel like it.

[sidereal]

Not sure if you're looking for volunteer editing, but:

p18, url to Setser's blog should be http://www.rgemonitor.com/blog/setser
p21, 1st para: "U.S.-bsed"
p24, 2nd para: missing 'who' to start the relative clause 'who warned' etc

If the core problem really is that (to the extent I correctly understood the paper) freed capital flies to safety and therefore away from developing (and presumably unstable) markets, is there really anything that can be done? If the risk premia aren't high enough, it doesn't seem like it. So the solution is stability before economics?

[Keith Adams]

Typo on pg. 21: "US-bsed".

[RobbL]

Brad,
Isn't one obvious remedy to raise taxes on capitol in the developed world?

[OskarShapley]

Are the images missing from the pdf?

[Matt]

I interpret the problem as a bounce back in capital from the core to periphery and back to core, but its return path is more concentrated.

The developing regions are being pushed by external trade, so capital in developing nations develops faster than its natural rate. The institutions there charge a fee today for production agreements tomorrow, and we get the inevitable phase shift between assets and liabilities, cyclic.

But I know from looking at the increasing variability and variety of traded goods that a middle class out there is operating. The capital that bounces back here bubbles around then has no where to go except partially back to the developing nations.

But we are talking long time periods, 20 - 30 years these bounces.

With continuous productivity improvement in the core, relative to the periphery; the core accumulates capital at a faster rate, but over time we want that capital to diffuse.

The key is to watch sub Saharan Africa, if human capital and technology have a positive correlation in the village, then the wheel is moving. We need to see the African village have an occasional, and positive relationship with the global trader, because that gives the village a chip on the table.

[Cosma]

Images are indeed missing.

Why, exactly, do you attribute the flow of capital from periphery to core to insurance against political instability? Is this a total guess or something with evidence backing it up? If the latter, a citation would be nice; if the former, you should be clearer about it.

[Randy]

I must say that I found your candor in this document quite appealing. I'm impressed when a learned person freely admits that they don't understand something.

My own ideas run similar to gorobei's. But I'm afraid that they are all flawed because they are logistically un-implementable.

"1. Promise $1/day to any person over 40 who has less than 4 children?"
This puts us in the business of maintaining an accurate census in these countries, which is patently impossible given the state of record keeping and literacy. What it would generate is a whole class of people who turn in false paperwork and stop doing productive labor.
And the people in those countries would see it as us paying them to be less populous so that they don't outgrow us and take over some day. The negative propaganda on that just writes itself. I can just hear Queda crying, "they are so desperate to get rid of us that they are willing to pay us to stop having babies." I'm afraid we can't go there.

"2. Create "education booths" around the world where a child can pass a math/English, etc, test and get $.05 a day (rising as they pass more advanced tests.)"
This doesn't have the same negative propaganda problem, at least not at the same levels. But the practical outcome is that it just creates a new system of corruption and takes some able people out of productive labor.

"3. Sell 'US protected individual accounts for rich foreigners,' add a by-country tax, and use the tax to fund negotiated improvements in the country of origin."
This proposal is almost exactly what I thought of right off. But I realized that the logistics of international banking is simply too complex to enforce this. If we tax purchases/investments/accounts/whatever from country A, then the rich folks in country A simply send their money elsewhere. Or they send their money to a Swiss bank that sells them shares in a holding company that buys assets in the US. Again, all we would succeed in creating is a new layer of wealth somewhere else (the capitalist in me has trouble calling this corruption, and that makes me feel a little guilty.)

Back to the original article....
"First, we need to recognize that the core is not a net capital provider to the periphery in the current generation, there is no sign that it is going to be, and that is a bad outcome."

This is the sort of entrenched advantage that sports leagues fight with competition-inducing rules like free agency and salary caps. It's too bad that there isn't some system for calling a time-out and drawing up teams again. But in the real world that feels like a problem for which no solution exists.

So we have to go back and solve the problem in an earlier step. The step that feels more solve-able is the big insight on page 13 ending with, "it requires enormous domestic savings efforts to get even tolerable amounts of real capital to use for development."

It seems like there are many controls that could be used to ameliorate this part of the inequality. Unfortunately this is the place where my lack of formal education in economics is my undoing. So I'm left to dribble out some guesses at what might reverse this situation.
* Could we inflate or deflate their currency in comparison with other global currencies?
* Could we tariff or subsidize their purchases?
* Could we buy into their banks and offer an artificially high rate of return?
* Could we offer a hedge fund -type investment that would offset some of their losses?
* Could we form intra-nation "teams" and pair up high performers with low performers, and split the proceeds somehow? Maybe if each country sold T-bills in it's partner's currency?

[William]

Here via Marginal Revolution, posted the following on my blog:

If the argument from the paper is true we may be entering into a stage where capital flows will benefit the poor more.

First, it seems that safe haven seeking should be a one-off behaviour made possible by the change in restrictions on capital flow; you'd expect the flow in that direction to tail off after a certain amount of time (it would, of course, be easy to check this; the implication from the DeLong paper is that it hasn't tailed off the way you'd expect, but this isn't made explicit).

Second, the current slowdown/recession in the US both makes the US a less attractive investment target for outsiders, and makes the rest of the world a more attractive investment target for insiders. Given the slowdown you'd expect total volumes of capital flowing to reduce somewhat, but the (an) important thing is the net capital flow. It'll be interesting to see if that changes over the next few years.