Biden Goes Big

The US president's proposed $1.9 trillion recovery package will provide enormous stimulus to the economy. The economic growth that results will generate substantial tax revenues, not just for the federal government but also for the states and municipalities that are now starved of the funds they need to provide essential services.

Joseph E. Stiglitz

NEW YORK – US President Joe Biden has proposed a $1.9 trillion rescue plan to help the American economy recover from the pandemic. 

Many Republicans oppose it, suddenly consumed with the fiscal religion they unceremoniously abandon whenever their party controls the White House. 

The massive tax cuts the GOP bestowed on billionaires and corporations in 2017 resulted in the highest US fiscal deficits on record, outside of a deep recession or war. 

But the promised investment and growth never materialized.

By contrast, Biden’s proposed spending plan is urgently needed. 

Recently released data show a slowdown in America’s recovery both in terms of GDP and employment. 

There is overwhelming evidence that the recovery package will provide enormous stimulus to the economy, and that economic growth will generate substantial tax revenues, not just for the federal government but also for the states and municipalities that are now starved of the funds they need to provide essential services.

Opponents of the Biden plan also disingenuously warn against inflation – that lurking bogeyman that is more fantasy than real threat nowadays. 

Indeed, some data suggest that wages may be falling in parts of the economy. But if inflation does emerge, the US has ample monetary and fiscal tools at the ready.

The economy would, of course, be better off without zero interest rates. It would also be better if policymakers raised taxes by imposing levies on pollution and restoring greater progressivity to the tax system. 

There is no valid reason why the richest Americans should pay lower taxes as a percentage of their income than those who are far less well off. 

Given that wealthy Americans have been the least affected, medically or economically, by the coronavirus pandemic, America’s regressive tax system has never looked uglier.

We have seen how the pandemic has ravaged some sectors of the economy, leading to high rates of firm closure, especially among small businesses. 

There is a real risk that not passing a large recovery package will do enormous, and possibly long-lasting, damage. 

This is because poor economic performance heightens economic anxiety (compounding the anxiety induced by the pandemic itself), leading to a downward spiral in which precautionary behavior lowers consumption and investment, further weakening the economy.

Indeed, whatever the cause, weak balance sheets and business failures fuel a contagion that will infect the entire economy, with powerful hysteresis effects coming into play. 

After all, firms that have gone bankrupt in the pandemic will not un-bankrupt themselves when COVID-19 is brought under control.

The fact that COVID-19 is a pandemic – global in scope – makes matters worse. 

While the best available data suggests that many developing countries and emerging markets have not been hit as badly as people feared they would be a year ago, the global economy’s unprecedented slowdown implies softening demand for US exports.

Poorer countries don’t have the resources to support their economies that developed countries do. 

China played a big role in the recovery from the 2008 global financial crisis; but even though it was the only large economy to grow in 2020, its recovery was markedly weaker than in the aftermath of that 2008 crisis (when annual GDP growth exceeded 9% and 10% in 2009 and 2010, respectively). 

China is also now allowing its trade surpluses to grow, providing less impetus to global growth.

Because the Biden plan incorporates the key features of what must be done, it promises to yield large returns. 

A first priority is to ensure that funds are available to fight the pandemic, to enable children to return to school, and to allow states and localities to continue to provide the health, education, and other services that people depend on. 

Extending unemployment insurance will not only help the vulnerable. 

By providing reassurance, it will lead to an increase in spending, with economy-wide benefits.

The moratorium on evictions through March 31 and assistance to low-income families will also encourage spending. 

More generally, it is well established that the poor have a high propensity to consume, so a package directed at increasing incomes at the bottom (including an increase in the minimum wage, child credits, and the earned income tax credit) will help revive the economy.

Under President Donald Trump, the programs that focused on small businesses were not as effective as they could or should have been – partly because too much of the money went to businesses that were not really small, and partly because of a rash of administrative problems. 

It appears that the Biden administration is fixing those problems. 

If so, expanding aid to businesses will not only help in the short run, but will also put the economy in good stead as the pandemic wanes.

Economists no doubt will argue about every feature of the program’s design – how much money should go here or there; what the threshold should be for receiving cash benefits; and the optimal triggers for scaling down the unemployment insurance program. 

Reasonable people can disagree about these details. Adjusting them is part of the stuff of which political compromise is made.

But where there should be no disagreement is that large amounts of money are needed urgently, and that opposition to it is both heartless and dangerously short-sighted.

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is Chief Economist at the Roosevelt Institute and a former senior vice president and chief economist of the World Bank. His most recent book is People, Power, and Profits: Progressive Capitalism for an Age of Discontent.

The great escape

Can China’s long property boom hold?

The country is building five times as many houses as America and Europe combined

Lottery winners normally win money. 

In China the big prize is being allowed to spend it. 

Demand for new homes in good locations is so high, and supply so limited, that several cities use lotteries to allocate them, some with odds as low as one in 60. 

When his number was chosen, John Chen, an engineer in Shanghai, had two minutes to decide whether to drop 9.6m yuan ($1.5m) on a house. 

“It emptied my bank account. But I did not hesitate,” he says. 

Yang Yang, a 38-year-old businessman in Hangzhou, lost out in three draws before finally winning one last spring. 

“It was even more nerve-racking than my university entrance exams,” he jokes.

Even being able to enter the housing lotteries is a matter of good luck, because entrants must be registered as residents of the booming cities, which places them on the right side of China’s wealth gap. 

By contrast, large swathes of the country have the opposite problem: overbuilt apartment blocks, sputtering economies and few people buying property. 

Hegang, a town near the border with Russia, briefly found itself in the spotlight after homes there were advertised for just 20,000 yuan, less than the cost of a square metre in Shanghai. 

It was an extreme example of the glut of empty homes in many small towns.

Similar splits are common around the world, with prices high in large cities and low in small towns. 

But the degree of the divergence in China, multiplied by the sheer size and growth of its market, means that understanding property is essential if you want to get to grips with what is happening in the economy. 

Every year China starts building about 15m new homes, more than quintuple the amount in America and Europe combined. 

The property sector—both the direct impact of construction and its indirect effect on everything from concrete to curtains—makes up a quarter of China’s GDP. 

The financial implications are profound, too. 

In 2021 Chinese developers are on the hook for more than $100bn in bond repayments, according to Moody’s, a rating agency. 

For the world as a whole, roughly a tenth of outstanding bank loans to non-financial clients have gone to China’s property sector, whether as financing for developers or mortgages for homebuyers.

One commonly heard view is that all this adds up to a ticking time-bomb. And some of the facts are alarming. Fully one-fifth of Chinese homes are vacant, finds a widely cited survey. 

Housing investment equates to about a tenth of GDP annually, higher than the prodigious levels reached in Japan before its bubble popped three decades ago. 

Debt has soared for buyers and builders alike. 

Evergrande, China’s biggest developer, has borrowed a cool $120bn, a 56-fold increase in the past decade alone.

Yet it is only fair to note that such concerns are nothing new. As far back as 2009 Jim Chanos, a hedge-fund manager, said China was “Dubai on steroids”, predicting that its property sector would implode spectacularly. 

Since then prices have doubled, and enough homes have been built for 250m people. 

The longevity of the boom suggests that the market is more complex than its depictions as a bubble suggest.

The main explanation for its success—or, put differently, its failure to collapse—is the skein of regulations aimed at forestalling the prophesies of doom. 

Some have long been in place, such as the rule that down-payments for mortgages must be at least 30% of the purchase price for a home. 

With so much equity in their houses, homeowners are strongly incentivised to make their monthly mortgage payments, limiting the risk of a vicious cycle of defaults, forced sales and collapsing prices. 

In many of the most populous cities demand is also tightly restricted, because a hukou—a local residency permit—is a prerequisite for buying a home.

As the property sector has swollen, the government has pledged to develop what it calls “a long-term mechanism” for stabilising prices and investment. 

The property market is, in its view, too important to be left to the market alone. 

In practice this has meant layering on ever more rules. 

Cities such as Shanghai and Hangzhou started requiring developers to run lotteries for new flats, with priority given to people who do not own homes. 

Many others have all but barred people from buying second homes. 

These often make for cat-and-mouse games. Since the second-home ban applies to families, not just individuals, some couples have obtained fake divorces in order to buy another house. 

On January 21st Shanghai ruled that divorcees must wait three years to count as first-time buyers if they had owned a home when married.

The government is also now reining in the most indebted real-estate firms. 

Late last year the central bank and the housing ministry said they would start assessing developers’ leverage on the basis of “three red lines”—one, for example, is that their liabilities should not exceed 70% of their assets. 

Only 11 of the biggest 100 developers would be given a passing grade on all three measures, according to Plenum, a consultancy. 

The others need to find a way to get inside the lines; if not, they will face strict caps on future financing.

The resulting dynamic offers a case study in how regulation changes the shape of the market. 

Some developers are working to pare their leverage by attracting new investors or by spinning off subsidiaries, such as their property-management arms. 

For many, though, the obvious first step is to boost cashflow by selling more houses more quickly, leading them to cut prices.

R&F is one of the big developers feeling the pinch. 

At one of its new developments in Jiangmen, a city in the southern province of Guangdong, it has cut prices by 20% in recent months. 

Sales, once slow, have soared—averaging about 15 homes per day. 

Even on a weekday afternoon a steady flow of prospective customers walks gingerly around construction debris to check out the flats still being built. 

One agent, his hair coiffed like a South Korean pop idol, boasts that he alone sold 18m yuan worth of units in December, though that was only enough to rank third among his colleagues.

Beneath the placid surface

Viewed narrowly, the many interventions have worked. 

In the biggest cities prices have basically been flat in inflation-adjusted terms over the past four years. 

Annual property sales nationwide have remained at the same level during that time, while new starts have been broadly in line with sales. 

A scheme to demolish old rickety homes and give their owners cash to buy new ones helped mop up unsold units in small towns. 

It would take just about ten months to clear all inventory at the current sales rate. 

“The property sector really is healthier than it used to be. The government has so many levers now,” says Zhang Sisi of Jinan University in Guangzhou.

But this calm engenders a different kind of concern. 

The many rules have not just made for a healthier market; they have made the market. 

Take the price stability. 

When developers win land auctions in big cities, they must set prices within a range prescribed by the government. 

A perverse outcome is that new homes can be a third cheaper than second-hand ones in the same neighbourhoods. 

Hence yet another rule: to stop people flipping their new homes for a tidy profit, several major cities have slapped a penalty on owners who sell within five years of buying. 

The lotteries, meanwhile, act as quotas to dictate the size of the market. Prices may be under control, but much demand is simply going unmet.

From this vantage, the becalmed market begins to look less like a success story and more like a pressure cooker. 

So in yet another intervention, officials are trying to let steam out of the biggest cities by guiding people to smaller ones—specifically, in the clusters of satellite towns being built up just outside metropolises. 

These towns are linked to the cities by high-speed trains but have much lower thresholds for newcomers wanting a hukou. To make them attractive, the government is also investing more in hospitals and schools. 

“Sometimes it takes the education ministry, not the housing ministry, to fix problems in the housing market,” says Ms Zhang.

Developers seem to be responding to this policy push. The most fertile ground for the city clusters are four prosperous coastal provinces (Guangdong, Fujian, Zhejiang and Jiangsu). 

Last year these made up 34% of all property investment in China, compared with 26% a decade ago. 

Developers are “no longer buying up big parcels of land anywhere in the country”, says Xiao Wenxiao of cric Research, a consultancy. 

“Now they are focusing on smaller plots in prime areas.” 

The flow of new homes in China, in other words, appears to be better situated than the stock.

A key question, then, is just how much scope there still is for China’s housing stock to grow. 

A 22% vacancy rate—the result of a well-respected survey by the Southwestern University of Finance and Economics in 2017—would suggest that the market is more than saturated. 

China’s demographics also point to weakening demand. 

The working-age population, the cohort that buys the most homes, is already shrinking. And the pace of rural-to-urban migration, another big source of demand in cities, has started to slow, too.

Nothing about the Chinese housing market is ever so straightforward, though. The 22% vacancy rate largely reflects the overbuilding of small towns. 

In and around big cities vacancy rates may be less than 10%, low by international standards, according to China International Capital Corp, an investment bank. Much of the housing stock is still shabby. 

A tenth of flats in cities do not include their own toilet. And many among the growing middle class, having spent a good portion of the past year locked down, are deciding that they want slightly larger homes.

Totting this all up, the baseline forecast of China Index Academy, the country’s largest property-research organisation, is that housing sales will fall by 4% or so annually in the coming half-decade, going from roughly 15m units sold in 2020 to 13m in 2025. 

That would be a challenge for China; long a pillar of growth, the property sector would become a drag. 

At the same time, it would be a gradual slope down, not a collapse, for the once-vertiginous market. 

If you listen closely enough, the ticking of the time-bomb sounds a little fainter. 

The Problem with the COVID Convergence

One of the most surprising global trends to appear during the COVID-19 pandemic is a reduction of inequality across countries, owing to the disproportionate effects of the virus on richer countries. Unfortunately, there is little to celebrate when convergence reflects losses at the top instead of gains at the bottom.

Pinelopi Koujianou Goldberg

NEW HAVEN – There is broad agreement that the COVID-19 pandemic has exacerbated inequality within countries. 

Less frequently noted is the impact on inequality across countries, which has been moving in the opposite direction, owing to the disproportionate effect that the virus has had on advanced economies.

Early in the pandemic, many expected that poorer countries would be hit much harder than rich countries. In a May 2020 poll of the Initiative on Global Markets’ Economic Experts Panel, a majority agreed that the “economic damage from the virus and lockdowns will ultimately fall disproportionately hard on low- and middle-income countries.” 

And policymakers held a similar view, with International Monetary Fund Managing Director Kristalina Georgieva noting in April that, “just as the health crisis hits vulnerable people hardest, the economic crisis hits vulnerable countries hardest.”

The assumption was that low- and middle-income countries would suffer from a lack of public-health capacity and fiscal resources. 

But the data tell a different story. In a June 2020 paper, the World Bank’s Tristan Reed and I found that cumulative COVID-19 deaths per million people were substantially higher in high-income than in middle-income and low-income countries, even when excluding China. 

Moreover, the trajectories of the pandemic were remarkably different across countries at different income levels.

As we showed in an update in December, this pattern has persisted: there is a strong positive correlation between income per capita and deaths per million. And though it might be tempting to attribute this finding to a measurement error (deaths may be reported less accurately in poorer countries), the magnitude of the differences is simply too large to ignore.

For example, recent data show that as of January 28, 2021, there were 1,323 deaths per million people in the United States and 1,496 deaths per million in the United Kingdom compared to 712 in South Africa (the hardest-hit country in Africa), 111 in India, 107 in Indonesia, 14 in Angola, and 7 in Nigeria. 

Meanwhile, many of the upper middle-income countries in Latin America have exhibited mortality patterns similar to those documented in Europe and the US.

We do not yet have a full explanation for this unexpected pattern. Preliminary evidence suggests that many low-income countries may have benefited from demographic factors (younger populations; lower obesity rates) and trained immunity (in which the innate immune system reprograms itself against a disease). 

But even more surprising is the unanticipated “advantage” that poorer countries have demonstrated on the economic front.

As a new paper by the Nobel laureate economist Angus Deaton shows, global inequality has declined as a result of the pandemic – at least in the short run. 

During the past year, income per capita fell by more in richer countries than it did in poorer countries, resulting in an unexpected “convergence” between rich and poor. More deaths per million means not just lost lives but also greater income losses.

Equally important, this pattern is not driven by China. On the contrary, while a population-weighted measure would suggest that global inequality has increased slightly – because China (which is no longer a poor country) pulled ahead of others last year – a population-unweighted measure that excludes China reveals a marked decline in global inequality.

Reduced inequality is usually a welcome development, at least in settings characterized by vast disparities in living standards across countries at different stages of development. And yet, the COVID-19 experience serves as a somber reminder that the “how” matters as much as the “what.” 

In this case, global inequality declined not because poorer countries became richer but because richer countries became poorer.

This form of convergence has disturbing policy implications. 

While low- and lower middle-income countries have fared well in relative terms, their outlook is increasingly bleak in absolute terms. 

Many now face rising debt, slower growth, declining revenue from commodity exports and tourism, and diminishing remittances.

Moreover, we have yet to see the long-term consequences of a lost year of income and investment in human capital. 

Millions of children (especially girls) have missed a year of school, just as millions of women have been deprived of maternal health care and millions more people have been plunged back into poverty.

Making matters worse, the nature of this unexpected convergence implies that advanced economies will have little appetite to channel resources toward poorer countries, whether in the form of direct aid, openness to international trade and investment, or debt forgiveness. 

Preoccupied with rising inequality at home, high-income countries will continue to turn inward, prioritizing their own citizens’ needs over those of the global poor.

The US and Europe’s retreat from the developing world will create an opening for others, not least China, which has already returned to growth. 

If accessing lucrative Western markets becomes untenable as a result of rising protectionist sentiment, China-centric alternative initiatives such as the recently signed Regional Comprehensive Economic Partnership may become increasingly attractive to developing and emerging economies.

On a more positive note, low interest rates in the US and Europe may lead to a “hunt for yield,” driving capital flows into developing countries. 

But, if so, these economies will need robust institutions and thoughtful policy to ensure that capital inflows foster widely shared growth and poverty reduction, rather than merely enriching a small upper class.

Most important, all countries will need to continue investing in their human capital and improving their domestic institutions, resource scarcities notwithstanding. Many improvements are a matter of will rather than budget. 

For example, strengthening schools is often a matter of ensuring that teachers show up in the classroom, and that students have access to appropriate textbooks.

Efficient use of available resources and effective implementation will be more important than ever. 

With the rich getting poorer, the poor must take matters into their own hands.

Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American Economic Review, is Professor of Economics at Yale University.

The Institutionalization of Crises

By: George Friedman

About a year after the COVID-19 pandemic introduced its new rules of survival, my wife and I risked life and limb for the chance to travel. 

Having made reservations on an airline now shrunken and a hotel normally inaccessible at the time of year, we went to the airport, where as always we were asked if our bags had been in our possession at all times. 

Our carry-ons were X-rayed as always, and I was asked to remove my belt for visual inspection. 

Everyone has been doing this since 9/11, and most of us are past the point of noticing how unseemly the pat-down process is. 

I also wore a mask and was asked to keep my distance from others going through the process. 

In 2001, I was forbidden to travel with a knife, today with a fever. 

After 9/11, we looked with suspicion at others, wondering if they carried the instruments of our death. 

Today we look at our fellow passengers and wonder similarly.

Both crises carried the risk of death, albeit without an obvious solution, and we were forced to jury rig solutions on a global basis. 

I have gone through security at airports from Singapore to Frankfurt, that is until the pandemic created a problem that could not be X-rayed. 

9/11 ushered in an era of threat that was seen as global, so the solution was global. 

Security check lines, conveyor belts and X-rays would make us safe from a global and invisible menace. 

Reasonable people bored in line could fantasize about ways to get around the x-ray and down a plane. 

The safety measures were necessary, and though they were imperfect, they worked. 

Or perhaps the destruction of al-Qaida and the Islamic State was the real solution. 

Or maybe they ran out of people capable of learning to fly a plane and willing to die for their beliefs.

Whatever the cause, the security protocols stayed in place for a generation, with social distancing now added for good measure. 

That these measures remain is not unreasonable. 

That there hasn’t been another hijacking the likes of 9/11 does not mean that it can’t happen again. 

Dismantling a security system that seems to have worked would be irresponsible. 

What is allowing a stranger to open your carry-on compared to death?

A similar thing happened in World War II. 

Before the war, security had been more lax in the U.S. military. 

Stages of security checks were conducted on people with access to sensitive information. 

It worked, but as with most things it was flawed, and the Soviets, not our enemies at the time, penetrated the atomic program. 

The need for security after the war was therefore not unreasonable, and what emerged was a complex network of intelligence agencies, all vigorously performing background checks for signs of duplicity. 

The social cost of mistrust is high, yet the cost of not being suspicious is also high.

Which brings us to COVID-19, the rules of which state that anyone might be dangerous. 

Yet the perfect application of the solution by everyone – the only real solution – simply won’t happen. 

The fact that it won’t happen, though, doesn’t change the fact that it is the best solution available. 

I have read articles saying that even after we are all vaccinated, we will still be expected to wear masks and maintain social distancing – not unreasonable if your goal is to minimize risks at all costs. 

Vaccines aren’t flawless, so backing them up with another layer of imperfect protection will certainly limit the threat. 

I don’t know if the people who wrote the articles know what they are talking about, but it would follow the two examples I have used: In a wrenching crisis like World War II, 9/11 or a global pandemic, all measures, however extreme, are on the table.

The defenses created against an attack 20 years ago remain in place. 

The security measures necessitated by a war that broke out 80 years ago remain in place. (If anything, they have been enhanced.) 

Each of these was the best available practice at the time and reasonable given the circumstances. 

The dangers they were meant to guard against are still potential dangers. 

Abandoning a measure to protect us as well as possible against ongoing threats would seem reckless. 

From this it follows that the measures imposed by COVID-19 will remain as well. 

The cost of failure is too high.

Each set of measures had its cost, of course, high at the beginning and later routinized into our daily lives. 

The issue is not the economic cost alone; it’s the cost of pyramiding measures designed to protect us that make everyday life a little more difficult. 

The costs of some such as X-raying our bags are relatively low, although the potential attack on privacy is not trivial. 

The complexity of getting many significant federal jobs, and the associated intrusion on our private lives, makes sense, although the criteria imposed by the government is arcane at best. 

We can adjust to wearing masks, but creating a new normal in which everyone always wears them and stays six feet apart will be unwelcome for some and strange to most.

Emergency measures endure when the emergency does. 9/11 could happen again. 

Today’s rivalry between the U.S. and China had its roots in the Cold War, which in turn had its in World War II. We do not know what variants of COVID-19 or new viruses might emerge. 

Prudence recommends security in all these varied areas. 

But when we consider how each individual measure forced us to change some part of our lives, and we lay all the security protocols on the table together, then we see a collective force that is justified one at a time, if startling in total.

Yet, they will remain in place. 

And as I walk through airport security, wearing a mask and maintaining social distance, I wonder about the process that cleared TSA personnel for the task of enforcing anti-terrorism and anti-COVID-19 measures. 

Our expectations of safety can eventually overload the system, even as they earnestly seek to do good. 

An emergency measure that is interminable is better called a way of life.