The economic impact of inward FDI on the US
Theodore H. Moran, Lindsay Oldenski, 4 March 2014
The US has once again ranked among the top two recipient countries for foreign direct investment. This column examines the effects of these large FDI inflows on the US domestic economy. Foreign multinationals are – alongside US-headquartered American multinationals – the most productive and highest-paying segment of the US economy. In addition, they provide positive spillovers to US firms. About 12% of the total productivity growth in the US from 1987 to 2007 can be attributed to productivity spillovers from inward FDI.
The US is the second-largest recipient of FDI in the world, behind China, and by far the largest target for FDI among OECD countries (OECD 2013). The numbers are large ($253 billion for the US), and the gap with the next-largest in the OECD is impressive ($63 billion for the UK and $62 billion for France in 2012).
Topics: Productivity and Innovation
Tags: FDI, multinationals, productivity, R&D, spillovers, US, wages
Foreign investors and crises: There is no safe haven for all seasons
Maurizio Michael Habib, Livio Stracca, 28 February 2014
At the peak of the Global Crisis, the US dollar appreciated and US Treasury yields fell, suggesting that foreign investors were purchasing US assets in general. Actually, they were fleeing only into short-term Treasury bills. This column discusses recent research showing that there are indeed no securities which are consistently a safe haven across different crisis episodes – not even US assets. However, a peculiarity of the US securities is that foreign investors do not necessarily ‘run for the exit’, even when a crisis has its epicentre in the US.
The resilience of the international status of the US dollar remains surprising (Frankel 2013). At the peak of the global financial crisis which started in the US, in particular in the last quarter of 2008, US treasury yields fell and the US dollar appreciated. This has created the impression of a stronger demand for US securities in general.
Topics: Financial markets, Global crisis
Tags: asset pricing, financial crisis, global crisis, home bias, portfolio flows, reserve currency, risk aversion, safe haven, US
Political connections in turbulent times
Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak, Todd Mitton, 25 February 2014
Political connections affect economic outcomes in emerging markets. This column discusses new evidence showing that something similar goes on in the US. Over the ten trading days following the announcement of Timothy Geithner as Treasury Secretary, financial firms with a connection to Geithner experienced a cumulative abnormal return of about 12% relative to other financial sector firms. This reversed when his nomination ran into trouble due to unexpected tax issues.
When assessing the political situation in many countries, it is common practice, and entirely reasonable, to consider who has what kind of personal connection to people in, or contending for, power.
Topics: Politics and economics
Tags: emerging markets, political connections, US
The US manufacturing recovery: Uptick or renaissance?
Oya Celasun, Gabriel Di Bella, Tim Mahedy, Chris Papageorgiou, 24 February 2014
The strong rebound of manufacturing production following the Great Recession of 2008–09 has generated renewed interest in the sector among analysts and policymakers. This column argues that a detailed look at the data suggests that claims of a US manufacturing renaissance are unwarranted. Yet, there remain factors that could support a greater contribution from the manufacturing sector to overall US growth in the years ahead.
Amid increasing anecdotes of a ‘renaissance’ in US manufacturing, many commentators have argued that the sector may contribute more significantly to domestic GDP and global industrial output in future (e.g. Financial Times 2012, New York Times 2012, McKinsey Global Institute 2012, Citi Research 2013).
Topics: Global economy
Tags: Great Recession, growth, manufacturing, US
Clarifying the debate about deflation concerns
Mickey Levy, 21 February 2014
A popular view among economic commentators is that rich countries face a serious risk of deflation, and should adopt aggressive macroeconomic stimulus policies to ward it off. This column argues that despite similar headline inflation rates, the US, Europe, and Japan in fact face very different macroeconomic conditions. In the US, much of the recent disinflation is attributable to positive supply-side developments. In Europe, an aggressive round of quantitative easing might encourage policymakers to delay the reforms that are necessary to avoid a prolonged Japanese-style malaise.
A common theme among many economic policymakers, financial market participants, and the media is that rich industrialised nations face a high risk of deflation, and that deflation always harms economic performance and so must be combatted with aggressive macroeconomic stimulus. Such broad assessments are misleading, and under certain circumstances may lead to misguided policies.
Topics: Global crisis, Monetary policy
Tags: deflation, disinflation, Europe, eurozone, Japan, quantitative easing, US
Firm age, investment opportunities, and job creation
Manuel Adelino, Song Ma, David Robinson, 12 February 2014
There is a strong link between entrepreneurship and growth – young firms were responsible for almost all net job creation in the US economy over the last 30 years. This column presents new research into the responsiveness of firms of different ages to investment opportunities. Firms aged 0–23 months create about twice the total number of new jobs in response to local income shocks than firms that are more than six years old.
Economists have long been concerned with understanding how firms respond to changing investment opportunities. Indeed, this question is central to ongoing policy discussions about economic growth and job creation, since the way firms create jobs is by increasing investment and employment in response to new economic opportunities.
Topics: Financial markets, Labour markets, Productivity and Innovation
Tags: employment, entrepreneurship, firm age, growth, job creation, US
Where is the land of opportunity? Intergenerational mobility in the US
Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, 4 February 2014
The US is supposed to be the land of opportunity. This column presents evidence that is better thought of as the ‘lands of opportunity’. Economic mobility varies dramatically across US cities. Some have upward-income mobility comparable to the most mobile countries in the world. Others have rates below that of any developed country. These geographical differences are correlated with five factors: segregation, income inequality, local school quality, social capital, and family structure.
The US is often hailed as the land of opportunity, a society in which a child's chances of success depend little on her family background. Is this reputation warranted?
Topics: Poverty and income inequality
Tags: Intergenerational Mobility, segregation, US
Information frictions and the law of one price: "When the states and the kingdom became united"
Claudia Steinwender, 16 January 2014
Information is critical for the efficient functioning of markets, yet is in reality often limited. Since researchers usually cannot observe the information that market participants have, little is known about how information frictions distort trade flows and price patterns. This column discusses research that quantifies the effects of information frictions by looking at an historical episode – the transatlantic telegraph connection of 1866. Information frictions decreased average trade flows and the volatility of trade, leading to substantial welfare losses.
When it comes to global trade flows, the world is still far from flat. What kind of trade barriers explain the “missing trade” (Trefler 1995)? Economists have recognised that indirect barriers are more important than direct trade barriers (e.g. tariffs), but the precise nature of these barriers is still poorly understood (Anderson and van Wincoop 2004, Head and Mayer 2013).
Topics: International trade
Tags: Hollister UK, information frictions, international trade, US
Greater inequality and household borrowing? New evidence from household data
Olivier Coibion, Yuriy Gorodnichenko, Marianna Kudlyak, John Mondragon, 29 January 2014
One popular explanation for the increase in US household debt in the years before the subprime mortgage crisis is that households with stagnating incomes borrowed more to ‘keep up with the Joneses’. This column presents recent research that questions this explanation. Low-income households in high-inequality regions in fact borrowed relatively little compared to similar households in low-inequality regions. A theoretical model in which greater local income inequality facilitates the screening of loan applicants makes predictions that are consistent with the data.
The financial crisis of 2008–09 was preceded by an exceptional rise in borrowing by US households, accounted for primarily by a rise in mortgage debt. There are two main views about the source of this ‘great leveraging’:
Topics: Financial markets, Poverty and income inequality
Tags: credit rationing, debt, Inequality, subprime mortgage crisis, US
It’s time to eliminate the US corporate income tax
Laurence J. Kotlikoff, 14 January 2014
Though taxing corporations may be a political no-brainer, it may be a big economic mistake. This column discusses recent research showing that the tax is not paid primarily by rich corporate shareholders. They can, and do, move their capital away from countries that have high corporate rates. Eliminating the US corporate tax by, for example, taxing accrued global corporate profits as personal income can produce dramatic increases in US investment, output, real wages, and saving. Modest gains accrue to early generations with very sizable gains going to young and future generations, both skilled and unskilled.
Perhaps the most maddening aspect of America’s dangerous government’s political infighting is the failure of politicians in both parties to agree to reforms on which they agree.
Tags: corporate income tax, taxation, US