Os previsíveis imprevisíveis - Jeffrey Frankel, Harvard Belfer Center

 ANALYSIS & OPINIONS - Project Syndicate

Foreseeable Unforeseeables

Author: 
• Jeffrey Frankel
 

| Mar. 27, 2020

Events like the COVID-19 pandemic, the US housing market crash of 2007-2009, and the terrorist attacks of September 11, 2001, are often called “black swans.” The term is meant to suggest that no one could have seen them coming. But these episodes each involved known unknowns, rather than what former US Secretary of Defense Donald Rumsfeld famously called “unknown unknowns.”

After all, in each case, knowledgeable analysts were aware not only that such a thing could happen, but also that it was likely to happen eventually. Although the precise nature and timing of these events were not predictable with high probability, the severity of the consequences was. Had policymakers considered the risks and taken more preventive steps in advance, they might have averted or mitigated disaster.

In the case of COVID-19, epidemiologists and other health experts have been warning about the danger of a viral pandemic for decades, including as recently as last year. But that has not stopped US President Donald Trump from claiming that the crisis was “unforeseen,” that it is an issue that “nobody ever thought would be a problem.” Likewise, after the attacks of September 11, 2001, President George W. Bush wrongly asserted that “There was nobody in our government, at least, and I don’t think the prior government that could envision flying airplanes into buildings on such a massive scale.”

In light of such statements, it is tempting to attribute these disasters solely to executive incompetence. But human error at the top is too facile to be a complete explanation, considering that the general public and financial markets have also often been caught by surprise. Stock markets had reached historic highs just before the 2008 financial crisis, and again before the latest crash that began in late February. In both cases, there were plenty of foreseeable tail risks that should have militated against irrational exuberance.

On these occasions, investors were not just following overly optimistic baseline forecasts. Rather, they saw essentially no risks at all. The VIX – a measure of perceived financial-market volatility (sometimes known as the “fear index”) – was near record lows in advance of both 2007-2009 and 2020.

Several factors help to explain why extreme events so often catch us by surprise. First, even technical experts can miss the big picture if they do not cast their net wide enough when analyzing the data. They sometimes look only at recent data sets, assuming that in a fast-changing world, events from 100 years ago are irrelevant. Americans often come with an additional set of blinders: an excessive focus on the United States. Giving little mind to the rest of the world is one of the perils of American exceptionalism.

​In 2006, for example, the finance whizzes who priced US mortgage-backed securities relied primarily on the recent history of US housing prices, effectively operating under the rule that housing prices never fall in nominal terms. But that rule merely reflected the fact that the analysts themselves had never witnessed housing prices falling in nominal terms simultaneously. Housing prices had indeed fallen in the US in the 1930s, and in Japan as recently as the 1990s. But those episodes did not coincide with the lived experience of US-based financial analysts.

If those analysts had only consulted a broader data set, their statistical estimates would have allowed for the probability that housing prices would eventually fall and that mortgage-backed securities would therefore crash. Financial analysts who limit their data to their own country and time period are like nineteenth-century British philosophers who concluded by induction from personal observation that all swans are white. They had never been to Australia, where black swans had been discovered in a previous century, nor had they consulted an ornithologist.

Moreover, even when experts get it right, political leaders often don’t listen. Here, the problem is that political systems tend not to respond to warnings that estimate the risk of some disaster at a seemingly low figure like 5% per year, even when the predictable costs of ignoring such probabilities are massive. The experts who had warned of a serious pandemic got the risk assessment right. So, too, did Bill Gates and many other astute observers working in sectors as far afield as public health and the movie business. But the US federal government was not prepared.

Worse, in 2018, the Trump administration eliminated the National Security Council unit that had been created by President Barack Obama to deal with the risk of pandemics; and it has regularly tried to slash the budgets of the Centers for Disease Control and Prevention and other public-health agencies. It is little wonder that America’s handling of the pandemic – the lack of testing and the dangerous shortage of critical-care equipment and facilities – has fallen so far short of other advanced economies, not least Singapore and South Korea.

But, in addition to reducing America’s capacity to respond to pandemics, the White House simply had no plan, nor recognized that it would need one, even after it had become obvious that the coronavirus outbreak in China would spread globally. Instead, the administration dithered and diverted blame, failed to ramp up testing, and thereby kept the number of confirmed cases artificially low, perhaps to support stock prices.

As for Trump’s claim that “Nobody has ever seen anything like this before,” one need only look back four years to the deadly Ebola outbreak that killed 11,000 people. But they were far away, in West Africa. The 1918-19 influenza pandemic killed 675,000 Americans (along with some 50 million worldwide), but that was 100 years ago.

Apparently, our political leaders are impressed only when a disaster has killed a large number of citizens within their own country and within living memory. If you have never seen a black swan with your own eyes, they must not exist.

The world is now learning about pandemics the hard way. Let us hope that the price in lives is not too high – and that the right lessons are learned.

Jeffrey Frankel

• James W. Harpel Professor of Capital Formation and Growth
• Member of the Board, Belfer Center

For more information on this publication: Belfer Communications Office

For Academic Citation: Frankel, Jeffrey.“Foreseeable Unforeseeables.” Project Syndicate, March 27, 2020.

Aumento das desigualdades e comercio internacional: alguma relacao? NAO! - Jeffrey Frankel

A desigualdade ENTRE países está diminuindo, como já demonstraram muito tempo atrás (2002, 2006), os estudos do economista catalão (e torcedor do Barça), professor em Columbia, Xavier Sala-i-Martin, atualmente economista-chefe e responsável pelos relatórios do World Economic Forum sobre competitividade mundial.
Mas a desigualdade DENTRO dos países está aumentando, tanto nos países desenvolvidos quanto nos emergentes e em desenvolvimento, como já demonstraram vários estudos.
O que isso tem a ver com o comércio internacional? Nada, ou quase nada, como demonstra Jeffrey Frankel. Ou pouco, muito pouco.
A desigualdade aumenta com a qualificação do trabalho e com "prêmios" maiores atribuídos ao capital, relativamente ao trabalho, como diria um pikettiano. Isso é um problema? De forma nenhuma. Apenas demonstra que TODOS deveriam aumentar o seu capital intangível, o que não fizeram os preguiçosos trabalhadores não qualificados dos países avançados. Eles entraram numa "armadilha da renda média": já dispondo de uma remuneração adequada para um padrão de consumo satisfatório, passam as noites na frente da TV em lugar de continuar estudando, como todos devem fazer, para se reposicionar nos mercados de trabalho. Ser operário a vida inteira não é garantia para ninguém.
Esta é a minha "teoria" para a reconcentração de renda dentro dos países.
Portanto, não me venham com protecionismo comercial.
Ao contrário: o comércio exterior LIVRE aumenta as rendas dos cidadãos em todos os países, mesmo entre os não conectados diretamente a ele, pois permite mesmo a um desempregado comprar bens mais baratos.
Em conclusão (e aqui vale para os IDIOTAS que estão defendendo as políticas do Trump): as medidas protecionistas adotadas pelo presidente idiota vao tornar os americanos mais pobres e retirar empregos dos seus próprios eleitores.
Paulo Roberto de Almeida
São Paulo, 7/01/2018


DOES TRADE FUEL INEQUALITY?

JEFFREY FRANKEL
PROJECT SYNDICATE, Jan 2, 2018 
https://www.project-syndicate.org/commentary/globalization-trade-inequality-relationship-by-jeffrey-frankel-2018-01?utm_source=Project+Syndicate+Newsletter&utm_campaign=2c325b882f-sunday_newsletter_7_1_2018&utm_medium=email&utm_term=0_73bad5b7d8-2c325b882f-93567137

To explain the rise in inequality that began in the 1980s and has accelerated since the turn of the century, many have pointed out that indicators of globalization, such as the trade-to-GDP ratio, have also been rising rapidly over the same period. But does that correlation imply a causal link between trade and inequality?

CAMBRIDGE – Inequality has become a major political preoccupation in the advanced economies – and for good reason. In the United States, according to the recently released World Inequality Report 2018, the share of national income claimed by the top 1% of the population rose from 11% in 1980 to 20% in 2014, compared to just 13% for the entire bottom half of the population. Qualitatively similar, though less pronounced, trends characterize other major countries such as France, Germany, and the United Kingdom.

To explain the rise in inequality that began in the 1980s and has accelerated since the turn of the century, many have pointed out that indicators of globalization, such as the trade-to-GDP ratio, have also risen since 1980. But does that correlation imply a causal link between trade and inequality?

There are certainly reasons to doubt it. The global trade-to-GDP ratio peaked in 2008 at 61%, after a 35-year climb, falling back to 56% by 2016 – at precisely the time when fear of globalization reached political fever pitch.

What if we look at the world as a whole, rather than individual countries? As Columbia’s Xavier Sala-i-Martin pointed out in 2002 and 2006, even as inequality has risen in nearly every country, inequality across countries has decreased, owing largely to the success of developing countries like China and India in raising their per capitaincomes since the 1980s.

Multiple factors, including urbanization, high savings rates, and improved access to education, undoubtedly underlie these countries’ impressive performance. But, if one uses geography to isolate exogenous determinants of trade, it becomes apparent that trade has been among the most powerful drivers of Asia’s economic success, and thus the convergence between the developed and developing worlds.

For someone like US President Donald Trump, this would indicate that Asia’s success has come at America’s expense. This view of trade as a zero-sum game was a feature of the mercantilist theory that reigned three centuries ago, before Adam Smith and David Ricardo made the case that trade would normally benefit both partners, by enabling each to take advantage of their comparative advantages.

But the Smith-Ricardo theory has a key limitation: it does not distinguish among a country’s citizens, and therefore cannot address the question of income distribution within a country. Given this, the Heckscher-Ohlin-Stolper-Samuelson model may be more useful, as it distinguishes between workers and owners of physical, financial, or human (skills) capital.

The HO-SS theory, which dominated international economic thinking from the 1950s through 1970s, predicted that international trade would benefit the abundant factor of production (in rich countries, the owners of capital) and hurt the scarce factor of production (in rich countries, unskilled labor). Workers could command higher wages if they did not have to compete against abundant labor in poorer countries.

Then came the post-1980 revolutions in trade theory. Paul Krugman and Elhanan Helpman introduced the previously neglected elements of imperfect competition and increasing returns to scale. Later, in 2003, Marc Melitz showed how trade could shift resources from low-productivity to high-productivity firms.

Critics of globalization latched onto these newer economic theories, claiming that they demanded a rethinking of the traditional case for free trade. It was precisely at that time, however, that the HO-SS trade theory’s prediction that free trade would hurt lower-skill workers in rich countries apparently began to materialize.

Yet not all of the HO-SS theory’s predictions have come true. As Pinelopi Goldberg and Nina Pavcnik reported in 2007, the expectation that trade would reduce inequality in the countries with the most unskilled workers, because their services are in greater demand in an integrated world market, has not been borne out. “There is overwhelming evidence,” they write, “that less-skilled workers in developing countries “are generally not better off, at least not relative to workers with higher skill or education levels.” In the same year, Branko Milanović and Lyn Squire also found that tariff reduction is associated with higher inequality in poor countries.

Ten years later, inequality continues to worsen within developing countries, including the so-called BRICS emerging economies. In Brazil, the top 1% accounts for 25% of national income. In Russia, the income share of the top 1% of the population increased from 4% in 1980 to 20% in 2015. Likewise, in India, that figure rose from 6% in 1982 to 22% in 2013. In China, it surged from 6% in 1978 to 14% in 2015. And, in South Africa, it rose from 9% in 1987 to 19% in 2012. A look at the top 10% of earners shows similar trends.

This does not mean that the forces described by the HO-SS theory are irrelevant. But there is clearly more to current inequality trends than trade. Technological progress – which has raised demand for skilled workers relative to unskilled workers, at a time when the supply of skilled graduates lags – seems to be a major factor everywhere. The growing tendency of many professions to produce winner-take-all outcomes may play a role as well. A lack of redistribution through taxes in a country like the US (compared to major countries in Europe) does not help matters.

Inequality is clearly a serious problem that merits political attention. But focusing on trade is not the way to resolve it.

Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.