The Pandemic Effect on World Trade: Some Early Data

The World Trade Statistical Review 2020 from the World Trade Organization is an annual report which is mainly focused on detailed data for trade patterns from the previous year. I find that it requires some mental effort to remember what the world economy looked like in 2019, but of course, trade tensions were already high. The value of global merchandise trade fell 3% in 2019--the first time it had fallen since the Great Recession years back in 2008-9--while the value of services trade rose 2.1%. However, this year's report also includes some preliminary data on how aspects of global trade have evolved since the COVID-19 pandemic hit earlier this year. For example: 

One early indicator of trade are based on data from purchasing managers and the new orders they have received for goods that will be exported. The sharp fall, and then the rebound, suggest that the level of these orders may have bottomed out in March or April, and that a recovery in actual exports may be perceptible in the June data. 

Here's a measure of the quantity of container shipping. Notice that the fall in the last few months is not (yet) as deep or severe as the decline during the Great Recession.

As one might expect, the number of commercial flights plummeted, falling by something like three-quarters in March 2020.

Tourism and travel is a major elements of international trade: for example, when a foreign traveler in the US spends money on US goods and services, it is treated in the trade statistics as an "export" of US production to a foreign consumer. The US typically runs a surplus in travel industry, with exports (blue line) well above imports (gray line), but both have dropped substantially in early 2020.  

Finally, here are a couple of figures comparing national-level data on exports in April 2020 and on imports in March 2020 to the monthly data for a year earlier. 

Those who believe that international trade is bad for the US economy should of course welcome the 2020 fall in trade as a silver lining in what is otherwise shaping up to be a dismal year for the economy. Or alternatively, they might reconsider the extent to which trade is the fundamental source of US economic problems or reducing trade is a useful solution to those problems.   

Slavery and the History of US Economic Growth

Slavery was both a set of economic arrangements and also a raw authoritarian human rights violation. It's unsurprising that there has been long-standing controversy over the relationship: for example, did slavery in the United States boost to economic growth or hold it back? Gavin Wright revisits these issues in "Slavery and Anglo‐American capitalism revisited"  (Economic History Review, May 2020, 73:2, pp. 353-383, subscription required).  The paper was also the subject of the Tawney lecture at the Economic History Society meetings in 2019, and the one-hourlecture can be freely viewed here.

Wright frames his discussion around the "Williams thesis," based on the 1944 book Capitalism and Slavery, focused on the United Kingdom. Williams argued that while slavery played an important role in British capitalism in the 18th century--in particular, the brutalities of slave labor were central to production of sugar and thus to Britain's international trade--by early in the 19th century the British economy and exports had evolved toward manufacture of industrial products, in such a way that slave labor was no longer vital.  Wright argues that as the US economy of the 19th century evolved, slavery tended to hold back US economic growth. 

To set the stage, let's be clear that the economic activity of slavery was deeply entangled with capitalism. Wright offers an example that will resonate with those of us working in higher education:

The prominence of slave-based commerce for the Atlantic economy provides the background for the arresting connections reported by C. S. Wilder in his book Ebony and ivy, associating early American universities with slavery. The first five colleges in British America were major beneficiaries of the African slave trade and slavery. ‘Harvard became the first in a long line of North American schools to target wealthy planters as a source of enrollments and income’. The reason for what might seem an incongruous liaison is not hard to identify: ‘The American college was an extension of merchant wealth’. A wealthy merchant in colonial America was perforce engaged with the slave trade or slave-based commerce.

However, as numerous writers have pointed out over time, the coexistence of slavery with British and American capitalism of the 17th century does not prove that slavery was necessary or sufficient for an emerging capitalism. As many writers have pointed out, historical slavery across what we now call Latin America. At that time, Spain and Portugal (among others) were also active participants in the slave trade, yet their economies did not develop an industrial revolution like that of the UK. Countries all over Latin America were recipients of slaves, like the area that became the US, but those countries did not develop a US-style economy.  Clearly, drawing a straight line from slavery to capitalism of the Anglo-American variety would be wildly simplistic. 

Wright argues that slavery did seem essential to sugar plantations: "Sugar plantations required slave labour not because of any efficiency advantage associated with that organizational system, but because it was all but impossible to attract free labour to those locations and working conditions." But Wright argues that when it came to cotton (or tobacco or other crops), slavery did not have any particular advantage over free labor. Thus, US cotton plantations run by slave labor did not come into being because they had an economic advantage, but rather because slaveowners saw it as a way to benefit from owning slaves. 

The Atlantic economy of the eighteenth century was propelled by sugar, a quintessential slave crop. In contrast, cotton required no large investments of fixed capital and could be cultivated efficiently at any scale, in locations that would have been settled by free farmers in the absence of slavery. Early mainland cotton growers deployed slave labour, not because of its productivity or aptness for the new crop, but because they were already slave owners, searching for profitable alternatives to tobacco, indigo, and other declining crops. Slavery was, in effect, a ‘pre-existing condition’ for the nineteenth-century American South.

It's true that a lot of pro-slavery writers in the 1850s boasted that cotton was essential to the US economy, as a way of arguing that their own role as slave-owners was also essential. But slave-holders also argued that wage labor was exploitative and slavery represented true Christian morality and the Golden Rule. Rather than listening to the explanations of those trying to justify evil, it's more useful to look at what actually happened in history. If it was true that slave-produced cotton was essential to US economic growth,, then end of slavery should have wiped out US economic growth. But it didn't. Wright points to some research literature looking back at the US economy in the 1830s:  "Cotton production accounted for about 5 per cent of GDP at that time. Cotton dominated US exports after 1820, but exports never exceeded 7 per cent of GDP during the antebellum period. The chief sources of US growth were domestic. ...  [The] cotton staple growth theory has been overwhelmingly rejected by economic historians as an explanation for US growth in the antebellum era."

Similarly, if it was true that slave plantations were the  most efficient way of growing cotton, then the end of slavery should have caused the price of cotton to rise on world markets. But it didn't. 

The best evidence that slavery was not essential for cotton supply is what happened after slavery’s demise. The wartime and postwar years of ‘cotton famine’ were times of great hardship for Lancashire, only partially mitigated by high-cost imports from India, Egypt, and Brazil. After the war, however, merchants and railroads flooded into the south-east, enticing previously isolated farm areas into the cotton economy. Production in plantation areas gradually recovered, but the biggest source of new cotton came from white farmers in the Piedmont. When the dust settled in the 1880s, India, Egypt, and slave-using Brazil had retreated from world markets, and the price of cotton in Lancashire was back to its antebellum level ... 

Again, slave labor on US cotton plantations was for the benefit of the slaveholders, not the US economy as a whole. Indeed, as the 19th century evolved, the US South consistently underperformed as a cotton supplier. Wright points out three reasons. 

First, "[t]he region closed the African slave trade in 1807 and failed to recruit free labour,
making labour supply inelastic." Why were slaveowners against having more slaves? As Wright points out: "After voting for secession in 1861 by 84 to 14, the Mississippi convention voted down a re-opening resolution by 66 to 13. The reason for this ostensible contradiction is not difficult to identify: to
re-open the African trade was to threaten the wealth of thousands of slaveholders across the South." In short, bringing in more slaves would have reduce the price of existing slaves--so existing slaveowners were against it. In addition, immigrant to the US from, say, 1820 to 1880 overwhelmingly went to free states. Slave states in the southwest "displayed net white outmigration, even during cotton booms, at times when one might have expected a rush of immigration. One result was low population density and a level of cotton production well below potential."

Second, "[s]laveholders neglected infrastructure, so that large sections of the antebellum South were bypassed by the slave economy and left on the margins of commercial agriculture." The middle of the 19th century was a time when the US had a vast expansion of turnpikes, railroads, canals, and other infrastructure often built by state-charted corporations. However, almost all of this contruction occurred in the northern states. Not only were the southern states uninterested, they actively blocked national-level efforts along these lines: "Over time, however, the slave South increasingly assumed the role of obstructer to a national pro-growth agenda. ,,, [S]outhern presidents vetoed seven Rivers & Harbors bills between 1838 and 1860, frustrating the ambitions of entrepreneurs in the Great Lakes states."

Third, "the fixed-cost character of slavery meant that even large plantations aimed at self-sufficiency in foodstuffs, limiting the overall degree of market specialization." One main advantage of slavery in cotton production was that it guaranteed having sufficient labor available at the two key times of the year for cotton: planting and harvesting. But during the rest of the year, most cotton plantations grew other crops and raised livestock

The shortcomings of the South as a cotton producer during this time were clear to some contemporary observers. Wright says: "Particularly notable are the views of Thomas Ellison, long-time chronicler and statistician of cotton markets, who observed in 1858: `That the Southern regions of the United States are capable of producing a much larger quantity of Cotton than has yet been raised is very evident; in fact, their resources are, practically speaking, almost without limit’. What was it that restrained this

potential supply? Ellison had no doubt that the culprit was slavery ..." 

In short, the slave plantations of the American South were a success for the slaveowners, but not for the US economy. From a broader social perspective, slavery was a policy that scared off new immigrants, ignored infrastructure, and blocked the education and incentives of much of the workforce. These policies are not conducive to growth. As Wright puts it: ""Slavery was a source of regional impoverishment in nineteenth-century America, not a major contributor to national growth."

A Gentle Case for Paying Kidney Donors

Simon Haeder makes a gentle case, nudging the undecided to consider the possible of paying kidney donors, in "Thinking the Unthinkable: Buying and Selling Human Organs" (Milken Institute Review, Third Quarter 2020, pp. 44-52).

Today, 15 percent of Americans suffer from chronic kidney disease. Of these, roughly 800,000 have progressed to end-stage renal disease, where kidney function has been reduced to 10 to 15 percent of normal capacity. Most of them – half a million or so – require regular dialysis, and eventually a transplant, to survive.

Dialysis sustains life, yet it is far from a perfect substitute for normal kidney function. It is a time-consuming process that often leaves patients fatigued, with increased risks of infection and sepsis, and subject to a number of other ailments. What’s more, dialysis is very expensive, with an average annual cost of $90,000 that is largely underwritten by government. In 2018 alone, Medicare spent $114 billion on chronic kidney disease patients, with the end-stage renal disease population, which makes up a meager 1 percent of the total Medicare population, accounting for more than $35 billion. And this figure does not include spending by private insurers or patients’ out-of-pocket payments.

Kidney transplantation is superior to dialysis in every way. It not only increases the quality of life for patients, but also substantially decreases long-term costs of care for patients with ESRD [end-stage renal disease]. All told, a kidney transplant is worth on the order of a half-million dollars to kidney disease sufferers and those who share the cost of dialysis. Transplants are also head and shoulders above dialysis in terms of life expectancy. While the five-year survival rate for end-stage renal disease is 35 percent, it increases to 97 percent for those receiving transplants.

One unsurprising result of the explosion in end-stage renal disease is that kidney procurement has consistently failed to provide enough organs for transplants. The waiting list for kidneys has ranged from 76,000 to 87,000 over the past decade, as more than 20,000 individuals are added to the rolls each year. And with demand increasing at around 10 percent annually, a lot of those in need are just out of luck. On average, 13 people die each day waiting for kidneys (and another seven die waiting for other organs). It is highly unlikely that more effective appeals to the kindness of others will solve the shortage long term. It certainly hasn’t so far.

The arguments for and against paying kidney donors have become fairly well known over time. Haeder runs through them clear, and there's no need to belabor them here. But for example: 

Yes, it would be nice if there was a surge in voluntary donations. But it hasn't happened, in the US or anywhere. So people keep dying for lack of a kidney transplant. 

Yes, there are hard questions about the incentives involved with paying for kidney donations, but the hard questions cut in both directions. Haeder writes: 

The very idea of putting prices on body parts infuriates many by besmirching the ideal of altruistic donations. Of course, the altruism in the current transplantation process stops with the donor, the recipient and their families – everyone else is getting paid. Moreover, proponents rightfully point out that we already allow compensation to individuals for donations of blood plasma and for providing surrogate motherhood services, so the expansion to organs would be a change in degree only.

There are concerns that paying to donate a kidney would exploit the poor. But it does require a bit of fancy philosophical footwork to argue that you must deny someone an option to be paid a large sum of money so as to avoid "exploiting" them. Moreover, there are many aspects of society, like paying to take jobs that have greater risk of injury or death,  that "exploit" the poor in the same sense. Haeder notes: 

We have long been perfectly willing to exploit the poor by paying them to enroll in potentially dangerous prescription drug trials – and, most importantly, by encouraging them to put their lives on the line by joining the military.

Moreover, there are incentives for large and profitable private-sector companies that provide dialysis treatments to lobby against paying kidney donors--because a rise in kidney transplants would cut into their profits. If one chooses to be uncharitable in the motives we impute to the other side of this debate, one could point out that those who are against paying kidney donors are on the side of big for-profit dialysis companies and against making direct payments to individual kidney donors who may happen to be poor. 

For previous posts with relevance to the intersection of economics, incentives, and paying for kidney transplants, or paying for blood, plasma, bone marrow, and breast milk, see: 

• "Some Thoughts on Commodification" (May 1, 2020)
• "Paying Kidney Donors: Covering Expenses?" (August 8, 2019)
• "Global Kidney Exchange" (March 7, 2017)
• "Paying Bone Marrow Donors" (November 23, 2016)
• "Volunteers for Blood, Paying for Plasma" (May 16, 2014)
• "What if Government Paid Kidney Donors" (December 2, 2015)
• "Selling a Kidney: Would the Option Necessarily be Beneficial?"(March 12, 2014)
• "The Human Breast Milk Market" (August 24, 2015)

Federal Reserve Assets Explode in Size (Again)

The Federal Reserve is reinventing itself in plain sight, again. Here's a figure from the Fed website, "Recent Balance Sheet Trends."  From the beginning of March through July 20, total assets held by the Fed rose $2.3 trillion, from $3.9 trillion to $6.2 trillion, as shown by the top blue line. (The vertical scale on the figure shows millions of millions--that is, trillions.)

The description of the pattern at the Fed website sounds like this: 

The size and composition of assets held by the Federal Reserve has evolved noticeably over the past decade. At the onset of the financial crisis [in 2008], the level of securities held outright declined as the Federal Reserve sold Treasury securities to accommodate the increase in credit extended through liquidity facilities. Though the various liquidity facilities wound down significantly over the course of 2009, the level of securities held outright expanded significantly between 2009 and late 2014 as the FOMC conducted a series of large-scale asset purchase programs to support the U.S. economy. Then, securities held outright declined as a result of the FOMC's balance sheet normalization program that took place between October 2017 and August 2019.

The orange line shows that most of the increase is due to increased holdings by the Federal Reserve of "Securities Held Outright." A more detailed breakdown of the Fed balance sheet as of July 23 shows that in the last year (and mostly in the last few months), Fed holdings of Treasury securities have risen $2.1 trillion, while holdings of mortgage-backed securities have risen more than $400 billion. By comparison, Fed holdings of corporate bonds and short-term commercial paper are relatively small.

The bump at the lower right-hand side of the figures shows "liquidity facilities," which are ways in which in the Fed makes short-term loans to key players in financial markets so that during a time of severe financial and economic stress, the markets don't lock up for lack of short-term funding. These loans were as high as $500 billion in April and May, but are now down to $150 billion and falling. 

In short, when people wonder about the source of the money for the enormous US budget deficits in recent months during the COVID-19 pandemic, one answer is that the US savings has nearly quadrupled in the last few months, as opportunities to spend contracted and as people worried about the size of their personal nest eggs. In one way or another (say, via a money market fund or bank account),  a chunk of this money was flowing into government borrowing. The other main part of the answer is that the Federal Reserve is buying federal debt, and in that way is financing the US government support of the economy.

At the worst of the Great Recession, in October and November 2008, the Fed increased the assets it was holding by about $1.2 trillion.  For comparison, during the three months from March to May 2020, the Fed increased the assets it was holding by $3 trillion--more than double what it did in the heart of the Great Recession.  

The Fed took one large step to transforming itself back in the Great Recession of 2007-2009, when it shifted to a sustained policy of long-term asset purchases, often known as "quantitative easing." In 2014, the Fed decided to slowly taper off from that policy, and so Fed assets decline modestly through late 2019.  The Fed is now transforming itself again.   

 The COVID-19 recession is an extraordinary economic shock, well beyond what even a prudent household or business would have planned for. It's difficult and a little unseemly to criticize an emergency response, and I won't do so. But even when emergency responses are justified, that doesn't make the costs go away. And by definition, an emergency response is not intended to be sustained for long periods of time.