Happy August — I hope readers in the northern hemisphere are enjoying their summer. And thanks to my splendid colleague Claire Jones for standing in on Free Lunch last week with an excellent piece on why consumer spending is holding up despite rising interest rates.
With news being relatively thin on the ground in August, I am tempted to use this month to share thought-provoking reading I have come across rather than offer a lot of economic analysis. (I emphasise relatively thin on the ground — Russia is still pummelling Ukraine; a coup just happened in Niger; a former US president has been indicted for criminal conspiracies to overturn the 2020 election). But I also want to give you an opportunity to let us know what topics you would like to see covered, or covered more, in Free Lunch. Scroll down or click here to fill in the ultra-short (one question!) poll — and if you have other ideas than the suggestions here, we would love to hear from you at freelunch@ft.com.
Let me start by recommending three eye-opening long reads. Two are from last weekend’s FT: Henry Mance’s essay on the sudden respectability of asking whether aliens exist, and Sam Jones’s Lunch with the FT with the historian Tim Snyder. The third is economist Adam Posen’s Foreign Affairs essay on the end of China’s economic miracle. This China pessimism is clearly growing — Free Lunch readers will have noticed that it has cropped up several times recently here.
Now, for two broader topics in my pile of reading — both so broad that they affect pretty much everybody.
The story no one can ignore because it affects us all . . .
There has been a lot of good economic journalism in recent weeks around the freakish climate events we are experiencing — from record high air and sea temperatures to record low Antarctic ice coverage. Let it no longer be said that the media (at least quality media) neglect global climate change and its effects!
Start with my colleagues’ excellent Big Read on how extreme heat is reshaping our economies. In all kinds of ways, productivity suffers when the temperature rises. This is obviously true in sectors where humans are particularly exposed to extreme heat: tourism, typical outdoors activities such as agriculture, transport and construction, but also indoor activities when they take place in buildings designed for cooler weather only.
Perversely, protection against other hazards may make workers more vulnerable to heatwaves: a New York Times article mentions the challenge hot weather presents for activities requiring heavy protective clothing, from slaughterhouses to gas leak repairs.
And it’s not only humans that are made less productive, but infrastructure — with materials such as steel warping or concrete setting too fast in extreme heat.
Then there are the droughts and floods leading to crop failures — in themselves a productivity hit — and in turn to higher food prices (on top of the effects of Russia’s war against Ukraine). A nice article in the Economist highlights big grain harvest declines in Australia and the US because of droughts, and India’s cut in rice exports after “debilitating rains”. As the piece points out, the resulting higher food prices, and high temperatures directly, tend to cause social unrest, a further threat to economic productivity.
Move on to diseases, such as this report that cholera outbreaks are on the rise because of more frequent tropical cyclones. And that’s just one example of many, according to scientists. Climatic changes seem to have worsened a majority of known infectious diseases (and ameliorated many fewer). The World Health Organization expects climate change to cause 250,000 additional yearly deaths in the coming decades. Dengue fever is on the rise in Europe, and malaria could return there and to the US. The next global pandemic could be a well-known disease, spread more easily by climate change.
. . . and the story everyone ignores but will affect us all anyway
Another text that caught my eye was Andy Haldane’s op-ed in the FT on central bank digital currencies, in other words government-banked e-money. In his trademark style, Haldane tells the story of the conspiracy theory-tinged opposition to CBDC via the petition once launched to stop him from “scrapping cash”. The then-chief economist of the Bank of England signed the petition himself, “in a failed attempt to lighten the mood”.
The deep point is something else. Haldane says it is fear of such public opposition that has made CBDC designers recommend that any future digital pound (or euro, or dollar) should not pay interest, lest it becomes so attractive that people take money out of bank deposits and put it into CBDC. But this is the true scandal: it amounts to forcing holders of (digital) cash to subsidise the government, in a regressive way to boot. Three cheers to Haldane for pointing this out.
For me, this prompted two further thoughts. First, we should ask the converse of Haldane’s question (why should we not pay interest on CBDC?) for banks. Why should central banks be paying interest on commercial banks’ reserves with them, which are (as Haldane rightly says) CBDC for banks? The answer I get when I ask this of central bankers or their advisers, is that not remunerating reserves at the central banks’ interest rates would amount to a “tax” on banks, so this would be “fiscal policy”. I disagree with this: we did not force banks to pay negative interest rates on most reserves when policy rates were below zero, and we do not need to pay them positive ones now — especially when government budgets are badly strained.
But even accepting that view, for the sake of argument, why is the same not true for retail CBDC? Why is it OK for central banks to do fiscal policy and tax ordinary people, while this is anathema when it comes their treatment of banks? It seems like central banks really have to choose one or the other, and treat CBDC for people the same as they treat CBDC for banks (which is what reserves, in effect, are).
Second, why should we even try to prevent people from choosing CBDC over bank deposits? One matter is a panic flight from banks in a crisis — but that can be addressed with good liquidity lines from central banks. Another is if people permanently prefer to keep their liquid money in CBDC rather than commercial bank deposits. But nothing would stop banks from offering a premium interest rate over the CBDC rate to make their deposits more attractive. And central banks could lower CBDC rates enough, including below zero, to get private deposit rates to what best benefits the economy. The advantage is that the payment system and the overall money supply could be kept safe from any recklessness banks may possibly show in their decisions to lend and allocate credit. We could, of course, trust the banks to be safe. But if we learn from history, we should welcome the CBDC alternative to deposits with open arms.
Other readables
Mariya Manzhos writes beautifully of her — and millions of other Ukrainians’ — efforts to fully adopt their native Ukrainian language.
The high cost of housing is interposing itself in young people’s romantic choices. The dreadful possibility that we are returning to a Jane Austen mode of dating made me think of Thomas Piketty’s treatise on the history of inequality, and his frequent use of 19th century literature to reflect how it shaped society.
In decoupling news: Some South Korean corporate giants have successfully reduced their reliance on the Chinese market.
Numbers news
Before Brexit, the price of emitting carbon in the UK was the same as elsewhere in the EU, since they shared the same emissions trading system. But since March, the price in the UK’s own successor scheme has fallen 40 per cent below the EU’s carbon price because of policy choices to make the scheme less restrictive.
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Ketchup-bottle economics: UK shop prices, UK producer prices and eurozone industrial producer prices are all falling.
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Source: Economy - ft.com
