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Fall 2019
Active Readings for Business
Corpus N°9

Guillaume Sarrat de Tramezaigues

guillaume.sarratdetramezaigues@sciencespo.fr

1/ « A flextension ! », Financial Times 2019 Pages 2-3

2/ « A new SP500 record highs », Financial Times, 2019 Pages 4-6

3/ « Business and the planet», The Economist, 2019 Pages 7-8

4/ « A nobel prize on poverty », The Economist, 2019 Pages 9-10

Department of Economics– Nov. 2019

  

Article 1 2 
Financial Times
Prime Minister agrees to Brexit ‘flextension’ until January 31
Sebastian Payne, Jim Brunsden, Mehreen Khan
October 29 2019

Boris Johnson has accepted a Brexit extension until January 31 and urged EU leaders not to grant any further
delays as he pushes for a general election before the end of the year. National ambassadors from the 27 other EU
member states approved a “flextension” on Monday that could last as long as the end of January but which gives
the UK the possibility to leave the bloc sooner if its withdrawal agreement has been ratified.

In a letter to Donald Tusk, president of the EU council, the British prime minister called the extension an “unwanted
prolongation” and said he would have “much preferred it if the UK parliament could have proceeded rapidly to ratify
the deal reached between us”. Mr Johnson added that the prospect of another delay was “corroding public trust in
politics” and said his push towards an election was necessary to avoid further delays. “I would also urge EU member
states to make clear that a further extension after 31 January is not possible,” he wrote. “This is plenty of time to
ratify our deal. It will avoid this parliament simply extending our membership again and again.” I would . . . urge EU
member states to make clear that a further extension after 31 January is not possible.

he letter came as Mr Johnson prepared to ask MPs to vote on Monday for a general election on December 12 —
something that the government is expected to fail to secure because he needs two-thirds of MPs to back him and
the opposition Labour party has indicated the party will not support his proposal. However, Downing Street insiders
said if Mr Johnson loses the vote, the government would bring forward legislation to try to secure a pre-Christmas
election. It is expected to mirror a proposed bill from the Liberal Democrats and Scottish National party that points
to an election on December 9. Mr Johnson’s plan B has a better chance of success — because he needs only a
simple majority of MPs to back election legislation.

The EU27 decision means the bloc has granted a request for a Brexit delay made by the UK government earlier
this month after Mr Johnson was forced by MPs to go down this route. The move sounds the death knell for Mr
Johnson’s “do or die” bid to take Britain out of the EU on October 31.

The EU27 agreement on the Brexit extension was reached after a flurry of diplomatic activity over the weekend to
win over France. French president Emmanuel Macron pushed back last week against attempts by European
Council president Donald Tusk to rally countries behind a Brexit delay to January 31. Paris argued that Britain had
to explain clearly what it would do with a Brexit extension, and warned that pressure had to be kept up on the
Commons to ratify Mr Johnson’s draft Brexit treaty. “It’s true that France had a fairly tough position,” said one EU
official. “But there is now the [prospect] of quick British elections, which changes the picture.”

The text agreed by the EU27 leaves open the possibility for Britain to leave on December 1 or on New Year’s Day
if its withdrawal treaty has been ratified in time. Mr Tusk said in a tweet on Monday that the Brexit extension
decision will now “be formalised through a written procedure”, avoiding the need for an EU leaders’
summit. Brussels’ understanding is that the terms of the so-called Benn act oblige Mr Johnson to accept the
extension that has been granted by the EU, given that it runs to the January 31 date sought by the British parliament.
The act says that, were such as extension to be offered by the EU, Mr Johnson “must immediately” notify Mr Tusk
that the UK agrees to it. Once that is done, the EU expects to complete its own written sign-off within 24 hours.
One EU official said it should all be done by Tuesday or Wednesday.

As part of the Brexit delay decision, EU leaders will underline that, after more than two years of talks, the
negotiations on the terms of the UK’s departure are definitively over. In a clear message to the Labour party that
is interested in amending Mr Johnson’s Brexit deal, an EU27 declaration “firmly” excludes any reopening of talks in
the future. It also rules out negotiations on the future EU-UK relationship until the Brexit deal is ratified.

In April EU leaders were similarly categorical that negotiations on the withdrawal agreement finalised by Theresa
May were over, when they granted Britain a Brexit extension to October 31. Despite insisting at the time “that there

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can be no opening” of the draft Brexit treaty, they went on to agree to the move with Mr Johnson. But the EU has
crafted harder language against reopening the revised withdrawal agreement in the new text. Another section 3 
underlines Britain’s obligation to nominate a member of the next European Commission to serve until Brexit
happens: something Mr Johnson has so far refused to do.

Department of Economics– Nov. 2019

  

Article 2 4 
Financial Times
How the S&P 500 has hit record highs
Optimism rises due to Fed interest rate cuts and progress in US-China trade talks
Peter Wells
October 29 2019

US stocks set a record high on Monday, surpassing levels they last reached in the summer and cementing a return
of investor confidence built on progress in US-China trade talks and interest rate cuts from the Federal Reserve.
The benchmark S&P 500 closed 0.6 per cent higher at 3,039.4, taking it past its previous peak of 3,025.9 on July
26 and notching an intraday record of 3,044.1 in the process.

That brought its advance this year to 21.3 per cent. “Optimism is hitting investors from all directions,” Charlie Ripley,
senior investment strategist at Allianz, said, pointing to progress on trade talks between Washington and Beijing,
market expectations for a Fed rate cut this week and upbeat earnings results. “Against this backdrop, we would
expect market optimism to continue to improve, which is particularly important as we head into the holiday spending
season.” The push into new territory comes as US earnings season moves into top gear, with about one-third of
the S&P 500 reporting third-quarter figures this week.

Those out the door in previous weeks have beaten expectations and signalled cautious but not especially downbeat
outlooks. The 7 per cent increase in the S&P 500 since the end-of-August nadir has also coincided with a rebound
in the yield on the 10-year Treasury bond, reflecting a softening of investors’ concerns about the long-term
prospects for the global economy.

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5 

Against the backdrop of Washington and Beijing struggling to agree a deal on trade, investors had became wary
over the summer about the trade war’s impact on global growth. At the end of August, the yield curve, which reflects
yields on government bonds of different maturities, was flashing its strongest prediction of a recession since the
financial crisis. But the US and China inched their way to an interim trade deal which both sides say they are hopeful
of signing soon, to prevent additional increases in tariffs.

And investors have also grown more confident in the Fed. While the central bank in July cut interest rates for the
first time since the crisis and backed it up by easing policy again in September, it also appeared reluctant to signal
much extra support. Recent weak readings on the global and domestic manufacturing sectors have seen the
probability of an October rate cut jump to about 90 per cent, more than double the likelihood a month ago, according
to futures prices. A third, “insurance” cut at Wednesday’s policy meeting would lower the range for the benchmark
borrowing rate 25 basis points to between 1.5 per cent and 1.75 per cent.

Within the S&P 500, technology has retained its place as the index’s top-performing sector in 2019, while energy
remains the laggard as the US’s shale oil boom slows. High-dividend sectors like real estate and utilities had done
well over summer as brewing recession concerns drove government bond yields to multiyear lows and investors
instead looked to companies in these sectors for higher income. They have since trimmed their gains as bonds
sold off. Investors have noted a twist in the tale of the stock market’s latest ascent. This most recent leg higher has

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been driven by so-called value stocks, solid companies available at historically low valuations, which can often be
in economically sensitive sectors. 6 

This is as opposed to growth stocks, such as those in technology, that are growing regardless of the economy.
Bargain-hunting investors lept in after the performance of value relative to growth hit its worst near the end of
August.

On Monday, President Donald Trump tapped out a mostly markets-focused message on Twitter, marking the new
intraday record for US equities. “The S&P just hit an ALL TIME HIGH. This is a big win for jobs, 401-K’s, and,
frankly, EVERYONE! Our Country is doing great. Even killed long sought ISIS murderer, Al-Baghdadi. We are
stronger than ever before, with GREAT upward potential. Enjoy!”

Department of Economics– Nov. 2019

  

Article 3 7 
The Economist
Can business tread more lightly on the planet?
The stuff paradox
Oct 17th 2019

Almost 50 years before Extinction Rebellion, a British-born protest movement, exported its brand of climate activism
to the world, young Americans did so on Earth Day, April 22nd 1970. The youth then was more bell-bottomed than
nowadays but felt no less “bamboozled and cheated” (as The Economist put it at the time) that their elders were
bequeathing them a wrecked planet.

Their main concern was different from today’s: unbridled economic growth and consumerism would, they warned,
swiftly exhaust the world’s resources. Their Malthusian concerns proved misguided. Raw materials have never
come close to running out. Now the focus has turned from scarcity to excess—specifically, of carbon dioxide in the
air. In the past 50 years the burning of fossil fuels has more than doubled its concentration, accelerating global
warming with its potentially calamitous consequences. Andrew McAfee of the mit Sloan School of Management
thinks that these fears, too, are overblown. Humankind, he posits in a new book, “More From Less”, is reaching
“peak stuff”—though people consume more, businesses use fewer resources to make it. With an anti-capitalist
crusade focused on a surfeit of stuff once again gathering steam among eco-socialists, it is a timely assertion.
Sadly, it is an oversimplification.

Mr McAfee builds on “The Second Machine Age”, the bible of techno-optimism he co-authored with Erik
Brynjolfsson in 2014. This time he mines data on America’s resource use since the first Earth Day to argue that the
world is moving beyond the “industrial era” of resource-heavy goods. The latest computer age is making things so
much lighter and less material-intensive that it promises to decouple economic growth from environmental
degradation.

A look at the physical building blocks of the American economy—metals, minerals, wood, paper, fertiliser, water
and energy—indeed suggests that in many cases their absolute usage has peaked in recent decades, even
as gdp has soared. Everything from farms (the average American cow produces more than four times as much milk
as in 1950) to iPhones (each one contains a calculator, camera, tape recorder, map and other gizmos) have, as Mr
McAfee puts it, gradually “dematerialised”. Some rich European countries are on a similar path. India and China
may follow.

This is down to two pairs of factors. First, technology and capitalism, blamed for many of the ravages of
industrialisation, are now reinforcing each other in favour of dematerialisation. Hardware, software and networks
enable goods to be slimmed down, optimised, even eradicated, as Google Maps has rendered useless the likes of
London’s A-Z. Competition in free (albeit regulated) markets encourages companies to lower costs by using fewer
materials or substituting expensive ones for cheaper alternatives.

A second pair of factors, Mr McAfee contends, has accelerated the trend of late. Public awareness and responsive
governments are helping rectify the shortcomings of free markets, such as the failure to price in the cost of pollution.
Global environmental governance is getting better—a bold claim, the author concedes, but not completely
outlandish even in America, where many cities and states are setting carbon-reduction goals at odds with the
climate-sceptic-in-chief in the Oval Office.

Mr McAfee’s focus on corporate use of resources is refreshing. Too often, businesses are caricatured as rapacious
predators of Earth’s bounty. In fact, since the dawn of capitalism, they have produced products that become lighter
on the ground and on the wallet because profit-hungry bosses see advantage in thrift. No company has thrived in
the long term by using resources less sparingly. Likewise, cutting emissions involves using less power per unit of
output and more renewable power. The first helps the bottom line. As solar and wind energy get cheaper, so does
the second.

Department of Economics– Nov. 2019

  

Producing less overall is a different matter, however. Sceptics about the extent of dematerialisation, Mr McAfee’s
central contention, go back to William Jevons, a British economist who argued in “The Coal Question”, an essay 8 
from 1865, that more efficient use of the fossil fuel inevitably leads to higher total consumption. “Jevons was wrong,”
Mr McAfee claims confidently, citing the recent decline in coal use in America even as it has become cheaper.

Not so fast. Some of the West’s purported dematerialisation may be down to more of the goods it buys being
manufactured abroad, not at home. Mr McAfee thinks that this is negligible. It probably isn’t. And though the coal
question may have been extinguished, at least in America, its modern-day version—call it the carbon question—
remains burning.

In a book published nearly 150 years after Jevons’s treatise, Vaclav Smil, a Czech-Canadian scientist (and a
favourite of Bill Gates), argued that as goods become lighter and cheaper the market for them explodes and, as
Jevons predicted, increases demand for resources. The weight of the average mobile phone in 2011 was one-sixth
what it had been in 1990. But the number of phones ballooned from 11m to 6bn. So the total mass of phones
globally went from 7,000 tonnes to about 700,000 tonnes. Less, Mr Smil writes memorably, is “an enabling agent
of more”.

Material concerns
For businesses, the “Jevons paradox” is not merely academic. Fearing a backlash from eco-conscious consumers,
firms are striving to lower their carbon intensity. So long as this brings down costs, ceos happily oblige and society
reaps the benefits of higher efficiency and better resource allocation. But if that leads to higher sales, companies’
overall environmental impact may rise.

They should not be shamed—or required to urge customers to buy less of their wares, as some activists who glued
themselves to corporate headquarters in London seem to demand. Governments can make citizens want less by
making consumption pricier, with carbon taxes or other regulations. Until they do, firms will try to sell more stuff—
because most people want more of it.

Department of Economics– Nov. 2019

  

Article 4 9 
The Economist
A Nobel economics prize goes to pioneers in understanding poverty
Randomised trials help policymakers grasp which policies work and which don’t
Oct 17th 2019

The most important question in economics is also the hardest: why do some countries stay poor while others grow
rich? In 2015, 10% of the world’s population lived on less than $1.90 per day, down from 36% in 1990. But more
than 700m people remain in extreme poverty, and the number grows every day in certain parts of the world, in
particular sub-Saharan Africa. For their contributions to understanding gaps in development, the better to close
them, Abhijit Banerjee, Esther Duflo and Michael Kremer have been awarded this year’s Nobel prize for economics.
All three are Americans, though Mr Banerjee and Ms Duflo are immigrants (and married to each other). Ms Duflo
is only the second woman to have received the prize and, at 46, the youngest winner ever.

Thirty years ago, economists mostly looked at the big picture. They studied large-scale structural transformations:
from rural and agricultural to urban and industrial. Macroeconomists built growth theories around variables such as
human capital, then ran cross-country growth regressions to try to measure relationships—for example, between
years of schooling and gdp per person. But data were scarce or poor, and the vast number of potentially relevant
factors made it hard to be sure what caused what.

In the mid-1990s Mr Kremer, at Harvard University, tried something different. With collaborators and co-authors,
he began studying poverty with methods more commonly associated with chemists and biologists: randomised
trials. If human capital—health, education, skills and so forth—is essential for development, then economists had
better make sure they understand where it comes from. In Kenya he conducted field experiments in which schools
were randomly divided into groups, some subject to a policy intervention and others not. He tested, among other
things, additional textbooks, deworming treatments and financial incentives for teachers linked to their pupils’
progress.

Each such experiment shed a little light on one small part of the “hardest question”. Educational resources—
textbooks, say—turned out to do little for learning outcomes. Making pupils healthier improved their attendance,
but did not necessarily mean they learned more. The experiments had a larger result, however: they taught the
economics profession that randomised trials could work in the field.

Mr Banerjee and Ms Duflo built on the foundation Mr Kremer laid, deploying randomised trials to study health care
and entrepreneurship as well as education. In India, they found that focusing extra teaching resources on pupils
who had fallen behind paid big dividends. They showed that microloans—small-scale lending to the cash-strapped
poor—were less transformative than had been claimed, but could help ambitious entrepreneurs. The three scholars
have studied absenteeism among teachers and nurses, immunisation programmes, the management of public
infrastructure and the use of productivity-boosting technologies such as fertiliser. They have spent countless hours
observing and learning from the daily struggles of the world’s poor.

By breaking big questions into smaller ones, and tackling each in carefully designed experiments, they overcame
some hard epistemological problems. Economists who used cross-country regressions could not easily say whether
extra schooling boosted growth or merely occurred alongside it. Field experiments, by contrast, could show not
only the link between better teaching and greater learning, but how the connection worked.

There remained the problem of “external validity”: the extent to which a measured relationship holds outside the
research context. People are complex, and the world ever-changing; thus it is hard to be confident that a relationship
between two variables will endure. Researchers must also be aware that the groups being tested may differ subtly
from a broader population, or that something in the experiment may be influencing participants’ behaviour. In
mastering field research, Mr Banerjee and Ms Duflo showed how to overcome these difficulties. “Natural”
experiments, such as an oil shock, cannot be rerun to satisfy nagging doubts. Field experiments can be replicated.
Structuring experiments so that they can be scaled up over time permits greater confidence still.

Department of Economics– Nov. 2019

  

A developing story
Each nugget of truth prised out of the data generated by field experiments represents a contribution to 10 
understanding the world. The hope is that many small truths can be piled together to make a big one. These
laureates’ work uses economic theory as a guide, but nonetheless represents a departure from the discipline’s
business-as-usual, in which economists peer down from on high at society and seek to discover the equivalent of
Newton’s laws of motion. Randomised trials are a part of an important development in recent decades, away from
high theory and towards an empirical grounding. With these awards the Nobel committee endorsed this shift. It is,
furthermore, a practical award, celebrating work that offers ways to improve lives.

But the hardest question still looms. Mr Banerjee and Ms Duflo reckon that their work builds toward an answer.
Taken together, their experiments reveal that the gap in productivity between the most and least efficient producers
is much wider in developing economies than in advanced ones. Fix that, one small intervention at a time, and
perhaps eventually the hard question will go away. More macro-minded economists counter that the huge fall in
global poverty of the past three decades owes little to such fiddling. It happened, rather, as a confluence of global
forces buoyed poor countries’ fortunes. The mystery of global poverty remains. If enough economists emulate the
innovative spirit and scholarly care of this year’s laureates, it will not remain for ever.

Department of Economics– Nov. 2019