The Economist (a British weekly) in its September 6 issue, p. 67, dances to the tune of the neoliberal piper as it, when defining potential growth’ implicitly uses neoclassical models which by assumption exclude the possibility of involuntary unemployment. Potential growth is supposed to be: ‘the speed at which the economy can expand while keeping inflation in check’. Wrong.
Following the lead of Harrod, 1939 and Domar, 1946 and defying Solow (who, to get rid of the expenditure flow consistentcy of the Harrod and Domar models, ruled out unemployment in his famous 1956 article about growth, in retrospect a textbook case of scientific retrogression!) we have to define ‘potential growth’ as ‘the speed at which the economy can and has to expand while keeping unemployment low’. See about this also this recent article by Fazarri et al and this Slack wire blogpost about the article. Empirically, the German, Spanish, Irish and Greek experiences seem to be described much better by the Harrod/Domar ideas than by the Solow model, Germany since 1991 being affected by Domar style endemic deflationary forces.
In a practical sense the definition of The Economist, which does not take structural unemployment into account, would restrict potential Spanish and Greek growth to 3% a year, the Harrod and Domar insights however show that both countries can grow much, much faster for quite some time as unemployment is sky-high.
Of course, potential growth is not necessarily the same thing as sustainable growth. Which makes things complicated. But inflation is no serious restriction, at least not for Greece and Spain. One overlooked aspect of the Spanish bubble before 2008 is by the way that wage increases were relatively restricted (really, check the data, and unit labour cost increases in manufacturing were restricted, too) as these were mitigated by large increases in immigration as well as a fast increase in the participation rate of women.
The German ‘Statistisches Bundesamt’ has published new, revised data on German economic growth. These data clearly show a slightly less rosy picture (in fact: a more gloomy picture) than previous data. Germany unequivocally experienced the feared ‘double dip’ in 2012/2013 – and we can’t even exclude a triple dip (a dip being defined as two subsequent quarters showing a decline of production). This despite record low interest rates! Which of course means that Schauble and Merkel are wrong: contractionary policies are not expansionary, they are, as they are intended to be, contractionary (why is this for many people so difficult to understand…). Even when domestic interest rates are low.
I do not really expect a double dip: extra-Eurozone orders for manufacturing showed an extra-ordinary increase of +10% (mainly investment goods which, considering the size of the German economy, is HUGE). This increase even compensated the recent dismal development of domestic orders. But a little historical perspective is in order: total orders are still way lower than in 2007… Fortunately, the labour market is still doing reasonably well, the number of jobs increases with about 0,8% a year (which is to an extent caused by people working ever fewer hours, on average – if that’s voluntary that’s a good thing). We can’t however be sure that foreign, extra EU orders will keep compensating rapidly declining German retail sales. German domestic demand still seems to be sub par. Domestic demand has to revive and the number of jobs will have to grow with at least 2% a year. Raise those wages (with an additional 1% for a number of years), cut those taxes.
By the way. Last year, German government wealth declined more than a little – because, well, mainly something with banks.
The value of capitals. Does Airbnb drive house price increases in London, Berlin, Dublin and Amsterdam?
Since 2008, economic statistics have twisted my mind, again and again. One of the weird patterns shown by the data are comparatively very large and fast house price increases in capitals.
Look here for London.
Look here for Berlin
Look here for Dublin
Look here for Amsterdam
Look here for Paris
Is this caused by a large and fast increase in gross rental yields of houses enabled by the site Airbnb, which makes it a lot easier for international tourists to rent houses from individual owners, which leads to a rapid increase of potential gross rental yields of existing houses? According to a recent article in De Volkskrant, a Dutch newspaper, this is at least one of the reasons why house prices are increasing in Amsterdam, not just because individuals are enabled to let their houses but also because new companies are very rapidly using Airbnb to enter this market (especially in the center of cities) which leads to house price increases – increases which are consistent with the fact that tourism is one of the few growth sectors in Europe, at the moment. Look also here, for Venice (Italy).
If this hypothesis is right, these price increases are no sign of a property bubble.
After re-unification, the German unemployment rate has been way too high for way too long. Look here for excellent data from ‘der Spiegel’, a German weekly. Comparing the 1991-2013 unemployment data with the 1950-1960 period of the ‘Wirtschaftswunder’, when the initially very high unemployment rate declined rapidly for 10 years in a stretch, the post re-unification era was a time of massive policy failings. Unemployment rates either increased or were stagnant for 14 years in a stretch. Neither the monetary union between West- and East-Germany nor the subsequent ‘internal devaluation’ policies (needed because the implied exchange rate of the East-German ‘mark was way too high to begin with while subsequent developments led to an inflation shock in 1992-1994 which, alas, was not offset by external devaluation) led to any kind of rapid decline of unemployment. To the contrary. More succesful economic policies would have led to lower unemployment and higher investment rates – is it too much to expect at least a temporary increase in the German investment rate after re-unification? It did not happen.
From: Erwan Mahé (guest post)
29 August 2014
Mr Draghi’s speech at the Jackson Hole symposium was definitely the highlight of late last week. A lot of ink has already been spent about it, and I preferred to wait a bit before expressing myself on the matter. I was especially waiting for the inevitable response of our German friends, who did not disappoint us, with German finance minister Schauble’s declaration this morning that the “ECB’s Draghi has been “over-interpreted.”
While I do not want to “over-interpret” anything our central bank chief says during his pilgrimages to the Grand Teton National Park, where the Siberian scenes of Rocky 4 were filmed, I think it important to understand it in full. After all, his comments appear just as significant as those made during his whatever it takes speech in the summer of 2012. The parallel appears all the more worthwhile, since I remember, the day before Mr Draghi pronounced his famous words, my own intervention at the same meeting to explain the ECB’s ability to reverse the situation before a gathering of American investors, terrorized as the European experiment appeared on the verge of collapse. My argument that no ECB chief would allow the eurozone to implode under his leadership was met a mix of scepticism and irony. Some Texas hedge fund managers bet on the zone’s implosion and claimed that the ECB’s efforts to oppose “free market forces” would meet the same fate as the BoE’s unsuccessful attempt to defend the pound sterling in 1992. Super Mario’s dramatic statement provided sweet revenge and some new diligent readers. Read more…
In Europe, there is no need for lower pensions. Maybe for shorter pensions – not for lower pensions. But before starting to think about shorter pensions we first have to get unemployment down and activity rates up. The present combination of high (youth) unemployment and ever lower pensions is a fricking disaster for young and old alike – which is aggravated by cutting entitlements.
The population of the European Union is ageing. This is a problem: we will have to take care of a steeply increasing number of people with Alzheimer and comparable debilitating, care-intensive diseases. But there is, at least during the next decades, no entitlement problem. Pensions can be paid – there is no lack of labour in the European Union, it’s not a supply side problem. At this moment, unemployment is 11,5%. This can and should go down to 3 or 4%. All kind of models used to calculate the burden of pension entitlements assume, in an implicit or explicit way, ‘full employment’. These models can and should be discarded as Mario Draghi is right: we’re far away from full employment – further than pre-2008 type of models. On top of this, productivity in low or medium productivity countries like Spain, Greece, the UK and even more so in Poland and Romania can increase with 2 to 3% a year for an extended period. On top of that, broad ‘U6′ unemployment’ is much higher than official ‘U3′ unemployment. Also, ‘activity ratio’s’ can increase (even when accounting for ‘broad unemployed’). Hey, these are already increasing in a spectacular fashion (graph), all kinds of ideas about structural rigidities preventing this are bogus (employment ratios can however often still easily double). It’s not a supply side problem.
France is doing relatively well (graph 1). It clearly escaped the historical unique decline of productivity which took place in the UK (more on this below). And though it did not increase its productivity lead over Germany – it did keep its lead (graph 2).
Despite this clear success of French economic policies and its high rate of productivity, a sign of an effective economic system, France gets a bad press. ‘The Economist’ starts an article about French education with the sentence ‘Wary of competition when it comes to global markets..’. And Tyler Cowen sees France as one of the countries with enhanced risk of secular stagnation, soon to be left behind by history. What a nonsense. Dacia, a Romanian brand of cars owned by Renault, has by far the best quality/safety/size/price combination of all cars on sale in my country. And at least according to this test, the Dacia Sandero is the most dependable European car Read more…
Jan Mankes was born in 1889 in Meppel, the Netherlands, and died in 1920 from tuberculosis. At the age of twelve he became the apprentice of a glass painter. At eighteen, he was established as an independent artist. Influenced by Tolstoï, ideas about vegetarianism and communal ownership of land, he became the most ‘silent’ painter of the Netherlands. I’m always very impressed by his birds. Read more…
Recently, Eurostat published data on labour participation rates in North Africa and the eastern mediterranean. In many of these countries, female labour participation rates (paid labour, that is) are low (graph 1). And they are lower than they used to be (graph 2).
Graph 1. Labour market participation rates, Israel (IL), Morocco (MA), Egypt (EG), Lebanon (LB), Tunisia (TN), Palestine (PL) and Algeria (DZ).
Real ‘micro foundations’ of macro ideas are possible. Asger Lau Andersen, Charlotte Duus and Thais Lærkholm Jensen use data from 800.000 individual Danish households to show the micro-economic underpinnings of ‘balance sheet recessions’. When house prices decline, severely indebted households spend relatively less than less indebted households – even when debt service does not change and the incomes of the indebted households increases more than the income of less indebted households. Remarkably, they do not cite the author intellectualis of the idea of balance recessions, Richard Koo.
Elstat, the Greek statistical office, is still prosecuted for producing reliable statistics
British inflation is still at a historical low.
The increase in employment in the UK is mainly caused by an increase in self-employment. This increase in self-employmnent is mainly caused by fewer people leaving ‘self-employment’.
Despite declines of employment in Estonia and Latvia in the first quarter of 2014, unemployment in the Baltic states is declining (second quarter 2014). Second quarter employment data are not yet available.
In Italy, the business ‘birth rate’ increased in 2013. Turnover has however decreased for the fifth year in a row.
On Voxeu a book about secular stagnation has been published. Can I add something to this? Yes: information on the secular development of the rate of fixed investment (5 graphs).
The book contains a lot of interesting and important ideas about labour (ageing, declining male participation rates), technological possibilities (opinions differ about the magnitude of these possibilities but everybody sees possible improvements in life styles and health) and disequilibrium economics: tenacious interruptions of the flows of money which can not be cured or are even caused by changing relative prices (i.e. lowering then interest rate) are preponderant in the book. And only Smets (from the ECB…), Jimeno and Yiangou still believe in the confidence fairy. But even they advocate a smaller financial sector. ‘Fixed capital’ does however not get enough attention. According to me, progress will be increasingly dependent on household purchases of specialized consumer durables (in combination with cultural changes in life styles) instead of upon government and company ‘fixed investments’ which means that households will have to get the means (i.e. higher incomes) to finance these ‘household investments’. This will not only enable these purchases but it will also be necessary to fill the expenditure gap left by the decrease of government and business fixed investment. Read more…
And it’s an engineered slump. A striking fact of the graph above is the sudden stalling of the European recovery around 2011, Q1. This stalling was deliberately caused by Eurozone monetary policies. One can of course point to the ECB interest rate increases of April as well as July 2011. But these increases were, in the end, limited to ‘only’ 0,5%. Much more important, however, is what happened to ‘real economy interest rates’, like those paid by governments and, as governments nowadays are the financer of last resort for banks, therewith to rates paid by households and non-financial companies (graph 2).
Graph 2. Difference between interest rates paid by Italian, Spanish and French governments and the German government Read more…
The UK labour market does well. The number of jobs increased with 2,7%, year on year. The total number of hours worked increased with 3,4% which means, as earnings per hour show (low) growth of about +0,6% and consumer price inflation is about 2%, an increase of 2% in total spending power. As a lot of the increase in jobs as well the increase in wages is in low wage occupations (the high wage financial sector is still under siege), where people have a high marginal propensity to spend additional income, the fast increase of the number of jobs together with rather low pay increases boosts consumer spending. Also, according to Eurostat, UK GDP increased with 3,1% which indicates that average (!) productivity is still declining, albeit slightly. Caveat: all these data are based upon three month averages, the not-official single month data for June show somewhat less positive developments.
The ONS (the UK statistical Office) does not only measure the level of unemployment but also flows of people in and out of employment, unemployment and inactivity. According to these data, during Read more…
According to official data, by far the larger part of fixed assets in Germany consist of land and land related investments like houses and buildings. This pattern is typical for rich countries. Note that Germany was one of the few countries to escape the international house price boom of the 1990-2008 period. Note that the data do not even include agricultural land.’Machinery and equipment’, i.e. trucks, cars, planes and machinery and the like, are of relatively minor importance, to an extent because they depriciate faster than buildings.
Printing income. When I borrow money to buy an existing house this is not counted as ‘production’ in the national accounts (though it does increase the amount of money). When I borrow money to buy a house and to pay the fee of the real estate agent the fee is counted as an increase in income and production. Large scale constructions like this one (IPO’s…) drove profit growth in the banking sector, since 1990.
Leaving the train station. In 2013, use of public means of transport in Spain declined with about 6% – for the fifth year in a row.
Isaac Asimov and the representative consumer. <strong>Foundation and earth is an interesting science fiction novel by Asimov about the representative consumer (the hive-mind of the Gaia planet), agent based modelling (‘psycho history’), a world inhabited by 1200 homo economicus individuals (who, interestingly, changed themselves into ultra-intelligent hermaphrodites who never meet in the flesh and only trade with each other via video) Read more…
Not much blogging from my side as Edward tricked me into constructing ‘Piketty series’ for the Netherlands – but this is a game changer (via left foot forward): the Bundesbank finally understands. Economic policies aimed at financial deregulation, low wages and asset price increases instead of low unemployment, high employment and high income have failed.
* Spending in the Eurozone is too low, unemployment is disastrously high, people are getting evicted from their houses while the number of empty houses increases and in quite some countries poverty is rising.
* For obvious reasons, not every country can export itself out of unemployment at the same time (a classic example of a ‘zero sum game’).
* Present policies to engineer current account surpluses are anyway not based upon any kind of serious export strategy but upon restricting domestic demand, which leads to a ‘race to the bottom’
* Households and companies are heavily indebted while low spending and high unemployment causes increasing problems with non-performing loans
* Companies are not going to invest when demand stays low, even when interest rates are low
* Quite some people do not want the government to act as a ‘spender of last resort’
Which leaves wage increases as the only way to restore demand, increase prosperity and lower unemployment (getting unemployment down to 4% in five years, with 1% productivity growth and 1% inflation and a share of wages (including mixed income) of 70% means that wages can increase with 4 to 5% a year, a little bit less when investments increase). Economies are of course quite unpredictable, but we can start with ‘forward guided’ 4% wage increases for two or three years.
Germany’s Bundesbank, Europe’s largest central bank, has backed a call for higher wages to boost the flat-lining Eurozone economy.
Jens Ulbrich, the bank’s chief economist, has joined a growing list of key players calling for widespread pay rises to fend off the crippling effects of failed austerity and low inflation and to crawl back the falling wage share in national wealth. Read more…
In economics, there is an unfortunate rift between academics and the economists who actually measure the economy. Which means that academic economists give little attention to the extremely important question how economic concepts relate to actual measurements – one reason why so much of their work is naïve (the ‘Ricardian’ household, which cuts consumption when government spending increases and the like). Fortunately, economic historians, who often have to do the measurements themselves, often bridge part of the gap. Robert Gallman has some highly relevant remarks about different ways to measure (nineteenth century USA) capital – and how these relate to the future, the past, uncertainty, savings, consumption foregone and replacement costs. This still leaves out important parts of the concept of capital like liquidity, ownership and the ‘overlapping generations’ problem – which however does not make these remarks less valuable. Read more…
The ‘Statistisches Bundesamt’ has a kind of app which helps companies to use data on historical inflation to insert ‘real price’ clauses in contracts – which can lead to a ‘price-price’ spiral. Interesting, as many economic models suppose that historical inflation is caused by expectations about future inflation (really!).
The German Handelsblatt has a very interesting article (sorry, no link) about business credit in the north (+1,4%) and the south (-5,9%) of the Euro Area. Which shows the difficulties of monetary policy in the Euro Area: one size fits none.
Eurostat published, coincidentally on July 17, data on EU energy imports from Russia. 39% of EU imports of natural gas and 34% of oil imports come from Russia. Also (including re-exports):
For seven Member States (Bulgaria, Czech Republic, Finland, Hungary, Lithuania, Poland, Slovakia) more than 75 % of their petroleum oils imports came from Russia. Twelve countries (Austria, Bulgaria, Czech Republic, Estonia, Finland, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia), imported more than 75 % of total national imports of natural gas from Russia.
Price increases caused a surge in imports from Russia from 80 million euro in 2005 to 140 billion in 2013.