Archive for May, 2012

Economic Drift

May 31, 2012 8 comments

from Peter Radford

We are at sea. Adrift. Going nowhere. Wallowing about with little direction. Not sinking. Not soaring. Just floating. Just.

Today’s GDP numbers validate the view that our economy is all of the above. The economy grew at a 1.9% rate rather than the previously announced 2.2% rate. The next few quarters look set to follow the same pattern. There is precious little drive to pull us forward, yet not much to torpedo us either. It is exactly what we would expect from an economy still deep in private debt and without any coherent political leadership. Insipid policies have real consequences. You don’t deal with the demons of an underperforming, overly indebted, and decaying private economy by introducing a series of tweaks. You hit it with a hammer. But that implies having the courage and conviction to deliver such a blow. Obama didn’t in 2009. He still doesn’t. And, worse, Romney doesn’t see the need to do anything positive at all. So this year’s election will not be a palliative for our economic woes. It may be significant for other reasons, but the economy looks set to flounder whoever wins in November.

The data speaks enormously to our malaise: Read more…

Spain’s government and European authorities bent on dismantling welfare state

May 31, 2012 8 comments

from Mark Weisbrot

MADRID — I have argued for some time now that the recurring crisis in the eurozone is not driven by financial markets’ demands for austerity in a time of recession – as is commonly asserted. Rather, the primary cause of the crisis and its prolongation is the political agenda of the European authorities – led by the European Central Bank and European Commission. These authorities — which if we included the IMF constitute the so-called “Troika” that runs economic policy in the eurozone — want to force political changes, and particularly in the weaker economies, that people in these countries would never vote for.

This is becoming more obvious here in Spain, where the government – run by the right-wing Popular Party (PP) – shares the political agenda of the European authorities, perhaps even more than the IMF does.  Read more…

Pay-to-play economists

from David Ruccio

In an excerpt from his new book, Predator Nation, Charles H. Ferguson, the director of Inside Job, describes how “significant portions of American academia have deteriorated into ‘pay to play’ activities.”

Academics on industry payrolls are now so numerous and powerful that they can often prevent universities, professional associations, and academic journals from adopting or enforcing strong conflict-of-interest policies. They also have a chilling, even dominant, effect on several areas of academic research and policy analysis.

The sale of academic “expertise” for the purpose of influencing government policy, the courts, and public opinion is now a multibillion-dollar business. Academic, legal, regulatory, and policy consulting in economics, finance, and regulation is dominated by a half dozen consulting firms, several speakers’ bureaus, and various industry lobbying groups that maintain large networks of academics for hire specifically for the purpose of advocating industry interests in policy and regulatory debates.

He illustrates his argument with two examples, both economists: one a Republican (R. Glenn Hubbard), the other a Democrat (Larry Summers). Read more…

Graph of the day. How to spell ‘austeridad’?

May 29, 2012 5 comments

from Merijn Knibbe

The news of the day was the 9.8% drop of  retail sales in Spain in April. Time for a long-term perspective. The other day, Tyler Cowen stated that Spain could be in situation A (a deep but ‘normal’ recession with, in the end, a rebound) or (as he believes) in situation B: a self reinforcing death spiral of high costs, increasing unemployment, lower expenditure, austerity and post-boom capital flight (he uses other phrases, but that’s what he says. I’m by the way much, much more positive about Spanish competitiveness than almost everybody else). Does the drop in retail sales fit in situation A or situation B.

Eurostat does, at the moment, not provide Spanish data for 2012 I spliced the data from the Instituto nacional de estadistica for January-April to the Eurostat data. There will, no doubt, be some conceptual differences between the Eurostat and the Intistuto series. Never mind. The pattern is clear.

Read more…

Ethical Issues. Again.

May 29, 2012 20 comments

From Peter Radford

Just when I thought it was safe to re-engage with economics I stumble across two more reasons for my blood to boil. Economics is – not to put too fine a point on it – a rotten profession. As in ethically rotten. Not all economists of course. Some try to tell the truth. Or rather not to lie. Others just plod on teaching from texts that omit crucial information.

As in there is no way, no way at all, to tell whether a demand curve actually slopes downwards in the way we are all taught.

No way.

But is that rather crucial fact ever mentioned to undergraduates? Call me skeptical.

There are great complications with the derivation of even this most basic of all economic concepts. Sure it sounds about right. But it cannot be proved. Cannot. Getting rid of those nice neat curves would muck up so much of what economics includes that, in the name of simplicity, the profession continues to ignore the theoretical rot in its foundation and chug on as if all is well.

It isn’t.

It isn’t ethical to teach something that is what amounts to a gut feel as if it were a cast iron law.

I have been reminded of thus by reading Jonathan Schlefer’s book “The Assumptions Economists Make”. It’s worth a read. But be prepared to emerge angry at economists. They tell a lot of fibs and use the concept of simplification as a way of obscuring how little they know, or can prove, about economies. Read more…

Factoid of the day: the Baltics, not a textbook example of austerity (guest post)

May 29, 2012 1 comment

Graph from Rainer Kattel and Ringa Raudla

Economists at the moment debate the pro’s and con’s of Austerity. The Baltic countries are often used as an example, as they are supposed to have been the first countries to implement such policies. A few days ago I posted a quote which showed that Estonia got quite some transfers from the EU, which facilitated ‘austerity’ policies. However, as one commenter stated, Estonia is only a very, very small country.

Thanks to Rainer Kattel and Ringa Raudla and based upon an as yet unpublished paper we can now publish a graph on EU-transfers to the Baltics (Estonia, about 1 million inhabitants, Latvia, about 2 million inhabitants and Lithuania, about 3 million inhabitants) as well as EU transfers to the PIIGS (over 100 million inhabitants).

Public deficit and EU fiscal transfers (cohesion funds), as % of GDP, in the Baltics, 2008-2010.

Imagine where the debt and deficits of Spain and Italy and maybe even Greece would have been if they had gotten such amounts of money… (Ireland, however, would still be in the trouble). Anyway – when discussing the pro’s and con’s of ‘austerity’ it is highly important to make a distinction between ‘Baltic style’ austerity and ‘PIIGS-style’ austerity.

Mortgage and Securitization Fraud: Where’s the Task Force?

May 26, 2012 8 comments

from Dean Baker

It was almost four years ago that Federal Reserve Board Chairman Ben Bernanke, Treasury Secretary Henry Paul Paulson, and then New York Fed Bank President Timothy Geithner ran to Congress warning that the end of the world was near. They told members of Congress that the banks were drowning in bad debt and without a massive bailout they would soon be forced into bankruptcy. Congress quickly coughed up the money in the form of $700 billion in TARP loans. The Fed contributed trillions more.

Undoubtedly most of the bad debt was due to stupidity, which does not seem to be in short supply on Wall Street despite the high paychecks. The folks running the major banks somehow could not see the largest asset bubble in the history of the world. The fact that house prices had risen by more than 70 percent above their trend level, with no plausible explanation in the fundamentals of the housing market, did not trouble these high-flyers.

But there was more than just stupidity involved here. There was an epidemic of mortgage fraud that was identified by the FBI as early as 2004. Read more…

Wrong about the Euro

May 26, 2012 7 comments

A trick question: who was wrong?

* Cees Maas, one of the architects of the Euro who still states (2012) that there is nothing wrong with the Euro and that Eurozone wide consumer price inflation is all that matters, even when house prices go through the roof and even when there are considerable differences in consumer price inflation between countries? And who still does not seem to know that Spain had sizeable government surpluses, before 2008.

* Or Paul de Grauwe, who in 1998 (!) made remarkable precise predictions about what would happen in a country called Spain and warned about asset price inflation, differences in inflation between countries, the risks of unregulated flows of capital and the dangers inherent in denying the importance of private debt?

The answer is of course that the former president of the ECB, Jean-Claude Trichet, and his ECB-economists were wrong. They should have known about the ideas of De Grauwe, they should have taken action when the risks he warned about materialized. They didn’t. Incredulous.

Nothing ‘natural’ about unemployment?

May 25, 2012 3 comments

Can Post-Keynesian inspired and Austrian inspired economists agree that unemployment should go down to 2, maybe 3% but not higher? On this blog, Fred Foldvary (a Geo/Austrian inspired economist) stated, in a comment of 30 May 2011,

The textbook case for firing at will is only optimal with genuine full employment, so that workers have contract clout. Genuine full employment implies that the only unemployment is frictional. But the textbooks posit a “natural” rate of unemployment much higher than frictional, which is bogus, since the “natural” rate is merely the long-run average, made higher than frictional by barriers between labor and resources

This statement raises, among other things, important questions about the concept of the ‘natural rate of unemployment’. And, of course, about the reason why textbooks and economists use this concept!

Another Austrian inspired economist, Tyler Cowen, raises (in a blogpost of 15 May on ‘Marginal revolution‘) somewhat similar objections against the concept of structural unemployment: if people are really needed – they will be employed. No matter what. Read more…

Factoid of the day: Industrial new orders in the Euro area

Eurostat still publishes data on industrial new orders – but at this moment does not publish press releases. Which gives us the possibility to tinker a bit with the data. The graph shows total new orders in the Euro area, divided into:  

* orders from outside this area

* and orders from inside the area.

Non-euro area orders are back to the 2007/2008 level, euro area orders are still clearly below this level. Mind that this is a nominal variable! The pattern for individual countries is in most cases roughly comparable, sometimes a bit more extreme like in Germany and sometimes a bit less extreme, like in Spain. If the Euro area, except for Germany, wasn’t experiencing a serious dip at this moment the German economy would probably start to show clear signs of overheating.

Still watching men work

by David Ruccio

Deadliest Catch is now in its eighth season and we’re still watching the men on the Cornelia Marie, Wizard, Northwestern, Time Bandit, and other boats work. Like last year at just about this time, I want to ask the question, what’s with Deadliest Catch and all the other television shows (from Ice Road Truckers to Moonshiners) representing men at work?

My colleague Jon T. Coleman [ht: dg] offers the following perspective:

Watching men battle storms, sleeplessness, falling ice chunks, and 400-pound traps while keeping their cigarettes lit on heaving, slime-covered decks is the principal fun of Deadliest Catch. We tune in to witness masculine agony. The producers know their audience, so they focus on greenhorns and strung-out vets. The rookies bumble into trouble while the old-timers explore the dead-end of careers meant for younger bodies. The captains, cozy in their wheelhouses, philosophize for the cameras. They typically instruct their underlings to meet pain with stoicism. “You ain’t a man,” once spoke Captain Phil, “until you’ve pulled out a tooth with a pair of pliers.” . . . Read more…

Factoid of the day: core and ‘constant tax’ inflation in Spain, Germany and the Eurozone.

Updata: the data are on the eurostat site, but they are somewhat hard to find. Look here and click on Economy and finance/Prices/Harmonized indices of consumer prices and you’ll find prices at constant tax rates. You’ll also find the HICP monthly data annual rate of change. Click these and click Select Data and click ‘Coicop’. Way below in the Coicop list you will find core inflation.

One of the things which baffled economists after 2008 is that inflation stayed quite high in countries like Spain and Greece. But it didn’t. When we look at core inflation (excluding highly volatile energy prices, and in this case also seasonal vegetables) or at ‘constant tax’ inflation (which excludes the consequences of increases in among other things VAT tax (look here for these increases) the data show that inflation in Spain, for instance, which up to 2008 had been quite a bit above the EU and German level, became as low or even lower. The Greek data (not in the graphs) show the same pattern, while the data also show that higher energy prices cause relatively higher inflation in countries with a relatively low price level, like Spain or the Baltics, than in countries like Germany. Mind that medium term core inflation has been slightly below the 1,9% medium term ECB target.

. Read more…

Hans Joachim Voth on the increase in working hours around 1800

May 23, 2012 4 comments

Edward is on holiday, so I thought I might post a few things on ‘work’ and ‘labour’. Correct me if I’m wrong, but it seems to me that one of the things which more or less unites the people commenting on this blog is that they do not only look at labour as ‘a cost of production’ or even ‘a valuable resource’ – but as an activity which deserves respect, which is part of somebody’s identity and which, if given a chance, is a creative force for the better. In this spirit today a little bit of economic history: the innovative work of Hans Joachim Voth who discovered that in the second half of the eighteenth century, people start to work a lot harder. And this ‘industrious revolution’ must have been as important to the economic changes around 1800 as coal, steel, steam and the potato. There is some discussion about why this happened (Necessity? A craving for the new consumer goods like sugar, coffee and cottons? A new ethic? A new sense of ‘self’? All of these?). But it did happen:

Did working hours in England increase as a result of the Industrial Revolution? Marx said so, and so did E. P. Thompson; but where was the evidence to support this belief? Literary sources are difficult to interpret, wage books are few and hardly representative, and clergymen writing about the sloth of their flock did little to validate their complaints. In this important and innovative study Hans-Joachim Voth for the first time provides rigorously analysed statistical data. He calls more than 2,800 witnesses to the bar of history to answer the question: ‘what were you doing at the time of the crime?’. Using these court records, he is able to build six datasets for both rural and urban areas over the period 1750 to 1830 to reconstruct patterns of leisure and labour. Dr Voth is able to show that over this period England did indeed begin to work harder – much harder. By the 1830s, both London and the northern counties of England had experienced a considerable increase – about 20 per cent – in annual working hours. What drove the change was not longer hours per day, but the demise of ‘St Monday’ and a plethora of religious and political festivals

Here’s a pdf of an article about this.

On the ‘industrious revolution’: Jan de Vries (who stresses the dynamic side of it as well as the historical role of the household) and R.C. Allen and J. L. Weisdorf who make a distinction between ‘necessity and hardship driven’ increases in work and ‘consumer driven’ increases.

Obama’s Latest China Move: Blinded by the (solar) light

By Kelly Sims Gallagher and Kevin P. Gallagher

The Obama Administration’s preliminary decision to impose a 31 per cent tariff on solar panels imported from China is short sighted. The move could cause a trade war, hurt the US economy, jeopardize US security interests, and put the world further off course in terms of meeting its global climate change goals.

The decision opens the US up to a trade war in renewable energy, of all things. The US currently has a trade surplus with China in solar energy because of large US exports of poly-silicon to China. Not surprisingly, Li Junfeng, a senior Chinese government official, has already proposed imposing retaliatory tariffs on US polysilicon—and a trade war might not stop there.

The measure could also hurt one of the few bright spots in the US economy. Jobs in the solar sector grew by 7 per cent last year thanks to the combination of higher demand for solar PV (due to lower prices for the modules) and state and national incentives for renewable energy. Most of the new jobs are in the solar installation business. If the Obama Administration makes solar modules one-third more expensive by imposing these tariffs, US demand for solar PV will certainly fall, and new jobs in this sector will vanish. Chinese solar firms can shift their production to other countries to avoid the tariffs, and will still be more competitive than SolarWorld—the German company whose US subsidiary is behind the complaint.

The Obama Administration should be praising, not punishing Chinese support for renewable energy. By supporting renewable energy, China is appropriately correcting for market distortions, which the United States should be doing too. Global fossil fuel subsidies are estimated at $300bn per year. Fossil fuels also damage the environment when they are burned, which imposes costs on public health from air and water pollution. In a 2011 paper, the social cost of carbon dioxide emissions today was estimated by Yale economist William Nordhaus to be between $40 and $288 per ton carbon, depending strongly on one’s choice of discount rate. Fossil fuel imports also account for 59 per cent of the US trade deficit, and the US Navy spends countless dollars defending international shipping lanes for oil and other commodities. Recognizing these problems in the Chinese context, the Chinese government recently announced a modest carbon tax, created domestic feed-in tariffs for both wind and solar energy, and is effectively supporting their clean energy industries.

It is in the US’s interest to encourage China to reduce the growth of oil and gas imports, so that the global costs of these fuels will not continue to rise. Wind and solar-derived electricity can directly substitute for Chinese imports of natural gas for power generation. If China succeeds in developing an electric car industry, renewables could power their automotive fleet too.

It is also smart for the US to support China’s efforts to reduce emissions of greenhouse gases. Given China’s heavy reliance on coal, major investments in renewables and energy efficiency can enable China to reduce the carbon intensity of its economy. If the Chinese don’t make a big shift to renewables, there’s no chance of avoiding severe climate change because China is already the largest emitter of greenhouse gases in the world.

Finally, the merits of the actual case are dubious. Prices of Chinese-made PV modules in China are lower than they are outside of China, so it’s hard to see how they are “dumping” on the U.S. market. The true problem is overcapacity, which market forces will correct in time. The Chinese government has undoubtedly provided support to its solar industry, but so has the US government with its loan guarantees, investment tax credits, and production tax credits. At the local level, SolarWorld Industries America (the lead filer of the complaint) itself received millions in tax breaks and subsidies in Oregon when it decided to locate its manufacturing facility there. Indeed, the Commerce Department only found evidence of small Chinese subsidies in its March 2012 ruling. SolarWorld only had six co-filers, but more than 100 U.S. firms lined up against it.

Chinese government support for solar energy has already benefited the world in terms of improved welfare, climate mitigation, and reduced global energy prices. The rest of us are essentially free-riding on this support. Rather than punish China for its laudable efforts, the Obama Administration should applaud it and do its part to correct market distortions too.

Kelly Sims Gallagher is associate professor of energy and environmental policy at The Fletcher School, Tufts University. Kevin P. Gallagher is associate professor of international relations at Boston University.

Published in the Financial Times, May 22, 2012

Factoid of the day 22/5/2012. Diminishing German competitiveness?

May 22, 2012 4 comments

Update More thorough on this: JW Mason on The Slack Wire

Are trade imbalances in the EU due to differences in productivity and sluggish development in countries like Spain and Greece? I doubt it. After 2007 the German intra EU trade surplus (goods) diminished from 127 billion Euro to 54 billion Euro. Does this indicate diminished German productivity and competitiveness? Of course not. It was largely caused by the severe crisis in Southern Europe, which caused a decline of southern european imports. Before 2007, southern Europe of course saw its deficits increase – mainly because of rising imports, not so much because of declining exports. Spanish exports in fact increased faster than German exports! But in the case of Italy probably also because of sluggish development. Contrary to Spain and Greece, where productivity increased as fast or even faster than the EU average (and, as German productivity decreased vis-a-vis the EU average, quite a bit faster than in Germany), Italy witnessed a sharp and unprecedented deterioration of its relative productivity. But the Italian trade deficit in fact stayed quite limited… Trade deficits are also caused by high aggregate demand, not just by low competitiveness. It might by the way well be that the intra-european current account of southern Europe, which includes services (tourism), shows a surplus!

Southern Europe however still has a large goods deficit with ‘the rest of the world’. But should we cure this by lowering nominal wages or by increasing excises on energy and using this money to lower VAT on labour intensive services and to finance investments in durable energy?

Factoids of the day: government deficits in Denmark and the -9,5% German deficit in 1995

According to the new rules, government deficits in the EU are supposed to be smaller than -0,5%. Hmmm. Denmark (not an Euro country) had surpluses of over 5% of GDP – but could not prevent it’s deficit to breach the ‘Maastricht’ -3% threshold (all data Eurostat, except 2012: The Economist). Let alone the new -0,5% threshold… And Germany had a -9,5% deficit in 1995. Other sources even speak of a 14% deficit. This was among other things caused by the government consolidating the debts of the Treuhandanstalt, the organisation which sold the East-German companies. Who should cast the first stone? More important – large swings in government finances seem to be unavoidable.

Factoid of the day 20/5/2012: the not so large increase of wage costs in Spain

May 20, 2012 3 comments

1. Contrary to popular opinion and taking into account that wage costs per hour of German industry in 1996 were the highest of Europe, the relative increase of wages in Spanish industry (companies with 10 or more employees) has been quite limited. Note that in 1996 West-Germany were even higher than the average for Germany! And note that the almost 10 Euro difference between West en East-Germany did not lead to a fast development of the East-German economy: up to today East-German unemployment is quite a bit higher than West-German unemployment. All the talk about irresponsible increases in Spain seem to be overrated, surely as Spanish goods exports increased (slightly) faster than German goods exports, post 2000.

2. However, German economy wide Unit Labour Costs did decline a lot, compared with other countries. This could have been caused by a fast increase of productivity. German productivity however increased less than the EU average. So, what did cause the decline of the relative economy wide Unit Labor Costs (graph 2)?

Factoid of the day: the closet Keynesians in Estonia

May 19, 2012 4 comments

Estonia does reasonably well, compared with the other Baltic countries (and really well when we look at its government deficit). How is this possible, considering harsh austerity? Well, read this:

“When compared to the previous years, the share of foreign funds in the total expenditures of the budget will increase in years 2011 and 2012 due to the intensifying of the implementation of the structural funds of the EU programme period for years 2007-2013 and will comprise on average approximately 18% of the total expenditure volume. The total planned volume of foreign funds for years 2011-2014 is in excess of 50 bln EEK. One of the government priorities is to use the foreign funds as fast as possible, in order to contribute to enlivening the economy and to creation of jobs. This is why there is a forecast of relatively sharp decline of the volume of supports for years 2013-2014, due to depletion of the funds of the programme period.”

Here’s the link. (look at state budget strategy 2011-2014).

By the way – contrary to the other Baltic countries Estonia did not slash expenditures as much but increased taxes.

Libertarian Chaos

May 18, 2012 56 comments

from Peter Radford

There’s not much to say. After all the brinkmanship and game playing over the debt limit last year, and after being ridiculed by pretty much everyone, the Republicans are back at it. In an election year and with last year’s plunge in the polls as evidence that voters just don’t agree with their tactics.

What am I missing?

Apparently nothing.

The Republican extremist caucus in the House is setting its eyes on another confrontation with Obama over the debt ceiling. They want another deal. This after reneging on the last deal only a few days ago.

Are they kidding?

No they’re just extremists. Read more…

“Seigniorage” is not the same thing as the “inflation tax”

May 18, 2012 3 comments

Update: a follow up to this post which calculates seigniorage income of European private banks can be found here

The most dramatic example of “seigniorage” I know about is the period after the German hyperinflation of the 1920’s. During the hyperinflation people shunned money and wanted to get rid of it: the “hot potato effect”. After the hyperinflation, people wanted to restore their cash balances and the stock of money (the new ‘Rentenmark’, not legal tender by the way) quadrupled without any inflationary consequences. Let’s call this the “seed potato effect”. Which, of course, led to a seigniorage profit for the institution wich emitted this money. Just like the selling of stamps to stamp collectors leads to a seigniorage profit for countries like Lichtenstein (aside: the new-age idea of Thomas Sargent that the non-inflationary expansion of money was possible because of enhanced ‘credibility’ of the German government is of course wrong. It was due to new institutions. The Central Bank was even side-lined. Hjalmar Schacht, the main bureaucrat of the new German system, was of course extremely credible – as he knew that it was not gold, rye (yes, even a rye standard was devised) or credibility but rationing of credit in the new, non-Central Bank currency which was the solution).

I state this because recently two Dutch economists again equated ‘seigniorage’ with the ‘inflation tax’– which is wrong and confuses the already confused discussion about the Euro even more. Read more…