For over a year now Spain shows high year on year employment growth. Excellent news and a clear sign of a serious recovery! But does this also mean that structural reforms are paying off? Four remarks:
A) The graph shows that. before 2008 (i.e.: before the reforms of the labour market), the Spanish labour market was extremely dynamic already, showing the highest rates of job growth of the entire North Atlantic economy. Which means that the 3% growth we witness at this moment is not any kind of proof of the success of structural reforms.
Governments have, just like banks, quite some ‘off balance sheet’ debt, which is considered not to to be part of the ‘official’ debt of the government as it is not primarily owed by the government but by a government controlled ‘entity’. The government is, however, often responsible when things go wrong. Especially Germany has a lot of this kind of debt. Greece has remarkably few of such contingent debts. What kind of organizations make up these ‘entities’? A full 121%-point of the 126% of GDP contingent debt of Germany is caused by ‘units involved in financial activities’ (Sparkassen and the like, 40% of all banking assets in Germany are owned by public banks). Mind that these banks have assets too, of course. But ‘contingent government liabilities’ for banks not controlled by the government, the kind of liabilities which cause Brussels to wreck the European welfare states (cut pensions to save the bankers), are not included in these data. Fun fact: the third bailout memorandum for Greece states in a rather shrill, almost hysterical way that CEO’s of banks have to be independent of the government. The German Sparkassen of course aren’t. Germany was one of the very few countries which did not have a house ownership and price bubble.
I love (most) companies. I love (most) markets. And like Ricardo Hausmann I totally think that investments and increases in scale led to unimaginable increases in productivity, though we have to remember that the largest absolute increase in productivity in spinning took place when the distaff was replaced by the spinningwheel – according to a woman I once talked with at a local fair, who had mastered the distaff as well as the spinning wheel, the wheel is two to three times as productive. I.e. – it cut the time needed to spin a certain amount in half. Such improvements in productivity also enabled increases in prosperity – including shorter working weeks, though we should not forger that people spinning in putting out systems using the spinning wheel or the many single women in pre industrial revolution urban centers were, ahem, not always the most prosperous members of society – though they took part in a well defined market system. Unlike Hausmann, however, I do think that government production (most roads, most education, large parts of healthcare and insurance) is an important part of our present prosperity, too. Hausmann does not even mention this – just like the neoclassical macro models, which almost always assume that government production has zero value by nature. Hausmann also forgets about rent extraction, for instance by multinationals who want to drill for oil and natural gas in Peru and are not taxed enough. And Hausmann is wrong about Peru, too. That’s not a dirt poor country and poverty is (according to world bank data) falling fast, while economic growth is, compared with the South American average, high and stable. Again: why doesn’t Project Syndicate (the site which published the Hausmann blog) have a better fact checker! Read more…
Yesterday alone the italian coastguard saved 4.400 refugees. Germany expects 800.000 asylum seekers in 2015.Are such numbers manageable?
In a purely quantitative way: easily. Let’s take Germany: in 2014 the number of births increased with 5% to 715.000, leaving Germany with a natural decrease of minus 153.000. Subtracting this from the 800.000 refugees and adding about 400.000 people coming in from other EU countries leaves population growth of about a million or 1,3%. many countries have successfully coped with such growth rates, there is no reason why Germany couldn’t (and mind: the natural decrease is set to increase).
The problem is of course that the babies born in Germany will get at least 10 years of education, will speak German and understand German culture. Many of the asylum seekers will have had quite some education – but a not inconsiderable part of them will be illiterate even in their own language. Few of them will speak German. Not all of them will adapt to core western values, for instance in the case of gender relations.
It won’t solve all of these problems. But it seems that investing in these refugees – i.e:for many of them (young, old, men women) years of education in german (or french or Dutch or whatever) and vocational training – is a necessary part of the solution.
And the Italian coast guard is of course doing a good job.
- The explosive influence of mister Luther. The European 16th century reformation is resurfacing as a political and economic watershed. Jeremiah (of all names…) Ditmar and Skipper Seabold show how fast (we knew that already) and, especially how much (that’s new: epic) Luther’s 95 theses, hammered to the door of an obscure church in an obscure place, influenced the content of printing and how fast this led to new rules and laws.
- Ravi Kanbur and Joseph Stiglitz discover than, when we talk about wealth, balance sheets have two sides, one side (liabilities) which basically is about ownership rights and power and another which is the value of real and financial assets. Quote: “what Piketty and others measure as wealth ‘W’ is a measure of control over resources, not a measure of capital K, in the sense that that is used in the context of a production function.“. To estimate this ‘production function capital’ the value of financial capital has of course to be subtracted from total wealth, while inflationary increases of house prices wreak havoc with the idea of ‘one kind of production function capital’. The good thing: the acknowledge the importance of (control over) ‘land’ and other unproduced capital. Aside – if I remember well, debts (liabilities) are used to pressure Greece to sell harbours and railways and the airports and the like (real, land related assets).
- The Bank of Italy discovers that: “the weakness of aggregate demand was contributing significantly to the decline in inflation“, while this weakness also influences inflation expectations’. The point: this means that, contrary to Lucas and Sargent inspired ideas in the Trichet era, the central bank is not the sole and only institution which governs inflation expectations while governing expectations is not enough to control inflation. Draghi is ++smarter than that, but it is good to see that the fight against the Lucas/Sargent paradigm is joined by the Italian central bank. Lucas/Sargent kind of ideas are by the way tempting to the ego of central bankers and therewith dangerous by nature.
- Eurozone small and medium sized enterprises as well as small and medium sized banks still have a hard time when it comes to financing. Small and medium sized enterprises in the Netherlands (which has no small banks left) do especially bad.
- About how bullying Iceland and Greece led to suboptimal negotiations.
At this moment I’m working on an article on the capital market in Hennaarderadeel, a rural part of Friesland, between 1537 and 1556. Look here for the unbearable flatness of this area, the landscape as shown has not changed too much since 1537. The data are obtained from the excellent transcriptions of hundreds upon hundreds of sixteenth century deeds available on the website of Paul Borghaerts (and there is much more where that came from… ). Interesting questions are: who were the lenders, who were the borrowers, how much did they lend and borrow, why did they lend and borrow and how did lenders and borrowers meet – without banks. And a genuine capital market of course has an interest rate (graph, every dot is a transaction), note the increase after 1550 (interestingly, after 1543 a 20 year pause in the sixteenth century price revolution came to an end).
Kudo’s to the British ONS (Office for National Statistics). They have a new, interesting economic statistic: the Job to Job Flow Rate (JJFR), “the number of people who remained in employment over the quarter but have changed job”. As can be seen, the variable is cyclical sensitive and a downward change of this variable may help to answer questions about why people stay working for Amazone or accept crappy wages or crappy bosses. A high rate of JJFR might however indicate a movement from declining industries into more interesting or more productive jobs or at least into jobs with a better future: from finance to healthcare. The increase of the rate after the spring of 2012 indicates that labour might have gotten more clout during this period. Recently, however, employment in the UK is declining again, the flow out of unemployment is at a post 2009 low and the JJFR is stalling at a level which is clearly below the pre 2008 level. Not good.
During the ‘months of fruitless negotiating’ Varoufakis was one of the few reasonable, levelheaded, well informed and realistic, fact based personalities. I.e.: a heretic. About the third, somewhat Orwellian, Memorandum of Understanding he states on his blog: “Written in troika-speak it is almost impossible to decypher by those not speaking this unappetising language. Click here for the complete MoU text annotated liberally by yours truly.” An excerpt (one link removed, annotations between square brackets, great education resource):
Memorandum of Understanding for a three-year ESM programme
1. Outlook and strategy
Greece has requested support from its European partners, to restore sustainable growth, create jobs, reduce inequalities, and address the risks to its own financial stability and to that of the euro area. This Memorandum of Understanding (MoU) has been prepared in response to a request of 8 July 2015 from the Hellenic Republic to the Chairperson of the Board of Governors of the European Stability Mechanism (ESM) for stability support in the form of a loan with an availability period of three years. In accordance with Article 13(3) of the ESM Treaty, it details the conditionality attached to the financial assistance facility covering the period 2015-18. [Of course the real ‘story’ is that this MoU was prepared to reflect the Greek government’s humiliating capitulation of 12th July, under threat of Grexit put to PM Tsipras by the EuroSummit. …]. The conditionality will be updated on a quarterly basis… [i.e the Greek government will be constantly engaged in the troika process, starting a new ‘review’ just as the previous one ends]…taking into account the progress in reforms achieved over the previous quarter. In each review the specific policy measures and other instruments to achieve these broad objectives outlined here will be fully specified in detail and timeline. Success requires ownership of the reform agenda programme by the Greek authorities. The Government therefore stands ready to take any measures that may become appropriate for this purpose as circumstances change. The Government commits to consult and agree with the European Commission, the European Central Bank and the International Monetary Fund on all actions relevant for the achievement of the objectives of the Memorandum of Understanding before these are finalized and legally adopted. [This is astonishing: A government commits to agreeing with the troika, even if it does not agree! Of course the opposite does not apply: the troika does not commit to “consulting and agreeing with the Greek government”. Note too that the troika considers all legislation to be subject to its approval, including laws on higher education etc. Greek sovereignty is being forfeited wholesale.]. Read more…
Some recent data from Eurostat:
- Quality of life. GDP (Gross Domestic Product) shows the accounting connection between monetary spending, production and income. But it’s only about monetary variables like debt and income. it’s not about happiness or environmental damage. Eurostat however has a new, easy multidimensional scoreboard to estimate aspects of ‘quality of life’ (health, housing conditions, overall life satisfaction, safety, governance, environment, material living conditions, employment, time use, education, social relations). Finland has, for instance, the highest ‘housing satisfaction rate’ of Europe, Bulgaria the lowest. Check it!
- Health. When we look at ‘Amenable and preventable deaths’ Lithuania and Latvia do, according to Eurostat, a bad job. Bulgaria (a poorer country!) does better. Greece does much better (clearly less of a basket case country than often suggested). Turkey does much better, too. Source. Using Turkey as a yardstick it shows that in Europe ‘progress’ can not be taken for granted (click on the graph for a larger version). Graph 1. Sex differences in amenable mortality rates, 2012 (per 100.000 inhabitants)
Links. The financialization of macro economics, growth, unimportant banks, Dijsselbloem loots the Greek state
1. Kudo’s to the ECB. I’m very happy that they have recently included the household debt ratio’ in their new ‘key statistics‘ (down to 95,9% of disposable income). When you click on the item you get a press release which gives information about financial (new houses etcetera) as well as non-financial investments (stocks, bonds) of households and non-financial companies. In his General Theory Keynes called these financial investments ‘investments with a zero elasticity of production’ in the sense that no labour was needed to produce them (or only to keep the printing press running). It is good to see that the ECB includes this information in its key statistics and, like Keynes, emphasises the difference between real investments (which lead to work and to new fixed capital and potentially to a higher level of production and prosperity) and financial investments.
Edmund S. Phelps, Nobel laurate in economics, stumbles and falls when assessing the dire causes and dire consequences of austerity in Greece
Edmund S. Phelps, 2006 Nobel laureate in economics, makes and understandable but basic and grave statistical mistake when trying to understand recent macro economic events in Greece. This mistake leads him to misunderstand what’s happening in Greece and to downplay the absolutely dire consequences of austerity. Contrary to his ideas, the data show that record Greek austerity did coincide, and prefectly so, with the extreme increase in unemployment and the extreme decrease in employment. It is hard to understand that somebody of his stature can misread the data to the extent he did. And I do not understand why a presigious blog like Project Syndicates publishes such an op-ed, riddled with mistakes which even a freshman in economics should not be allowed to make.
Are stressed and stagnating economies like those of fFnland and Greece economic backwaters, doomed to stagnation, ridicule and decline which can only increase productivity by financial manipulations? Of course not. By far the larger part of productivity increases in Eurozone periphery countries has been of the lasting kind and productivity in Greece and Finland is still about 30% (yes, that’s a lot) higher than in 1995, even though the data are also consistent with a certain amount of debt driven productivity exuberance in the years directly before 2008 and part of the decline might be caused by the implosion of a debtdriven bubble, like in Greece between 2007 and 2011 (data: Eurostat). While, again, any bubble effects are dwarfed by the structural increase before 2008 and while part of the post 2008 decrease must also be caused by low levels of production which often tend to depress productivity.The lasting nature of the post 2008 productivity decline and stagnation however indicates that something else might be the matter, too.
Elstat has published new population estimates for Greece. And what happened to Portugal, Ireland, Estonia, Spain Latvia, Lithuania, Romania or Bulgaria is happening to Greece, too. People are leaving in droves.and the population is declining as far as I know especially the working age population! Aside: don’t tell to me that international European job markets aren’t flexible. They are. Before 2008, a massive influx of foreign workers enabled Spain to have the second highest job growth in an absolute sense of the entire rich world, only next to the (much larger) US. Housing boom related private demand in Spain was of course fickle – but the supply side of the labour market reacted vigorously. No petrification there.
The economic slump in Greece is even deeper than we thought and austerity played and even larger role in causing this slump. than we assumed, up to now. At least, according to two new serious studies by Elstat, one containing revised trade data and the other containing data on spending on health.
* The trade data show that the goods trade deficit (not the same thing as the current account!) was between 2006 and 2010 even larger than estimated up till now. Which means that (A) the macro economic capital inflow imbalance was even larger while (B) the spending bust after 2010 had even larger consequences than hitherto estimated (as the deficit dwindled even faster, thanks to an unprecedented decline in domestic demand).
* The health data show that health expenditures declined from about 9 to about 8% of GDP while the old data showed that the share of health expenditure was more or less stable at 9 % of GDP (mind that GDP declined with 25%). This means that (largely government financed) health expenditure declined even faster than we thought which i.e. contributed more to the slump.
Taken together, means that austerity was even more brutal than we thought. Economic history is, to quite an extent, ‘bean counting’. And counting more beans or counting them in a more precise way sometimes changes our view of the past. Which is what Elstat did. This contrary to the endeavours of mr. Jan Strupczewski, Read more…
Greece did not need money to pay pensions. Greece needed money to… roll over its debts and to pay interest. Yawn. And the whole third bail out package is tailored to exactly this: swapping one kind of financial asset for another (tabel) (and oh, banks will receive another 25 billion of free money). The present situation in which the Greek bank system is closed and the creditors do all they can to destroy the Greek economy (again: tripling tourism VAT is a very, very bad idea) might however mean that Greece won’t be able to pay pensions or whatever, too. What Greece needs is, of course, a return to nominal growth ASAP. Graph 1 and 2 show that, in 2014, Greek debts actually declined a little but despite growth of the real economy, debts as a % of GDP increased because of price deflation. Mind that the largest increases of government debt in table 2 are caused by government transfers to banks – with the blessings of Brussels. Save the banks, screw the vulnerable. Last post for some weeks. somewhere in the Vosges, in France, I’ll occupy myself with family matters, cycling and sixteenth century Frisian farmers who were already lending and borrowing quite a lot – without banks (the ledgers with all these data are nowadays, transcribed, on the internet!). But aside from a pawn shop ran by an orphanage in Leeuwarden real banks in Friesland were, despite all this lending and borrowing, only a nineteenth century invention – which leads to the Coasian question: why do banks exist. Clearly not (just) to facilitate lending and borrowing… Read more…
Are dependable statistics one of Greece’s best friends? But are the Greek at the same time messing up the independence of Elstat, the Greek statistical office, as indicated by the recent ‘Diktat’? For those who care to look, statistics always convey a meta message. Recently, the German Statistisches Bundesamt published, based upon Eurostat data, a graph showing prices of hotels in the different countries of the EU. This is, of course, not a coincidence. At the same time people in Brussels were trying to quadruple Greece tourism VAT from 6,5 to 23% which, as the German graph clearly shows, would wipe out any kind of price competitiveness gained by the brutal Greek wage cuts. The Bundesamt is fully entitled to, next to their scheduled publications, publish any statistics as they see fit, according to UN treaties. And to criticize Merkel or Schauble, if they misuse official statistics (or me, of course, when I state that publication of the hotel prices is a subtle political statement). Also, official Greek and Eurozone statistics do map the unprecedented depth and length of the Greek crisis or the (for a western country) unprecedented level of unemployment and the tens of billions given away by the Greek government to the Greek banks. One of the elements in the
European deal with Greece ‘Diktat’ (German, ‘Befehl‘) from Brussels is however the safeguarding independence of Elstat, the Greek statistical office. What is the matter? Among other things, the present Greek chief statistician has been prosecuted for recalculating and overstating (!) the budget deficit during the Karamanlis years…The situation is according to the European Statistical Governance Assistance Board (ESGAB), March 24 2015, not caused by the Syriza government: Read more…
In case you missed it: Greece has to accept all the measures, which will increase unemployment to at least 30% and possibly 35%, lead to unprecedented amounts of dirt poor old people while 50 billion worth of assets is stacked away in a fund which is mainly meant to recapitalize the banks (surprise!) to be able to negotiate about a deal. This is not yet the deal itself (personal: as I see it there is literally a sadistic element to these measures). Mind that Greece knows next to no unemployment benefits while the number of elderly is rising rapidly. Austerity is of course supposed, by some, to be some kind of miracle cure. But is it? No. None of the Eurozone austerity countries did well, when we look at employment. And neither did Denmark or the Netherlands which before 2008 did everything right, aqccording to the neoliberal rulebook. Private debt fuelled growth, government surpluses, flexible labour markets etc. etc. At this moment, the Netherlands even have something like a 13% of GDP surplus on the current account (Q1, 2015). Despite this employment growth disappointed…. Read more…
In January during the ASSA conference William Waller held a speech titled:”Policy in an area of unreason’. Remarks upon receiving the Veblen commons award‘. Recommended.
And the dying European project reminded me of this:
Jessye Morgan sings Erlkönig (Goethe-Schubert) Read more…
I’m increasingly lost about the whole Euro/Grexit/European Union project.
- How could something which is basically about something as basic as rolling over debts get so out of hand?
- Why do the Greek want to keep the Euro so badly?
- And why are politicians like Schauble and Guy Verhofstadt (who according to this blogpost has quite some ties with banks like Eurobank in Switzerland, owned by Spiros Latsis, the richest man in Greece) so hysterical about Greece?
The first two questions leave me at odds. The third seems to be answerable. It is the oldest trick in the book. Create a common enemy to be able to gain power and lead the Eurozone to your destination. And according to Varoufakis, it might indeed be something which could be called the ‘Schauble-Schrecken’: “Based on months of negotiation, my conviction is that the German finance minister wants Greece to be pushed out of the single currency to put the fear of God into the French and have them accept his model of a disciplinarian eurozone.”. Though Verhofstadt, who did not even understood that Greece reformed more than any other country, might just serve the needs of the richest man in Greece. Read more…
The foundation of the design of the Euro system is the idea of ‘financial discipline’. Democratic governments, according to this idea irresponsible by nature, had to be reigned in by rational private lenders active on a newly created international capital market (no, not just the banks, also and often more important our pension funds). Part of this design was a decline of international financial transfers in the EU while a central fiscal authority was absent, too. Again: by design! Financial markets had to do the job, away with these democratic governments!
Something unexpected happened, however. Up to 2008 governments were not reigned in by the FIRE sector, as interest rates in the periphery of the Euro Area declined much more than anticipated by economists while the private sector could, until 2008, borrow at lib and often became severely indebted. Which meant that after the Lehman moment, which made capital flows reverse, governments and the ECB somehow had to step in. The way this happened led in Greece to one of the largest peacetime declines in GDP in developed countries ever (graph).
Graph slightly adapted from: source. Hat tip: Jesse Frederik.