Thursday, March 30, 2006

Irish Economy Booms-For Now

GDP growth in Ireland was a full 5.7% in the fourth quarter compared to the same period last year. Adjusted for terms of trade, growth was in fact even higher than the 5.7% volume number. Even taking into account that Ireland have much higher population growth than the rest of Europe due both to a much higher birth rate and a large inflow of Eastern European workers, this is far higher than any other Western European country.

Even taking into account the fact that some of Ireland's GDP is an accounting fiction created by the internal pricing of multinational corporations wiching to benefit from Ireland's low corporate taxes, Ireland now have a higher per capita income than its increasingly socialist neighbor Britain. In sharp contrast to the U.K., government consumption declined somewhat relative to GNP and GDP evem though it increased fast in absolute terms.

This does not mean that all is well for Ireland. While some of the factors now driving growth, like its relatively low tax and spending levels and its favourable demographics will remain, others are not as likely to be permanent. The strong housing boom in Ireland have been driven by in part the low interest rate policies of the ECB and in part by the inflow of Eastern Europeans who have boosted both demand and labor supply for the residential construction industry. The increasing inflationary pressures and cyclical upswing in the Euro-zone makes several interest rate hikes likely, something which will hit Ireland harder than other parts of the Euro-zone due to the large build up in debt in Ireland in recent years.

Moreover, due to shrinking populations and higher rates of economic growth (at least in per capita terms) Eastern Europeans will be more reluctant to emigrate. And as more and more EU countries do away with their immigration restrictions for Eastern Europeans, they will increasingly go other countries than Ireland.

Over a longer period of time, Ireland's outlook is certainly far better than the rest of Western Europe due to its lower taxes and higher birth rates. However, there is a risk for a temporary cyclical downturn.

Both Bullish And Bearish News in "Final" U.S. GDP Report

Today, the "final" (Actually it's not really final as they still can and probably will revise it later, but it's final for now) version of fourth quarter GDP in the U.S. was released . in terms of aggregate GDP no big changes was made. A upward revision in inventories slightly offset by lower personal consumption contributed to raising the headline number from 1.6% to 1.7%. Inflation indexes were also somewhat upwardly revised, particularly the one that the Fed focuses on, the "core" PCE deflator, but the change wasn't particularly dramatic in that respect either. There were however some other noteworthy aspects.

The most bullish news presented was that corporate profits (after adjustment for capital consumption, inventory valuation and taxes) surged 13.8%, after the 4.3% Katrina related dip in the third quarter, leaving them 14.6% higher than a year ago. However, as the profit boom was mainly in the financial sector and in utilities, this may not have as big of an impact on the future trends in business investments as the headline number would suggest. Even so, this factor is bullish for the outlook of business investments. Rising interest rates may however mean that investments will not rise as much as profitability trends would motivate.

As was indicated by the current account report, net factor income from abroad developed in a negative way for America, which means that Gross National Product rose less than Gross Domestic Product.

The composition of growth in this report shows that it is more unlikely than ever that first quarter GDP growth will hit the 5% level some analysts have predicted. As I've pointed out before, it is more likely with roughly 4%. With inventories rising as much as $40 billion in the fourth quarter, it will certainly leave a negative contribution to growth. And the downward revision to real disposable income makes the likely consumption boom of the first quarter less strong than previously expected. Business investment numbers have also been weaker than expected. All of this is only partially cancelled out by some trade numbers for other countries that makes a dip in the February trade deficit likely.

Wednesday, March 29, 2006

U.K. Economy Driven by Government Spending Financed Abroad

According to the third reading published today, the British economy showed surprising strength and grew 1.8% in real terms during the fourth quarter of this year compared to the same quarter last year. That is not much by historical british standards and it is clearly weak compared to most other countries outside of Western Europe and adjusted for terms of trade changes it is even less but it is still stronger than one would have expected given numbers that indicate that U.K. manufacturing is in a recession.

The explanation usually given is that the U.K. economy is transforming into a service economy. True, but if you look at the numbers you see that it is to a worryingly high extent government services. Between the fourth quarter of 2004 and the fourth quarter of 2005, government consumption rose from 21.4% to 22.1% of GDP. Moreover, government investment rose from 1.7% to 2.2%. Total government purchases thus rose from 23.1% to 24.3%. This means that private sector GDP hardly rose at all last year.

Not surprisingly, this meant that both the budget deficit and the current account deficit rose last year, despite various tax increases from Gordon Brown.

Despite all the talk of "New Labour"-Tony Blair and Gordon Brown is increasingly looking like "Old Labour" with their government spending surge financed by borrowing from foreigners. This also means that U.K. economic prospects is not particularly bright. While a large inflow of Eastern European workers and a turnaround in mortgage
lending together with strong global economic growth means that total GDP growth will likely remain positive this year, the current economic policies of Blair & Brown is worsening the longer term economic prospects of Britain.

Tuesday, March 28, 2006

U.S. National Debt Clock Will Soon Run Out of Space

If you have ever been to New York, you'd know that there is a national debt clock near Time Square (Picture from 2003).

As you can see however, the clock can only show a debt of at most $9,999,999,999,999 . But now with the debt already at $8.31 trillion, and increasing at a rate of more than $20,000 per second,it can soon reach $10 trillion-a number higher than the clock can handle.

The clock's owner, one Douglas Durst, had shut it down in 2000 when the national debt had stabilized due to a surge of tax revenues related to the tech stock bubble. But in 2002, after Bush had proven his fiscal recklessness, he felt he had to restart it. At the time it restarted it was only $6.1 trillion. Now with the $10 trillion mark expected to be reached some time during 2008, he plans to replace the clock with one that can show 14 instead of just 13 digits.

He motivates the existence of the clock like this:

"Durst insists that the clock is non-partisan in its effort to shame the federal government over what he sees as its willingness to gamble away the nation's future.

"We're a family business," Durst said. "We think generationally, and we don't want to see the next generation crippled by this burden," he said."

Cyclical-But Not Structural- Upswing in Europe

Several economic indicators published today in Europe, including business confidence numbers from Italy and Germany, showed unexpected strength. This makes a
rate hike from the ECB by May a near certainty, it may (although that is still unlikely) even come as soon as next week.

The problem is that this recovery seems entirely cyclical. Money- and credit figures published by the ECB today showed that year over year money supply growth accelerated from 7.6% to 8.0% in February while private sector credit growth accelerated from 9.6% to 10.3%. Illustrating my previous point about how the two previous quarter point hikes have been too little, too late.

Meanwhile, too illustrate that the conditions for a structural, sustainable boom in Europe have not improved, the mass protests against the modest liberalization of labor laws in France have continued and indeed increased in strength. While this proposed liberalization can and should be criticized for not going far enough, that is not what the protesters object against. They have the opposite objection , with the imbecile argument that because unemployment is so high with the current system, the current system should not be changed.

These protests now appear likely to succeed, and the proposal will now likely be withdrawn entirely or at least watered down even more.

The protests will thus not only create short-term disruptions for the French economy, they will also prevent any of the structural reforms needed to improve its long-term prospects. Again, the reform per se was relatively modest and wouldn't have had much effect anyway, but if a reform as modest as this can't be implemented, then no French government will dare implement any more radical reforms, thus ensuring the long-term stagnation of the French economy.

Monday, March 27, 2006

Japanese Government Reduces Its Spending

Here is something you are unlikely to see in America-or Sweden: Japan's parliament passes budget which is lower than that of the previous year.

To be sure, these cuts are too small, particularly given the size of the Japanese budget deficit. But at least they're moving in the right direction.

Israel Second Most Unequal Developed Economy

According to this BBC News story Israel have the second highest level of inequality among all developed countries (after the United States). This is quite interesting given how Israel have a level of government spending relative GDP comparable to the level in Sweden. By contrast, relatively low-spending Japan have a level of income inequality similar to that of Denmark and Sweden, illustrating that limited government and high income inequality need not be associated with each other.

Even so, this high level of inequality is damaging for the chances of Israel's most free market oriented politician, Likud leader Binyamin Netanyahu, whose limited free market reforms of Israel's statist economy during his previous terms as Prime Minister and Finance Minister, is widely blamed for the widening income inequality. But without further free market reforms, Israel will not be able to significantly raise its currently relatively low level of per capita income, which is less than half of that in the United States.

The primary cause of both the high level of inequality, the high level of government spending and the low level of per capita income is that significant porions of the Israeli population consists of families where there is only one who works outside the home, usually in a low-paying job (at best, but particularly among ultra-Orthodox Jews it is common for the father to be living off the state as well), while the mother takes care of the very many children. These families are mostly Arabs or ultra-Orthodox Jews. Now, if these families simply made a choice with their own money to abstain from a high level of material standard of living in favor of having a large family there would be nothing wrong with that. But the problem is that the Arab and ultra-Orthodox Jewish voters vote for and receive massive subsidies from the economically productive secular Jewish parts of Israel, something which greatly inhibits Israel's growth potential and makes Israel anything but appealing for gifted Jews (of which there are quite a lot), something which in turn of course means that Israel's economy will operate far beloe potential. One illustration of this point is that both of Prime Minister Ehud Olmert's sons have emigrated from Israel (one lives in New York, the other in Paris).

So even though the level of relative poverty among Israel's Arabs and ultra-Orthodox Jews is basically self-chosen within the context of a welfare state which allows them to live off the productive work of others, it is used as a argument against cutting back on that welfare state.

Friday, March 24, 2006


There are lots of morons in the world, so to be more specific I am refering to Jacques Chirac and his latest childish act.

Thursday, March 23, 2006

Environmentalism -Not Oligopoly- Behind High Swedish Electricity Prices

Recently, Social Democratic politicians in Sweden have been complaining about high electricity prices in Sweden, which they all blame on the partial deregulation of the electricity market. Allegedly, the culprit is oligopolic behavior of electricity providers and therefore it is claimed that increased regulation and/or a "windfall tax" on energy company profits is needed.

The problem however, is certainly not the highly limited degree of deregulation of the energy sector, but the high degree to which the energy sector is regulated and taxed. To refer to the Swedish energy sector as an example of laissez-faire capitalism is simply absurd considering that 1) The Swedish government imposes heavy taxes on electricity and many sources of electricity, like nuclear power and fossil fuels. 2) The Swedish government have banned the construction of nuclear power plants and have indeed closed down the Barsebäck nuclear power plant. It is also illegal to construct Hydro-electric power stations and fossil fuels are heavily taxed. 3) The biggest electricity power company in Sweden is Vattenfall, which is 100% owned by the Swedish government. If they truly believed that energy companies behaved in a oligopolic way, they could just order their own company to stop doing that.

So the Swedish government who have done everything it can in order to raise electricity prices in the form of high taxes and artificial limitation of supply and who owns the biggest power company have the nerve to blame the free market for high electricity prices. This is a simply unbelievably shameless form of audicity.

Indeed, it is hypocritical of the Social Democrats to decry the existence of high electricity prices. Isn't that what they want for environmentalist reasons? Isn't that the purpose of energy taxation and the various limitations of energy supply? They should really be happy about high electricity prices given how that have been what they have tried to achieve for environmentalist reasons. The brazen hypocricy that they now display is probably just a way for them to deflect the anger from ordinary Swedes and energy intensive manufacturers over high energy prices.

The story of how the limited degree of deregulation in the Swedish energy sector is blamed for high energy prices is all too reminiscient of how the limited degree of deregulation of the energy sector in California was blamed for the energy crisis in California, rather than the price controls and the environmentalist supply limitations.

How Much Effect Did the Bush Tax Cuts Have?

When confronted with the reckless spending habits of President Bush and the Republican Congress, some small-government Republicans offer a mild criticism of that, while claiming that this
was compensated by the positive effect of the Bush tax cuts.

These positive effects are generally disputed by Democrats and now by conservative Bush critic Bruce Bartlett. Bartlett was for this blasted by supply-sider Donald Luskin.

Bartlett points to how the current economic boom have been no stronger than that of the 1990s, when taxes were raised. Bartlett however concedes that few if any Bush boosters (at least not now) claim that the 2001 or 2002 tax cuts had any effect as these were not focused on lowering marginal tax rates, but on boosting demand through various deductions. The 2003 cuts on capital gains and dividend taxes however certainly did lower marginal tax rates on capital investments.

Bartlett then concedes that the number of companies paying dividends rose after that, as did capital spending. But he says that this does not prove that the tax cuts were responsible for that, citing the general problem in empirical studies.

"Students of philosophy will recognize a logical fallacy usually quoted in Latin: post hoc ergo propter hoc. Basically, it means that just because B follows A, it doesn't prove A caused B. There may not necessarily be any relationship between the two. Only careful analysis can establish such a relationship."

Sure, but the positive supply effect of lower tax rates can in fact be established on a theoretical basis . As people want more money, anything which increases the monetary incentive of something will increase the existence of that.

In this day and age, when foreigners are anxious to prop up the dollar, the interest rate raising effect (the so-called "crowding out effect") of the ensuing budget deficit is likely to be highly limited, thus ensuring that supply-boosting tax cuts will raise growth. Although of course, the increased foreign purchases of U.S. government securities will lower national income somewhat because of the increased interest payments to them.

Thus, while it can be stablished that the effects of the Bush tax cuts were positive, it is far less certain that the effect will be as significant as some supply-siders claim, especially after taking into account the increased interest payments to foreigners. And they are not likely to do away the massive distortions caused by Alan Greenspan.

Italian Protectionism Hypocricy

The Italian government is upset that the French government have tried to block a take-over of a French company by a Italian company and so now they have tried to have "economic nationalism" condemned.

But this is the same Italian government that just pushed through tariffs on shoes from China and Vietnam. For Berlusconi, protectionism is fine as long as it gives Italian companies an advantage-but not when it gives them an disadvantage.

Wednesday, March 22, 2006

Richard Salsman's Confused Review of Greenspan

New blog post at the Mises blog.

Monday, March 20, 2006

Hypocritical Democrats

James Hamilton of Econbrowser exposes the hypocricy of the Democrats-who first vote against raising the legal debt limit and then , only 2 hours and 19 minutes later, they vote for increasing the debt by spending an extra $3.3 billion on the Low-Income Home Energy Assistance Program.


An man faces execution because he converted to Christianity. Is this a news item from infamous Islamic theocracies like Iran or Saudi Arabia? Or perhaps it is from Afganistan before the fall of the Taliban regime in 2001. No, it is from democratic Afganistan in March 2006.

Value of University Education Seems to be Exaggerated

Is this the sort of backward logic today's universities teach? From a BBC News Story about student protests against the proposal of modest liberalization of French labor laws:

"The government says it will encourage employers to hire young people, but students fear it will erode job stability in a country where more than 20% of 18 to 25-year-olds are unemployed."

So because today's rigid labor laws have created mass unemployment, one should not change them? If that is the sort of absurd backward logic that universities teach today, then one can really question the value of universities.

Sunday, March 19, 2006

Just Abolish the Capital Gains Tax

The EU Commission have now sued Sweden because of Swedish tax rules that allows Swedes who sell their homes and buys a new one to defer capital gains taxation, but only if their new home is in Sweden. This, the EU Comission points out, is a form of discrimination against people who want to move to another EES (EU+Norway,Iceland and Liechtenstein) country. The Swedish government replies that it will not abolish the possibility to defer capital gains taxation because that would reduce mobility, but does not want to extend it to other countries because it will be difficult to follow house transactions and collect taxes in other countries and that extending the right could open to tax planning.

True perhaps, but surely what is good for the state should take a backseat to what is good for the overall economy.

Moreover, because having capital gains taxes in the first place will even with the deferal rule reduce mobility (if people want to move to rented homes) and because capital gains taxes in general discourage investments, the capital gains tax should be abolished altogether.

Thursday, March 16, 2006

Aussie Economy: Weak Housing vs Strong Commodity Sector

I first wrote about the Australian economy in an article in November 2004 at the peak of a long economic boom in Australia. At the time, Australia had a cyclical boom driven by two factors: 1) rising commodity prices which in turn were driven by China's strong boom 2) A housing bubble. I pointed out that neither are sustainable in the long run, but that the fate of the Aussie economy depended upon whether they ended at the same time or not. If it did, Australia would suffer a sharp recession. If it didn't Australia could get away with a "soft landing".

In September last year, I followed it up with a post where I pointed out that it seemed like Australia once again earned its reputation as "the lucky country". The housing bubble had started to burst, but the economy continued to grow because the commodity price boom had continued.

Now that the Reserve Bank of Australia have released the numbers of the latest GDP report, this overall picture of strong commodity sector and weak housing sector is roughly unchanged. Despite the weak housing sector, terms of trade adjusted growth remains higher than in most other rich countries.

Dwelling investments (i.e. residential construction) have now fallen to 6.4% of GDP, down from a peak of over 7% of GDP in the first quarter of 2004. Meanwhile, business investments have risen from 14.9% to 16.5%. The proportion of this going to the commodity sector is not specified, but it seems likely that most -if not the entire- of the increase have gone to the commodity sector.

The current account deficit have during the same time fallen relative to GDP while the household savings rate is somewhat less negative. The imbalances of the Australian economy created by the housing bubble have thus lessened somewhat as the bubble have partially deflated, but they are still significant. For the Aussie economy to continue to escape the recession that normally follows a bubble as significant as the housing bubble of recent years, it will have to experience continued luck in the form of continued commodity price increases.

U.S. Federal Debt Limit Raised $781 billion

The U.S. Senate decided as expected to raise the legal limit on the gross federal debt by $781 billion, from $8,184 billion to $8,965 billion. This was the fourth such increase during the Bush presidency, and at the rate the debt is increasing now, another such increase will be needed already next year.

Meanwhile, as we can see in the above linked story, notoriusly statist Republican Senators like Arlen Specter have been working to increase spending and eliminate even the few timid and insufficient spending cuts proposed by President Bush. One can wonder why they even bother to have a formal debt limit when they are going to raise it every year when it is reached and when they are working non-stop to increase it through more and more spending.

Mexico Discovers Huge Oil Field

Mexico's President Vicente Fox announces the discovery of a mayor oil field, containing an estimated 10 billion barrels at a value of approximately $600 billion (Equivalent to the annual GDP of Mexico).

This is good news both for Mexico and the rest of the world (except for competing oil producers). This will bring much needed extra income to the dysfunctional Mexican economy and it will lower global oil prices and lessen dependency on Middle Eastern oil, all of which is very good.

However, for Mexico's dysfunctional economy to experience a more significant upswing, Mexican politicians must root out the widespread corruption in the justice system and deregulate the economy.

Wednesday, March 15, 2006

Jonah Goldberg on Spoiled French Students

Jonah Goldberg have a good column on the spoiled brats in France who protest against a necessary labor market reform proposed by Prime Minister Dominique de Villepin:

"Imagine riot police had to be sent into Harvard to quell an enormous student protest. OK, that's not terribly hard to imagine. But instead of the usual reasons for prosperous students to get all uppity - gay rights, antiwar hoopla, a strong math requirement - imagine that Harvard students rioted over the possibility that they could ever be fired from their first jobs.

Well, that's pretty much what happened over the weekend at the Sorbonne, the creme de la Brie of French education. Prime Minister Dominique de Villepin, the leader with the most important hair in Europe, pushed through a law which says that employers don't have to give lifetime job security to job applicants under the age of 26. Seriously. For the first two years of what the French call the First Employment Contract, employers can fire you if you don't do your work satisfactorily or if they can't afford to keep paying you. Of course, if you make it past those first two years, the smothering mothering of the crapulent French Au Pair State kicks back in and you never again have to worry about getting fired. You would have to be an on-the-job rapist or serial killer to get sacked. Even using the wrong salad fork at the company bistro wouldn't do it.

France passed the law because its economic flexibility makes Dick Cheney look like a yoga master by comparison. Until this latest dip of the French baby toe into economic reform, employers had little choice but to offer open-ended employment contracts that amounted to "employment for life." Even the few exceptions to the rule require endless legal battles that may end in the employer being fined and forced to reinstate the employee with back pay. This is a great system if you are already employed (and care more about enjoying cafe-au-laits and endless vacations then you do about the long prosperity and posterity of your civilization). But if you are young, unemployed or (shudder) an employer, this is a disaster of epic proportions."

How Mugabe Destroyed Zimbabwe's Economy

Good article on Front page magazine on how Zimbabwe (Previously known as Rhodesia) saw its economy decline from being one of Africa's most successful to being one of the poorest and most chaotic because of the policies of black racist and socialist dictator Robert Mugabe, who once was celebrated as a "freedom fighter" by leftists.

Tuesday, March 14, 2006

U.S. Current Account Deficit Reach Record 7% of GDP

The U.S.current account deficit reached $224.9 billion or 7.0% of GDP during the fourth quarter of 2005. This is a new record, both in absolute terms and relative GDP. The deficit had temporarily fallen during the third quarter due to insurance payments from non-American insurance companies to victims of Katrina.

Even net investment income turned negative this quarter, owing mostly to increased interest payments to foreign holders of U.S. government bonds. The net investment income is likely not as positive as the statistics claim due to internal pricing policies of multinational corporations wishing to shift their profits to low-tax localities like Ireland. While this does not affect the overall current account balance, as it also means that the trade deficit is overestimated, the illusion of a investment income surplus until now have mistakingly lead some economists to believe that the U.S. external deficits are an illusion.

But there is no reason to believe that.Instead it reflects in part that investment income for America is overstated and in part it reflects that Americans have -due to a higher proportion of equity investments- had higher returns on their non-American assets than non-American investors .

But now with yields rising on U.S. government securities, the effect of the second factor is diminishing, which in turn together with the continued external deficits means that net investment income will turn even more negative during 2006.

Interestingly though, direct investments offshore by U.S. corporations fell sharply during 2005, from $252 billion in 2004 to $21.5 billion. During the second half of 2005, direct investments in fact turned negative. Foreign direct investments in the U.S. on the other hand rose from $107 billion to $129 billion. I'll return later for a more in-depth analysis of the implications of this.

Saturday, March 11, 2006

Latvia Also Have 10.5% Growth

Just like neighboring Estonia , Latvia had 10.5% GDP growth in the fourth quarter of 2005.

Just like in Estonia, 10.5% growth is actually even more impressive if you look at per capita growth as Latvia's population shrank by more than 0.5%. By comparison, Japan had zero population growth, the EU had 0.4% and the USA 1%. 10.5% growth is in per capita terms thus equivalent to 11.5% growth in the EU and more than 12% growth in the USA.

The Latvian statistics authority don't issue spending categories, but the closest equivalent to government consumption among the production categories, "public administration and defence; compulsory social security" showed a mere 2.8% growth, indicating that the role of government is declining in Latvia, in sharp contrast to both Sweden and America.

Latvia and Estonia now shares the top spot for growth in the EU, with the third baltic country, Lithuania coming in third at 8.3% and Slovakia coming in fourth with 7.5%. Not coincidentally, these four countries are the four with the lowest level of government spending and all four have adopted relatively low flat taxes.

And workers are benefiting from this boom with real wages rising 9.7%, even as unemployment is declining rapidly (from 9.6% to 8.2%).

Friday, March 10, 2006

U.S. Economic Imbalances Worsens

Yesterday two key reports on the imbalances of the U.S. economy were published, on the trade deficit and the "Flow of Funds" report.

The trade deficit increased to a new record high of $68.5 billion in January. That was a lot higher than the average estimate of economic analysts, but lower than the $70 billion I thought it would rise to. The main reason why the deficit came in lower than I expected was smaller than expected surpluses in Canada and Germany. But even so, the deficit is extremely high and still on an upward trend.

The reason why the trade deficit rose can be found in the "Flow of Funds" report released later that day by the Federal Reserve.

It showed that household debt rose 2.76% from the upwardly revised level of $11187.9 billion in the third quarter (previously published as $11000.3 billion, a upward revision that were partially -but only partially- cancelled out by a $148.2 billion downward revision of corporate debt) to $11496.6 billion. Household debt is now at a record 124.3% of disposable income, or 90.1% of GDP. Total private sector debt rose to a record 155.4% of GDP. When Alan Greenspan became Fed chief private sector debt was only 120% of GDP, with household debt being at 77% of disposable income or 56% of GDP. Mortgage debt alone, at 94% of disposable income or 68% of GDP is now much higher relative to income than all forms of household debt were in 1987.

The optimistic spin being made by some economists like Mike Mandel of Business Week is that this massive debt increase is more than offset by
rising asset values, taking household net worth (including net assets of non-profit organizations) to a new record high of $52.1 trillion.

It is indeed true that if these asset price increases were sustainable, then the rising debt level wouldn't be a problem. But as asset values are ultimately derived from national income, then rising asset prices in excess of national income growth is not sustainable. And as we saw in 2000-02, asset prices can fall. But debts will not fall along with the asset values. And with debts reaching a record 18.6% of assets (By comparison the debt/asset ratio was 14.5% in 1987, and only 14% as late as 1999 ) , leverage is higher than ever. Something which is particularly true in the housing sector, where mortgage debt relative to housing values have risen to 44% from 33% in 1987, despite record high housing valuations.

Moreover, Mandel's derivation of "real net worth", fails to take the lost purchasing power from higher prices of houses and other assets into account.

Thursday, March 09, 2006

Does the Chinese Save Too Much?

Morgan Stanley chief economist Stephen Roach is usually one of the more insightful among prominent economists, yet his Fortune essay "The U.S. and China's savings problem" were not particularly good.

I basically agree with him in his analysis of the U.S. savings shortfall, except for his call for a consumption tax as a partial solution to it. A consumption tax would, contrary to his assertions, not improve the incentive for savings even assuming for the sake of the argument that the entire burden of the tax falls on consumers. The reason is that the ultimate end of savings is future consumption. And a consumption tax would not only punish current consumption, it would punish equally the future consumption which savings are meant to enable. Only assuming that the consumption tax would be reduced in the future or that people are planning to emigrate would it have any such effect, but neither of these seem plausible for the vast majority of Americans.

More serious are the problems in his analysis of China's "excess savings". How could you have "excess savings"? It is possible to over-save of course, if you save so much that you consume so little that you cannot survive or at least that you feel greater uncomfort with your current consumption being too low, then with the alternative of reducing future consumption.

But while the still relatively poor Chinese would presumably be quite anxious to increase their low level of current consumption, there is no evidence that they really feels this is more important than increasing their future income by saving. After all, unlike another high-saving majority ethnic Chinese country, Singapore, China does not have a forced savings scheme, so the high savings rate is a voluntary choice, meaning it really reflect their current time preference .

But what about Roach's contention that the trade surplus resulting from the high savings rate sparks asset price bubbles in both China and America? This is however not really true as it is not the high savings rate but the Chinese central bank's purchases of U.S. government bonds that causes these problems. That in turn is mainly a function of how the Chinese government attempts to only gradually raise its exchange rate, something which entices foreign speculators to move capital into China to benefit from the certain future appreciation of the yuan. This capital inflow in turn forces the Chinese central bank to accumulate dollar assets.

While it is true that the high savings rate in China would likely raise asset price both in China and elsewhere even in the absence of the distortions created by the fiat money system, it would in that case not be a problem. Lower interest rates and thus higher asset prices that reflect lower time preference are unlike the lower interest rates and higher asset prices caused by inflationary credit not unsustainable and do not create any distortions. It will in fact help increase growth worldwide.

The high Chinese savings rate is good -not bad- for the world economy. What is bad is the distortions created by the policies of both the American and Chinese central banks as well as Bush's reckless deficit spending.

Wednesday, March 08, 2006

Thou Shall Not Speak Ill of Bush

Conservative maverick Bruce Bartlett tells of why he turned on Bush and spoke out against him- even though he knew it would cost him his job at the Bush loyalist "think tank" National Center for Policy Analysis.

Tuesday, March 07, 2006

About the Swedish GDP Report

Today the Swedish GDP report were published ( Here is a more detailed Swedish language version of the report). It showed that GDP volume rose by 2.9% in the year to the fourth quarter. Nominal GDP growth were 4.7% and terms of trade adjusted real GDP (the most relevant number) rose 2.4% on the year before. While that is above both the Western European average and the historical Swedish average, it was a lot lower than most analysts had expected ( except me who had predicted in late January that the number would come in lower than consensus estimates.).

And it makes the assertions of leading Social Democrats that "Sweden have the highest growth in Europe" look more silly than ever. Because while the number is again somewhat above the Western European average, it is lower than virtually all Eastern European countries (particularly the Baltic states) and it is also lower than many Western European countries. Published volume growth (I don't have access to terms of trade in most countries so this comparison must be made in volume terms. Given how Sweden's terms of trade is deteriorating any adjustment for that would likely be of disadvantage for the Swedish position) in Greece, Spain and Denmark have already been shown to be higher, and it is almost certainly higher in Ireland and Luxembourg (who have yet to publish their fourth quarter numbers but whose numbers for earlier quarters have been far higher than in Sweden) too. Outside of the EU, Norway and Iceland likely also outperformed Sweden.

And this is despite the inflationary credit boom sparked by the low interest rate policies of the Swedish central bank, Riksbanken. The cyclical element of growth was thus much greater in Sweden than in the rest of Europe.

Another worrisome element was that government purchases again increased faster than overall GDP. Government purchases ( consumption+ "investments") increased 5.7% in nominal terms (what matters in this context) versus overall nominal GDP growth of 4.7%. Government purchases is now 31.1% of GDP in Sweden versus 19% in America and 9% in Hong Kong. This bodes ill for the future too.

U.S. Government Keeps Growing

The preliminary budget report for the U.S. federal government from the Congressional Budget Office showed an increase in the deficit despite surging tax revenues. This means that both government revenues and spending faster than GDP, implying reduced economic freedom in America. It also bodes ill for the future fiscal outlook. When the U.S. economy in a likely not too distant future turns down and asset price inflation slows or even reverses, revenues will stagnate or perhaps even fall. Combined with the fast spending growth this will mean that the deficit will rise sharply from today's fairly high levels.

Meanwhile, Treasury Secretary John Snow have again pleaded with Congress to raise the debt limit. He did so already in the end of December 2005, warning that if the limit of $8,184 billion wasn't raised it would be reached in February this year. It's now March, and the limit haven't been raised and it would have been reached hadn't the Treasury Department resorted to various accounting tricks, such as tapping into various funds intended for other purposes. But Snow now warns that they're running out of tricks and if Congress doesn't raise the limit it will be breached the week of March 20, something which will mean that the federal government will default on its debts for the first time ever, something which would permanently raise its future borrowing costs.

Monday, March 06, 2006

Estonia's Rapid Economic Expansion Continues

GDP growth in Estonia continues to be extremely rapid, at 10.5% during the last quarter of 2005 compared to a year earlier according to preliminary estimates. More detailed numbers about the composition of growth is not available until the final numbers are released on March 31st.

Estonia's extremely business friendly climate with relatively low burden of taxation and regulation, along with sound macroeconomic policies with a budget surplus and a currency board has helped fuel growth.

Saturday, March 04, 2006

Zimbabwe Food Crisis Worsens

Ever since Zimbabwe's black racist dictator Robert Mugabe drove away productive white farmers, stole their land and gave it to his incompentent cronies and the equally incompentent land-invading thugs that called themselves "war veterans", Zimbabwe's economy have been collapsing as I have documented before on this blog ( see here and here).

Now, food crisis and therefore the general economic crisis have worsened further. At least one third of the population in this once food exporting country will require food aid from abroad to survive, while unemployment have reached 80% and inflation 600%. The latter number is rising rapidly as food prices rose 30% just during the latest week. Not that the Zimbabweans should really worry about that since we all know that the "core" inflation rate which the Fed believes we should focus on excludes food prices.

Mugabe claims of course that a drought and not his policies are responsible, just as North Korea have blamed starvation there on natural disasters. But this fails to explain why we never saw these kinds of food shortages during droughts before, or why other countries suffering from droughts do not suffer these problems.

Friday, March 03, 2006

High Inequality Necessary in China During Industrialization

In his latest column, Stephen Roach discusses what he argues is the rising inequality both between and within countries as a result of globalization. His claim that inequality between countries is rising is dubious as poor countries as a group have far higher growth than richer countries. For now, I will leave aside his discussion on income inequality in America and instead focus on his discussion of income inequality in China.

While some ignorant American conservatives stuck in cold war thinking insist on refering to China as "communist China" or "Red China", China is now a basically capitalist country. Not surprisingly, the end of communism in China have meant that it have started to catch up with the prosperous majority Chinese countries -Hong Kong, Taiwan, Singapore- that have had capitalism since the end of WW2.

In order to achieve a higher level of prosperity and economic development, it is necessary to get the rural population of farmers into the cities and thus into industrial-,construction- and service activities, all of which have a far higher marginal productivity than farming.

But in order to get farmers to move into the cities it is necessary to have a strong economic incentive to move into the cities-which is to say urban income levels must be much higher than rural income levels.

Any attempts to try to reduce urban-rural income disparities through increased government spending for the rural population will only serve to slow down the necessary migration from rural to urban areas and thus not only slow down growth but also slow down the reaching of the long-term equilibrium population balance between urban and rural areas when the large gaps won't be necessary anymore. Thus, attempts to reduce social tensions in the short-term through government redistribution will only serve to increase inequality and thus social tensions in the short-term: The Chinese government must keep its cool and avoid short-sighted measures to reduce the urban-rural income gap.

This is not to say that there aren't measures it can undertake to reduce inequality and social tensions without reducing the incentive for migrating to urban areas. First of all, they should scrap (a measure which have been discussed but not yet undertaken) the formal restrictions on internal migration. These restrictions are in practice almost never enforced, but they greatly weaken the bargaining position for workers who have moved into the cities. Secondly, by allowing the yuan to appreciate and by scrapping capital outflow restrictions, the Chinese central bank can end the large build-up of foreign reserves which have created high money supply growth which in turn have redistributed from the poor (both rural and urban poor) to the rich.

The latter measure, scrapping capital outflow restrictions, are also being increasingly likely to be implemented as it is advocated in government run news papers.

Thursday, March 02, 2006

ECB Rate Hike-Too Little, Too Late

So, the ECB raised short-term interest rates for the second time in the last 4 months. While rate hikes are understandably not popular among people with large debts -including governments-, they are certainly necessary today given that rates was so artifically supressed in the first place. Indeed, the criticism that one should direct towards the ECB is in fact that interest rates are still being artifically supressed and should therefore be raised further to the free market level. While it is not possibly to know for sure what the free market level -the level we would have had under a free market monetary system i.e. a gold standard- is as long as we have a fiat monetary system, we can be fairly certain that as long as money supply growth stays high, it is artificially supressed. And the current 7.6% money supply growth is way above the ECB:s own target of 4.5%, not to mention gold supply growth of 1-2%.

The result of the ECB's too inflatonary policies is as I pointed out in this article not only that consumer price inflation is above the ECB's supposed ceiling of 2%, but also the even more troublesome facts of excessive debt- and house price increases which in turn have pushed down savings which in turn have pushed the Euro-zone current account balance into deficit.

Wednesday, March 01, 2006

Lack of Welfare State Increases China's Savings Rate

This Reuters story tells of how savings in "communist" China is high because it lacks a welfare state. The article seems to assume that this is a bad thing that the Chinese government should fix by introducing "cradle to grave welfare" for all, but in reality the high savings rate boosts Chinese growth by providing for more capital investments.