Monday, July 31, 2006

They'll Be Back

Zimbabwe, who has arguably the worst economy in the world with 1,200% inflation, 75% unemployment and sharply falling GDP, have come up with a idea how to solve the problem of too many zeroes on the bills of the Zimbabwean currency: erase 3 zeroes from it.

But with 1,200% inflation, it will only take two to three years before these zeroes will be back. For such a reform to be meaningful, you're gonna have too rein in money supply growth too. Meanwhile, hyperinflation combined with Robert Mugabe's many other insane policies (such as his theft a few years ago of the lands of competent white farmers and the redistribution of that land to his in agriculture incompetent cronies) will continue to destroy what was once one of Africa's strongest economies but who is now one of the biggest failures (and that saying a lot).

Sunday, July 30, 2006

Katrina- Another Government Failure

Interesting Wall Street Journal story about the incompetent government management of the Katrina affair.

An incompetence which is all too typical of the government. As Prestopundit humourously comments it:

"The WSJ tells the inside story on a government fiasco in the making. Thank God the government doesn’t run the schools, protect the borders, or control the money supply … hey, wait a minute …"

Saturday, July 29, 2006

Smart Package From Republicans

The House of Representatives have now passed ( with a majority of 230 to 180) an increase in the minimum wage from the current $5.15 to $7.25 in 2009, along with a estate tax cut.

Really smart move to mix the minimum wage issue with the estate tax cut from the Republicans. It is not clear yet that this package will pass the Senate as well, but it clearly increases the chance of a estate tax cut getting passed.

The Democrats are furious over this hybrid bill, which is understandable. If the House bill gets passed in the Senate, the Republicans will get the estate tax cut through, while depriving the Democrats of using the minimum wage issue as a rallying cry. That is why the Democratic leaders oppose this, and it remains to be seen whether this Republican tactic will prove to be successful, but if it is, it will be an example of smart leadership from the Republican leaders.

A higher minimum wage is of course a bad thing, but considering that inflation has eroded the value of the dollar so much -and will continue to erode it until 2009- that such a hike won't do much damage (it will in real terms remain well below historical peaks and the level in most European countries). So, it might even be worth it from a libertarian point of view too, and not just from a Republican tactical point of view.

Weak U.S. GDP Report

The latest U.S. GDP report was mostly bearish news for the U.S. economy.

First, because growth slowed significantly, from 1.4% to 0.6%, or from 5.6% at an annual rate to 2.5% at an annual rate. Meanwhile, inflation accelerated both excluding and including energy prices.

And secondly, because previous growth have been downwardly revised. Nominal GDP for the first quarter was downwardly revised by 0.3%, while the GDP price index was upwardly revised by 0.5%, meaning that real GDP was downwardly revised by 0.8%. That in turn means that published real GDP for the second quarter is in fact 0.2% lower than previously published real GDP for the first quarter.

2003 growth was downwardly revised to 2.5% from 2.7%, 2004 growth revised down to 3.9% from 4.2% and 2005 growth to 3.2% from 3.5%.

Moreover, as net factor income was also downwardly revised and as capital consumption was upwardly revised, national income was downwardly revised even more than GDP ( 0.55% in nominal terms and 1% in real terms).

Talk of a "Bush boom" thus appears even more illegitimate than ever. The positive effects from some of Bush's supply-side tax cuts appears to have been largely cancelled out by the negative effects from a rising deficit and the remaining distortions from Fed policy.

The one bright spot was the 0.35 % upward revision of nominal disposable personal income as so-called "proprietors income" and dividend income was greatly upwardly revised. But most of this was cancelled out by higher inflation and as overall nominal national income was downwardly revised, this came at the expense of a dramatic downward revision of retained corporate profits, something which is bearish for the outlook of investment spending.

Thursday, July 27, 2006

The Task Force for Raising European's Cost of Living Strikes Again

In case you thought "The Task Force for Raising European's Cost of Living" ( aka the EU Commission ) was getting tired after their quests for raising the price of diapers and plastic bags, think again.

It seems now that they have caved in for the demands from protectionist countries like France, Spain, Portugal, Italy and Poland and announced continued tariffs against shoe imports from China and Vietnam.

Free trade oriented countries with no domestic shoe industry like Britain and Sweden have protested, but they seem to count for less than the shoe producing countries.

Hong Kong to Impose Sales Tax ?

I see now in columns from Alan Reynolds at and Christopher Lingle at TCS Daily that the world's freest economy, Hong Kong is moving closer to imposing a sales tax. Both argue quite well against the idea.

Provided the revenues from this is used to lower other taxes, this may not be such a bad thing. But in practice, it is unlikely that this will happen. Instead this will likely in part be used to increase social spending.

Increasing the number of taxes is likely to increase total taxation as each tax will seemingly seem less punitive. When America introduced the income tax in 1913, it was promised that the revenues would be used to lower tariffs. In the end, total taxation went up.

This is why the idea of a sales tax in Hong Kong should be rejected. And this is why for example voters in Stockholm should reject the introduction of "congestion taxes".

If every krona raised from such a tax would be used to cut income taxes for the people of Stockholm, it would perhaps be a good idea. But in practice, it is likely to increase total taxation (and indeed, the left-wing parties in favor of the tax have promised to use revenues to increase spending).

Tax Cuts Raise Growth-If They Are Matched by Spending Cuts

Greg Mankiw quotes a Wall Street Journal summary of a Treasury Department report on tax policy.

The 3 main conclusions are:

1. Marginal tax cuts improve incentive for wealth creation and leads therefore to more wealth creation aka higher economic growth.

2. Tax cuts that do not improve incentives, like tax child credits or marriage penalty relief will however not improve growth.

3. The beneficial effects of marginal tax cuts presuppose that they are paid for by spending cuts. If paid for by increasing the budget deficit, -like Bush's were- they won't have any beneficial effects. Indeed tax cuts that do not improve incentives and is paid for by borrowing will in fact have a negative effect on growth.

These conclusions are very similar with the ones I presented exactly two years ago in my article "Does the Income Effect Argue for Taxes". It took the U.S. federal government only two years and a lot of well-paid economists to come up with the same conclusions that I presented then.

Monday, July 24, 2006

Norway's Government Disses Wal-Mart

Norway's new left-wing government have decided its large oil fund ,where Norway's windfall profits from high oil prices are saved, should boycott shares in companies who act unethical according to leftist standards-and this means among others, Wal-Mart. The main losers from this will likely however be the Norwegan government itself as it will likely receive lower returns.

Sunday, July 23, 2006

China's Revaluation-One Year Later

New blog post on the Mises blog.

Saturday, July 22, 2006

Morgan Stanley on Nordic Economies

Morgan Stanley have for the last two days published analysis of the Nordic economies-see here and here- or at least Finland, Denmark, Sweden and Norway (The fifth and by far tiniest Nordic country, Iceland, was left out).

They point out that Finland and Denmark both have their monetary policy set by the ECB as Finland have adopted the euro while Denmark have pegged its currency to the euro. Sweden and Norway have by contrast independent monetary policies. One of their conlusions from Morgan Stanley is that the temporarily lower inflation in Sweden combined with its inflation targeting framework have put interest rates further below the neutral rate than in Denmark and Finland. That is also the reason as to why the Swedish krona is undervalued. Both of these factors will boost growth just in time for the coming election, but the inevitable bigger tightening will later slow growth significantly. This is exactly what I've been arguing for some time now.

Thursday, July 20, 2006

Will the Spanish Economy Crash?

Usually when discussing Euro-zone economies with economic problems, it is Italy or Germany, and sometimes Portugal, which is mentioned. Which is natural since these three economies has had the weakest growth in recent years. Yet many observers, like here Matthew Lynn and Charles Duma, now believe that the biggest problem in the future will be Spain. This may strike some people as odd, as Spain have in recent years had the fourth highest growth rate among the old 15 EU countries, after Ireland, Luxembourg and Greece. But looking beyond headline GDP numbers and you see great imbalances in the Spanish economy. As late as in 1998, Spain actually had a small current account surplus, but now they have largest deficit relative to GDP of all mayor economies, including America. Unit labour costs have increased by as much as in Italy and household debt has increased from 50% of disposable income in 1996 to 100% today. And Spain’s economy is dangerously dependent on the construction sector, with residential investments making up an incredible 17% of GDP, more than double the level in America.

These facts are of course related to each other the current account deficit being the result of massive borrowings by households to buy these newly constructed homes. The overheated construction sector have helped bid up unit labour costs, something which have further increased the trade deficit. The housing boom is driven by two factors: low interest rates and massive immigration.

The low interest rates are of course a result of Spain’s entry into the Euro-zone, where interest rates are set at very low levels reflecting the weak economies of Germany and Italy. But clearly, the current low levels are certainly not sustainable. A 8.9% money supply growth rate and 11.4% private sector credit growth is simply not sustainable for an economic area whose structural growth rate is as weak as that of the Euro-zone. Because the current Spanish boom is so dependent on the interest rate sensitive construction sector and because Spanish households have accumulated such a high debt burden (although it is still lower than in the U.S. or the U.K.), rate increases are likely to hit Spain a lot harder than other Euro-zone economies. Indeed, if a significant pick-up in growth and inflation in the rest of the Euro-zone forces the ECB to a more dramatic tightening of monetary policy than the timid moves so far, Spain’s construction sector, and by extension the entire Spanish economy could be hit hard.

However, there are reasons to believe that any housing bust will be limited, even if the ECB significantly raises interest rates. The other main driving force behind the boom, the large scale immigration of both low skilled workers from Africa and Latin America and old age retirees from Northern Europe looks set to continue. While the economies of Africa and Latin America have picked up pace recently, the existing income differential is far too big for that to significantly reduce the willingness to emigrate. And despite some grumblings from the conservative opposition, anti-immigrant sentiment has so far remained limited. So the flow of immigrants from Africa and Latin America looks set to continue for the next few years.

Meanwhile, the continued ageing of Northern Europe means that the number of old age retirees wishing to settle in Spain’s warmer climate will in fact likely increase, not decrease. All of which implies that demand for housing will remain strong in Spain even if ECB tightens its monetary policy.

Further likely to cushion the Spanish economy in case of rising interest rates are the fact that these rising interest rates presuppose economic strength in the rest of Europe, which would mean stronger demand for Spanish exports, counteracting any downturn in the housing sector.

For all these reasons, Spain will not "collapse" as Matthew Lynn or Charles Dumas think, although growth will likely slow significantly in particularly relative and probably also absolute terms as interest rates rise.

Wednesday, July 19, 2006

Why Free Trade Is So Much Better Than Foreign Aid

Illustrating again how the best way of reducing world poverty is free trade, it is reported how salaries in India's software service firms is rising at an annual rate of 15% in nominal terms or more than 10% in real terms. Previously, there have been numerous stories ( like this one ) about how real wages in China have similarly risen at more than 10% per year, illustrating that free trade and globalization is beneficial for the world's poor.

Compare this to the various African countries who's economies are dependent upon foreign aid, who were stagnating or even falling behind until the recent commodity price boom. Free trade have proven far more effective than
foreign aid in reducing poverty. And unlike foreign aid, which of course hurts the donor countries, free trade is also mutually beneficial.

In some cases, foreign aid also subsidizes destructive wars, like in the case of the Palestinians. For free trade to provide any benefit, people must engage in productive activities, whereas being an aid recipient requires nothing, and in fact relieves the recipients of the need to produce food and other positive goods. If the Palestinians hadn't received any "humanitarian" foreign aid, they would have been forced to produce their own food (In say some of the evacuated Israeli settlements, which before the evacuation had highly productive agricultural production but which now produces no food) and wouldn't have had the time or the resources to shoot Quassam rockets into Israel or kidnap Israeli soldiers, which in turn of course would have meant that they wouldn't have received the Israeli retaliation that they now complain about.

In short, free trade encourages productive behavior, foreign aid is at best useless and in some cases encourages destructive behavior.

Tuesday, July 18, 2006

Bush Does the Right Thing-For the Wrong Reason

Apparently, President Bush is close to issuing his first veto during his 5½ years as President-this to prevent a bill passed in the Senate (and previously in the House) that would give federal funding to stem cell research.

Although there have been many occassions in the past where a veto would have been even more important, he is actually doing the right now by vetoing this bill . And I say this not because I believe that stem cell research is "murder"-but because science should be privately funded and not funded by the government.

This is a point missed for example by the ARI-affiliated Capitalism Magazine which last year expressed its approval of the news that the House had passed a bill approving federal funds for stem cell research by posting the news under "dollar" (which means "good news" as opposed to news posted under "cross") and by posting a cartoon that attacks Bush's position on the issue. As it is now, privately funded stem cell research is not banned, or even discouraged (at least not any more than any other business activity). It is simply not subsidized by taxpayer's money. And that is what an Objectivist should think is the proper state of affairs with regards to stem cell research.

I by the way find the closing paragraphs of the BBC News article to be somewhat curious:

"Not since Thomas Jefferson has a US president gone this long without using his veto, reports the BBC's James Coomarasamy.

He says the Bush administration has successfully used pro-life issues to mobilise its Republican base, notably in the 2004 presidential election.

It is ironic that one of those issues seems set to result in the president's first veto, he adds."

And why is that ironic? It seems in fact quite proper that if he attracted voters based on "pro-life" rhetoric, that he actucally pursues "pro-life" policies and uses his first veto for that issue.

UPDATE July 20: I now see that the Ayn Rand Institute explicitly condemns the veto:

"IRVINE, CA--"President Bush’s veto of a bill to remove restrictions on federal funding of embryonic stem cell research is immoral," said Dr. Yaron Brook, executive director of the Ayn Rand Institute.

"It is revealing that Bush has used his first veto to oppose potentially life-saving research in the name of the dogma that microscopic embryos are sacred. Clearly, Bush and other ‘compassionate conservatives’ are not concerned with the well-being of humans, but with sacrificing them to clumps of cells in the name of religion. Such opposition is rooted in the perverse worship of human suffering.

“Anyone who truly cares about human life must condemn this religious assault on medical progress.” "

Immoral to restrict federal funding? Rather curious position coming from someone who represents a institute named after someone who always maintained that science should not be tax funded.

UPDATE 2, July 22: Apparently, someone must have reminded the ARI that they are supposed to be opposed to government funding of science, so they later issued this clarification:

"IRVINE, CA--"The political fighting over embryonic stem cell research is the inevitable result of government funding of science," said Dr. Yaron Brook, executive director of the Ayn Rand Institute.

"It is only because science today is so dominantly funded by the government that restrictions on federal funding can wreak the devastation they have--severely hindering a promising area of potentially life-saving medical research."

"If science were left free, as it should be, funded solely by private sources, a scientist would not have to plead the merits of his work before a majority of politicians, however ignorant or prejudiced by religious or other dogmas they might be.

"The government should get out of the business of funding science. But so long as it is involved, it must scrupulously respect the separation of Church and State. Its funding decisions must be made on rationally demonstrable, not faith-based, grounds. Bush's veto clearly violates this principle."

This sounds a lot more consistent with objectivist principles, although the validity of the last paragraph presuppose that the money saved by vetoing stem cell research would be used to increase funding elsewhere, something I have yet seen no indication of.

China's GDP Growth Reached 11.3%

It actually appears that I was too cautious when I wrote that China had "nearly" 11% growth during the second quarter, as the actual number turned out to be 11.3%. With industrial production growth accelerating to 19.5% in June, growth momentum is continuing to pick up.

This extraordinarily high growth number is mostly a result of a super-competitive economic structure, with no welfare state and (partly for that reason) an enourmous supply of motivated workers and a extremely high savings rate, but it is also a result of a inflationary monetary policy. The latter have created great excesses in certain sektors.

Now, because China's structural growth rate is so extraordinarily high, I don't expect any kind of recession in China once the malinvestments created by the inflationary monetary policy is unfolded. But it will nevertheless mean that a lot of the hard earned savings of the Chinese people will be wasted and that growth will slow significantly

The Chinese government is well aware of these excesses and have therefore introduced some administrative controls to rein them in. But this will likely only have a limited success and is likely to further swell the trade surplus and therefore the excessive foreign exchange reserves. As these reserves are invested in assets with low returns,. this too will inevitably mean wasting the hard-earned savings of the Chinese people.

Tthe obvious solution, as I've stated repeatedly, is to significantly revalue the yuan, something which would enable the Chinese authorities to rein in credit growth without swelling the trade surplus. But unfortunately, it seems that this will not happen because of irrational nationalistic pride in "resisting foreign pressure".

Monday, July 17, 2006

Free Trade Is Not An "Act of Good Will"

In today's editorial of Sweden's biggest news paper, Aftonbladet, Editorial writer Mats Engström calls for trade restrictions from the E.U. on Israel to punish it for its alleged crimes.

There are several probalems with this. First of all, as all regular readers of this blog knows, I do not think that Israel is the guilty party here . Instead, it is is Hamas and Hezbollah which is at fault here.

But even apart from this, I also object to his view that free trade agreements with other countries is an altruistic act, or an act of good will .

Free trade is always a mutually beneficial act, which because of the law of comparative advantage , will always result in a higher standard of living for all particiants.

While Israel would undoubtedely suffer more from Israeli-EU trade sanctions than the EU itself would because of the fact that the EU is much larger, with more than 450 million people versus 7 million, and as a result of this some of the worst anti-Israel fanatics might still favor sanctions on Israel even after being educated about the effects of sanctions, it is nevertheless the case that regular EU citizens would lose from anti-Israeli protectionist activities.

Whatever one's view of Israel's right to self-defence in the face of rocket attacks and kidnappings from Hezbollah and Hamas, it should be clear that trade barriers against it would harm the EU as well.

Wednesday, July 12, 2006

One Year Anniversary

Today is exactly one year since this blog started. During that year 329 (including this one) posts have been posted, or about 0.9 per day. The blog have steadily improven and the readership risen, positive trends which will continue. As before, the blog focuses on economics, but will also discuss politics in general and other things which I feel should be commented on.

Why Quotas/Affirmative Action is Racist/Sexist

I have previously described the damage created by affirmative action in America and Malaysia. I will now adress the hypocricy and injustice of such policies.

Although supporters of such policies claim to be anti-racist and anti-sexist (in the case of gender quotas), they really are racist and sexist. The South Park episode Chef Goes Nanners illustrates why that is in a very good way. The episode is about how the black Chef deems the town's flag racist as it features some white guys killing a black guy, whereas others view the flag as part of the town's heritage ( A obvious reference to the Confederate flag controversy). Stan and Kyle, who thinks the flag is controversial because it involves killing defends the flag like this:

"Kyle: Our main point is that the flag shouldn't offend anyone, because killing has been around since the bieginning of time. All animals kill. And the animals that don't kill are stupid ones, like cows and turtles and stuff. So people should not be so upset about killing. [returns to his seat amid a smattering of applause]

Chef: [stands up] Whoa whoa whooaa! You just missed the point entirely!

Kyle: Huh?

Chef: I'm not mad because the flag shows somebody gettin' killed, It's because it's racist!

Kyle's Team: [minus Stan] Racist??

Chef: Children, don't you even know what this argument is about?! That flag is racist because a black man is being hung by white people.

Kyle's Team: [minus Stan] Ooooooohhh.

Chef: Ooooooohhh?!

Kyle: W-we really didn't see it that way.

Chef: But that's a black man up there!

Kyle: Y-yeah, but… the color of someone's skin doesn't matter.

Chef: Well of course it matters when- [catches himself] …Oh my God. Wait a minute. You children didn't even see the flag as a black man being hanged by white people, did you?

Kyle's Team: [minus Stan] No.

Chef: [deducing, marveling] Why, that is- that is the most beautiful thing I have ever heard.

Mayor: What?

Mr. Wyland: What?

Chef: Don't you see? All this time I thought these little crackers had turned racist, when actuallih they were so not racist that they didn't even make a separation of black and white to begin with. All they saw when they looked at that flag was five people.

A Few People: Awww.

Some KKK members: Awww.

Kyle: Yeah.

Chef: I'm sorry, children. I was wrong about you. But I still the flag needs to be changed. But now I realize that I almost let racism turn me into a racist."

In the case of affirmative action/quotas, its supporters are making the same mistake as Chef. A true anti-racist and anti-sexist shouldn't care whether or not some ethnic groups or gender is over-represented or under-represented anywhere. The only thing they should care about is whether or not the most qualified get the position. Only if they are shut out on account of their race or gender should we get upset. And , ironically, this is exactly what affirmative action/quotas will do: shut out whites or Chinese (In Malaysia) or men just on account of their race or gender. The alleged anti-racism of the left have made them into racists. As the test scores of blacks/Malays before university and the far higher failure rate of those admitted under affirmative action illustrates, their under-representation simply reflects that they are under-represented among those who are qualified.

While white racists use that under-representation to argue for rejecting all blacks -even those who are qualified-, black racists and white leftists use it to reject qualified whites. While in today's society, only white racists are recogniced as racists, black racists and white leftists are really just as racist, only they are anti-white rather than anti-black as the white racists. Both adhere to the racist principle of rejecting someone better qualified just because of their race.

In Sweden, we have luckily so far largely escaped the kind of ethnicity-based affirmative action we've seen in America and Malaysia, but because of the strong position of feminism, there have been an increasing use of gender quotas. And now, if the left-wing alliance retains a majority in this September's election, there is a strong risk of Sweden getting a law imposing gender quotas on corporate board rooms, like we've seen in neighboring Norway.

Most opponents of the quotas have conceded the view that there must be more women in corporate board rooms, only they say the means of restricting the property rights of share holders in deciding how their companies should be run is immoral. While I certainly agree that the means are immoral, I think we should also challenge making increased female representation a end. Why should that be of any concern to you unless you are a sexist who judge people on account of their gender? What should be focused upon is whether or not competent people -whether male or female- or shut out in favor of less competent people.

Are there a lot of competent woman unjustly excluded from corporate board rooms? Yes, there clearly are, but there are probably just as many competent men unjustly excluded from corporate board rooms as they for example do not know the right people or as the people choosing board members focus on irrelevant characteristics or simply don't know about them. A true anti-sexist should be no more concerned about the competent women who are being excluded than the competent men who are being excluded.

Tuesday, July 11, 2006

Saudi Columnist to Palestinians: Do Something Useful

Via Frontpagemag I found this interesting column from a Saudi (!) columnist named Yusuf Nasir Al-Suweidan, where he tells the Palestinians to quit whining and quit making war and start doing something useful:

"The main mistake lies in the fact that the Palestinian organizations did not respond correctly to the Israeli withdrawal from Gaza... and its consequences. Instead of beating their swords into plowshares, pens, and other things that are needed for the development of Palestinian society - in terms of the economy, society, culture, and so on - most of them read the developments incorrectly and immaturely. This was exploited by the terrorist networks, that are funded and run by the regimes of the ayatollahs in Tehran and the Ba'th [party] in Syria, and [people] have been taken in by delusions and empty slogans like 'liberation from the river to the sea' [that are heard] among the poor, hungry, and desperate Palestinian masses. At present, what [these masses] need most is food, medicines, clothing, and other essentials - not explosive belts, car bombs, and the slogan, 'Congratulations, oh Martyr, the black-eyed virgin awaits you.'"

He's absolutely right, of course. As long as the Palestinians use all of their available resources and all of their energy to acquiring and shooting Quassam-rockets, suicide bomber belts and other weapons that are only bound to invite the kind of Israeli retaliation they now whine about, why should we pity them and give them the consumer goods they could have produced instead of Quassam-rockets?

Look For Chinese Trade Surplus to Increase Further

China's trade surplus increased to a record $14.5 billion in June or $123 billion during the latest 12 month period. This is furthermore likely to increase further as Chinese authorities implements various administrative controls to avoid over-investments in sectors deemed overheated. This is bound to reduce import growth while having no effect on export growth, thus increasing the trade surplus.

That in turn is likely to further strengthen protectionist sentiment in the West. Accelerating the pace of yuan appreciation seems like the obvious solution to this, but
nationalist pride might prevent this.

Monday, July 10, 2006

The EU Commission's Struggle For Higher Prices

The EU Commission should perhaps rename itself "The Task Force For Raising European's Cost of Living". First I read in Swedish news paper Dagens Nyheter about how they attack certain countries for having a too low VAT on diapers. Cheap diapers? Well, thank goodness we have the EU Commission to attack that problem.

And then I read in EU Observer about how the EU Commission will attack another great problem: cheap plastic bags. To deal with that problem, a 15% tariff will be slapped on plastic bags from China and Thailand.

So here we see the justification for the existence of the EU Commission: we pay sky-high salaries to a bunch of bozos and their bureaucrats so that we will have to pay a lot more for consumer goods. Does that make sense to you?

Sunday, July 09, 2006

How Euro No Vote Could Secure Social Democratic Victory

One of the arguments used by many in the "Yes" camp in the Swedish referendum on joining the Euro in 2003 was that it would lead to lower interest rates, something the "No" camp denied. The "Yes" camp was wrong and the "No" camp was right, of course, as there is no reason to believe that large currency areas will necessarily have lower interest rates than smaller currency areas ( already then,interest rates was lower in Switzerland than in the Euro-zone)and we have since then seen how both short-term and long-term interest rates in Sweden have fallen below Euro-zone levels.

But what both sides got wrong was that it is not necessarily the case that low interest rates is a good thing. Indeed, it is a bad thing when the cause of low interest rates are central bank manipulation.

And it is certainly the case that today's low Swedish interest rates are largely a result of central bank manipulation, something which is illustrated by the fact that money supply growth is running at 11.5%. And while short-term Euro interest rates have risen from 2% to 2.75% since the referendum, short-term Swedish interest rates have fallen from 2.75% to 2.25% (after reaching a low of just 1.5% during the second half of last year). While Swedish interest rates appear to be heading up now, they are not likely to rise any faster than in the Euro-zone, likely leaving the current interest rate spread unchanged, at least during the coming months.

As not only Austrian business cycle theory, but also many non-Austrians would recognice, the stimulus from artificial supression of interest rates will in most cases give the economy a short-term boost, but it will not raise long-term growth, something which of course implies by logical necessity that in the period between "short-term" and "long-term" there will be an economic downturn (at least compared to what it otherwise would have been. If structural growth is high enough however, as in China, growth might still be positive) resulting from today's low interest policies.

We are now however still living in the "short-term" period, meaning that today's high economic growth in Sweden can to a large extent be attributed to the supression of interest rates by the Riksbank.

This could have political consequences. In just a little over two months, Sweden will have a general election and the race looks tighter than ever, with the centre-right opposition running neck in neck with the ruling Social Democrats and their partners, the communist Left Party and the Green Party.

The centre-right opposition parties look better organized than ever and generally seem in much better shape than the left-wing parties, particularly as parliamentary chaos might ensue if there is a left-wing majority, as the Social Democrats wants to continue as a minority government, while the Left Party and the Green Party both insist that they must be made part of the government.

The only thing the Social Democrats have going for them is really the current strong cyclical upswing . A cyclical upswing that is largely driven by the Riksbank's low interest policies. If the Social Democrats ultimately manage to gain a narrow majority together with the Left Party and the Green Party, this will on the margin have been the result of the low interest policies of the Riksbank (which is probably the reason for the negative left-wing reaction to the recent interest rate hike ). On the margin, the half a percentage point difference in interest rates could be responsible for tipping over the balance in favor of the left-wing bloc. A low interest rate policy which given the downward pressure on consumer price inflation created by deregulation and increased competition in the retail sector (food prices have fallen due to the increased presence of low-price chains like Lidl and Netto), is a natural and unavoidable result of the existence of an "independent monetary policy" based on inflation targeting.

Ironically thus, what many considers as one of the mayor personal defeats for Prime Minister Göran Persson, the 2003 Euro no vote, could help him escape a defeat in the far more important vote of the 2006 general election.

The Increasing Irrelevance of G8

Interesting article about how G8 is becoming increasingly irrelevant by shutting out China and other fast growing large economies. China is already larger than 5 ( Britain, France, Italy, Canada and Russia) out of 8 G8 members and will likely surpass Germany as well very soon. Meanwhile, 5 other economies, namely Spain, Brazil, South Korea, India and Mexico are larger than that of the smallest G8 country (Russia), although Russia's surging oil revenues means it might surpass some of these. Spain is also larger than Canada.

Saturday, July 08, 2006

American Government Expansion Continues

According to the July monthly budget review from the Congressional Budget Office, which reports the preliminary budget numbers for June and the final numbers for the previous 8 months of fiscal year 2006 (October 2005-September 2006), the rapid expansion of the size of the American government continued.

Federal spending adjusted for calendar effects rose 8.6%. well above even the accelerated 6.5% nominal GDP growth we have seen, something which if continued for the remaining 3 months would imply that the federal spending to GDP ratio, which under Bush have already risen from 18.5% in fiscal year 2001 to 20.1% in fiscal year 2005, would rise another 0.4%:points to 20.5%.

There are two main reasons why this have occurred. First, rising interest rates have partially reversed the effect I discussed here.This accounts for about 0.2% points. The other main reason is the new Medicare prescription drug benefit, which have made Medicare spending soar 15.5%.

Nevertheless, despite this the budget deficit looks set to shrink somewhat as tax revenues surges. That is in part a result of continued economic growth, in part a result of high inflation and in part a result of higher economic inequality (which given a "progressive" tax system will raise the tax revenues to GDP ratio).

At current levels, the budget deficit would appear not too worrisome. However, it must be remembered that America is currently at its cyclical peak, a time when budget deficits are always much lower than usual as a booming private sector always results in surging tax revenues and a decline (at least in relative terms) of the burden of government spending. When America in a likely not too distant future slips into a recession, the budget deficit will rise sharply again. But unlike the previous cyclical peak when America had a budget surplus , this time it starts with a significant deficit.

And most countries -even Sweden- sees the relative burden of government fall during cyclical upswings. For America however, the burden of government have continued to increase even during a cyclical upswing, despite the fact that both the Congress and the White House are controlled by the party that used to claim it was in favor of limited government.

Friday, July 07, 2006

Déjá Vu About Stupid Wall Street Analysts

In a series of events earily similar to what happened two months ago, Wall Street analysts strangely chose to characterice a strong U.S. job report as weak because of their irrational obsession about the "non-farm payroll". Just like two months ago, both the average work week and average hourly earnings came in a lot higher than expected, but all of this was ignored because "non-farm payrolls" were somewhat lower than expected. The implicit value of the upwards deviation of workweek and hourly earnings were more than 10 times higher than the implicit value of the downward deviation of "non-farm payrolls", but that is apparently irrelevant for the so-called analysts of big Wall Street firms.

Anyway, the strong employment report was somewhat surprising given the weak car- and retail sales and the weakness of both the manufacturing and non-manufacturing ISM Surveys. Aside from statistical discrepancy (i.e. that either or both sets of numbers are wrong), the only possible interpretation of this is that unit labor costs and price inflation was very high ( The high nominal growth implied by the employment report divided by the weak real growth implied by the weak car sales and weak ISM surveys). That would imply that far from the Fed's interest rate hikes being done, they must and will continue.

With the continued increases in commodity prices (Oil rising above $75!) and the likely continued acceleration in rent increases from the unaffordable housing market continued with a pick-up in the so far subdued unit labor costs, price inflation is likely to continue to stay high or even accelerate.

Thursday, July 06, 2006

Icelandic Economy Melting

Those who believe the Friedmanite floating exchange rate is the path to economic stability would be well advised to study the experience of Iceland, the smallest of the Nordic countries with just 300,000 inhabitants. Meaning Iceland is exactly 1000 times smaller than the United States.

Iceland have good microeconomic policies with tax rates well belove the levels of other Nordic countries with a top personal income tax of 35% and a top corporate income tax of 15%. Unemployment benefits and other government hand outs to people who don't work are also much leaner than in the other Nordic countries. Combined with the strong traditional Lutheran work ethic of Nordic countries, this have given Iceland an extraordinarily low unemployment rate of just 1.5% and the by far highest employment to population ratio in the world.

Yet Iceland's macroeconomic foundations are anything but sound, except for the government finances, who like the other Nordic countries show a surplus. Iceland is one of the smallest currency zones in the world and pursues a Friedmanite floating exchange rate policy.

In recent years there have been massive foreign borrowing by Icelandic banks. Together with a investment by the American company Alcoa in an Aluminum plant called Fjarðaál, this caused the Icelandic krona to massively appreciate, paving the way for a massive current account deficit of more than 15% of GDP.

Investor nervousness about the massive external deficit have caused the Icelandic Krona to plunge. Because Iceland is such a pathetically small currency zone, this have sent consumer price inflation sky-rocketing, reaching 8%. Moreover, the dramatic decline in the krona is also ominous because given the large external debts denominated in foreign currencies, a weaker krona will sharply increase the debt to income ratio, just like it did during the East Asian crisis 1997-98.

To defend the currency, the Icelandic central bank have raised interest rates to 13%, and is expected to raise it even more soon. This have helped stabilize the currency in the short-term, and is under the circumstances a wise move as the alternative of a plunging currency is far worse. But interest rates at these levels will likely send the Icelandic economy into a recession soon, possibly a sharp recession.

What the Icelandic currency crisis illustrates is that contrary to the assertions of the Friedmanites, floating exchange rate policies are not a guarantee too avoid the kind of currency crisis that have been associated with some countries who have pursued fixed exchange rates.

Wednesday, July 05, 2006

Economic Failures-World Cup Success Stories

The World Cup in football -or soccer as Americans call it- have captivated nearly the entire world except for America. I am not really that interested per se in the sport, where too few goals are made (Far too many World Cup matches have had the boring result of 0-0) for it to be really interesting, although the fact that there is so much media attention around it and the fact that the World Cup have broader economic, social and political consequences means that I feel compelled to follow the matches (or at least the results) anyway.

What is noteworthy is the fact that the 4 teams that made it to the semifinals came from 4 of the worst performing economies: Germany, Italy, France and Portugal. These are in fact the 4 worst performing economies of Europe, and apart from a few extreme examples like Robert Mugabe's Zimbabwe, the world. This is probably just a coincidence with no causal connection, so I guess all this means is that the people of these countries can comfort themselves by having a successfull football team, which to many people seems more important than having a successfull economy.

Fixing Mexico

Mexico's presidential election seems to be earily similar to the 2000 presidential election in the U.S. Conservative Felipe Calderon appears to have won a very narrow victory over his main opponent, leftist Andres Manuel Lopez Obrador, but Lopez Obrador now demands a recount of the votes. Still, it appears likely that Calderon will be the ultimate winner.

Given the controversy in the U.S. over the large flow of illegal immigrants coming in from Mexico, many Americans have demanded that Mexico fix its economy so fewer Mexicans feel the need to emigrate.

Mexico's economy have been disappointingly weak for the last few decades. While for example South Korea have seen its relative income level rise from 20% of the U.S. level in 1980 to 48% in 2003 (Rising above 50% in 2005), Mexico have in fact fallen further behind the U.S., from having a per capita income at 34% of the U.S. level in 1980 to 24%.

Some may attribute the weak performance of Mexico relative South Korea to Hispanic culture being less focused on thrift and education than Confucian North East Asian ( Japanese, Korean, Chinese) culture. And this is clearly part of the story. But this would not explain why Mexico have also trailed Chile, whose relative per capita income rose from 20% of the American level in 1980 to 28% in 2003.

Chile's upswing of course came after the radical free market reforms implemented under former dictator General Augusto Pinochet. But in what way is Mexico's economic system more statist and inferior than that of Chile or South Korea? Taxes and government spending is no higher in Mexico than in Chile or South Korea. It is mainly a question of a highly corrupt justice system and destructive regulations. As Deroy Murdock put it:

"Registering a Mexican business takes 58 days, versus 48 in China, 27 in Chile, 22 in South Korea, and five here. During nearly two months of procedures, Mexican officials have numerous opportunities to encourage “tips” to speed things along. Mexico’s Private Sector Center for Economic Studies calculates that, in 2004, 34 percent of businesses paid “extra-official” sums to functionaries and parliamentarians totaling $11.2 billion. As the late Carlos Hank Gonzalez — Mexico City’s once-humble, eventually loaded, former mayor — put it: “Show me a politician who is poor, and I will show you a poor politician.”

Among 159 nations Transparency International surveyed last year, Mexico is the 65th most honest place to do business, tied with Ghana. While America is 17th (a pathetic showing, incidentally, for Earth’s leading economy), Chile and Japan tie for 21st, while South Korea and Italy tie for 40th. Businessmen in this poll perceive even Cuba, No. 59, as less corrupt than Mexico."

Moreover, Mexico's most important sector, the oil industry, is 100% controlled by the state-owned Pemex, who is notorius for failing to exploit Mexico's oil resources, something which is particularly disastrous given today's super high oil prices.

That Calderon, who seems to better grasp what the problems are and how to fix them now seems to win is good. However, because the Mexican parliament will be controlled by opposition parties, his ability to deal with the problems will be limited. 6 years ago, the now outgoing president Vicente Fox said largely the same things as Calderon have been saying now, but because of the opposition control over the Mexican parliament, there has been little progress.

Tuesday, July 04, 2006

Zero Interest Rate Policies To End Next Week in Japan?

According to this news report, the Bank of Japan, have decided "in principle" to end its zero interest rate policy next week, which it has had for more than 5 years.

That is good. Because of the reluctance from both banks and the public to initiate a credit expansion (and because price deflation have left real interest rates above zero), money supply growth have been very low in Japan and no serious private sector imbalances have been created. But now as optimism returns in Japan, it is well advised of them to start normalizing interest rates to pre-empt the creation of the kind of serious imbalances that have been created in America and have started to arise in Europe too.

With companies and households having reduced their debt burden, the Japanese private sector is in far better shape than in Europe and America, something which bodes well for short to medium term growth in Japan.

Rising interest rates could however be very negative for Japanese government finances due to the high level of government debt. That is why it is imperative for the Japanese government to accelerate the cuts in public spending in general and the spending on the oversized government "investments" in particular.

Sunday, July 02, 2006

Inflation Strikes Back

Interesting story of how a penny (1 cent) now cost 1.2 cent for the Federal Reserve to manufacture. The reason why the penny now cost more than a penny to manufacture is that the price of zink (which the penny is made of) and other metals have soared, something which ultimately is caused by the Fed's own inflating. In this case, we thus see how inflation have struck back at the Fed, whose reckless inflating may have been profitable at first, but who now have made the act of making some forms of money too expensive to be profitable.

This reminds me of the old Beavis&Butt-Head episode "Green Thumbs", where the boys sit outside the local store, Maximart, and only have one dollar bill while the sign says that their favorite food, Nachos, cost $2, whereupon Beavis remarks "We need like more money", to which Butt-Head replies "good thinking, Beavis!". After Beavis start producing some confused ideas about creating a machine which you can put a dollar into and get another dollar out and then put that dollar back into the machine and then get another dollar out, Butt-Head (who is stupid, but slightly less so than Beavis)upon hearing that and seeing a sign in one window that you can get copies for 10 cents, gets the idea of going to the copy shop and copy the dollar in the black and white copy machines. He starts making copies, thinking he is really smart, remarking "I can't believe no one has ever thought of this before". Of course, as all of my readers (who presumably are more educated than Butt-Head) know, quite a lot of people (including governments) have thought of the idea of counterfeiting before. And his copies, which were black and white on one side and blank on the other wasn't going to fool anyone.

Yet as futile as Butt-Head's attempted counterfeiting was, at least he made paper copies of paper money and at least the "nominal value" of his copies were 10 times as high as the cost of producing them. Beavis, who again is even more stupid than Butt-Head, took the nickel (5 cent coin) he had and put it in the copy machine. Even apart from the fact that a paper copy of a metal coin which were black and white on one side and blank on the other was even less likely to fool anyone than Butt-Head's one dollar bill copies, the "nominal value" of his copies were half of the cost of producing them.

It seems now that the Fed have been forced by its own inflating to engage in a Beavis-type stupid act of producing money at a higher cost than the value of the produced money. I guess this is what one might call poetic justice.

Saturday, July 01, 2006

About Corporate Executive Pay

Recently, Göran Hägglund, the leader of the Swedish Christian Democrats attacked Swedish CEO's for receiving excessive pay. Most likely this was a case of political pandering to culturally conservative but economically leftist Social Democratic voters who like the Christian Democrat's negative attitudes towards homosexuals and their more tolerant view of mothers who want to take care of their own children but who dislike their marginally more free market views of economics. By indulging in anti-CEO rhetoric, Hägglund clearly hopes to attract some of these voters.

But apart from its vote-winning appeal, do his attacks make any sense? Quick answer: no.

Having a good CEO and rewarding him (or her) if he does well is absolutely vital. The cost of the wrong strategic decisions usually cost companies far more than the even the highest CEO salary. The marginal benefit of having a good CEO is so much greater than the marginal benefit of any single regular worker, so it makes sense to pay them far more.

It would be wrong to award good CEO's with the entire marginal benefit (or even most of it) of their good decisions, since it is not them but the capitalists who take the risk of losing money if things go wrong. But giving CEO:s whose decisions have created billions in benefits for the companies a few millions is hardly unreasonable.

To be sure, there are probably a lot of CEO's who are overpaid. Indeed some probably shouldn't even be CEO's. But there are likely also some CEO's who are underpaid. Just how Hägglund or anyone else can say that CEO pay is generally too high is not clear. Is he basing this on some egalitarian dislike of income differentials? Probably, but in that case there is no reason why he should single out just CEO's. A lot of writers, movie stars, athletes etc. earn more than CEO's and yet they are not attacked. Not to mention of course the bosses of the CEO's: the owners of the companies. Capitalists are often even richer than CEO's and in most companies earn a lot more in dividends and capital gains than the CEO does.

And, it must be emphasized, what business of Hägglund or some other left-wing populist is there if companies choose to overpay its executives (assuming for the sake of the argument that they are overpaid)? Contrary to general belief, it is not consumers or workers who pay CEO salaries. CEO pay have no effect on the marginal cost of any product so high CEO pay will not raise prices, and as it have no effect on the marginal benefit of hiring workers it will not lower worker's wages or lead to job losses.

No, the people who loses if CEO's are overpaid are the shareholders. They're the ones that should be upset if the CEO is overpaid, not workers, consumers and definetly not politicians. And it is for that reason the responsibility of the shareholders to prevent excessive CEO pay. And since again many shareholders are even richer than the richest CEO's it doesn't even make sense for an egalitarian to whine about high CEO pay.

Hägglund or other politicians should however not get involved in the dealings between private shareholders and CEO's.