Friday, December 30, 2011

Begging The Question On Labor Force Participation

Some analysts are trying to put a positive spin on the unprecedented drop in the labor force participation rate as simply being a question of more people seeking to get more education. I find it indeed quite likely too that a very large portion of those that have dropped out of the labor force have started in school again.

But that begs the question of why do they want to go back to school? Because it's fun or because it's interesting? Not likely, except perhaps for a small minority. Instead, the reason why they go back to school is because they're unable to find a job and thinks that additional education will enable them to get a job. That may perhaps be a good idea for the people in question, but that doesn't in anyway change their status as discouraged, hidden unemployed as almost all would quit school and immediately take a job if they could (at least assuming it's a steady job).

Thursday, December 29, 2011

Temporary & Permanent Tax Cuts

One criticism against the payroll tax cut that has frequently been made from conservative and libertarian economists is that it is temporary, and because people supposedly make decisions on permanent conditions it will have no effect.

This argument has a limited degree of truth in it as it is true that if taxation of investments are reduced by say 5 percentage points for one year, it will have less effect on investments that last more than a year than a "permanent" tax rate reduction of 5 percentage points. Just how great the difference is depends on how long the investment will last (the longer, the greater difference it makes).

However, because total after tax return still rises, it will still promote any investments that generates profits within a year.

Furthermore, the payroll tax reduction isn't about investments, at least not directly, it instead has a positive effect in the form of boosting labor supply, something that increases employment in part through a reduction in frictional unemployment and in part by lowering labor costs. Given the limited degree of wage rigidity that exists cutting the employer's share of the payroll tax cut would have been more effective, but

But don't businesses hire people based on long-term factors? Well, they often do, but there is no rational reason for them not take advantage of temporarily lower labor costs by hiring people temporarily given that America's flexible "hire and fire" laws makes it very easy and costless to fire employees.

Furthermore, it should be noted that no tax rate is really permanent (which is why I've put quotation marks around it except here) since they can, and very frequently have historically been change. While a "permanent" change is in the United States somewhat more difficult to change due to the fact that the two chambers of Congress and the President can usually block them if they want, that is as the historical record illustrates a difference of degree, not kind.

The real problem with temporary instead of "permanent" tax cuts isn't therefore so much that the short term effect is smaller. The real problem is that once the tax cuts expire, the positive effects will expire too, meaning that it will lower future growth, largely cancelling out the short term positive effect.

Wednesday, December 28, 2011

The Endowment Effect & Indifference

Per Bylund discusses how the endowment effect can be explained using praxeological insight that sellers value goods exchanged lower than the price while buyers value it higher than the price-an insight that is lost in neoclassical mathematical economics where it is assumed that prices reflect the point where buyers and sellers are indifferent to them. That is not the only possible explanation, but it is one and it is yet another example of how the excessive faith in mathematical methods reduces our understanding of economic reality.

Payroll Tax Cut Doesn't Alter Social Security's Status

Randall Holcombe argues that the payroll tax cut will alter Social Security's status:

"The Social Security program has been based on the premise that it works like a pension program. Workers pay in to the program when they are working, and then collect pension benefits when they retire. Retirees are entitled to those benefits because they paid for them through the payroll tax when they were working.

Despite the fact that the Social Security program is run like a Ponzi scheme, the entitlement aspect of the program is difficult to argue against. Workers have been told all their lives that in exchange for paying the payroll tax, they are entitled to retirement benefits.

The payroll tax cut severs that link. The payroll tax has been cut in half, and the difference is being made up from general revenues. Workers can no longer say they paid their taxes and are entitled to their benefits, because half of those taxes are now coming from general revenues, just like any other entitlement program."

However, Holcombe is wrong to argue that before the payroll tax cuts there was a strong link between the the taxes paid collectively and the benefits received.

Holcombe seems to think that Social Security works like the new Swedish pension system where there is a direct link between how great assets the government pension funds have and how high benefits the retirees receive, something that for example meant that following the 2008-09 economic slump, pensions benefits received by retirees were automatically reduced because the slump meant that the funds received lower revenues and because the value of the stocks they held fell.

By contrast, Social Security benefits (like benefits in the old Swedish pension system that was in place until 1994) have never been linked to how high payroll tax benefits the government have received, they have instead been linked to inflation. This means that when revenues have fallen due to recessions, it has always been compensated through "general revenue". Compensating a reduction in revenues due to lower tax rates is in principle no different from compensating a reduction in revenues due to a lower tax base. The alleged link between payments and benefits have never been more than an accounting illusion meant to deceive people about the program's true nature, a deception that Holcombe seems to have fallen for.

Monday, December 26, 2011

The Difference Between North Korea & South Korea Illustrated

Brad Plumer has this telling chart over how the economies of North Korea and South Korea has developed over the last few decades:
The main reason for this divergence is that North Korea is a planned economy while South Korea's is mostly market based, but the North's extreme trade isolationism/protectionism and it's extreme militarism (using more than 25% of its GDP on its military and with more than a fifth of men aged 17-54 in active military duty with the rest being considered reserve soldiers) have also contributed to this divergence.

The end result of this is not just that they're generally poor in North Korea, but also that millions have starved to death and much of the rest are malnourished (resulting in the fact that
they are on average 15 centimeters (6 inches) shorter than in South Korea) and the fact that they don't have any electricity much of the day or during nights, as can be seen in this classic photo:

Sunday, December 25, 2011

20 Years Since End Of Soviet Union

Today is not only Christmas Day, it is also the twentieth anniversary since the end of the Soviet Union and the lowering of the Soviet flag from the Kremlin. Because any transition is bound to be short-term disruptive for those whp are dependent on a certain system, and because the transition has been mishandeled because of corruption, incompetence and mob rule, it meant a lot of short term hardship for many people in the Soviet Union.

Even so, it was a good thing because it has in the long run meant more freedom. This is evident by the fact that the country that has pursued the most radical reforms, Estonia has performed best, while countries that like Belarus has reformed only very little are both poorer and less free.

Friday, December 23, 2011

Stupid Italian Limit On Cash Payments

The new for government to subsidize banking: limit Cash Payments:

"Italian banks, which charge businesses up to 2 percent for credit-card transactions, could end up being the main beneficiaries of the new rules, according to Rome-based consumer group Adusbef. “Unless banks cut fees on credit cards and current accounts, they’ll just make more money from the new law,” said Mauro Novelli, the general secretary of the organization, which represents banking and insurance customers."
Another problem with the new Italian €1,000 upper limit on cash payments is how it is supposed to reduce tax evasion. Yes, I know of course that the idea is that tax evasion will be more difficult if made through debit cards than cash, but as far as I know transactions where taxes were evaded were already illegal and already unreported, so why would making it illegal in a second way make people cease to make these unreported and illegal transactions? The only payments that would be affected is really cash payments above the €1,000 limit (and below the existing €2,500 limit) where they would have followed tax rules.

Given this, such rules will have very little or no effect while unnecessarily creating discomfort, eliminating privacy even for transactions where tax laws are followed and subsidize the banking system.

Statistical Notes Friday December 23

-Despite the seemingly good headline U.K. GDP number, the details were weaker as I pointed out yesterday. Meanwhile, though the government deficit fell somewhat in November, the current account deficit rose to a new all time high of £15.2 billion in the third quarter while real retail sales in November fell by 0.4% in November compared to October and by 0.7% compared to November 2010-

-Most indicators, including initial jobless claims, new home sales and durable goods orders indicates that the U.S. economy strengthened in the fourth quarter after being weaker than previously estimated in the third. However, real disposable income was stagnant in November, and remains below its June peak.

-Canada's monthly GDP was unchanged in October, after 4 consecutive monthly increases.

-Euro area construction spending fell in October by 1.4% compared to September and by
2.8% compared to October 2010.

-Greece's current account deficit fell by a third to €1.5 billion, but that is still too high and for the January-October period as a whole, the drop was more moderate, from €18.7 billion to €16.5 billion.

Similarly, Portugal's current account deficit fell from €1.2 billion in October 2010 to €350 million in October 2010, but for the whole January-October period it only fell from €13.7 billion to €10 billion.

-Unemployment in Taiwan rose slightly, but this was more than entirely the result of an increase in its labor force participation rate.

-Similarly, Hong Kong unemployment rose slightly but this was also more than entirely the result of faster growth in its labor force. Meanwhile, consumer price inflation fell slightly but was at 5.7% still very high.

Thursday, December 22, 2011

British Inflation 2.5%?

British growth was seemingly upwardly revised for the third quarter, to 0.6% from 0.5%. However, yearly growth was left unchanged at 0.5%. What's even more important, nominal growth was downwardly revised to only 3% for the year (from 3.3%). That means that for real growth to be 0.5%, inflation would have to be only 2.5%, even as the British consumer price index has increased at roughly 5%.

The price index for gross domestic purchases rose 3.1%, implying a 0.1% contraction. However, even 3.1% is significantly below the 5% consumer price index increase. In part, this is likely because the gross domestic purchase index is probably "chain-linked", that consistently yields lower results than the "fixed basket" approach of the CPI. In part, it could also reflect that the CPI includes the effects of the increase in the Value Added Tax, while the gross domestic purchases index excludes it.

Monday, December 19, 2011

North Korea As The Commie Nazi State

The death of North Korea's dictator Kim Jong-il and his replacement with his son Kim Jong-un, rattled Asian markets in general and South Korea's in particular. Something that one wouldn't think should happen considering that North Korea has virtually no trade or other economic interaction with any other Asian country except China-and even for China the importance of that is completely insignificant. The reason why markets were rattled is because they feared that Kim Jong-un might carry out some form of attack to demonstrate strength to the others in the North Korean leadership.

North Korea is one of the most bizarre nations in the world, way beyond fellow Communist dictatorship Cuba. Not only does it have a plan economy and Stalinist political repression, it also for example deliberately keep trade relationship to a minimum according to the principle of juche (self-reliance), is extremely militaristic (with 20% of men in the ages 17-54 in active military duty and most of the rest considered reserve soldiers and at least 25% of GDP going to the military) and has a bizarre personality cult revolving around the Kim clan, with Jong-il's father Kim Il-Sung ("the great leader") as "eternal President" even 17 years after his death and Kim Jong-Il ("the dear leader"), and presumably soon Kim Jong-un as well.

North Korea's regime is also the arguably most racist government in the world, not just against non-Asians but also even against non-Korean Asians.

So it combines a communist economic system, with a totalitarian form of government, personality cult around its leaders, extreme militarism and racism. That pretty much makes it a perfect example of a "commie nazi" state.

The term "commie nazi" was coined in the Simpsons where the character McBain while delivering UNICEF pennies for "puny children" was attacked by commie nazis whose symbol combined the swastika with the hammer and the sickle.

Some have argued that it is impossible to be "commie nazi", but that is clearly not true. There have been several movements that have tried to combine Communist ideology with National Socialist ideology, such as the left-wing faction of Hitler's party, the NSDAP, led by the Strasser brothers that criticized Hitler for allowing non-Jewish capitalists to retain formal control of corporations (and were bloodily purged by Hitler for that) or the National Bolshevist movement in Russia.

None of the aforementioned groups have ever risen to power, but it would seem that North Korea is in fact an example of an actual "commie nazi" state.

Friday, December 16, 2011

Lack Of Hyperinflation Doesn't Refute Austrian Monetary Theory

Paul Krugman attacks Ron Paul for his Austrian views of monetary issues in his latest column.

His main argument is that one advocate of Austrian economics, Peter Schiff, supposedly predicted hyperinflation 3 years ago, something that hasn't happened.

But Schiff's prediction error doesn't affect the validity of the Austrian view unless it could be shown that it was a necessary implication from the Austrian analysis. And it isn't.

That is because first of all, Austrian monetary analysis not only doesn't have to, but as far as I know haven't ever, said that increases in the monetary base directly create price inflation. It is only indirectly, to the extent it increases money supply, that it will have any effect. And while money supply has increased the last few years it has increased far less so than the monetary base.

And though some Austrians sometimes express themselves as if a higher money supply will necessarily raise prices that is not necessarily the case either if money demand increases. For example if money supply increased in the fictional Duckborg by $1 billion but went directly into Scrooge McDuck's money bin and he just kept it there then the effect on prices will be the same as if there had been no money supply increase, which is to say no effect. The same goes for money in the real world, even when it is many people that hold money and even if it is deposit money rather than physical cash.

And because of lower nominal interest rates as well as the European debt crisis, demand for dollars has increased, cancelling out much of the effect from the increase in money supply.

So no, the lack of hyperinflation doesn't in any way refute Austrian theory or vindicate Keynesian theory

The Problem With Krugman's Baby-Sitting Example

Peter Schiff has an excellent refutation of Paul Krugman's (in)famous baby sitter example that he has repeatedly used as an example of the supposed virtues of inflation:

Thursday, December 15, 2011

Another Interesting Economic Methodology Article

At the Mises Institute web page, a mostly excellent article by Hans- Hermann Hoppe about the contradictions in the positivist philosophy underlying the dominant paradigm in academic economics, has been published. Read it here.

His refutation of the logically inconsistent positivist/empiricist assertion that all knowledge is either "relations of ideas" that are necessarily unrelated to reality or "matters of facts" that are necessarily uncertain (to use David Hume's expressions) was particularly good. An excerpt:

"This is empiricism's central claim: Empirical knowledge must be verifiable or falsifiable by experience; and analytical knowledge, which is not so verifiable or falsifiable, thus cannot contain any empirical knowledge. If this is true, then it is fair to ask: What then is the status of this fundamental statement of empiricism? Evidently it must be either analytical or empirical.

Let us first assume it is analytical. According to the empiricist doctrine, however, an analytical proposition is nothing but scribbles on paper, hot air, entirely void of any meaningful content. It says nothing about anything real. And hence one would have to conclude that empiricism could not even say and mean what it seems to say and mean. Yet if, on the other hand, it says and means what we thought it did all along, then it does inform us about something real. As a matter of fact, it informs us about the fundamental structure of reality. It says that there is nothing in reality that can be known to be one way or another prior to future experiences which may confirm or disconfirm our hypothesis.

And if this meaningful proposition is taken to be analytical, that is, as a statement that does not allow any falsification and whose truth can be established by an analysis of its terms alone, one has no less than a glaring contradiction at hand. Empiricism itself would prove to be nothing but self-defeating nonsense.[5]

So perhaps we should choose the other available option and declare the fundamental empiricist distinction between empirical and analytical knowledge an empirical statement. But then the empiricist position would no longer carry any weight whatsoever. For if this were done, it would have to be admitted that the proposition — as an empirical one — might well be wrong and that one would be entitled to hear on the basis of what criterion one would have to decide whether or not it was. More decisively, as an empirical proposition, right or wrong, it could only state a historical fact, something like "all heretofore scrutinized propositions fall indeed into the two categories analytical and empirical." The statement would be entirely irrelevant for determining whether it would be possible to produce propositions that are true a priori and are still empirical ones. Indeed, if empiricism's central claim were declared an empirical proposition, empiricism would cease altogether to be an epistemology, a logic of science, and would be no more than a completely arbitrary verbal convention of calling certain arbitrary ways of dealing with certain statements certain arbitrary names. Empiricism would be a position void of any justification."

My main objection to the contents of the article is that I don't believe in Hoppe's (and Mises') Kantian philosophical defense of praxeological economics, because the correct justification comes from the Aristotelian/Objectivist philosophical paradigm. This article, that I have linked to before, provides arguments for the correct paradigm.

Tuesday, December 13, 2011

More On Friedman's "Positive Economics"

In October, I linked to an interesting article about the philosophy and methodology about economics that defended the Austrian view and attacked Milton Friedman's positivist view. It contained in short two key arguments:

1) Concepts are abstractions of certain aspect on groups of thing that omit other characteristics without denying them. For example an eye is an organ that detect light and convert it into electro-chemical impulses in neurons. Eyes function and look differently depending on which species and to a lesser extent even which individual they are on, but the concept of eye only contain the essential characteristic of detecting light and converting it into electro-chemical impulses in neurons. These other characteristics aren't included but not denied either. These other characteristics exist in some form but may come in any form.

The implication of this is that Friedman was wrong when he asserted in his essay "The Methodology of Positive Economics" that a completely realistic theory of markets would have to include for example the different eye- and haircolors of traders. His point with that is that since this according to him shows that economic theory has to be unrealistic, there's no harm in using false assumptions. But economic analysis is based on the economic concepts used that only include relevant characteristics of the markets, and the different eye- and haircolors of traders is usually not among them. That doesn't mean that the existence of different eye- and haircolors is denied, but it is omitted because it is usually completely irrelevant. Omitting facts irrelevant for the analysis isn't unrealistic, unlike the use of directly false assumptions, like for example "perfect competition".

2) Economic analysis isn't so much about how one action or event causes another later in time, but about how actions and events causes things to be different compared to a counter-factual scenario, The relevance of this distinction can be illustrated by looking at currency market movements. QE2 has no doubt caused the U.S. dollar to have a weaker exchange rate than it otherwise would have had, but other factors, primarily the European debt crisis have still caused it to rise in value against many currencies. An analysis that simply involved looking at how things change over time couldn't make that statement about the effects of QE2 because that's not how things have turned out, but a counterfactual analysis can still say that the dollar would have risen even more in value against these other currencies if it hadn't been for QE2.

Similarly, to use Friedman's example of the minimum wage, counterfactual analysis can establish that unless it is so low that it is below the marginal productivity of everyone who have a job or would have found a job, a minimum wage will increase unemployment, but in reality higher minimum wages might be followed by lower unemployment if there are other factors pushing it down.

The point with this is both that this makes it very difficult to really test theories and that counterfactual analysis of economic action makes it possible to establish economic laws depite the fact that humans have free will.

All of this is good, but after re-reading Friedman's essay (or more specifically the 34 out of 42 pages available on Google books), I noticed that Friedman used more arguments that should be adressed.

One, that could be used as an argument against point 1) above is that we can't know which aspects are relevant so the only way of knowing what is relevant is what theory of relevant aspects makes the best predictions. But while it is true that we by some means must investigate the specific characteristics of a certain situation to determine what the specific causal factors are, analysing the predictions of certain possible causal factors isn't necessarily the best way of getting to the truth because as mentioned above there are often different causal factors that work in opposite directions. Furthermore, this question isn't about the correctness of theories but about the applicability of theories. There is a big difference between a theory being incorrect, like the theory that lightning is created by the Norse god Thor, and a theory being inapplicable, like the correct theory of lightning is in places where lightning doesn't occur.

Another is that people and things often behave or move as if a false theory was true. He uses examples like how many objects drop at the speed it would have dropped in vacuum, and that leaves are positioned as if they deliberately tried to maximize the amount of sunlight it receives or that expert billiard players use mathematical formulas to determine how he should make his shots. We all know these explanations aren't true but our observations are still consistent with them. Friedman's point is therefore that it is only natural to use false assumptions in economics, such as the neoclassical mathematical models that says that businessman make their business decisions and household their purchase decisions using advanced mathematics since supposedly they are consistent with predictions about the behavior of business executives and housheholds.

But this conclusion doesn't follow even assuming for the sake of the argument that these models really make correct predictions (a very questionale assumption to say the least). The fact that some false theories make predictions that turn out to be correct, or at least appears to be correct, is the reason why many false theories in for example physics have been able to live on for so long. Most physical phenonenoms that we perceive are entirely consistent with Newtonian physics, even though we now know it is wrong in at least some aspects.

But the difference between physics and economics is that we already know what is correct whereas in physics all theories are ultimately derived from experiments. Thus, while it is correct in physics to base theories on which theory currently is most consistent with predictions from experiment, there is no need to assume false theories in economics just because they make predictions that turn out to be correct. Basing economic theories on predictions therefore brings us away from the truth, unlike in physics where they bring us closer to the truth. Friedman's argument is akin to saying that because crutches facilitates movement for people with wounded legs, people with good legs should also move using crutches even though it impairs movement for them.

Monday, December 12, 2011

Rumor Of Swedbank "Collapse"

Suddenly, an old post about Swedbank from 2008 that normally these days are read a few times a week (or not at all) got more than 1000 views in a day-the vast majority from people from Latvia. I was at first puzzled at the sudden massive interest in that more than 3 year old post, but then I read that a rumor has been spread in Latvia that Swedbank will collapse, and since the post was high on the list of several google searches, many have clicked on it, presumably because they wrongly thought that it was written recently and not in September 2008 (they really should start to learn to limit their search to web pages published in recent days).

The rumor itself is BTW of course completely unfounded. Swedbank is a very profitable bank as their latest report shows, and even their baltic division is profitable these days thanks to the strong economic recovery there. Nor is there in this case much of a liquidity problem despite the mass withdrawals since the Swedbank Baltic division can get as much liquidity it needs from its Swedish mother company-who in turn can get as much liquidity it needs from the Swedish central bank. However, the mass withdrawals have in some cases emptied Swedbank ATM:s in Latvia, though these should be filled again in a few days.

Saturday, December 10, 2011

Chinese Foreign Reserves Are Falling

I noted in October the irony of blaming the U.S. trade deficit on China's policy of a semi-fixed exchange rate considering that the yuan has in fact been far stronger than that of non-Japanese Asian countries with floating exchange rates and for that matter currencies of European countries with large surpluses like Switzerland, Norway and Sweden. I noted that if the yuan had had a floating exchange rate, it too would have likely have dropped.

Now Ryan Avent does the same, and provides us with this chart of how different emerging market currencies have performed against the U.S. dollar in a period when the yuan has appreciated in value somewhat against the U.S. dollar.
He also notes that the Chinese central bank have in fact intervened in the currency markets to prop up the value of the yuan and reduced its foreign exchange reserves.

This isn't proof that the yuan is valued higher than it would have been with a floating exchange rate, but Paul Krugman and many other pundits have asserted that increased foreign exchange reserves proves that the yuan is undervalued. By their logic, the yuan is actually overvalued now.

Friday, December 09, 2011

An Enviable Level Of Problem

In the English language Korean online newspaper Korea JongAng Daily, a writer called Kim Jong-so writes about rising discontent over high youth unemployment in South Korea. How high is it? 6.7%. While that is higher than the less than 3% unemployment rate for middle age and older workers in South Korea, it is lower than in all Western countries. By comparison, youth unemployment was 22% in the EU as a whole, with even the country with the lowest youth unemployment rate, Holland, having a youth unemployment rate of 8.2%. All Western countries, but Spain in particular, with its 48.9% youth unemployment rate wióuld just love to have the level of problem with youth unemployment that South Korea has.

Wednesday, December 07, 2011

Statistical Notes Wednesday December 7

-The UK non-manufacturing PMI rose to 52.1 in November from 51.3 in October. However, industrial production in October fell by 0.7% compared to September and by 1.7% compared to October 2010.

-U.S. manufacturing orders fell 0.4% in October. In contrast to its manufacturing counterpart, the ISM non-manufacturing index for November fell, but was at 52 still above the 50 threshold for expansion.

-Australia's current account deficit fell to $5.6 billion in the third quarter, less than 2% of GDP, while real net national disposable income (essentially terms of trade adjusted GDP) rose by 1.9% (7.8% at an annualized rate) in the third quarter compared to the second and by 6% compared to Q3 2010.

-German factory orders rebounded by 5.2% in October, but that was after three consecutive monthly declines and orders were still 3.4% below its June peak. However, they were still up by 5.6% compared to October 2010. Similarly, industrial production rose by 0.8% compared to September while stilling being 2.4% below its July peak and up by 4% compared to October 2010.

-Euro area services PMI fell to 47.5 in November, down from 47.8 in October.

-Consumer price inflation in Taiwan fell to 1.0% in November, from 1.2% in October.

-Employment in Israel rose as much as 4.1% in September compared to a year earlier, while average real wages rose a more moderate 0.6% compared to a year earlier.

Tuesday, December 06, 2011

Krugman Thinks The Euro Zone Is The Entire World

Paul Krugman rejects the notion that Southern European countries can emulate Germany's success because it supposedly rested on running large external surpluses, and since everyone can't run external surpluses that is impossible. While it is true that the current account balance is a zero sum game on a global scale, his analysis is wrong for other reasons.

First of all, Germany's increasing surpluses was not a cause of its relative success, instead the success is a partial explanation of the surpluses. Rational policies particularly with regard to the labor market helped make Germany more competitive, creating surpluses.

Note however that this doesn't mean that Southern Europe wouldn't benefit from reducing its reliance on foreign capital by reducing and preferably like Ireland and the Baltic states completely eliminate their current account deficit. In fact, given the external mistrust against them, that is absolutely essential. But that is different from the German situation.

Secondly, while it would be better for the people of Germany to use the products they produce domestically to a higher extent (in net terms) rather than to lend it to Southern Europeans, reducing the deficits of Southern Europe doesn't presuppose a reduction in the German surplus, or for that matter a reduction in the surplus of other euro area surplus countries like Holland and Finland. That is because trade and economic interaction happens with countries outside of the euro zone as well. Reducing or eliminating Southern European deficits can happen by reducing the surpluses of countries like for example Saudi Arabia, Singapore, China, Japan, Switzerland, Norway and Sweden (or by increasing for example the U.S., U.K. or Australian deficits).

Monday, December 05, 2011

Unemployment Rate Underestimates U.S. Employment Problem

Judging from the 8.6% headline unemployment rate number, the current employment situation isn't really that catastrophic. It's bad as it is significantly above the 4.4% rate we saw during the cyclical peak in 2007, but less so than in 1982 when the unemployment rate peaked at 10.8%.

Yet this number doesn't include many people who really should be considered unemployed because they would prefer to have a job, but have given up give up after having seen their job applications rejected countless times. As a result, the labor force participation rate has dropped from 66.4% in January 2007 to 64% in November this year. While it is possible that some of the drop in the participation rate is caused by an unprecedented surge in the will to voluntarily become homemakers, that is implausible beyond an unsignificant extent and there is no evidence whatsoever for believing it.

One way of estimating the true unemployment rate would then be to divide the employment rate with the January 2007 participation rate. The employment rate last month was 58.5% and 58.5/66.4 is 88.1%, meaning that the true unemployment rate is 11.9%. That's down from the July peak of 12.5%, but still higher than in 1982.

But didn't the participation rate drop during the 1981-82 recession? Actually no, in fact it increased marginally, from 63.7% in July 1981 to 64.1% in December 1982.
Some readers may note that the absolute level of the participation rate was roughly the same in 1982 as now and wrongly conclude that there was a lot of hidden unemployment then too. That would however be a wrong conclusion as it was far more common back then for people, usually women, to voluntarily choose to be homemakers. This is evident from the fact that while the female participation rate rose from 53.1% in December 1982 to 59.5% in November 2011, the male participation rate fell from 78.7% to 73.4% during the same period.

(The source for all these numbers can be found here)

Saturday, December 03, 2011

They Turned The Lead Republican Candidate Into A Newt

Hopefully it will get better here as well..:-)

Different Logic For Creditors & Debtors

I recently pointed out why inflation isn't as good for debtors as is commonly assumed. Only if and to the extent it raises nominal income more than it raises the nominal cost of non-debt payments will it really help debtors and improve their ability to repay the debt and meet the debt payments. In most cases it will, but not in all cases, and even in the cases it do the gain is much smaller than is commonly assumed.

By contrast, inflation is unequivocally bad for creditors whose investments lose value basically proportionate to inflation. Some readers may object that creditors are subject to the same possible negative effect of relative price changes as debtors, but while that is true in the sense that it is possible that some relative price changes caused by inflation could make some creditors gain from inflation in other contexts (for example if they apart from holding debt securities also own oil stocks) that is not relevant for the analysis of the effect on creditors in their role as creditors.

To the extent that higher inflation has raised the after-tax nominal interest rate they receive this is not applicable  but given that a loan with a fixed interest rate has already been made or given that the central bank prevents such an increase in nominal interest rates higher inflation is bad for creditors.

The case is different when it comes to the effect of higher real growth. Higher real growth is very positive for debtors because either their nominal income is increased more than their cost of living or their cost of living is reduced more than their nominal income. Either way, their debt burden is reduced as they have more money left for debt payments.

By contrast, higher real growth has no direct positive effect at all on creditors. To the extent it reduces defaults or (in the case of variable interest rates on loans they have made) persuades the central bank to allow real interest rates to increase it could however have an indirect positive effect. However those effects is only indirect and relatively small in the case of fixed interest rates.

Friday, December 02, 2011

Statistical Notes Friday December 2

-The U.K. manufacturing PMI fell to 47.4 from 47.6 the previous month.

-Jobless claims rose in the United States, but so did also the ISM manufacturing index and construction spending.

Employment rose by 278,000 according to the household survey and by 120,000 according to the payroll survey. However, average weekly (and hourly) earnings dropped by 0.1%.

-Employment in Canada fell by contrast by 19,000 in November compared to the previous month, raising the unemployment rate to 7.4%. However, employment was still up by 1.2% compared to November 2010.

-The Euro area manufacturing PMI fell to 46.4, in line with an earlier estimate.

-Industrial production in Estonia rose by 2.9% in October compared to the previous month and also by 2.4% compared to October 2010.

Real retail sales in Latvia fell by 2.9% in October compared to September but was still up by 4.9% compared to October 2010.