British vs Spanish Recessions

As expected, Spain reported that it like Britain had slipped into a double dip recession.

There is one striking difference between the British and Spanish recession. Whereas Britain has had a drop in real wages by nearly 2.5% but has had stable employment, Spain has had stable real wages but a drop in employment by nearly 4%.

Note that in both cases, real aggregate labor earnings, which is a function of employment and average real weekly/monthly earnings, have declined more than GDP. In Britain GDP was unchanged compared to a year earlier while real aggregate labor earnings fell by nearly 2.5% while in Spain GDP fell by 0.4% while real aggregate labor earnings. There are 3 possible explanations for this:

1) GDP weakness is underestimated.
2) Labor market weakness is overestimated.
3) Corporate profits and other non-labor income is booming

There is no information available about 3) for the first quarter, but during
Q4 2011 corporate profits was indeed rising in Spain so it is likely a partial explanation there during , but in Britain profits actually fell meaning that this factor just makes the discrepancy even larger.

 Particularly in Britain but also in Spain one factor is that the GDP deflator rose a lot less than the harmonized consumer price indexes. If you believe the GDP deflator is more accurate then that leads us to 2), but if you believe the CPI is more accurate then that leads us to 1). I personally more in the latter explanation for both.

In Britain it is also a factor that nominal labor earnings rose during Q4 2011 more than the labor statistics have reported, which is puzzling since in most countries data over labor earnings in the national accounts are based on the labor market reports. It would be interesting to know just what other data source the producers of the national accounts use.

I Don't Know Why I Started To Think Of Obama

I just saw an old recording of the Family Guy episode "Stu and Stewie's excellent adventure" where it is told that in the future there would be a President Douchebag who would in his re-election bid defeat challenger Senator Daterape, whereupon he exclaimed

The people of America has spoken and they're saying they want four more years of Douchebag

For some reason that made me think of Obama and his re-election campaign. I have however difficulty associating Romney with "Senator Daterape". Except for the fact that he was Governor, not Senator, that more brings to mind the former Democratic President.

QE Disables Firms From Investing

It is often stated that an objective with so called quantitative easing is to induce firms to invest more. But as is reported here, quantitative easing in Britain have, by lowering interest rates of bonds held by private companies' pension funds created a big shortfall in those funds, compelling firms to divert money from investments to filling the shortfall in those funds.

Some advocates of inflationist policies view harming creditors as something positive, yet creditors are to a large extent pension funds for ordinary workers, meaning that either money must be diverted from investments to compensate for the damage or worker's pensions must fall. In Britain's case we are seeing both, the first to the extent nominal interest rates have been surpressed, the latter to the extent inflation reduces the real value of the pensions workers have a right to.

British Policy Has Been Keynesian, Not Anti-Keynesian

The spin by Paul Krugman and other Keynesians on the British double dip recession is, not surprisingly, that we should blame it on the most recent modest spending restraints from the British government. But that ignores the facts laid out by the Guardian's economics editor:

" Since the recession began, the Treasury has borrowed £500bn, the pound has depreciated by 20%, interest rates have been pegged at 0.5% for more than three years, and the Bank of England has plonked £325bn of newly created money into the banking system. The result has been the weakest recovery of the past 100 years"

Given that British GDP is only about £1,500 billion per year, these numbers make Britain  one of the most radical countries in terms of both government borrowing (aka "stimulus") and central bank "quantitative easing"

Yes, Britain Really Is In A Double Dip Recession

Just as I expected, today's preliminary GDP number from Britain showed that it has entered a double dip recession as GDP has fallen two quarters in a row, by 0.2% in Q1 2012 following a 0.3% drop in Q4 2011. Compared to a year earlier, real GDP was unchanged and compared to 4 years earlier, it is down by 4.3% If you take population growth into account, the numbers are even weaker.

Some have questioned the accuracy of the data, claiming that employment data and various "surveys" give a brighter picture. Starting with the employment data, it is true that they show an increase in the number of employed, but they also show a big drop in real wages, with average weekly earnings increasing only 1.1% from a year earlier, which given the 3.5% inflation rate implies a drop of 2.4% in real terms. Aggregate real labor income is thus in fact falling even more than GDP, so these data do not paint a brighter picture of the U.K. economy.

As for the surveys, it is true that they generally give a stronger picture, but since they are only just surveys of a small number of people, one should view them with even greater suspicion than other data.

One form of really hard data that is almost certain (assuming the government don't deliberately distort like they did in Greece), tax revenue, confirms that there is a recession, as tax revenues only rose in nominal terms by 1.3%, a real decline of more than 2% despite the fact that the first quarter was 1 day (February 29) longer this year compared to last year.

It is possible that to a small extent this weakness was the result of falling inequality (in a progressive tax system, tax revenues increase/decrease more than GDP if inequality increases/decreases), but since all revenue sources increased less than inflation for the quarter as a whole, that is at most only a minor factor.

British Government Debt Surpassed £1 Trillion 2 Years Ago

The Telegraph reports that British government debt rose above £1 trillion for the first time. And that is indeed what the latest government report says.

Actually, though, British government debt rose above £1 trillion  2 years ago, and was as Eurostat reported yesterday £1,293 billion in the beginning of the year (now likely well above £1.3 trillion).

The reason why the numbers differ is that the British government's official releases relies on "net" debt while Eurostat publishes gross debt. It might seem better to look at net debt, but that overlooks that the intragovernmental holding of debt and other financial assets are mostly part of pension funds and similar funds that have commitments to pay for example pensions to retirees in the future. Which is to say, these assets are in fact associated with debts to for example future retirees, making it misleading to exclude them from government debt.

Of Course Inflation Reduces Real Wages

Dean Baker denies the obvious negative link between inflation and real wages pn both theoretical and empirical grounds.

Starting with the theoretical case. Baker asserts that "most wages follow in step with inflation" though he concedes that some don't. Actually very few do, at least in the short term. Few if any, can go to their employer and get a raise on the ground that the gasoline and food they buy have become more expensive. It just doesn't work that way.

It is true that if in the medium- to long term inflation raises the nominal value added created by each worker then this will push up wages, but that doesn't always happen and even when it does there is generally a time lag between when workers face higher cost of living and when their pay gets increased.

Baker then correct asserts that creditors lose from higher inflation but then goes on to incorrectly conclude that this means that most workers in their role as debtors must win, something that isn't entirely accurate for reasons I explained here. The big winners from inflation instead tend to be the mostly very wealthy stock holders who benefit as inflation both raises corporate profits relative to wages and raises valuations.

As for the empirical case, Baker produces a chart which he claims disproves the link. Anyone who can see a link must have better eyesight than him, he writes, a comment obviously meant to be sarcastic.

And it is indeed a bit difficult to see anything, but that is Baker's fault for creating such a small chart for such a long period of time.But if you look closely, you can in fact see that usually (but not always of course as there are other factors involved) when inflation , represented by the the red line, increases significantly, real compensation of labor falls significantly and vice versa, the two great increases in inflation in the the mid-1970s and in 1979-80 being the clearest examples of this, but far from the only ones. For example in early to mid 2008 when inflation increased sharply, we saw a significant drop in real labor compensation followed by a dramatic increase in real hourly compensation in the second half of 2008 when there was a temporary period of price deflation. And when recently QE2 raised inflation from about 1% to about 3.5% we saw a shift from rising to falling real hourly labor compensation.

So the empirical record does in fact confirm that particularly in the short term, inflation has a negative effect on real wages.

Demography Won't Slow Down China Anytime Soon

The Economist has an article which argues that China deep future problems in its economy and society because of its low birth rate. That may perhaps indeed become true by 2050 or 2060 or so, but in the coming two or three decades, shortage of workers will certainly not prevent it from becoming the world's biggest economy.

First of all, I'm not sure whether The Economist has the fertility rates right. I can't find any official numbers from China, but in the United States it is more like 1.93 (in the link it is stated as 64.4 per 1000 woman in ages 15 to 44, so to get 1.93 you multiply 64.4 by 30 and then divide it by 1000) children per woman in reproductive age according to the latest official statistics, than the 2.08 The Economist claims it is

More importantly, the absolute number of births was still 16.04 million in China, slightly more than four times the 3.98 million in the United States. This means that the number of native born 25-year olds in China will be slightly more than 4 times more compared to the United States in 2036. The difference in the total number of 20-year olds in 2031will probably be somewhat smaller because the U.S. is likely to have some net immigration while China probably won't , but China will still have a nearly 4 times bigger working age population as late as 2036.

About The French Presidential Election

France, the world's fifth biggest economy (after the United States, China, Japan and Germany) is having the first round in its presidential election this weekend.

 I am not familiar with all the presidential candidates from smaller parties, so there might be someone among them that is worth rooting for or actively supporting and voting for if you live in France, but even if there is someone good there they unfortunately have almost no chance of getting to the second round.

Of those with any chance of making it to the second round, they all stink, to be blunt. We have a far-left trotskyite by the name of Jean-Luc Mélenchon who advocates a 100% tax on incomes above €360,000 per year (among other loony extreme left-wing policies), we have the semi-fascist Marine Le Pen, we have the socialist Francois Hollande who rejects spending cuts and advocates increases in France's already high marginal tax rates and then there's the incumbent Nicholas Sarkozy who has joined in on his rival's calls for increased protectionism, higher taxes and more regulation.

Of these, Sarkozy is clearly the lesser evil, since he is more moderate than the others in his calls for higher taxes and more regulation and since he has actually implemented (and is more likely to favor more) some badly needed spending cuts.

Some free market advocates still argue that we should root for Hollande because both candidates stink, and it is better that the openly socialist candidate win because then the terrible results will be associated with socialism.

The problem with that view is that first of all, given the fragile state of the European economy, a 5 year meltdown in the continent's second biggest economy is the last thing we need. And there is certainly no guarantee that the general consensus in France will be that Hollande's failure was because he was too socialist. It is in fact even more likely that the conclusion will be that the even more consistent socialist Mélenchon should have been elected or that Le Pen should have been elected.

And then there's the fact that Hollande was just endorsed by Paul Krugman....

Unlimited Inflation To End Depressions & Recessions?

Ironically, though the paper money standard that replaced the gold standard was originally meant to empower governments, it now seems that paper money is perceived as an obstacle to unlimited government power for three reasons:

1) When people make cash payments, their purchases aren't tracked, giving them privacy from government surveillance

2) If payments are made in cash, it will enable them to make payments without paying taxes.

3) The existence of physical cash makes it impossible to lower nominal interest rates below zero because if they are below zero then people will withdraw their money from banks.

So, while paper money isn't as big impediment to government power as the gold standard was, it is nevertheless an impediment compared to a society with only electronic money. '

Because of this, the more ardent statists favor the abolition of paper money and a monetary system with only electronic money and electronic payments. The latest statist to advocate the abolition of paper money is leftist Salon-writer Matthew Yglesias.

What bothers Yglesias isn't however so much points 1) and 2), but 3). Yglesias entitles his article "How eliminating paper money could end recessions" and argues that if only interest rates could be lowered sufficiently below zero, people would want to stop holding money and buy more, ending any and all recessions according to Yglesias.

It is certainly true that if money loses value, people will be more inclined to make purchases rather than hold on to money. But that needn't increase production, it is more likely to simply raise prices. Indeed, by lowering the incentive for earning money it is more likely to lower production.

After all, what matters for the demand to hold money isn't just nominal interest rates on money but also expected inflation, or in other words what matters is real interest rates. And we've had societies where real interest rates have been extremely negative, impoverishing anyone who holds on to money for too long. The most extreme and (in)famous examples of this was Zimbabwe in 2009 and Germany in 1923. Last time I checked, Zimbabwe in 2009 and Germany in 1923 wasn't examples of booming economies "despite" the fact that real interest rates in those countries were close to -100% (the lowest possible level)

The Permanent Temporary

After falling for several months, the yearly consumer price inflaion in Britain rate increased again in March , from 3.4% to 3.5%..

So-called analysts however assure us that this is just "temporary".Bank of England Governor Mervyn King said in February last year after several years of inflation at 3% or more similarly that the high inflation then was just "temporary", and in February 2010 he similarly assured us that high inflation then just reflected "short-run factors".

English may only be my second language, but I am quite certain that "temporary" and "short-run" means in English that something will only last for a short period of time. Yet here we have Mervyn King and other Keynesians telling us year after year that high British inflation will only be "temporary".

The failure of British inflation to fall despite the fact that growth is stagnant or slightly negative is of course something that contradicts the Keynesian dogma that a weak economy must mean that inflation will be low (and that high inflation must create an economic boom). It is probably because the Keynesians refuse to believe that their theories true that they year after year embarrass themselves by calling something that has persisted for years and shows no sign of disappearing "temporary".

Good Cartoon

This isn't just applicable to the energy sector, but to the economy in general.

HT: Mark Perry

The Spectator On Sweden

The Spectator (the British one) has an interesting article on Sweden's relative economic success in the last few year. It can be complimented with the following charts published by Sweden's governing Moderate Party. The first one depicts average annual GDP growth in the latest 5 years in Sweden compared to selected other countries and groups of countries, the second depicts average annual employment growth in the latest 5 years compared to the same countries and groups of countries. Sverige is of course the Swedish word for Sweden and Tyskland is the Swedish word for Germany.

The charts are partially misleading because they don't adjust for population growth, but taking that into account wouldn't change much except that Germany would go from somewhat weaker than Sweden to somewhat stronger. But since Germany has pursued similar policies as Sweden, that only reinforces the conclusion that such policies have positive effects.

Illustration Of Depressed U.S. Job Market

For once, there was actually a useful, as long as you ignore his incorrect Keynesian conclusions from the facts he presents, blog post by Paul Krugman as it provided this chart of the employment rate of "prime age" Americans:

This number is useful as it avoids the dangers of both the unemployment rate (that ignores the "hidden" unemployed that wants to have a job but have quit looking for jobs because they believe they have no chance of getting one) and the overall employment rate (that can distort because of demographic shifts between age groups). The chart of course confirms the point I made a few days ago about how the recent uptick in job growth is far from sufficient to compensate for the effects of the slump.

Price Inflation, Recoveries & Iceland

Recently, a number of Keynesians, including of course Paul Krugman, have argued that the key to a quick economic recovery is higher price inflation. Just how high they want it go depends on which one you ask but Krugman for example argued that sustained inflation at 3-4% would "almost surely help the economy".

Now, it should be conceded that higher monetary inflation can stimulate short-term economic growth to the extent the new money enters the economy according to the scenario described by the Austrian business cycle theory. The recent slight acceleration of growth in the United States does reflect this. But this will only pave the way for future problems, as Greenspan's "successful" attempt to revive the economy after the "dot com bubble" by creating a housing bubble illustrated.

Moreover, if inflation happens in other ways it will not revive real economic growth. It will boost nominal growth but the higher price inflation will mean that real economic growth won't increase. An example of this is Britain, who have had sustained inflation of 3-4% (though VAT changes have sometimes pushed it below or above that range, but the average has been about 3.5%) for the latest 5 years, yet have seen unemployment rise and real average pay for people with jobs drop by a total of 10%.

But perhaps Krugman was too timid in his recommendation for inflation of 3-4%. How about 9.2%? That is in fact what they've had in Iceland on average between 2008 and 2011. If higher inflation was a miracle cure, then surely 9.2% would be good enough.

Yet though Iceland's economy recovered slightly in 2011, by 1.5% adjusted for terms of trade changes, it remained a full 9.7% below its 2008 level. And that's assuming an average inflation rate of "only" 6.7% (for some reason the domestic demand and private consumption deflators in the GDP numbers have increased significantly less than the harmonized consumer price index for Iceland).

Some point to how Iceland still has relatively low (7%) unemployment but that overlooks first of all that Iceland had extraordinarily low (just 2%) unemployment before the crisis, and secondly that "hidden" unemployment has increased strongly as there has been a big drop in the participation rate and thirdly that there has been a 9% drop in real wages for people who still have jobs

U.S. Job Market Far From Healed

In case you're wondering why I haven't blogged during the latest week, it's not that I'm dead, nor is it that I've decided to quit blogging, instead it is that my internet service provider Telia have messed up big time, making me unable to access the Internet. But now I'm back after having bought Internet access from another internet service provider. Hopefully, they won't also screw up.

Luckily, I don't seem to have missed a lot of major events during that, but a few things did happen, including the U.S. jobs report that was released on Friday despite the fact that it was "Good Friday" and most markets were closed.

The report indicated an apparent weakening in job growth in March, but that probably mostly reflected a reversal of the weather effect that arificially boosted job growth in January and February.

But while employment is clearly in an upward trend, it will be a long time before conditions have recovered to the level when Obama was inaugurated, in January 2009, as a writer on CNN Money asserts will happen soon.

Though it is true that the absolute number of employees is close to the January 2009 level, this overlooks that population has increased during these 3 years and 2 months. The employment to population ratio was in March 2012 58.5%, versus 60.6% in January 2009. While some of that decline can be attributed to more "baby boomers" retiring, most of it reflect an increase in unemployment, both open and "hidden".

Sprechen Sie Deutsch? Well, The Unemployed Of Europe Should Arguably

I am fluent in two languages: namely English as readers may have concluded from the fact that I am able to blog in English here, and Swedish, which is my native language, as readers may have concluded from the fact that I'm from Sweden (and blog in Swedish here). Due to the similiarities of Norwegian and Danish to Swedish, I understand these languages mostly, but that is only due to the fact that the languages are so similar, I haven't made any effort to study them.

Setting aside my "coincidential" understanding of Norwegian and Danish, the third language that I have some understanding of is German. I studied it in Sweden's equivalent of high school, and though I've forgotten some of what I learned (It was a lot of years since I was in high school), I remember most of it, and have recently upgraded my vocabulary by watching on youtube German language versions of movies I've watched. Still, I am far from being fluent in German , so for the time being I can only say that Ich kann deutsch sprechen und verstehen, aber nur ein bisschen.

Anyway, the reason I brought up this subject is that I've noticed an interesting pattern in the latest unemployment statistics: two out of the four countries in the EU with the lowest unemployment rates, namely Austria and Germany have German as the only official language and in one of the remaining, Luxembourg, it is one of the three co-existing official languages (along with French and Luxembourgish, the latter being basically a local version of German).

Add to that two German speaking countries outside of the EU, Switzerland and Liechtenstein, have even lower unemployment rates than Austria, Germany and Luxembourg, and it seems that at least for the time being the unemployed of Europe should try to learn German and apply for jobs in German speaking countries.