What Passes For "Bad Economic News" In Israel

Israel's left-wing opposition slams Netanyahu's government because growth according to preliminary estimates was "only" 3.3% in 2012. Even setting aside from the fact that it was more like 4% if you take into account the improvement in Israel's terms of trade, 3.3% is of course higher than in virtually all other advanced economies in 2012.

No, Court Doesn't Save French Socialists From Themselves

Apparently, a French court has struck down Socialist President Francois Hollande's new 75% tax rate on income above €1 million, something that some thinks means that there won't be punitive taxation of the richest in France. However, what the court actually objects to isn't the high tax rate, but that it will be applied to individuals, instead of households as has been the rule in France. By applying it to individuals while continuing to otherwise tax households, two households with the same total income could end up paying different rates depending on how incomes are divided among members of those households, something that the court finds violates the equal treatment rule in the French constitution.

This means that the Socialists are free to come up with a new tax proposal that applies a 75% tax on household income above €1 million, and the government has indeed already that it plans to quickly introduce a new proposal that doesn't violate the equal treatment rule.

It is a shame for France that the court in fact didn't strike down the punitive taxation, and only objected to some technical details in the enacted proposal. Even using unrealistic static analysis, where behavior isn't affected, the tax would have only brought in €210 million, a neglible sum (about 0.01% of GDP) in France's €2 trillion economy And considering how it has driven away hundreds of rich Frenchman, including famous actor Gerard Depardieu to Belgium and other countries, and created negative PR for the French business climate, the tax is in fact a lot more likely to lower tax revenue rather than increase it.

"Going Over The Cliff" Might Be A Good Thing

Veronique de Rugy makes the case for "going over the cliff". As she correctly points, that has its negative side in the form of higher marginal tax rates, something that is bad for growth, but nevertheless, it is long overdue for Americans to decide whether they want big government or not, instead of continuing the current policy of small government when it comes to taxation and big government when it comes to spending. In the long run, the current deficits that the combination of low taxes and high spending means is both unsound, harmful and unsustainable.

So ultimately, they 'll have to choose between either raising taxes (and that means higher taxes not just for the rich, but for the middle class as well) or cutting popular spending programmes or do a combination of these two. What the so-called "fiscal cliff" means is in fact doing that third option of both raising taxes and cutting spending to cut the current deficit of more than $1 trillion a year by half.

Not stopping it would therefore represent a great leap toward ending the current unsustainable and unsound build up of debt. The fact that the so-called debt ceiling (currently at $16.4 trillion, more than $2 trillion higher than 16 months ago) will be reached on the last day before "the cliff" could be viewed as a sign that the massive deficit reduction it means should be implemented, even though parts of it (the marginal tax rate increases) are bad for growth.

Japan's New Inflationary Strategy

Japan has during the latest decade lagged most countries in GDP growth and it has also had low but relatively persistent price deflation. This has by some been interpreted as evidence that even low levels of deflation is harmful to the economy.

However, if you adjust for population growth, Japanese growth has actually been in line with U.S. growth and somewhat higher than the average for Western Europe. And if you further adjust for the fact that Japan's population is aging much faster than elsewhere, growth has actually been higher. Total GDP may have grown slower, but GDP relative to its working age population has been growing somewhat faster than the average for rich countries.

As a result, unlike both the U.S. and Western Europe it has a higher employment to population (in the 15 to 64 year age span) than a decade ago, and a lower unemployment rate. This clearly indicates that the source of Japan's economic stagnation is demographic, not monetary.

This didn't stop Japanese voters from electing a new government that promised to create at least 2% in yearly inflation and has threatened to remove the Bank of Japan's formal independence unless it does a lot more to inflate. Since an "independence" that depends on it following orders isn't really independence, this means that the Bank of Japan's independence has in effect already been abolished.

One interesting aspect of this is that it shows that merely by creating expectations of more inflation, you can create it. During the latest month the yen has fallen by 4% against the U.S. dollar, by 5% against British pound and the South Korean won (I've included the won because South Korea is Japan's most important competitor in its export markets) and by more than 6% against the euro.
Compared to a year earlier, the declines are even more dramatic, falling by nearly 10% against the dollar, by more than 10% against the pound and the euro and by more than 15% against the won.

By raising import prices and raising nominal export revenues this will raise price inflation and nominal GDP.  However, real GDP won't be increased other than at best temporarily, because prices are likely to increase about the same as nominal GDP.

The Perils Of NGDP Targeting

At first glance, nominal GDP (referred to as NGDP henceforth) targeting, as proposed by Scott Sumner and other so-called "market monetarists" could be viewed as a big improvement compared to inflation (CPI) targeting.

Whereas CPI targeting central banks would respond to a positive supply chock that lowers consumer price inflation, such as the Internet-related productivity gains and Asian crisis related slump in commodity prices in the late 1990s by inflating more and thereby create an asset price bubble, like the "dot com bubble", a NGDP targeting central bank wouldn't as the decline in inflation would be offset by higher real GDP (RGDP).

During the period of 1991-95, inflation was on average 2.4%, a number that dropped to 1.7% during 1996-2000, creating the impression, given the CPI targeting paradigm that conditions became less inflationary. By contrast, NGDP growth increased from 5% to 6.1% during that period, indicating more inflation. It is thus clear that with NGDP targeting instead of CPI targeting, the "dot com bubble" might have been prevented or at least greatly contained.

However, the coming 5 year period, 2001 to 2005 (when the housing bubble was inflated), illustrates that the NGDP targeting paradigm can be problematic too. Whereas inflation increased from 1.7% back to the 2.4% level, NGDP growth fell to 4.9%. If you based your target on the conditions of the early 1990s, then the NGDP targeting central bank would have pursued basically the same catastrophic policies that Greenspan pursued then. So in that period, NGDP targeting would have been as bad or slightly worse than CPI targeting.

What's worse, NGDP targeting would under conditions of negative supply chocks pursue even more inflationary policies than CPI targeting. One example of this is Scott Sumner's insistence that the Bank of England should pursue an even more inflationary monetary policy, despite average annual inflation of 3.5% in Britain during the last 5 years. Pursuing such policies would further aggrevate the increasing imbalances in the British economy.

U.K. "Twin Deficits" Increases

In contrast to Ireland, the U.K. is seeing both its budget- and current account deficits increase. The budget deficit was £17.5 billion in November, up by £1.2 billion compared to November 2011. For the April-November period as a whole the deficit rose by £9.3 billion to £92.7 billion. Not much of the alleged "austerity" can be detected in the actual numbers, in other words...

Partly as a result of the higher budget deficit and partly because of the overvalued pound and negative real interest rates, the current account deficit rose from £8.7 billion in Q3 2011 to £12.8 billion. During the latest year, the deficit was £47.7 billion, or about 3.1% of GDP, up from £24.7 billion or 1.6% of GDP.

Irish Economy Starting To Recover

Ireland is often lumped together with the Southern European crisis countries. That was until recently justifiable since it too is a euro area country that has had a very weak economy and received a bailout due to soaring yields on its government bonds.

Yet Ireland has the recent year come to diverge in a positive way from Portugal, Spain, Italy and Greexe. Its borrowing costs have dropped dramatically so that they now potentially could return to the bond market. True, yields have dropped dramatically in Greece, Portugal and Italy too, but in Greece and Portugal they are still at punitive levels and Italy never saw yields rise high enough to force them to leave the bond market. 

And though current account deficits in Southern Europe has dropped dramatically in the latest year, particularly in Greece and Portugal, they still have external deficits. By contrast, Ireland now has a large and rapidly rising current account surplus, €6.9 billion, or more than 5% of GNP, up from a surplus of just about €1.5 billion a year earlier and a deficit of more than €10 billion at the height of its housing bubble in 2007.

Though domestic demand is still falling somewhat, the increase in its external surplus was big enough for GNP to increase 3.7%. Contrast this with the significant declines in economic activity in Southern Europe in general and Greece in particular. It is also in fact stronger than in all non-Baltic EU countries.

The recovery in the labor market has so far been a lot weaker than the recovery in GNP, but unemployment has in fact in recent months declined, from 15% in February to 14.6% in November. Contrast this with the increases in the unemployment rates in Souther Europe by several percentage points.

 As with the Baltic states, the Irish certainly shouldn't feel content with their current economic state of affairs. 14.6% is of course still an unacceptably high unemployment rate, and because GNP fell by 9.7% between 2007 and 2011, it is still 6.3% lower than 5 years ago. But things have at least finally started to improve, unlike in Southern Europe.

Greece & Latvia

Today Eusostat published trade statistics, which showed that the monthly euro area trade balance in October continued to strengthen about €10 billion compared to a year earlier.

Perhaps more interesting than that was that the fastest goods export growth in the January-September period was recorded in Latvia (+14%) and Greece (´12%). Latvia and Greece are opposites when it comes to GDP growth, Latvia having the highest at more than 5% while Greece had the biggest decline in GDP of nearly 7%. There are two reasons why strong growth in the export of goods have lifted Latvia but not Greece.

One is that Greece had very little goods exports to begin with, being the equivalent of only about 10% of GDP last year, while Latvia's goods exports was nearly 40% of GDP, meaning that the Greek 12% gain only represents a boost of 1.2% of GDP while the Latvian 14% gain reprresented a boost that was the equivalent of about 5.5% of GDP.

Partly as a result of this domestic demand has fallen sharply in Greece, more than offsetting the gain in exports while the big increase in export revenues have helped boost domestic demand as well in Latvia. Greece have of course long been notoriously bad at exporting goods, relying instead on tourism revenues and loans from foreigners to finance their imports. Now that the second source of financing is drying up as foreigners understandably don't want to lend to the Greeks any more, Greeks have been forced to reduce their imports, which is why Greece at the same time as they had the second biggest increase in exports also had the by far biggest drop in imports, falling by 13% compared to a year earlier. As its imports were far bigger than its exports, this played a much bigger role in reducing the Greek deficit in goods. Altogether, the deficit declined by the a sum equal to roughly 4% of GDP, the equivalent of a decline in the U.S. trade deficit by more than $600 billion.

John Kerry As New U.S. Secretary Of State

Massachusetts Senator and former Democratic Presidential candidate John Kerry will likely be the new U.S. Secretary of State now that Hillary Clinton resigns. I guess this means that in the coming 4 years, the U.S. will vote for various things in the U.N. before they vote against them... The appointment is somewhat risky for Obama from a political perspective though, since this means that there will be a new election for the seat as Senator for Massachusetts, where Republican Scott Brown, who recently lost against Elizabeth Warren in the race for the other Massachusetts Senate seat, could win if the Democrats nominate a weak candidate.

Taxing Rich Liberals

Ann Coulter has some ideas on tax increases for wealthy people that would be less unacceptable to conservatives and libertarians than general income tax rate increases.

One is to abolish the deduction for state and local taxes. That would hit high income earners in the states where most rich liberals live, like California, New York and New Jersey

A tax that would be even more accurate in hitting rich liberals would be an excise tax on the entertainment industry. The big Hollywood stars are all really rich, often earning tens of millions of dollars per year, and with only a few rare exceptions, like Clint Eastwood, Arnold Schwarzenegger and Bruce Willis (and as my three examples illustrate, most of these exceptions are aging "has-beens" who aren't likely to do many more movies anyway) they are all liberals who advocate higher taxes. So why not let them pay higher taxes with an excise tax on the entertainment industry?

It's not like it would be unprecedented with excise taxes on specific industries as such already exist for alcohol, tobacco, gasoline and (because of Obamacare) tanning salons. And since the people in the entertainment industry supports politicians who says America needs higher taxes on rich people and since this would accomplish this, why shouldn't this be done?

Are Republicans Hypocritical About Cliff?

Paul Krugman asserts that the Heritage foundation and Chicago school economists and other Republicans who want to avoid the "fiscal cliff" are hypocritical because they argued that the Obama stimulus wouldn't have any effect because the increased government borrowing would crowd out private investment. If that was the case, Krugman reasons, then shouldn't decreased borrowing crowd in investment?

If Heritage and the others had used Keynesian arguments against the cliff, then Krugman would have a point, but they usually don't (except when it comes to military spending where many Republicans indeed use Keynesian arguments in a hypocritical way ). Instead, their main problem with the cliff consists in that it would mean an increase in marginal tax rates that is particularly dramatic when it comes to dividends, but also capital gains and compensation of workers. By contrast, Obama's so-called stimulus didn't lower marginal tax rates.

Krugman can argue that the concern about the incentive effects of higher marginal tax rates is exaggerated, but it is obvious that it is not hypocritical.

Family Guy Summarized In 85 Seconds

This clip is one of the best introduction to Family Guy as you could get. It contains at least five of its main themes:



-Peter Griffins tendency to do crazy shenanigans (in the sense of mischiefs/pranks) that end up hurting him and/or his family and/or his friends, and his wife Lois's sometimes successful, but usually failed attempts of preventing him from doing them.
-Glenn Quagmire's sexual perversion ("You're not the same giraffe from last night") as it is his house that the giraffe sticks its head in at 0:50.
-The pedophilia of Herbert the pervert, the old man at 0:34.
-And at the end, one of the many examples of the Cleveland Brown bathtub gag.
-Though this point isn't explained in the clip, the sending away of all the cops in the city by Mayor Adam West, was an another example of an important theme, namely Mayor West's excentric nature as the reason for sending the cops away was to rescue a fictional character in South America...

Yes, It Matters Who Receives Newly Created Money

In several posts Scott Sumner has taken the somewhat odd position that who receives newly created money is irrelevant for the distributional effects of money creation.

His argument essentially boils down to asserting that when the central bank purchases bonds the recipient switches bonds for money and is no richer because of that because his holdings of bonds is reduced by the same amount as his holdings of money is increased. This argument is wrong headed for two reasons. First of all, when the central bank purchases bonds bond prices will of course go up, increasing their net wealth.

Furthermore, because lower bond yields will all other things being equal raise other asset prices, including stock prices, it will also increase the wealth of those who hold such asset while reducing the purchasing power of those who don't have such assets

Secondly, the key thing isn't what happens when the monetary base is first expanded, the key thing is what happens when money supply in the fractional reserve banking system expands,

When credit is expanded, perhaps because of central bank policy, the people getting the loans will use the money somehow (considering how you have to pay interest, you don't get a loan just for fun), maybe to buy Internet stocks like in the late 1990s, or maybe to buy houses as in 2001-06. It should be obvious that this increases the wealth of those who currently hold such assets.

And yes, it matters which kind of assets are bought by the people receiving these loans, or if they simply use them for consumption. In the 1990s stock prices rose faster than in 2001-06 because the borrowers bought stocks to a higher extent, while in 2001-06  house prices rose faster than in the 1990s. By contrast in the 1970s when the new money was used for consumption, it resulted in higher consumer price inflation. Exactly how the the structure of those price changes will be depends on which individuals get more the newly created money and how they decide to use those money.

Coins In The Euro Area

Regarding my post about the low denomimations of coins and notes in the U.S. compared to Sweden, one reader pointed out to me that the Euro area has gone even further than Sweden in adjusting the value of its highest valued coin, which is €2, the equivalent of roughly SEK17, 1.7 times higher than the highest valed Swedish coin, the 10 kronor coin. Similarly, the lowest valued note is €5, the equivalent of roughly SEK43, 2.15 times higher than the lowest valued Swedish note, the 20 kronor note.

On the other hand, even as it has gone even further than Sweden in adjusting the lowest valued note, the Euro area is similar to the U.S., in maintaing 1 cent coins, and the 1 cent euro coins is only about 1.3 times higher valued than the U.S. one cent coin.

With a ratio of 200:1 between the value of the highest and lowest valued coins, the Euro area has a far bigger range in the value of its coins than both the U.S. (25:1) and Sweden (10:1).

Southern European CA Balance Update

Here is an update to the current account balance developments in Southern Europe, now for the January-September period (balances for January-September 2011 in parenthesis):

Spain: -€16.5 billion (-€30.3 billion)
Italy: -€15.6 billion (-€43.1 billion)
Portugal: -€2.1 nillion (-€9.2 billion)
Greece: -€3.5 billion (-14.8 billion)

Compared to the previous update, Greece and Spain made the biggest improvements while Portugal's rate of improvement slowed somewhat.

In absolute terms, Italy made the by far biggest improvement, €27.5 billion, but that reflects that Italy is the by far biggest economy, roughly 1.5 times bigger than Spain, roughly 8 times bigger than Greece and roughly 10 times bigger than Portugal. Relative to GDP, particularly Greece but also Portugal made much bigger improvements than Italy and Spain. Here are the improvements relative to GDP:

Spain: 1.7 percentage points
Italy: 2.3 percentage points
Portugal: 5.9 percentage points
Greece: 7.5 percentage points

The large improvement in the case of Greece is particularly in recent month to a high extent due to lower interest payments to non-Greeks following the writedown of privately held bonds and a lower interest rate on bonds owned by other government

European Crisis Yields Down Significantly-Except In Spain

Here is how the 10-year yields of the worst hit countries in the euro area has fared this year:

Spain: + 0.24 %:points
Italy:   -2.54 %:points
Ireland: -3.90 %:points
Portugal: -5.33 %:points
Greece: -18.83 %:points

Because there was a write down on the existing bonds earlier this year, it is partly misleading to compare the old bonds to the new. Furthermore, as the next table shows, even with the write down, Greek yields are still the by far highest:

Greece: 15.84%
Portugal: 7.44%
Spain:  5.28%
Italy:    4.49%
Ireland: 4.36%

Investors clearly expect even more write downs in the case of Greece, and as a result, it still faces yields that represents an effective cut off from bond markets. Portugal is partly similar to Greece in the sense that it has had a bigger drop in yields than others but still face unbearably high borrowing costs. Spain still has borrowing costs that are below the 6-7% range that is considered the threshold for unacceptably high levels, and they are down from the peaks earlier this year of above 7%, but it is the only country whose yields are above the level 11 months ago.

Italy has yields that can both be viewed as bearable and significantly lower than in the beginning of the year, and Ireland has done even better.