Tuesday, January 31, 2012

Ukrainians Are Indeed Poor

A few days ago, I reported about two forms of protests that in different ways were somewhat odd, one of which involved young Ukrainian women protesting their alleged poverty (and blaming it on the decision makers meeting in Davos) topless.

While one can have doubts about whether these particular women were really poor given the fact that they could afford to travel to Switzerland, it seems clear that most Ukrainians are indeed poor, judging by the preliminary 2011 GDP report from Ukraine. According to it, GDP in Ukraine was just 1,314 billion hryvniah. Given the fact that a hryvniah currently is only worth only 12.36 U.S. cents, that means that in U.S. dollar terms GDP was only about $162 billion.

And with Ukraine having on average 45.7 million people in 2011
this means that per capita GDP is only $3,545 per year.

This means that yearly per capita income in Ukraine is actually lower than monthly income in most countries in Western Europe and North America as well as some in Oceania, East Asia and the Middle East (the Arab Gulf).

While this is partly compensated by the fact that the cost of living due to the Penn effect is lower in Ukraine, the fact remains that most Ukrainians are very poor compared to Switzerland and other countries in the above mentioned regions.

Why is Ukraine so poor then? One of the topless female Ukrainian protestors claimed that it was "because of you" (clearly refering to the people attending the Davos meeting), but in reality it is instead in part because of Ukraine's communist part, and in part because of the incompetent and corrupt way that the transition from communism has been handled by government officials in Ukraine.

Why (Some Parts Of) Europe Underperforms

Interesting Wall Street Journal editorial which discusses why European growth has been weak for so long-namely demographics and excessive government spending. The article mentions Germany and Sweden as two countries that are "better run", which is basically true, but the point that could have been added was that their better relative performance is mostly because they have implemented tax- and social benefits cuts.

Germany by the way is an example of how countries in the short run can compensate for the effects of a shrinking working age population by employing a higher percentage of the people in that age group. They still have room to increase the employment rate for a few more years but with a 5.5% unemployment rate there is a limit to that. Perhaps Germany should encourage some of those newly unemployed Southern Europeans to learn German and move to Germany?

Monday, January 30, 2012

Statistical Notes Monday January 30

-U.S. GDP growth was 2.4% at an annualized rate (2.8% unadjusted for the deterioration in terms of trade) during the fourth quarter, somewhat below expectations, but above the level seen in previous quarters.

Meanwhile, real disposable income rose 0.3% in December while real consumer spending fell 0.1%, raising the savings rate to 4%. Money supply fell slightly the latest week but was still up 9.7% compared to a year earlier.

-Spain's labor market is in a free fall with employment falling 3.26% in the year to the fourth quarter, increasing the unemployment rate to 22.9% overall and more than 50% for youths.

-Euro area money supply growth slowed from 2.1% in November to 1.6% in December.

-Sweden's money supply growth rose by contrast, but was still only 0.9%.

-Real retail sales increased in December by 5% in Estonia and 7.1% in Latvia compared to a year earlier.

Meanwhile, the first estimate of GDP in Lithuania indicates that yearly growth fell from 6.7% in the third quarter to 4.3% in the fourth.

-Employment in Taiwan rose by 0.13% compared to the previous month and 1.8% compared to a year earlier, helping to push down the unemployment rate to a new cyclical low of 4.18%

Sunday, January 29, 2012

Odd Ways Of Promoting Your Movement

Members of the so-called "Occupy" movement in Oakland burn the American flag, because, considering the widespread support of outlawing this and the fact that most opponents of a ban are only motivated by a principal comittment to free speech, there is no better way of ensuring the support of ordinary Americans than burning the flag.

Meanwhile, young Ukrainian women protest topless in Davos, Switzerland, against their poverty. Just how they could afford to travel from Ukraine to Davos if they're so poor is unclear as is their ideas about how to end their alleged poverty. However, given the fact that a lot of men will want to have some "human action" with them, they could be promoters of Ludwig von Mises' classic economics book.

The Cost Of U.S. Sugar Restrictions

At least (it's probably higher) $3.86 billion

Stephen Harper's Pro-Growth Agenda

To boost economic growth in Canada, Prime Minister Stephen Harper will:

-Limit government spending.
-Make immigration policy more focused on immigrants that contribute to the economy.
-Increase free trade.
-Reduce regulatory delay for mines and energy production, thus increasing output of it.

Saturday, January 28, 2012

How Fed Policy Creates Crony Capitalism & Inequality

A reader has sent this interesting interview of David Stockman, former Reagan official.

I don't agree with verything he says, but his basic argument that Fed policy creates a crony capitalism that in turn creates undeserved wealth for bankers is certainly correct, as is his observation that Obama, Gingrich and Romney are clueless about or complicit in it.

Friday, January 27, 2012

Demand Driven Stagflation?

It is pointed out by Brad DeLong that the British economy has fared worse than even during the 1930s, since 2008.

The numbers are even worse if you adjust for the fact that the British population has increased by more than 2% during the period, though population increased almost as much in the 1930s as well.

DeLong of course blames Cameron's austerity policies, but there is a problem (actually there are several). That would suggest that the slump is demand driven, and if that had been the case we would have seen price inflation fall. But as it happens, inflation has increased the last few years and is at an annual average of 3.6% the last 3 years the highest since the early 1990s, and also significantly above the alleged 2% target of the Bank of England.

British inflation has also been a lot higher than in almost all other advanced economies. For example Sweden, whose economy has fully recovered even on a per capita basis, had an average inflation rate of 1.75% during the last 3 years.

The part of the austerity package that involved higher taxes (mainly a higher VAT) is really the only part that can explain this since they represent a negative supply shock that both raise price inflation and reduce real output, but that should have largely been cancelled out in part by the reduction in real disposable income from the tax increases and in part by the spending cuts.

Thursday, January 26, 2012

China's Economy To Surpass America's By 2020-Or Earlier?

According to preliminary estimates, China's GDP in 2011 was 47.156 trillion yuan, which at the current exchange rate of 6.3138 translates into roughly $7.47 trillion.

By comparison, tomorrow's GDP report for the United States will likely show that 2011 GDP was roughly, or slightly over $15 trillion. That means that China's economy is now nearly half as big as the U.S. economy.

This in turn means that China's economy could become bigger even sooner than previously thought. If the economic growth gap is 6% per year(lower than the average rate the last decade) and real appreciation is 2.5% per year (again, a lot lower than the average rate the last decade) than that would be sufficient for China's economy to become bigger by 2020. If the growth gap and/or real appreciation is closer to the average rate for the last decade, it could happen even sooner.

It is true that per capita income in China would still be a lot lower since China's population is more than 4 times as big. And in per capita terms, China might never surpass America. However, the fact that average income is so low is reason to believe thatv the "catch up" effect will continue to fuel growth in China. And so note that per capita income of one fourth of the U.S. level means that it would still be a lot lower than in the other majority Chinese countries (Hong Kong, Macao, Taiwan and Singapore).

Wednesday, January 25, 2012

Britain Slips Back Into Recession

U.K. GDP shrinks according to preliminary estimates by 0.2% in the fourth quarter compared to the third quarter. While it contracted even more in the fourth quarter last year, it had bad weather in the form of blizzards as an excuse that time, an excuse that isn't applicable this time.

Sunday, January 22, 2012

Germany As A Bastion Of (Semi-) Austrian Ideas

Interesting article at the Christian Science Monitor by John Browne (an ssociate of Peter Schiff) where it is pointed out that monetary thinking in Germany is closer to Austrian (in the sense of the school of economics) ideas than just about everywhere else.

Friday, January 20, 2012

Statistical Notes Friday January 20

-U.K. December retail sales was a lot stronger than other recent data, rising in real terms by 0.8% compared to November and 2.6% compared to December 2010. It should however be noted that retail sales in December 2010 was severly depressed because of snow storms.

By contrast, labor market statistics was a lot weaker, with the employment rate for 16 to 64-year olds dropping to 70.3%, the unemployment rate rising to 8.4% and average real earnings for those with a job dropping 2.8% compared to a year earlier.

-U.S. initial jobless claims fell to a new low, but December residential construction also fell. Meanwhile consumer prices were unchanged in December, causing the yearly inflation rate to drop to 3%.

-Total employment fell in Australia by 29,300 (0.25%) in December, reducing annual growth to zero. One brightspot though was that it was more than entirely the result of part-time employment, while full time employment actually rose.

-Consumer prices in Canada fell by 0.2% in December compared to November, reducing yearly consumer price inflation to 2.3%.

-Euro area construction spending rose in November by 0.8% compared to October and 0.2% compared to November 2010.

-Italy's monthly current account deficit fell by a third in November compared to a year earlier, from €5.15 billion to €3.45 billion.

-Hong Kong's labor market continues, in contrast to Britain's and Australia's, to be very strong, with total employment increasing 3.4% and full-time employment increasing 3.8% in the fourth quarter compared to a year earlier. As a result, full-time unemployment fell from 4% to 3.3% and part-time unemployment (aka underemployment) fell from 1.8% to 1.4% even as the labor force grew by 2.7%. Though some of that increase in the labor force reflected population growth, most of it reflected a rising labor force participation rate.

Tuesday, January 17, 2012

Why Debt Downgrade Matters Even Though It Shouldn't

Given the fact that bond yields of most of the euro area countries that were downgraded by Standard & Poors actually fell (contrary to what one might expect), similar by the way to how U.S. treasury yields dropped after they got downgraded by S&P, one can ask if S&P and other credit rating agencies have become irrelevant.

The short answer is: no thay haven't, though they should.

First of all we must realize that the move was expected and therefore already more or less priced in before the formal announcement after Friday's closing, so big changes wasn't to be expected. And other factors, for example ECB bond buying was active in pushing down yields.

And secondly, we have a really good reason to expect ratings to matter: namely that regulation requires many fund managers to only hold bonds that have sufficiently high ratings. It was because of this that Portuguese bond yields (already the second highest after Greece's) soared, as the downgrade forced many bond holders to sell.

But this is clearly something that should be changed. The credit ratings of credit rating agencies shouldn't in any way be encouraged or be made a mandatory standard by governments. They shouldn't play any role in legal accounting rules, nor in rules of which securities funds should invest in. This is both because it is principally wrong for governments to give private institutes such priviligies and because of their awful track record (to the extent they've been "right" it has almost always been because of the self-fulfilling prophecy mechanism).

So unfortunately, the incompetent redit rating agencies matter. But they shouldn't.

Statistical Notes Tuesday January 17

-British industrial production fell in November by 0.6% compared to October and by 3.1% compared to November 2010. The biggest drop was in mining and oil extraction, but manufacturing production also fell.

Meanwhile, despite an 0.4% monthly increase, the yearly rate of consumer price inflation dropped to 4.2% in December from 4.8% in November.

-The U.S. trade deficit rose from $43.3 billion in October to $47.8 billion in November due to a combination of falling exports and rising imports.

-Canada's trade balance by contrast went from a $487 million deficit to a $1.1 billion surplus due to a combination of rising exports and falling imports.

-Euro area inflation fell from 3% in November to 2.7% in December.

-GDP growth in China slowed to 8.9% in the fourth quarter, but that was still higher than generally expected. Meanwhile, industrial production rose by 12.3% in December while nominal retail sales rose by 18.1%.

Sunday, January 15, 2012

Krugman Contradicts Himself On S&P

When Standard&Poors downgraded America's credit rating last year, various leftists like Paul Krugman blasted them and said they had "no right to judge" and had a faulty analysis.

When by contrast the same agency downgrades France and 8 other euro area countries, suddenly Krugman argued that they have the right to judge and should be viewed as a source of wisdom because the S&P now use Keynesian reasoning to justify their downgrade.

It is of course not contradictory to say that a person or a group are wrong on some issues and right on others. It is however contradictory to one time dismiss someone based on past mistakes and claim they have no credibility or right to speak out because of it, only to later claim that they despite these mistakes do have that right and even use the fact that they apply the same thinking as them as an authority argument for that thinking

Saturday, January 14, 2012

Does Debt Crisis Vindicate Mercantilism?

Currently, there seems to be a positive correlation between current account balances and economic growth. Countries with big deficits like Greece, Spain and Britain are performing really bad, while surplus countries like Hong Kong, Singapore, Germany and Sweden are performing really good. And China with its large surplus are outperforming India with its deficit.

There are exceptions to this rule, of course. While having roughly as large (proportionally) a current account surplus as its northern and northern neighbors growth in Denmark has been very weak, and another surplus country, Japan has also had weak growth. Similarly, Turkey's economy has had extremely high growth even as it has a very large current account deficit. But despite these exceptions, surplus nations seems to be generally doing better right now.

This might seemingly vindicate mercantilism against non-mercantilist economics that says that we should expect higher growth in deficit countries because they get to invest the savings of the surplus nations in in their economy, creating jobs and production in the deficit countries.

But as it happens, non-mercantilist economics doesn't say that that deficits, or more accurately the capital inflows that are the flip side of them, will necessarily strengthen an economy. It will if it goes to finance sound investments , but not if it finances excess consumption or malinvestments. Even in the latter cases it might provide a short-term boost to economic growth (Turkey's boom for example contain some unsound elements), but once the unsuatainablity of the excess consumption or malinvestments become evident for investors, it will weaken the economy.

So the lesson is not that it is good to have a surplus or bad to have a deficit in the current account balance. The lesson is that it is bad to have excess consumption or malinvestments while good to have sound investments. This is escpecially true considering that surplus countries during problems in deficit countries are hurt too. Though still stronger than the deficit countries, growth in the surplus countries have weakened too because of falling exports and furthermore the surplus countries are likely too lose much of their formal export earnings because of inflation, formal defaults or both.

Friday, January 13, 2012

So They Were Fools, Not Liars

Washinton Post reveals that internal documents shows that Fed officials in 2006 believed that there was a housing bubble, and that even if it was, they would be able to contain it.

The Fed official were wrong, but that is hardly news. After all, both their actions and public statements at the time showed that they believed that there was no housing bubble. It would have been more shocking if the documents had showed that they lied and deliberately failed to take action than for the documents (as they do) to show that they were as clueless as their public statements and actions suggested.

Thursday, January 12, 2012

A Keynesian Space Alien Scheme

It has been suggested by some Keynesians that space aliens would solve economic problems because that would allow this world to run an aggregate current account surplus, something that is impossible without life on other planets. The problem is that (intelligent) space aliens might not exist, and even if they do exist they may not know of us, and even if they exist and know of us they seem to think (if they exist and know of us, given the fact that we're not being contacted) that it would be impossible or inappropriate to openly contact us.

However, the undeniable problem of unavailability (whether due to non-existence, ignorance, inability or unwillingness of the aliens) of space aliens can be solved using this scheme where we simply sell a lot of goods to an entity called "Space Alien" , goods that can then be shipped to say somewhere in the Pacific or Atlantic Oceans, where we then sink the ships (after having evacuated all human crew members, of course). The "Space Alien" entity will "pay us" with IOU's or something similar, providing us with whatever demand needed to prop up the economy according to Keynesian analysis.

Obviously, this entity will never ever pay back the money, but neither will for example war spending against perceived terrestrial or extraterrestrial threats, so there is really nothing that a Keynesian could object to this scheme.

Wednesday, January 11, 2012

Statistical Notes Wednesday January 11

-British exports fell in November by 0.9% compared to the previous month, though it was still up compared to a year earlier.

-U.S. employment growth continued in December, with employment according to the payroll survey being up by 200,000 and according to the household survey up by 176,000. Compared to a year earlier, the payroll survey indicated a 1.3% gain and the household survey a 1.1% gain.

Meanwhile, average hourly earnings rose by 0.2% and average weekly earnings by 0.5% in nominal terms. In real terms at least weekly earnings probably also rose compared to the previous month, though they likely dropped compared to a year earlier.

-Following two monthly declines, employment in Canada increased by 18,000 (0.1%) compared to the previous month and by 1.2% compared to a year earlier.

-German exports rose in November (up 2.5% on the month, 8.3% on the year), but both industrial production and factory orders fell compared to the previous month, though they were still up somewhat compared to a year earlier.

-Exports in Estonia increased by 24% while imports increased by 22%. In Latvia exports increased by 22% while imports increased 17%.

-Both factory orders and industrial production fell in November in Sweden compared to the pervious month, though industrial production was still up compared to a year earlier.

-Employment growth in South Korea in December was 1.9%, causing the unemployment rate to drop to 3.1% even as the labor force participation rate dropped.

-Employment growth in Israel slowed to 1.7%, while real wage growth increased to 2.4%

Tuesday, January 10, 2012

Germany's Jobfull Stagnation

One day we are told that the employment rate in Germany has increased 3.7% relative to the population (reaching a new all time high) and that the unemployment rate is the lowest since the reunification, the other we see that industrial production continues to fall in Germany.

In part this could perhaps be explained by growth in the service sector, and in part it reflects a drop in Germany's working age population. It could perhaps also reflect that official statistics either underestimate production growth or overestimate employment growth-or both. Still, employment growth is extraordinarily high considering the production growth numbers.

Some talk of "jobless recovery" in some periods of times in some countries. But Germany by contrast seems to have a jobfull slump or at least a jobfull stagnation.

Monday, January 09, 2012

One Of The Most Misleading Articles Ever

Matthew Yglesias' article about Austrian economics is so full of inaccuracies that it would require an essay to refute all of them. I won't bother doing that especially since I have already refuted many of the inaccuracies, here is for example a post on Bryan Caplan's rational expectations argument, here is a post on the argument that residential construction started to contract in 2006 (and so supposedly couldn't have caused the recession and here is a post on the myth that Sweden's relative success is due to inflationary policies.

The perhaps most surprising claim is Yglesias' assertion that Austrians don't believe that tax cuts will help during a recession. I don't think any Austrian have made that assertion. This is for example what Murray Rothbard wrote in America's great depression (page 22):

There is one thing the government can do positively, however:
it can drastically lower its relative role in the economy, slashing its
own expenditures and taxes, particularly taxes that interfere with saving
and investment. Reducing its tax-spending level will automatically
shift the societal saving-investment–consumption ratio in favor
of saving and investment, thus greatly lowering the time required for
returning to a prosperous economy.18 Reducing taxes that bear most
heavily on savings and investment will further lower social time preferences.
19 Furthermore, depression is a time of economic strain.
Any reduction of taxes, or of any regulations interfering with the
free market, will stimulate healthy economic activity; any increase
in taxes or other intervention will depress the economy further.

Saturday, January 07, 2012

The Myth Of Machines Causing Unemployment

Despite a modest recovery the last few months, the U.S. labor market remains depressed as this chart over the employment to population ratio illustrates.
Now again the myth that this is caused by machines displacing human workers resurfaces.

Yet if that was true then productivity growth would have increased, whereas in reality it has decreased from the 1990s. when the employment rate reached an all time high. Between 1990 and 2000, average annual GDP growth was 3.4% while average employment growth was 1.45%. Between 2000 and 2010, average annual GDP growth was just 1.5% while average employment growth was 0.15% (that the employment rate has dropped is thus more than entirely due to population growth). This means that productivity growth fell from 1.95% in the 1990s to 1.35% in the 2000s. In the 2006 to 2010 period, productivity grew even slower (1.2%).

Wednesday, January 04, 2012

Summary Of 2011 Currency Movements

It has become something of an annual tradition at this blog to summarize the yearly movement of a number of important currencies. This year, most currencies didn't change very dramatically against the U.S. dollar for the year as a whole. 5 currencies rose, three of which (the Australian and New Zealand dollars and the U.K. pound) only marginally. Only the yen and the yuan rose significantly, but far from dramatically. The other fell, but it was only the Brazilian real and the Indian rupee that did so in a really significant way.

It should however be noted that this yearly change masks more dramatic intra-year changes, as the U.S. dollar fell, driven by QE2, against almost all other currencies and usually significantly so during the first half. During the second half, it rebounded as QE2 ended and as the dollar's "safe haven" status during the European debt crisis increased demand for it.

Yuan: +4.9%
New Zealand dollar: +1.5%
Australian dollar: +1.3%
U.K. pound:+0.9%
Swiss franc: -0.1%
Singapore dollar:-0.5%
Norwegian krone: -1.3%
Canadian dollar: -1.6%
Swedish krona: -1.7%
Euro: -2.3%
South Korean won:-2.4%
Brazilian real: -10.7%
Indian rupee: -15.5%

Tuesday, January 03, 2012

Statistical Notes, Tuesday January 3

-The British manufacturing PMI rose somewhat but is still indicating contraction.

-The ISM manufacturing index rose from 52.7 to 53.9 in December while November construction spending rose 1.2% (driven by a 2% gain in private residential construction and a 1.7% gain in government construction, while private non-residential construction was flat), confirming that the U.S. recovery is accelarating, albeit from a near stagnation level.

-Euro area manufacturing PMI rose to 46.9 in December, but that still indicates contraction.

-Spain's current account balance swung from a deficit of €2.7 billion in October 2010 to a surplus of €500 million in October 2011. However, that improvement was partly the result of temporary factors, and for the whole January-October period, the improvement was more modest, from a deficit of €41.4 billion in 2010 to €32.1 billion in 2011.

-Germany's employment rate rose to a new high of 63.9% among people aged 15-74 in November (up from 61.6% a year earlier) while the unemployment rate fell to a new multi decade low of 5.5%, down from 6.7% a year earlier (and down from more than 10% just a few years earlier). The German labor market thus continues to be extraordinarily strong, especially considering that other data have indicated that the German economy has weakened.

-The Swedish manufacturing PMI rose to 48.9 in December, but like in the euro area and Britain, that still suggests contraction. Meanwhile, Swedish exports fell while retail sales rose.

-Both industrial production and retail sales for November suggested that Estonia's previously extraordinarily high growth rate has slowed considerably.
By contrast, both industrial production and retail sales indicates that growth in Latvia is in fact accelerating.

-According to preliminary estimates, Singapore's GDP contracted in Q4 2011 by an annualized rate of 4.9% compared to Q3 2011, lowering the yearly increase from 5.9% to 3.6%.

-Hong Kong's extraordinary retail sales boom continues, increasing by 23.5% in nominal terms and 16.9% in volume terms in November 2011 compared to a year earlier. Although that is lower than previously during 2011, it is still a lot higher than just about all other countries in the world. The gains are likely both driven by higher consumption by Hong Kong residents and by more tourists from abroad, mostly mainland China.

Sunday, January 01, 2012

U.S. Net Investment Income Isn't As Strong As It Seems

Paul Krugman argues that the fact that the U.S. has a net investment income surplus from abroad even after more than 30 years of often large current account deficits means that one shouldn't worry about excessive borrowing.

He is actually partially right on this one. The fact that many foreign investors have been stupid enough to buy the crappy Treasury securities (governments because of irrational mercantilist policies, private investors because of the even more irrational belief that they are "safe havens") which historically have given lower returns than almost all alternatives, and which at today's yields are guaranteed to inflict even greater losses on anyone who buys them have indeed meant that the U.S. has been able to evade the normal cost of a high level of borrowing.

However, official investment income statistics exaggerates just how high U.S. investment income from abroad is while underestimating GDP by the same amount. The reason for this is that U.S. multinational corporations systematically evade the high U.S. corporate income tax by attributing (using manipulated prices in intra-corporate deliveries) their profits to Ireland and other countries with low corporate income taxes. Because too much of costs and too little of revenues are attributed to U.S. operations this means that imports are overestimated and exports underestimated in official statistics,thus contributing to a too low estimate of GDP while net investment income is overestimated by the same amount that GDP is underestimated.

Because the underestimation of GDP is as big as the overestimation of net investment income, this has no effect on GNP or national income. The relevance is instead that net investment income statistics is misleading when it comes to estimating the effects of foreign borrowing.