Tuesday, December 31, 2013

"Defeating" Deflation Is Not Good Directly

As expected, given the yen's sharp drop, Abenomics has caused price deflation in Japan to end and turn in to inflation (while at the same time causing disinflation elsewhere as exchange rates are a zero sum game), causing some pundits to write about "a defeat" of deflation that is good news for Japan.

But even assuming that the theories of the negative effect of deflation on real growth are really correct (which they aren't, at least not at the low levels Japan has experienced) using a turn from deflation to inflation as a measure of success is wrong.

That is because given a certain level of nominal income, higher prices implies a lower real level of income. Indirectly, inflation is of course likely to imply a higher level of nominal income, which could mostly, entirely or even more than entirely offsett the higher price level, but the point is that an increase in the price level is not a standard of success since it all else equal implies a lower real income level.

Looking at the nominal change would be less bad since that at least all else equal implies a better real change. But the proper gauge is of course to look at real growth (adjusted for population change in many contexts).

Monday, December 30, 2013

Now That's Irony

Have you heard about that Russian ship,the M.V. Akademik Shokalskiy,  who has gotten stuck in Antarctica due to too much ice? Well, it turns out that the purpose of that ship's trip to Antarctica was to...... document the disappearance of ice due to "global warming". Now, that's irony....

Saturday, December 28, 2013

U.S., U.K. Yields Above 3%

Despite continued massive purchases by the Fed and the Bank of England respectively, U.S. and U.K. 10-year yields rose above 3% on Friday. Less than a year ago, they were well below 2%.  The increasingly extreme stock valuation levels have long been justified by the depressed bond yields. But with bond yields rising along with valuations that seems increasingly unjustified.

Friday, December 27, 2013

Left-Wing Confusion About Monetary Policy & Real Wages

Recently, several left-wing pundits have argued that an [even more] inflationary monetary policy is needed to boost real wages. Their argument is that an even more inflationary monetary policy would reduce unemployment and a lower unemployment rate would improve worker's bargaining power relative to employees.

What they forget is that the way more inflation reduces unemployment is by reducing real wages given a situation of nominal wage rigidity.

Arguing that inflation is needed to boost real wages is like arguing that in order to raise margins, retailers need to reduce them!

If real wages/margins are further depressed, then this would indeed improve the prospect of recovery from those depressed levels, but the end result at best is no better than if there had been no lowering in the first place, but most likely the end result would mean even lower values than otherwise.

Monday, December 23, 2013

Perspective On The Stock Market

As the below chart shows, the stock market, as measured by the Dow, was only about twice as high in value at its low (777) in 1982 compared to its high in 1929. After having only doubled in 53 years it has increased more than twentyfold since, to about 16300 today.

(A larger version of this chart can be found here) That is despite the fact that nominal national income increased much more in the 1929-1982 period (about thirtyfold from $94 billion to $2,840 billion) than in the 1982-2013 period (only somewhat more than fivefold, to $14,600 billion). This no doubt largely reflects that the stock market went from being highly overvalued in 1929 to highly undervalued in 1982. But at least to some extent it also implies that the stock market is overvalued right now.

Friday, December 20, 2013

In Defense Of Dividends

Matthew Yglesias has an incoherent attack against dividends, which he declares "evil" (!).

One way in which it is incoherent is that on the one hand he argues that they are supposedly worse for shareholders because they are taxed (as if capital gains aren't and as if any discrepancies don't reflect flaws in tax laws as opposed to the principle of dividends) , but on the other hand argues that it is bad if shareholders benefit because shareholders are disproportionately very rich, belonging to the infamous top 1%.

Similarly, he on the hand argues that stock repurchases are the best way to beenfit shareholders and on the hand arguing that it is bad if shareholders benefit.

Aside from being incoherent he also fails to understand basic economic in several ways. He argues that dividends are somehow not just because most current shareholders in for example General Electric didn't themselves provide funds for the company's investment. True, but irrelevant, as the investors who did finance these investments got their reward by being able to sell these shares to current owners (and through dividends). And it was the prospect of current and future dividends that was directly or indirectly the basis for these purchases from the investors that created for example GE.

Similarly, when pleading for stock repurchases as a better alternative to dividends he again reveals his economic ignorance as he says that they will increase the value of the stock. Now, it is true that as a complement to dividends, they will increase the value of stocks. But if it is a permanent substitute, and that must be what he has in mind by declaring them evil and wanting them abolished, it will make shares basically worthless, except for perhaps the rare number of people with enough shares to gain actual power over a company.

The reason for that is that the source of a stock's value, setting aside voting rights, is entirely the present value oif future cash flow that goes to the holder of stocks, which is to say the present value of future dividends.If you permanently eliminate, as opposed to doing so temporarily because the company is in a hopefully temporary crisis or need the cash for investments, then stocks will have no objective value at all. Making them more scarce through repurchases won't make it more valuable as long as it remains objectively without value.

Sunday, December 15, 2013

Ireland Is Reducing Unemployment By Reducing Wages

Ireland is seeing its labor market heal increasingly fast with unemployment dropping from a high of 15.1% in February 2012 to 14.1% in November 2012 and further down to 12.5% in November 2013. And contrary to some pundits this does not reflect enigration as employment is up 58,000, or about 3.2%, during the latest year, mening that employment is increasing faster than unemployment is decreasing.

Meanwhile, average hourly earnings dropped 1.8% in nominal terms (roughly the same in real, as inflation was roughly zero). Lower average earnings isn't a good thing as a self-end, of course, quite to contrary it is negative. However it can be the means to achieve a reduction in unemployment. And that seems to be what is happening in Ireland, more Irish are finding jobs because they accept lower pay.

This is of particular interest since Keynesians have argued that nominal wage cuts are basically impossible and even to the limited extent they're possible they wont work.

Friday, December 13, 2013

Complete Republican Surrender

As you can remember, the great budget battle in the U.S. in October ended with what was de facto a surrender from Republicans. The government was re-opened and the debt ceiling increased without preventing or delaying Obamacare or any other major concession from the Democrats. But to save face it was formally only a "temporary agreement".

Now that the temporary agreement is about to expire, Republican leaders have agreed to accept a deal that not only doesn't end Obamacare it raises taxes and spending compared to current law.

Quite frankly, I always thought the idea of using decisions about other spending areas and the debt limit to force Obama and Senate Democrats to stop the implementation of Obamacare was doomed to fail from the beginning, so Republicans can hardly be blamed for not wanting to do that again. But this deal goes beyond that and means higher spending and higher taxes (the extra levy on airplane tickets is called a "fee" but is really a tax) compared to what no deal and a so-called "clean bill" would have meant

Wednesday, December 11, 2013

Participation Rate Drop Mostly Economic, Not Demographic

The U.S. unemployment rate has dropped from a high above 10% to 7%. However, many of us has pointed out that this has been coupled with a continued drop in the labor force participation rate and argued that the drop therefore likely reflects that many job seekers have been discouraged from being rejected so many times by employers that they see no point in continuing to seek jobs actively. Remember, to be counted as unemployed it is necessary but not sufficient to lack employment. You must lack employment and actively apply for jobs.

An alternative explanation to the drop in the participation is that the population is aging as more and more so-called "baby boomers" retire. The standard participation and employment rate figures relates the number of employed and the workforce to all people older than 15. If the population is ageing, then the drop in the  participation rate will reflect that more people reach the age when they want to retire, not a weak labor market.

Recently, a number of news stories have asserted that the drop "entirely" reflects this demographic factor.
However, as it turns out, that is just about the drop in the most recent year. If we instead focus on the drop since the beginning of the recession in 2007, it is clear that most of the drop reflects labor market weakness.

One way to test this theory would be to focus on so-called prime age workers, people 25-54 which usually haven't retired. The employment rate in that age group has only increased from about 75% to 76% and is still well below the 80% level reached in 2007. This also implies that most of the drop in the official unemployment rate reflects an increase in the number of discouraged job seekers.

Tuesday, December 10, 2013

Record Deflation In Greece

Greek consumer price deflation accelerated to 2.9% in november compared with 1.9% in October and 0.4% inflation in November 2012. Consumer prices were thus 2.5% lower than in November 2011. The euro area as a whole had according to preliminary estimates inflation of 0.9% in November and 2.2% in November 2012, meaning consumer prices rose a cumulative 3.1%.

This increase in deflation will have two effects which will both contribute to a larger current account surplus (currently it is still only barely above zero) : the increase in real interest rates will induce more savings and less investments and the lowering of the relative price level will make Greece more competitive. While the effect on the current account surplus is unambiguously  to increase it the effect on growth is more ambiguous: domestic demand will be depressed further while net exports will strengthen

Monday, December 09, 2013

Krugman Doesn't Understand Basic Economics

 Either that, or he is delibaretely trying to mislead. Here is what he writes today when arguing against a reduction in unemployment benefits:
You might be tempted to argue that more intense competition among workers would lead to lower wages, and that cheap labor would encourage hiring. But that argument involves a fallacy of composition. Cut the wages of some workers relative to those of other workers, and those accepting the wage cuts may gain a competitive edge. Cut everyone’s wages, however, and nobody gains an edge. All that happens is a general fall in income — which, among other things, increases the burden of household debt, and is therefore a net negative for overall employment.

There are two fallacies here, both of which should  be apparent through understanding of basic economics. First of all, there , a decline in everyone's wages wouldn't cause a general fall in income, but a shift in income from workers to capitalists. You may think that such a shift is undesirable, but it's nevertheless not the same as a general fall in income.

And secondly, there is no reason to believe that everyone's wages would fall. What would fall is wages in low skilled jobs or jobs that the unemployed have the right skills for. Most people's wages wouldn't fall, Quite to the contrary, companies would likely pass on some of that reduction in labor costs through lower prices, which would raise real wages for people whose nominal wage haven't declined and limit the real decline for the people that have seen their wages drop.

Friday, December 06, 2013

The Non-Anglo Germanic Surplus Bloc

While Paul Krugman and others bash Germany for running a large current account surplus, the fact is that surpluses are the rule in Germanic countries in the Europe continent. All countries in the European continent (including Scandinavia but excluding the British isles and Iceland) that have a majority of its people speaking  a Germanic language except for Belgium, which is 40% French, have a large current account surplus.

Furthermore most of these countries have a surplus which is larger relative to GDP than Germany's. Norway's and Switzerland's surpluses are proportionately nearly twice as high as Germany's. Oh and both these countries partly achieve these surpluses through government intervention. Switzerland by its active policy to prevent the euro from falling below 1.20 francs and Norway by its massive oil fund that invests oil revenues in foreign financial assets. Yet "strangely" (there is an explanation) everyone only blame Germany while ignoring Norway and Switzerland.

Here is a table showing the balances first in absolute terms and then relative to GDP (or GNP in Luxembourg's case).

Germany    €167 billion
Netherlands €62 billion
Switzerland  €59 billion (CHF 72 billion)
Norway       €42 billion (NOK 350 billion)
Sweden       €27 billion (SEK 240 billion)
Denmark     €16 billion (DKK 120 billion)
Austria         € 8 billion
Luxembourg € 3 billion
Belgium     - €12 billion

Total          €362 billion

Switzerland   12%
Norway         12%
Netherlands   10%
Luxembourg   8%
Sweden            7%
Denmark          7%
Germany          6%
Austria            2.5%
Belgium           -4%

Total               7% (7.5% excluding Belgium)

Wednesday, December 04, 2013

Two Interesting Things About The Netherlands

The Netherlands is unusually complicated when it comes to its name, especially in English. The official name is the Netherlands (Nederland in the dutch language) but it is often called Holland and in English it is called Dutch as an adjective. It is somewhat less complicated in other languages, in Swedish for example there is the related Nederländerna and Holland, but in adjective form there isn't any special words, it's just a grammatical variation of these, nederländsk and holländsk.

Why is that? Well, the source of the name the Netherlands is obvious, that's the official name. Holland is actually a region in the central parts of the country consisting of two provinces, South Holland and North Holland. These two provinces have the largest population, and the by far highest population density of all Dutch provinces and the three biggest and  most important cities, Rotterdam, Amsterdam and the Hague, are there. So Holland is the most important region of the Netherlands, and the reason why that name is used as a substitute is therefore similar to why Britain is sometimes called "England" and the Soviet Union was sometimes called "Russia". Also, "Holland" is shorter and easier to write and say than "the Netherlands".

What about "Dutch", then? It appears to have been derived from the German word for German, Deutsch,. Remove an "e" and and a "s" from that word and you get dutch. German and Dutch are different languages, but closely related, which is why English speakers have started to use that name. This confusion is evident as the ethnic German Honus Wagner was referred to as "the Flying Dutchman" and the language of the Amish community in the U.S. is often called Pennsylvania Dutch, even though it is actually a form of German.

One surprising fact about the Dutch economy is that even as the government struggles with a budget deficit of about 4% of GDP, it has a current account surplus of €60 billion, or 10% of GDP. That is a higher surplus than Germany, and all other euro area economies relative to the size of its economy. Germany's surplus is only about 7% of GDP while it has a balanced budget. The private sector financial savings rate in the Netherlands of 14% of GDP is thus twice as high as Germany's. Unfortunately for the Netherlands, that massive savings surplus however mostly reflects depressed investments rather than high savings, which is why its economy is so much weaker than most other countries with large external surpluses.

Tuesday, December 03, 2013

Employment In North Korea

Getting a job isn't the same in North Korea as in almost all other countries. Here is how Mina Yoon, a North Korean who was able to escape from North Korea, describes it:

Basically, people in North Korea do not have the freedom to choose their occupations. Once you’re assigned a job from the government, it is your lifelong job. The reason the government assigns jobs is very simple: As part of strict control over all kinds of resources under its collectivism system, the government researches how many people are needed in each industry and location, and assigns people accordingly. The idea of employment in North Korea is therefore very different than in other countries. In North Korea, a job does not mean anything except where you go to work following the government order. That is why North Korean students do not have any dreams or aspirations about their future. They already know there’s no way they can make their dreams come true.
When I was a kid, I went to a kindergarten exclusively for children of military executives. The teachers there made sure that when anyone asked me about my dreams, I would answer: “I will study hard and be a medical doctor when I grow up. My dream is to make North Korean people healthy and well, and bring joy to Gen. Kim Il Sung.” Memorizing those sentences, I held on to a feeble dream that I was meant to be a doctor when I grew up. Later, after I graduated from that kindergarten I realized that even that planted answer was government propaganda.
In reality, most kids in North Korea cannot even think about their future. They really don’t have to, because the government makes choices on their behalf. Parents also do not bother worrying about their children’s future because they already know that what they want for their children will not make any difference. Upon graduation from high school, students fill out a form listing their top three career choices, but everyone knows it is nothing more than a formality. The government assigns the graduates with any jobs they think proper or necessary, and what the students want is not at all taken into account.
Read the rest here