New Blog Address: http://stefankarlssoneng.wordpress.com/

Ukraine Crisis Isn't Over

So now the so-called protestors have overthrown democratically elected President Yanukovich in what is in effect a coup. It is unclear what will happen, and how Russia and Yanukovich and his supporters will act, but this is almost certainly not the end of it.

Indeed, how could it be the end? Some people argue that protestors were motivated by anger over corruption and abuse of power from Yanukovich. But while Yanukovich is no doubt corrupt and some protestors may indeed have been motivated by anger over that fact, the opposition movement led by Yulia Tymoschenko is just as corrupt as Yanukovich, so if they prevail, that won't mean less corruption and abuse of power.

No, what this conflict is really about is that today's Ukraine is an artificial state created by Soviet commissars for the purpose of being a Soviet republic, not an independent state. It united areas that has always been Ukrainian or part of Poland, Hungary or Slovakia, and who now wants to distance itself from Russia and integrate with the EU. with historically Russian areas that have strong bonds (cultural, linguistic and trade-) to Russia. Here is an overview of the situation.

The bluer, Russian, areas not coincidentally coincide with the areas that voted for Yanukovich in the latest Presidential election in Ukraine, while the Ukrainian areas are the same that voted forTymoschenko.

The only sustainable, peaceful solution is for Ukraine to be divided just like Czechoslovakia was in 1993. Preserving Ukraine in its current form will only mean continued conflict.

How Old Posts Can Become Popular Again

Suddenly, my post about why Ukraine should be divided between its anti-Russian and pro-Russian parts has seen a dramatic increase in page views. That is no doubt related to the latest escalation of Ukraine's political crisis with both government forces and the neo-Nazi elements of the opposition increasingly using violent means in the confrontation. Ukraine is dangerously close to a full scale civil war. Let's hope that it doesn't come to that. Ukraine has been ravaged for a century by wars, German Nazis, Communism, corruption and ethnic conflict, to add a(nother) civil war would be really cruel. I remain convinced that secession is the best way to solve the conflict peacefully.

Government Debt Increases Less-Private Debt More

For years, the U.S. has had a sharp rise in its government debt, at a rate of more than a trillion dollars per year while household debt, particularly mortgage debt (largely due to debt writedowns), fell.

In 2013 the government deficit fell sharply due to higher taxes, lower spending and the economic recovery, but at the same time private debt stopped shrinking and started to increase again, particularly in the fourth quarter.

Is there a causal connection? Yes, at least partially. While Ricardian equivalence doesn't hold fully, people will save more (and borrow, which is a form of dissaving, more) when deficits are high, as they fear that in the future they will have to pay more to and/or receive less from the government. And so when the deficit falls they will save less, and borrow more.

British Inflation Still Remarkably High

For the first time since 2009, when oil prices had collapsed and the VAT had been temporarily reduced, British inflation fell below 2%, to 1.9% to be more precise. Note however that this is still more than a percentage point higher than in the euro area, despite the fact that the pound is up about 6% against the euro (and up about 6% against the U.S. dollar) during the latest year. When price inflation continues to exceed that in your major trading partners despite a rising currency, this suggests that domestic price pressures are very strong. In Britain's case it doesn't reflect rising wages however, but falling productivity.

Top 10 EA & EU Trading Partners

Here is a list of the 2013 top 10 trading partners for the euro area and the EU.

Euro area:
1) Britain
2) United States
3) China
4) Russia
5) Switzerland
6) Poland
7) Czechia
8) Sweden
9) Turkey
10) Japan

EU
1) United States
2) China
3) Russia
4) Switzerland
5) Norway
6) Turkey
7) Japan
8) South Korea
9) Brazil
10) India


4 countries, Britain, Poland, Czechia and Sweden, are in the first list but not the second because they are EU-members without the euro as currency, and are replaced by Norway, South Korea, Brazil and India. The fact that Norway, who isn't in the top 10 for euro area trade make it to fifth place in EU trade, ahead of Turkey and Japan who was 9) and 10) on the euro area trade list, is because of its extensive trade with non euro area EU members Britain, Denmark and Sweden.

Perhaps most surprising is the fact that trade with Japan is so limited. This reflects that Japan is a more closed economy than most people think and that most of its trade is with countries in the Asian-Pacific area. Furthermore, most products from Japanese companies sold in Europe are manufactured at Japanese-owned factories in for example China and Europe.

Leftists On The Effects On Employment From Government Subsidies

Recently, the Congressional Budget Office (CBO) in the United States estimated in a report on Obamacare that Obamacare will reduce employment by more than two million as the incentive of work is weakened. Somewhat surprisingly, leftists like Dean Baker, Matthew Yglesias and Paul Krugman and also President Obama, didn't even try to dispute that conclusion. Instead, they argued that conservatives (and libertarians) had misrepresented the decline in employment as meaning that two million people will be fired from their jobs, even though CBO argued that it reflected entirely, or almost entirely, people quitting their jobs voluntarily. And people leaving their jobs voluntarily implies a higher quality of life for these people, they argued. But while it is true that some people did misrepresent the conclusions of the report, their own conclusion that it is a good thing if Obamacare makes people leave the work force isn't correct either, because while the people receiving subsidies makes that decision voluntarily, the people who pays for the subsidy don't do that voluntarily as paying taxes isn't voluntary. It may be good for the people who receives the subsidy, but nor the people who pays for it or for the economy. Furthermore, as Peter Schiff points out, the same people who now concedes the fact that Obamacare subsidies reduces labor supply furiously denies that unemployment benefits will reduce labor supply. But there is no reason to believe that unemployment benefits will reduce labor supply less than Obamacare subsidies, quite to the contrary, as the former unlike the latter depends on you not having a job.

Will EU Punish Switzerland With Restricted Trade?

[First another technical note: At last, blogger is functioning properly again. However, because of the high risk of this happening again, I will still probably move very soon (the next few days) to a new blogging platform.]

As you may have heard, Switzerland voted with a razor thin margin margin (50,3% to 49.7%) to restrict immigration from the EU.

Personally, I think this was a bad decision which will hurt the Swiss economy even if the EU doesn't retaliate by restricting trade. Remember, the immigration which will be restricted isn't the inflow of tax-financed asylum seekers, it's the inflow of workers who support themselves and contribute to the Swiss economy. And with Swiss unemployment at only about 4% (even lower in the German speaking parts of Switzerland), this will create labor shortages in many sectors.

Because the decision will hurt the Swiss economy, the Swiss will be punished automatically through restricted growth. So it is not necessary for opponents of the decision to try to punish Switzerland by restricting trade.

And doing so would by the way hurt EU's economy too. Switzerland is after all the EU's third biggest export market, after the United States and China, and with the EU's economy so weak, hurting it further through a trade war is the last thing it needs. And the fact that Switzerland would be hurt even more isn't any consolation to the many additional unemployed such a decision would create.

Unfortunately, there is a nevertheless high risk that the EU will try to punish Switzerland through trade restrictions, just to set a warning example. The reason is that the EU bureacrats know that if Switzerland gets away with doing this, then Britons will feel free to exit the EU without fear of trade restrictions. And after that the Netherlands, Denmark and Sweden might follow, and after that perhaps the remaining rich countries. And then the EU would only consist of poorer countries in Southern and Eastern Europe. That is a prospect EU bureacrats view as intolerable.

Note to readers: I have technical problems again. Can only write here, not in the main post. Will change to new blogg platform soon

Today's Picture

Perhaps not entirely fair, but not entirely unfair either, and at any rate funny.

Argentina Devaluation Role Model No More

[Technical Note: This post was planned to be posted on Saturday, but during Saturday and Sunday, blogger, at least for me, malfunctioned as I was only able to write in the headline section. If things didn't improve, I planned on moving to a new platform today or tomorrow, but fortunately things got back to normal today.]

For years we have been told that Argentina was once like Greece or Spain, but that they devalued and that they then had a strong boom, the implication being that if only the Southern European countries also devalued they would boom too.

I have previously pointed out the errors of that argument. The boom in Argentina was greatly exaggerated because Argentinian authorities greatly underestimated inflation, and since real growth is nominal growth deflated by price inflation, this implies that real growth was overestimated. Furthermore, to the extent the boom was real it was because Argentina's terms of trade improved dramatically as the prices of its commodity exports rose dramatically, even in U.S. Dollar terms.

Now that the Argentinian economy has entered a deep crisis, it doesn't look like much of a role model anymore. So how do the pro-inflationists who have previously extolled it as an example of the benefits of currency debasement react?

Well, Paul Krugman first just ignored it and pretended that Turkey is the most troubled economy and doesn't even mention that Argentina has problems.

Then in a later post written after this post was originally written, commenting on Yglesias post below, he conceded that inflationary policies can be bad if pursued as radically as in Argentina. While coherent, this doesn't explain at what level inflation goes from good to bad, and why.

Matthew Yglesias says that Argentina has problems because of bad policies unrelated to its currency. Well, I certainly don't dispute that the Argentinian government has pursued a lot of bad non-monetary policies, but so have Greece and the other Southern European countries, and by admitting the importance of non-monetary policies in Argentina, you're admitting that such factors could be important in explaining Southern Europe's problems.

 Jeremy Warner essentially repeats Yglesias argument while repeating that Southern Europe has problems and points to how South Korea was able to recover by combining devaluation and policies sounder than Argentina's. It is true that South Korea has recovered but so has several countries that haven't devalued, like the Baltic countries, and more recently Ireland.

The lesson is thus, that recovery doesn't, at least not primarily depend on monetary policy, but on how sound other policies, as well as probably some cultural factors, are.