Stefan Karlsson's blog

Germany's Different Unemployment Rates

2012-02-01T15:09:00.001+01:00

Dean Baker criticizes the New York Times for reporting Germany's unemployment rate as 6.7% instead of 5.5%. The 5.5% rate refers to those who have no job at all, while the 6.7% rate also includes those who have only a part-time job but would want to have full-time employment instead. While there is a case for including those who have fewer hours than they want to, it becomes misleading to include them while making comparisons between countries because other countries only include those who are so to speak full time unemployed.

I agree with Baker on this point, and could add that numerous other media outlets make the same mistake as New York Times. but he is actually wrong to assert that the German government reports the higher number as its official rate. Obviously, the German government reported it, as they are the source of both numbers, but the number specified in its official press release on employment and unemployment is in fact 5.5% and only (for the overall unemployment rate) 5.5%. The same goes for the Eurostat release on unemployment in the 27 EU countries including Germany. That makes it all the more puzzling why so many media outlets insist on using the higher number for Germany, and only Germany.

Ukrainians Are Indeed Poor

2012-01-31T20:18:00.004+01:00

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

2012-01-31T15:29:00.000+01:00

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?

Statistical Notes Monday January 30

2012-01-30T15:54:00.000+01:00

-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%

Odd Ways Of Promoting Your Movement

2012-01-29T20:53:00.004+01:00

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

2012-01-29T16:20:00.000+01:00

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

Stephen Harper's Pro-Growth Agenda

2012-01-29T16:17:00.000+01:00

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.

How Fed Policy Creates Crony Capitalism & Inequality

2012-01-28T17:37:00.000+01:00

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.

Demand Driven Stagflation?

2012-01-27T14:51:00.005+01:00

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.

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

2012-01-26T15:43:00.000+01:00

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).

Britain Slips Back Into Recession

2012-01-25T14:50:00.000+01:00

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.

Germany As A Bastion Of (Semi-) Austrian Ideas

2012-01-22T20:48:00.000+01:00

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.

Statistical Notes Friday January 20

2012-01-20T19:50:00.002+01:00

-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.

Why Debt Downgrade Matters Even Though It Shouldn't

2012-01-17T20:13:00.000+01:00

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

2012-01-17T15:37:00.001+01:00

-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%.

Krugman Contradicts Himself On S&P

2012-01-15T16:24:00.001+01:00

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

Does Debt Crisis Vindicate Mercantilism?

2012-01-14T17:45:00.000+01:00

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.

So They Were Fools, Not Liars

2012-01-13T15:46:00.000+01:00

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.

A Keynesian Space Alien Scheme

2012-01-12T12:21:00.006+01:00

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.

Statistical Notes Wednesday January 11

2012-01-11T15:07:00.000+01:00

-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%

Germany's Jobfull Stagnation

2012-01-10T15:19:00.002+01:00

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.

One Of The Most Misleading Articles Ever

2012-01-09T16:53:00.001+01:00

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.

The Myth Of Machines Causing Unemployment

2012-01-07T18:04:00.002+01:00

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%).

Summary Of 2011 Currency Movements

2012-01-04T18:25:00.001+01:00

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.

Yen:+6.1%
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%

Statistical Notes, Tuesday January 3

2012-01-03T16:51:00.005+01:00

-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.

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

2012-01-01T12:48:00.001+01:00

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.

Begging The Question On Labor Force Participation

2011-12-30T16:25:00.000+01:00

Some analysts are trying to put a positive spin on the unprecedented drop in the labor force participation rate as simply being a question of more people seeking to get more education. I find it indeed quite likely too that a very large portion of those that have dropped out of the labor force have started in school again.

But that begs the question of why do they want to go back to school? Because it's fun or because it's interesting? Not likely, except perhaps for a small minority. Instead, the reason why they go back to school is because they're unable to find a job and thinks that additional education will enable them to get a job. That may perhaps be a good idea for the people in question, but that doesn't in anyway change their status as discouraged, hidden unemployed as almost all would quit school and immediately take a job if they could (at least assuming it's a steady job).

Temporary & Permanent Tax Cuts

2011-12-29T15:23:00.001+01:00

One criticism against the payroll tax cut that has frequently been made from conservative and libertarian economists is that it is temporary, and because people supposedly make decisions on permanent conditions it will have no effect.

This argument has a limited degree of truth in it as it is true that if taxation of investments are reduced by say 5 percentage points for one year, it will have less effect on investments that last more than a year than a "permanent" tax rate reduction of 5 percentage points. Just how great the difference is depends on how long the investment will last (the longer, the greater difference it makes).

However, because total after tax return still rises, it will still promote any investments that generates profits within a year.

Furthermore, the payroll tax reduction isn't about investments, at least not directly, it instead has a positive effect in the form of boosting labor supply, something that increases employment in part through a reduction in frictional unemployment and in part by lowering labor costs. Given the limited degree of wage rigidity that exists cutting the employer's share of the payroll tax cut would have been more effective, but

But don't businesses hire people based on long-term factors? Well, they often do, but there is no rational reason for them not take advantage of temporarily lower labor costs by hiring people temporarily given that America's flexible "hire and fire" laws makes it very easy and costless to fire employees.

Furthermore, it should be noted that no tax rate is really permanent (which is why I've put quotation marks around it except here) since they can, and very frequently have historically been change. While a "permanent" change is in the United States somewhat more difficult to change due to the fact that the two chambers of Congress and the President can usually block them if they want, that is as the historical record illustrates a difference of degree, not kind.

The real problem with temporary instead of "permanent" tax cuts isn't therefore so much that the short term effect is smaller. The real problem is that once the tax cuts expire, the positive effects will expire too, meaning that it will lower future growth, largely cancelling out the short term positive effect.

The Endowment Effect & Indifference

2011-12-28T21:58:00.003+01:00

Per Bylund discusses how the endowment effect can be explained using praxeological insight that sellers value goods exchanged lower than the price while buyers value it higher than the price-an insight that is lost in neoclassical mathematical economics where it is assumed that prices reflect the point where buyers and sellers are indifferent to them. That is not the only possible explanation, but it is one and it is yet another example of how the excessive faith in mathematical methods reduces our understanding of economic reality.

Payroll Tax Cut Doesn't Alter Social Security's Status

2011-12-28T15:52:00.003+01:00

Randall Holcombe argues that the payroll tax cut will alter Social Security's status:

"The Social Security program has been based on the premise that it works like a pension program. Workers pay in to the program when they are working, and then collect pension benefits when they retire. Retirees are entitled to those benefits because they paid for them through the payroll tax when they were working.

Despite the fact that the Social Security program is run like a Ponzi scheme, the entitlement aspect of the program is difficult to argue against. Workers have been told all their lives that in exchange for paying the payroll tax, they are entitled to retirement benefits.

The payroll tax cut severs that link. The payroll tax has been cut in half, and the difference is being made up from general revenues. Workers can no longer say they paid their taxes and are entitled to their benefits, because half of those taxes are now coming from general revenues, just like any other entitlement program."

However, Holcombe is wrong to argue that before the payroll tax cuts there was a strong link between the the taxes paid collectively and the benefits received.

Holcombe seems to think that Social Security works like the new Swedish pension system where there is a direct link between how great assets the government pension funds have and how high benefits the retirees receive, something that for example meant that following the 2008-09 economic slump, pensions benefits received by retirees were automatically reduced because the slump meant that the funds received lower revenues and because the value of the stocks they held fell.

By contrast, Social Security benefits (like benefits in the old Swedish pension system that was in place until 1994) have never been linked to how high payroll tax benefits the government have received, they have instead been linked to inflation. This means that when revenues have fallen due to recessions, it has always been compensated through "general revenue". Compensating a reduction in revenues due to lower tax rates is in principle no different from compensating a reduction in revenues due to a lower tax base. The alleged link between payments and benefits have never been more than an accounting illusion meant to deceive people about the program's true nature, a deception that Holcombe seems to have fallen for.

The Difference Between North Korea & South Korea Illustrated

2011-12-26T20:43:00.005+01:00

Brad Plumer has this telling chart over how the economies of North Korea and South Korea has developed over the last few decades:

The main reason for this divergence is that North Korea is a planned economy while South Korea's is mostly market based, but the North's extreme trade isolationism/protectionism and it's extreme militarism (using more than 25% of its GDP on its military and with more than a fifth of men aged 17-54 in active military duty with the rest being considered reserve soldiers) have also contributed to this divergence.

The end result of this is not just that they're generally poor in North Korea, but also that millions have starved to death and much of the rest are malnourished (resulting in the fact that
they are on average 15 centimeters (6 inches) shorter than in South Korea) and the fact that they don't have any electricity much of the day or during nights, as can be seen in this classic photo:

20 Years Since End Of Soviet Union

2011-12-25T16:08:00.001+01:00

Today is not only Christmas Day, it is also the twentieth anniversary since the end of the Soviet Union and the lowering of the Soviet flag from the Kremlin. Because any transition is bound to be short-term disruptive for those whp are dependent on a certain system, and because the transition has been mishandeled because of corruption, incompetence and mob rule, it meant a lot of short term hardship for many people in the Soviet Union.

Even so, it was a good thing because it has in the long run meant more freedom. This is evident by the fact that the country that has pursued the most radical reforms, Estonia has performed best, while countries that like Belarus has reformed only very little are both poorer and less free.

Stupid Italian Limit On Cash Payments

2011-12-23T19:42:00.003+01:00

The new for government to subsidize banking: limit Cash Payments:

"Italian banks, which charge businesses up to 2 percent for credit-card transactions, could end up being the main beneficiaries of the new rules, according to Rome-based consumer group Adusbef. “Unless banks cut fees on credit cards and current accounts, they’ll just make more money from the new law,” said Mauro Novelli, the general secretary of the organization, which represents banking and insurance customers."

Another problem with the new Italian €1,000 upper limit on cash payments is how it is supposed to reduce tax evasion. Yes, I know of course that the idea is that tax evasion will be more difficult if made through debit cards than cash, but as far as I know transactions where taxes were evaded were already illegal and already unreported, so why would making it illegal in a second way make people cease to make these unreported and illegal transactions? The only payments that would be affected is really cash payments above the €1,000 limit (and below the existing €2,500 limit) where they would have followed tax rules.

Given this, such rules will have very little or no effect while unnecessarily creating discomfort, eliminating privacy even for transactions where tax laws are followed and subsidize the banking system.

Statistical Notes Friday December 23

2011-12-23T16:28:00.001+01:00

-Despite the seemingly good headline U.K. GDP number, the details were weaker as I pointed out yesterday. Meanwhile, though the government deficit fell somewhat in November, the current account deficit rose to a new all time high of £15.2 billion in the third quarter while real retail sales in November fell by 0.4% in November compared to October and by 0.7% compared to November 2010-

-Most indicators, including initial jobless claims, new home sales and durable goods orders indicates that the U.S. economy strengthened in the fourth quarter after being weaker than previously estimated in the third. However, real disposable income was stagnant in November, and remains below its June peak.

-Canada's monthly GDP was unchanged in October, after 4 consecutive monthly increases.

-Euro area construction spending fell in October by 1.4% compared to September and by
2.8% compared to October 2010.

-Greece's current account deficit fell by a third to €1.5 billion, but that is still too high and for the January-October period as a whole, the drop was more moderate, from €18.7 billion to €16.5 billion.

Similarly, Portugal's current account deficit fell from €1.2 billion in October 2010 to €350 million in October 2010, but for the whole January-October period it only fell from €13.7 billion to €10 billion.

-Unemployment in Taiwan rose slightly, but this was more than entirely the result of an increase in its labor force participation rate.

-Similarly, Hong Kong unemployment rose slightly but this was also more than entirely the result of faster growth in its labor force. Meanwhile, consumer price inflation fell slightly but was at 5.7% still very high.

British Inflation 2.5%?

2011-12-22T11:49:00.000+01:00

British growth was seemingly upwardly revised for the third quarter, to 0.6% from 0.5%. However, yearly growth was left unchanged at 0.5%. What's even more important, nominal growth was downwardly revised to only 3% for the year (from 3.3%). That means that for real growth to be 0.5%, inflation would have to be only 2.5%, even as the British consumer price index has increased at roughly 5%.

The price index for gross domestic purchases rose 3.1%, implying a 0.1% contraction. However, even 3.1% is significantly below the 5% consumer price index increase. In part, this is likely because the gross domestic purchase index is probably "chain-linked", that consistently yields lower results than the "fixed basket" approach of the CPI. In part, it could also reflect that the CPI includes the effects of the increase in the Value Added Tax, while the gross domestic purchases index excludes it.

North Korea As The Commie Nazi State

2011-12-19T14:37:00.004+01:00

The death of North Korea's dictator Kim Jong-il and his replacement with his son Kim Jong-un, rattled Asian markets in general and South Korea's in particular. Something that one wouldn't think should happen considering that North Korea has virtually no trade or other economic interaction with any other Asian country except China-and even for China the importance of that is completely insignificant. The reason why markets were rattled is because they feared that Kim Jong-un might carry out some form of attack to demonstrate strength to the others in the North Korean leadership.

North Korea is one of the most bizarre nations in the world, way beyond fellow Communist dictatorship Cuba. Not only does it have a plan economy and Stalinist political repression, it also for example deliberately keep trade relationship to a minimum according to the principle of juche (self-reliance), is extremely militaristic (with 20% of men in the ages 17-54 in active military duty and most of the rest considered reserve soldiers and at least 25% of GDP going to the military) and has a bizarre personality cult revolving around the Kim clan, with Jong-il's father Kim Il-Sung ("the great leader") as "eternal President" even 17 years after his death and Kim Jong-Il ("the dear leader"), and presumably soon Kim Jong-un as well.

North Korea's regime is also the arguably most racist government in the world, not just against non-Asians but also even against non-Korean Asians.

So it combines a communist economic system, with a totalitarian form of government, personality cult around its leaders, extreme militarism and racism. That pretty much makes it a perfect example of a "commie nazi" state.

The term "commie nazi" was coined in the Simpsons where the character McBain while delivering UNICEF pennies for "puny children" was attacked by commie nazis whose symbol combined the swastika with the hammer and the sickle.

Some have argued that it is impossible to be "commie nazi", but that is clearly not true. There have been several movements that have tried to combine Communist ideology with National Socialist ideology, such as the left-wing faction of Hitler's party, the NSDAP, led by the Strasser brothers that criticized Hitler for allowing non-Jewish capitalists to retain formal control of corporations (and were bloodily purged by Hitler for that) or the National Bolshevist movement in Russia.

None of the aforementioned groups have ever risen to power, but it would seem that North Korea is in fact an example of an actual "commie nazi" state.

Lack Of Hyperinflation Doesn't Refute Austrian Monetary Theory

2011-12-16T20:27:00.000+01:00

Paul Krugman attacks Ron Paul for his Austrian views of monetary issues in his latest column.

His main argument is that one advocate of Austrian economics, Peter Schiff, supposedly predicted hyperinflation 3 years ago, something that hasn't happened.

But Schiff's prediction error doesn't affect the validity of the Austrian view unless it could be shown that it was a necessary implication from the Austrian analysis. And it isn't.

That is because first of all, Austrian monetary analysis not only doesn't have to, but as far as I know haven't ever, said that increases in the monetary base directly create price inflation. It is only indirectly, to the extent it increases money supply, that it will have any effect. And while money supply has increased the last few years it has increased far less so than the monetary base.

And though some Austrians sometimes express themselves as if a higher money supply will necessarily raise prices that is not necessarily the case either if money demand increases. For example if money supply increased in the fictional Duckborg by $1 billion but went directly into Scrooge McDuck's money bin and he just kept it there then the effect on prices will be the same as if there had been no money supply increase, which is to say no effect. The same goes for money in the real world, even when it is many people that hold money and even if it is deposit money rather than physical cash.

And because of lower nominal interest rates as well as the European debt crisis, demand for dollars has increased, cancelling out much of the effect from the increase in money supply.

So no, the lack of hyperinflation doesn't in any way refute Austrian theory or vindicate Keynesian theory

The Problem With Krugman's Baby-Sitting Example

2011-12-16T14:19:00.000+01:00

Peter Schiff has an excellent refutation of Paul Krugman's (in)famous baby sitter example that he has repeatedly used as an example of the supposed virtues of inflation:

Another Interesting Economic Methodology Article

2011-12-15T21:05:00.004+01:00

At the Mises Institute web page, a mostly excellent article by Hans- Hermann Hoppe about the contradictions in the positivist philosophy underlying the dominant paradigm in academic economics, has been published. Read it here.

His refutation of the logically inconsistent positivist/empiricist assertion that all knowledge is either "relations of ideas" that are necessarily unrelated to reality or "matters of facts" that are necessarily uncertain (to use David Hume's expressions) was particularly good. An excerpt:

"This is empiricism's central claim: Empirical knowledge must be verifiable or falsifiable by experience; and analytical knowledge, which is not so verifiable or falsifiable, thus cannot contain any empirical knowledge. If this is true, then it is fair to ask: What then is the status of this fundamental statement of empiricism? Evidently it must be either analytical or empirical.

Let us first assume it is analytical. According to the empiricist doctrine, however, an analytical proposition is nothing but scribbles on paper, hot air, entirely void of any meaningful content. It says nothing about anything real. And hence one would have to conclude that empiricism could not even say and mean what it seems to say and mean. Yet if, on the other hand, it says and means what we thought it did all along, then it does inform us about something real. As a matter of fact, it informs us about the fundamental structure of reality. It says that there is nothing in reality that can be known to be one way or another prior to future experiences which may confirm or disconfirm our hypothesis.

And if this meaningful proposition is taken to be analytical, that is, as a statement that does not allow any falsification and whose truth can be established by an analysis of its terms alone, one has no less than a glaring contradiction at hand. Empiricism itself would prove to be nothing but self-defeating nonsense.[5]

So perhaps we should choose the other available option and declare the fundamental empiricist distinction between empirical and analytical knowledge an empirical statement. But then the empiricist position would no longer carry any weight whatsoever. For if this were done, it would have to be admitted that the proposition — as an empirical one — might well be wrong and that one would be entitled to hear on the basis of what criterion one would have to decide whether or not it was. More decisively, as an empirical proposition, right or wrong, it could only state a historical fact, something like "all heretofore scrutinized propositions fall indeed into the two categories analytical and empirical." The statement would be entirely irrelevant for determining whether it would be possible to produce propositions that are true a priori and are still empirical ones. Indeed, if empiricism's central claim were declared an empirical proposition, empiricism would cease altogether to be an epistemology, a logic of science, and would be no more than a completely arbitrary verbal convention of calling certain arbitrary ways of dealing with certain statements certain arbitrary names. Empiricism would be a position void of any justification."

My main objection to the contents of the article is that I don't believe in Hoppe's (and Mises') Kantian philosophical defense of praxeological economics, because the correct justification comes from the Aristotelian/Objectivist philosophical paradigm. This article, that I have linked to before, provides arguments for the correct paradigm.

More On Friedman's "Positive Economics"

2011-12-13T16:15:00.008+01:00

In October, I linked to an interesting article about the philosophy and methodology about economics that defended the Austrian view and attacked Milton Friedman's positivist view. It contained in short two key arguments:

1) Concepts are abstractions of certain aspect on groups of thing that omit other characteristics without denying them. For example an eye is an organ that detect light and convert it into electro-chemical impulses in neurons. Eyes function and look differently depending on which species and to a lesser extent even which individual they are on, but the concept of eye only contain the essential characteristic of detecting light and converting it into electro-chemical impulses in neurons. These other characteristics aren't included but not denied either. These other characteristics exist in some form but may come in any form.

The implication of this is that Friedman was wrong when he asserted in his essay "The Methodology of Positive Economics" that a completely realistic theory of markets would have to include for example the different eye- and haircolors of traders. His point with that is that since this according to him shows that economic theory has to be unrealistic, there's no harm in using false assumptions. But economic analysis is based on the economic concepts used that only include relevant characteristics of the markets, and the different eye- and haircolors of traders is usually not among them. That doesn't mean that the existence of different eye- and haircolors is denied, but it is omitted because it is usually completely irrelevant. Omitting facts irrelevant for the analysis isn't unrealistic, unlike the use of directly false assumptions, like for example "perfect competition".

2) Economic analysis isn't so much about how one action or event causes another later in time, but about how actions and events causes things to be different compared to a counter-factual scenario, The relevance of this distinction can be illustrated by looking at currency market movements. QE2 has no doubt caused the U.S. dollar to have a weaker exchange rate than it otherwise would have had, but other factors, primarily the European debt crisis have still caused it to rise in value against many currencies. An analysis that simply involved looking at how things change over time couldn't make that statement about the effects of QE2 because that's not how things have turned out, but a counterfactual analysis can still say that the dollar would have risen even more in value against these other currencies if it hadn't been for QE2.

Similarly, to use Friedman's example of the minimum wage, counterfactual analysis can establish that unless it is so low that it is below the marginal productivity of everyone who have a job or would have found a job, a minimum wage will increase unemployment, but in reality higher minimum wages might be followed by lower unemployment if there are other factors pushing it down.

The point with this is both that this makes it very difficult to really test theories and that counterfactual analysis of economic action makes it possible to establish economic laws depite the fact that humans have free will.

All of this is good, but after re-reading Friedman's essay (or more specifically the 34 out of 42 pages available on Google books), I noticed that Friedman used more arguments that should be adressed.

One, that could be used as an argument against point 1) above is that we can't know which aspects are relevant so the only way of knowing what is relevant is what theory of relevant aspects makes the best predictions. But while it is true that we by some means must investigate the specific characteristics of a certain situation to determine what the specific causal factors are, analysing the predictions of certain possible causal factors isn't necessarily the best way of getting to the truth because as mentioned above there are often different causal factors that work in opposite directions. Furthermore, this question isn't about the correctness of theories but about the applicability of theories. There is a big difference between a theory being incorrect, like the theory that lightning is created by the Norse god Thor, and a theory being inapplicable, like the correct theory of lightning is in places where lightning doesn't occur.

Another is that people and things often behave or move as if a false theory was true. He uses examples like how many objects drop at the speed it would have dropped in vacuum, and that leaves are positioned as if they deliberately tried to maximize the amount of sunlight it receives or that expert billiard players use mathematical formulas to determine how he should make his shots. We all know these explanations aren't true but our observations are still consistent with them. Friedman's point is therefore that it is only natural to use false assumptions in economics, such as the neoclassical mathematical models that says that businessman make their business decisions and household their purchase decisions using advanced mathematics since supposedly they are consistent with predictions about the behavior of business executives and housheholds.

But this conclusion doesn't follow even assuming for the sake of the argument that these models really make correct predictions (a very questionale assumption to say the least). The fact that some false theories make predictions that turn out to be correct, or at least appears to be correct, is the reason why many false theories in for example physics have been able to live on for so long. Most physical phenonenoms that we perceive are entirely consistent with Newtonian physics, even though we now know it is wrong in at least some aspects.

But the difference between physics and economics is that we already know what is correct whereas in physics all theories are ultimately derived from experiments. Thus, while it is correct in physics to base theories on which theory currently is most consistent with predictions from experiment, there is no need to assume false theories in economics just because they make predictions that turn out to be correct. Basing economic theories on predictions therefore brings us away from the truth, unlike in physics where they bring us closer to the truth. Friedman's argument is akin to saying that because crutches facilitates movement for people with wounded legs, people with good legs should also move using crutches even though it impairs movement for them.

Rumor Of Swedbank "Collapse"

2011-12-12T08:11:00.006+01:00

Suddenly, an old post about Swedbank from 2008 that normally these days are read a few times a week (or not at all) got more than 1000 views in a day-the vast majority from people from Latvia. I was at first puzzled at the sudden massive interest in that more than 3 year old post, but then I read that a rumor has been spread in Latvia that Swedbank will collapse, and since the post was high on the list of several google searches, many have clicked on it, presumably because they wrongly thought that it was written recently and not in September 2008 (they really should start to learn to limit their search to web pages published in recent days).

The rumor itself is BTW of course completely unfounded. Swedbank is a very profitable bank as their latest report shows, and even their baltic division is profitable these days thanks to the strong economic recovery there. Nor is there in this case much of a liquidity problem despite the mass withdrawals since the Swedbank Baltic division can get as much liquidity it needs from its Swedish mother company-who in turn can get as much liquidity it needs from the Swedish central bank. However, the mass withdrawals have in some cases emptied Swedbank ATM:s in Latvia, though these should be filled again in a few days.

Chinese Foreign Reserves Are Falling

2011-12-10T17:56:00.000+01:00

I noted in October the irony of blaming the U.S. trade deficit on China's policy of a semi-fixed exchange rate considering that the yuan has in fact been far stronger than that of non-Japanese Asian countries with floating exchange rates and for that matter currencies of European countries with large surpluses like Switzerland, Norway and Sweden. I noted that if the yuan had had a floating exchange rate, it too would have likely have dropped.

Now Ryan Avent does the same, and provides us with this chart of how different emerging market currencies have performed against the U.S. dollar in a period when the yuan has appreciated in value somewhat against the U.S. dollar.

He also notes that the Chinese central bank have in fact intervened in the currency markets to prop up the value of the yuan and reduced its foreign exchange reserves.

This isn't proof that the yuan is valued higher than it would have been with a floating exchange rate, but Paul Krugman and many other pundits have asserted that increased foreign exchange reserves proves that the yuan is undervalued. By their logic, the yuan is actually overvalued now.

An Enviable Level Of Problem

2011-12-09T15:18:00.001+01:00

In the English language Korean online newspaper Korea JongAng Daily, a writer called Kim Jong-so writes about rising discontent over high youth unemployment in South Korea. How high is it? 6.7%. While that is higher than the less than 3% unemployment rate for middle age and older workers in South Korea, it is lower than in all Western countries. By comparison, youth unemployment was 22% in the EU as a whole, with even the country with the lowest youth unemployment rate, Holland, having a youth unemployment rate of 8.2%. All Western countries, but Spain in particular, with its 48.9% youth unemployment rate wióuld just love to have the level of problem with youth unemployment that South Korea has.

Statistical Notes Wednesday December 7

2011-12-07T14:45:00.000+01:00

-The UK non-manufacturing PMI rose to 52.1 in November from 51.3 in October. However, industrial production in October fell by 0.7% compared to September and by 1.7% compared to October 2010.

-U.S. manufacturing orders fell 0.4% in October. In contrast to its manufacturing counterpart, the ISM non-manufacturing index for November fell, but was at 52 still above the 50 threshold for expansion.

-Australia's current account deficit fell to $5.6 billion in the third quarter, less than 2% of GDP, while real net national disposable income (essentially terms of trade adjusted GDP) rose by 1.9% (7.8% at an annualized rate) in the third quarter compared to the second and by 6% compared to Q3 2010.

-German factory orders rebounded by 5.2% in October, but that was after three consecutive monthly declines and orders were still 3.4% below its June peak. However, they were still up by 5.6% compared to October 2010. Similarly, industrial production rose by 0.8% compared to September while stilling being 2.4% below its July peak and up by 4% compared to October 2010.

-Euro area services PMI fell to 47.5 in November, down from 47.8 in October.

-Consumer price inflation in Taiwan fell to 1.0% in November, from 1.2% in October.

-Employment in Israel rose as much as 4.1% in September compared to a year earlier, while average real wages rose a more moderate 0.6% compared to a year earlier.

Krugman Thinks The Euro Zone Is The Entire World

2011-12-06T20:25:00.001+01:00

Paul Krugman rejects the notion that Southern European countries can emulate Germany's success because it supposedly rested on running large external surpluses, and since everyone can't run external surpluses that is impossible. While it is true that the current account balance is a zero sum game on a global scale, his analysis is wrong for other reasons.

First of all, Germany's increasing surpluses was not a cause of its relative success, instead the success is a partial explanation of the surpluses. Rational policies particularly with regard to the labor market helped make Germany more competitive, creating surpluses.

Note however that this doesn't mean that Southern Europe wouldn't benefit from reducing its reliance on foreign capital by reducing and preferably like Ireland and the Baltic states completely eliminate their current account deficit. In fact, given the external mistrust against them, that is absolutely essential. But that is different from the German situation.

Secondly, while it would be better for the people of Germany to use the products they produce domestically to a higher extent (in net terms) rather than to lend it to Southern Europeans, reducing the deficits of Southern Europe doesn't presuppose a reduction in the German surplus, or for that matter a reduction in the surplus of other euro area surplus countries like Holland and Finland. That is because trade and economic interaction happens with countries outside of the euro zone as well. Reducing or eliminating Southern European deficits can happen by reducing the surpluses of countries like for example Saudi Arabia, Singapore, China, Japan, Switzerland, Norway and Sweden (or by increasing for example the U.S., U.K. or Australian deficits).

Unemployment Rate Underestimates U.S. Employment Problem

2011-12-05T13:20:00.001+01:00

Judging from the 8.6% headline unemployment rate number, the current employment situation isn't really that catastrophic. It's bad as it is significantly above the 4.4% rate we saw during the cyclical peak in 2007, but less so than in 1982 when the unemployment rate peaked at 10.8%.

Yet this number doesn't include many people who really should be considered unemployed because they would prefer to have a job, but have given up give up after having seen their job applications rejected countless times. As a result, the labor force participation rate has dropped from 66.4% in January 2007 to 64% in November this year. While it is possible that some of the drop in the participation rate is caused by an unprecedented surge in the will to voluntarily become homemakers, that is implausible beyond an unsignificant extent and there is no evidence whatsoever for believing it.

One way of estimating the true unemployment rate would then be to divide the employment rate with the January 2007 participation rate. The employment rate last month was 58.5% and 58.5/66.4 is 88.1%, meaning that the true unemployment rate is 11.9%. That's down from the July peak of 12.5%, but still higher than in 1982.

But didn't the participation rate drop during the 1981-82 recession? Actually no, in fact it increased marginally, from 63.7% in July 1981 to 64.1% in December 1982.
Some readers may note that the absolute level of the participation rate was roughly the same in 1982 as now and wrongly conclude that there was a lot of hidden unemployment then too. That would however be a wrong conclusion as it was far more common back then for people, usually women, to voluntarily choose to be homemakers. This is evident from the fact that while the female participation rate rose from 53.1% in December 1982 to 59.5% in November 2011, the male participation rate fell from 78.7% to 73.4% during the same period.

(The source for all these numbers can be found here)

They Turned The Lead Republican Candidate Into A Newt

2011-12-03T22:03:00.001+01:00

Hopefully it will get better here as well..:-)

Different Logic For Creditors & Debtors

2011-12-03T18:17:00.000+01:00

I recently pointed out why inflation isn't as good for debtors as is commonly assumed. Only if and to the extent it raises nominal income more than it raises the nominal cost of non-debt payments will it really help debtors and improve their ability to repay the debt and meet the debt payments. In most cases it will, but not in all cases, and even in the cases it do the gain is much smaller than is commonly assumed.

By contrast, inflation is unequivocally bad for creditors whose investments lose value basically proportionate to inflation. Some readers may object that creditors are subject to the same possible negative effect of relative price changes as debtors, but while that is true in the sense that it is possible that some relative price changes caused by inflation could make some creditors gain from inflation in other contexts (for example if they apart from holding debt securities also own oil stocks) that is not relevant for the analysis of the effect on creditors in their role as creditors.

To the extent that higher inflation has raised the after-tax nominal interest rate they receive this is not applicable but given that a loan with a fixed interest rate has already been made or given that the central bank prevents such an increase in nominal interest rates higher inflation is bad for creditors.

The case is different when it comes to the effect of higher real growth. Higher real growth is very positive for debtors because either their nominal income is increased more than their cost of living or their cost of living is reduced more than their nominal income. Either way, their debt burden is reduced as they have more money left for debt payments.

By contrast, higher real growth has no direct positive effect at all on creditors. To the extent it reduces defaults or (in the case of variable interest rates on loans they have made) persuades the central bank to allow real interest rates to increase it could however have an indirect positive effect. However those effects is only indirect and relatively small in the case of fixed interest rates.

Statistical Notes Friday December 2

2011-12-02T15:02:00.000+01:00

-The U.K. manufacturing PMI fell to 47.4 from 47.6 the previous month.

-Jobless claims rose in the United States, but so did also the ISM manufacturing index and construction spending.

Employment rose by 278,000 according to the household survey and by 120,000 according to the payroll survey. However, average weekly (and hourly) earnings dropped by 0.1%.

-Employment in Canada fell by contrast by 19,000 in November compared to the previous month, raising the unemployment rate to 7.4%. However, employment was still up by 1.2% compared to November 2010.

-The Euro area manufacturing PMI fell to 46.4, in line with an earlier estimate.

-Industrial production in Estonia rose by 2.9% in October compared to the previous month and also by 2.4% compared to October 2010.

Real retail sales in Latvia fell by 2.9% in October compared to September but was still up by 4.9% compared to October 2010.

Japanese Bond Yields Not As Low As They Appear

2011-11-30T20:41:00.000+01:00

Kash Mansori notes that despite the fact that both the deficit and the debt level in Japan are higher, bond yields are far higher in Italy, 7% (not 8% as he asserted) in Italy versus 1% in Japan.

The explanations that he offers, (the Japanese access to a printing press, high domestic savings and the vicious cycle created by the self-fulfilling prophecy of default) for this are basically correct and correspond largely to my explanation of the low U.S. bond yields (except that in the U.S., foreign central banks fill the role of domestic savers in Japan).

However, it should be noted that Japanese bond yields aren't as low as they seem. Japan has for the last two decades or so had more or less persistent price deflation even as the rest of the world has had almost persistent price inflation. This means that real interest rates are much higher in Japan compared to the rest of the world then what nominal interest rates would suggest.

In the year to October this year, consumer price inflation was 3% in the euro area and -0.2% in Japan . That means that the nominal difference in interest rate of about 6% was in real terms less than half of that.

The point here is not to deny that Italian bond yields are disturbingly high as they certainly are. The point is instead that even professional economists and bond investors (who really should know better) seems to fall for the money illusion as they compare without further thought bond yields in different currency areas without any regard for inflation.

Statistical Notes Wednesday November 30

2011-11-30T15:23:00.001+01:00

-Third quarter Swedish GDP growth slowed to 4.6% in volume terms and 3.6% in terms of trade adjusted terms in the third quarter, but that still makes it the fastest growing economy in the EU except for the three Baltic countries.

-In sharp contrast to its northern neighbor, Denmark had negative growth, with GDP falling by 0.4% compared to a year earlier.

-Euro area consumer price inflation held at 3% in November, while unemployment in October rose to a new high of 10.3%. Unemployment was highest in Spain at 22.8% and lowest at 4.1% in Austria.

-Real retail sales in Estonia rose 4% compared to the previous month and 5% compared to a year earlier.

-Third quarter GDP growth in India slowed to 6.9% from 7.7%.in the second quarter.

-Unemployment in Japan seemingly rose from 4.1% to 4.5%, though that was mostly the result of the inclusion of Fukushima and other areas heavily affected by the earthquake/tsunami earlier this year that had previously been excluded.

-Industrial production in South Korea in October fell by 0.7% compared to the previous month but rose by 6.2% compared to a year earlier. Also, a broader index of economic activity rose 0.3% compared to the previous month and 4.8% compared to a year earlier.

We'll See About That

2011-11-28T15:05:00.000+01:00

Venezuela's government led by Marxist nutcase Hugo Chavez has implemented massive increases in government spending and money supply, and quite predictably this has caused price inflation to increase.

The government's respone to this has been to implement price controls and threaten companies that don't do as they're told with nationalization. When responding to the people that points out that this will lead to shortages, Karlin Granadillo, who leads the agency that are going to enforce the price controls, said that "the law of supply and demand is a lie".

Well, we'll see about that. I have a feeling that she will be disappointed.

No Peak Oil In America

2011-11-26T18:28:00.002+01:00

Mark Perry points to this interesting Wall Street Journal editorial which points out that despite the massive subsidies from the Obama administration to Solyndra and other "clean energy" companies, it is actually the non-subsidized production of oil and natural gas that is booming. Since 2003 employment in the oil and gas extraction sector has increased as much as 80%, while employment in most other sectors have declined or stagnated.

As the article points out, this boom hasn't occurred because of Obama, but despite of him and would have been even greater if someone else had been President since January 2009 (and will therefore accelerate if someone else is inaugurated in January 2013.)

An excerpt:

"So President Obama was right all along. Domestic energy production really is a path to prosperity and new job creation. His mistake was predicting that those new jobs would be "green," when the real employment boom is taking place in oil and gas....

...The ironies here are richer than the shale deposits in North Dakota's Bakken formation. While Washington has tried to force-feed renewable energy with tens of billions in special subsidies, oil and gas production has boomed thanks to private investment. And while renewable technology breakthroughs never seem to arrive, horizontal drilling and hydraulic fracturing have revolutionized oil and gas extraction—with no Energy Department loan guarantees needed.

The oil and gas rush has led to a jobs boom. North Dakota has the nation's lowest jobless rate, at 3.5%, and the state now has some 200 rigs pumping 440,000 barrels of oil a day, four times the amount in 2006. The state reports more than 16,000 current job openings, and places like Williston have become meccas for workers seeking jobs that often pay more than $100,000 a year....

...Good news? You'd think so, but liberals can't seem to handle this truth so they are now trying to discredit the jobs that accompany it. The American Petroleum Institute recently commissioned a study by the Wood Mackenzie consulting firm, which estimated that better federal energy policy would create an additional 1.4 million jobs by 2030...

...And it stands to reason that if the Obama Administration dropped its hostility to oil and gas energy, even more jobs would be created as the industry invested to exploit other areas with new technology and production methods.

Yet earlier this month the Interior Department released a new five-year plan that puts most of the Outer Continental Shelf off-limits for oil drilling. And the Administration has delayed for at least another year the Keystone XL pipeline that is shovel-ready to create 20,000 new direct, pipeline-related jobs.

The Office of Natural Resources Revenue recently noted that federal revenue from offshore bonus bids (from lease sales) in fiscal 2011 was merely $36 million—down from $9.5 billion in fiscal 2008. The Obama Administration has managed the nearly impossible feat of turning energy policy into a money loser, pouring taxpayer dollars into green-energy busts like Solyndra. The Washington Post reported in September that Mr. Obama's $38.6 billion green loan program had created a mere 3,500 jobs over two years. He had predicted it would "save or create" 65,000.

Mr. Obama nonetheless keeps talking about "green jobs" as if repetition will conjure them. He'd do more for the economy if he dropped the ideological illusions and embraced the job-creating, wealth-producing reality of domestic fossil fuels."

Workers Worst Off During Obama Administration

2011-11-24T15:24:00.002+01:00

As a follow-up on Tuesday's post on how American workers have fallen behind during the current recovery, I have below summarized the statistics for how the overall economy as well as corporate profits and labor income fared during the recoveries from the 3 deepest slumps in post-World War II America, the ones in 1973-75, 1981-82 and 2007-09 (Source the Bureau of Economic Analysis interactive database):

1) Q1 1975 to Q2 1977
Real increase in per capita national income: 9.5%
Real increase in per capita corporate profits: 45.9%
Real increase in per capita labor income: 7.9%

2) Q4 1982 to Q1 1985
Real increase in per capita national income: 14.8%
Real increase in per capita corporate profits: 45.8%
Real increase in per capita labor income: 10.5%

3) Q2 2009 to Q3 2011
Real increase in per capita national income: 4.6%
Real increase in per capita corporate profits: 46.8%
Real increase in per capita labor income: -1.0%

As you can see the most recent recovery stands out in two respects: both that it was far weaker than the other two and that the relative gain in corporate profits compared to labor income has been far greater. Growth has been less than half of that in the 1975-77 recovery and less than a third of that in the 1983-85 recovery. Meanwhile, corporate profits gained more than 48% compared to labor income in this recovery, compared to a 35% relative gain in the 1975-77 recovery and a 32% relative gain in the 1983-85 recovery.

The irony is here that under a left-wing President pursuing pursuing supposedly pro-worker policies, workers are far worse off both in relative but particularly absolute terms than under the more centrist Ford administration, and even worse both in relative but particularly absolute terms compared to the tax cutting Reagan administration. Shareholders have gained more or less the same during these three administrations in absolute terms, but have in relative terms gained the most during Obama because workers have seen their income continue to drop in contrast to the solid gains during particularly the Reagan administration.

Statistical Notes Wednesday November 23

2011-11-23T15:34:00.002+01:00

-Headline quarterly U.S. GDP growth was downwardly revised from 2.5% to 2%, while the terms of trade adjusted growth number was downwardly revised from 3% to 2.7%. Adjusted Gross Domestic Income, that is supposed to be equal to GDP but isn't due to different data sources, increased a more moderate 1%.

Meanwhilem, after three straight monthly declines, real disposable income increased by 0.3% in October. While both "core" and overall durable goods orders fell, shipments increased. Intial unemployment claims increased slightly, but were still at a relatively low level.

-Canada's consumer price inflation rate fell from 3.2% to 2.9% in October.

-Euro area industrial orders fell as much as 6.4% in September compared to the previous month, but were still up by 1.6% compared to September 2010.

-Both Latvia and Lithuania saw big gains in employment and drops in unemployment in the third quarter this year compared to both Q2 2011 and Q3 2010, though the gains weren't quite as big as in Estonia. And at 14.4% and 14.8%, the unemployment rates are still unacceptably high.

-Inflation in Singapore fell in October to 5.4% from 5.5%, while inflation in Hong Kong remained at 5.8%.

-Employment in Taiwan rose in October by 0.14% compared to the previous month and 2.1% compared to a year earlier, helping to push down the unemployment rate to 4.3%.

-Israel's third quarter GDP increased at a 3.4% annualized rate compared to the previous quarter and by 4.7% compared to a year earlier. Although both the quarterly and yearly increases are lower than earlier in the year, they are still well above growth in most other countries.

American Workers Worse Off During Recovery

2011-11-22T16:26:00.003+01:00

Between the last quarter of the U.S. recession, Q2 2009 and Q3 2011 nominal national income has increased 11.6%. Given the 4.7% increase in the domestic purchases price deflator that translates into a 6.6% gain, which is 2.9% at an annualized rate. A very weak recovery compared to those after the 1973-75 and particularly the 1981-82 recessions, but still clearly a recovery.

However, as the population has increased by 1.9%, per capita national income is up only 4.6%. And for the vast majority of Americans who rely primarily on income from their jobs, it gets worse. Because while real corporate profits rose as much as 49.6%, real labor income ("compensation of employees) rose only 0.9%. Given the 1.9% population increase, this means that real per capita labor income has fallen by 1% during the recovery.

It is normal for corporate profits to increase more than labor income during recoveries, just as it is normal for them to drop more than labor income during slumps. However, the divergence has been larger than normal this time, and more importantly economic growth has been much lower, creating the unusual situation where workers are worse off during a recovery. And since most Americans depend almost entirely on labor income, this means that most Americans are worse off during the recovery.

Why Is America Getting Away With Deficit Spending?

2011-11-21T20:35:00.002+01:00

In response to my post about how the U.S. federal government can borrow and have a higher debt level than for example Spain while having a borrowing cost that is dramatically lower, one reader asked why that is. Well, there are essentially three different factors involved here:

1) Many countries with large external surpluses (China, Saudia Arabia etc.) peg their currencies with varying degree of rigidity to the U.S. dollar, and the most effective way of maintaining that through asset purchases are by buying dollar assets, creating an artificial demand for such assets.

2) Even more important is the self-fulfilling prophecy factor. If an asset is perceived as a "safe haven" then it will become so regardless of its objective qualities. If dog feces for some bizarre reason was perceived as a "safe haven" then suddenly in times of panic, multi billion dollar fund managers would buy large quantities of it. Given the fact that U.S. Treasuries during the last decades yielded worse than almost all other asset classes, the perception that they are safe in any sense except "safe way to lose money" is not much less irrational than regarding dog feces as "safe haven".

Similarly, if it is perceived that there is a risk that Spain for example will default, then its yields will soar, something that paradoxically will reduce demand for its securities since it increases the perceived risk of default, raising yields further in a vicious spiral. The U.S. government has had the luck of being perceived as a "safe haven" while the Spanish government has had the bad luck of being perceived as "risky", setting in motion self-fulfilling mechanisms.

3) The U.S. government is protected by its central bank, the Fed, which has the power to buy potentially unlimited quantities of its debts, while the ECB has only bought limited amounts of debt securities, and by declaring that the purchases will be very limited has failed to stop the self-fulfilling prophecy mechanism.

The reader then asked if the low yields of the U.S. government was a bubble. This can be answered by going through the 3 mentioned factors again. Could Saudi Arabia and the others stop trying to peg their currencies? Of course they could, but they're not likely to do so anytime soon. Could the perception of U.S. Treasuries as "safe haven" change? That is certainly also possible, but we can't know when that happens. Could the Fed stop its potentially unlimited purchases? Yes, as I explained here, there is a limit to the extent to which central banks can use "the printing presses" to back up their government, namely when they fear the inflationary consequences more than the effects on the governments ability to borrow and spend. The fact that Hungary has again slipped into a fiscal crisis despite having retained its own currency (the forint) illustrates that when private demand is too weak and the central bank too fearful of inflation, having your own central bank won't stop a fiscal crisis. That could happen in America too, but it's not as long as "Helicopter Ben" is in charge.

Democrats Can Also Be Inconsistent

2011-11-21T11:40:00.001+01:00

[Sorry about the lack of posting the last few days, but I have been sick. Now that I'm feeling better, I will start posting again, starting with this one]

Last month I discussed how some Republicans are inconsistent in their analysis of various forms of spending cut, arguing that cuts in non-military spending helps the economy while arguing that cuts in military spending hurts the economy.

Now we see Robert Reich make a contradiction which is basically the same except that he has the reversed opinion of which spending is good: he argues that increased non-military spending would boost the economy while arguing that military spending is "bloat" and implicitly arguing that it can be cut without weakening the economy.

As with the reverse Republican position, his position per se is not self-contradictory. One can believe that the non-military programs are of greater use than the military ones and therefore favor a shift in spending from military to non-military programs. However his belief in Keynesian effects from non-military programs is in contradiction with his implicit argument of non-Keynesian effects from military programs

$15 Trillion

2011-11-17T09:12:00.001+01:00

The U.S. Federal debt just rose above $15 trillion, yet bond markets are unconcerned about it, even as they are in panic over a lot lower debt levels (even in relative terms) in some European countries. This just goes to show that it is not a just world.

Statistical Notes Tuesday November 15

2011-11-15T14:14:00.001+01:00

-Nominal U.S. retail sales rose 0.5% in October compared to the previous month and 7.2% compared to October. Because the consumer price inflation numbers aren't available yet, it is still unclear how high the increases were in real terms, but most likely they were both positive.

-Seasonally adjusted employment increased by 10,100 in Australia in October compared to December. The yearly increase slowed to 0.9%, lower than the population growth rate.

-Canadian exports rose by 4.2% in September compared to August and 20.3% compared to September 2010, turning a previous trade deficit into a trade surplus. Increased exports of oil and other energy products was the main cause of these increases.

-Euro area industrial production fell by 2% in September compared to August, but were still up by 2.2% compared to a year earlier.

Euro area GDP in the third quarter rose 0.2% in the third quarter compared to the second and 1.4% compared to Q3 2010. Estonia had the highest growth rate of the euro area countries that has reported so far, followed by Slovakia, Germany and France, while Holland and Portugal contracted. Greece contracted on a yearly level by 5.2%, but quarterly change wasn't reported.

-According to preliminary estimates GDP in Estonia increased 0.8% (3.2% at an annualized rate) in the third quarter compared to the second quarter and 7.9% compared to Q3 2010. Although the growth rate is lower than earlier this year, it is still well above the level seen in most other countries.

-After three straight quarterly declines, third quarter GDP in Japan increased by 1.5% (6% at annualized rate) compared to the previous quarter. However, compared to a year earlier, GDP fell by 0.2%.

-Hong Kong's third quarter GDP growth slowed down to 4.3% from 5.3%, driven mainly by a drop in inventories.

That's A Real Labor Market Recovery

2011-11-14T11:52:00.001+01:00

Employment in Estonia rose as much as 8.6% in the year to the third quarter. If employment growth had been that fast in the U.S., it would have a million new jobs per month.

The unemployment rate is still fairly high at 10.9%, but is down from a peak of 19.8% in the first quarter of 2010. And if employment growth continues at this rate, and indeed even if it slows down, Estonia will soon see its unemployment rate fall below the EU average.

Greece More Competitive Than Germany?

2011-11-12T17:50:00.000+01:00

Perennial optimist Mark Perry tries to spin the news that wages are increasing a lot faster in China than in the U.S. as something positive for the U.S. because this will lead to more manufacturing staying in the U.S.

He is right in the sense that all else being equal lower relative wages in the U.S. will increase the willingness of companies to invest in the U.S. rather than China. However, though lower wages is a potential mean by which to increase employment, it is negative as a self-end. That is especially true to the extent it reflects lower relative productivity, because to the extent to which productivity is also lower it will not increase employment.

This can be illustrated by the fact that average hourly earnings is more than twice as high in Germany than in Greece, but as should be obvious especially these days, that doesn't mean that Greece is more competitive than Germany, because German productivity exceeds Greek productivity even more. And though wages are increasing a lot faster in China than in the U.S., so is productivity.

Who Pays Corporate Taxes?

2011-11-10T20:33:00.000+01:00

Walter Williams reminds us that contrary to what some people think, stock holders don't pay most of the burden for corporate income taxes.

Statistical Notes Wednesday November 9

2011-11-09T14:43:00.000+01:00

-Industrial production in Britain was unchanged in September compared to August, but fell by 0.7% compared to September 2010.

British exports increased 0.5% in September compared to the previous month, but the trade deficit still increased to £3.9 billion from £2.7 billion due to a 2.9% increase in imports.

-Industrial production in Germany fell by 2.7% in September compared to August, but was still up 5.5% compared to September 2010.

Exports rose by 0.9% in September compared to August and 10.9% compared to September 2010. As a result, Germany's trade- and current account surplus rose somewhat compared to a year earlier.

-Euro area retail sales fell by 0.7% in September compared to August and by 1.5% compared to September 2010.

-Swedish factory orders fell by 0.9% in September compared to the previous month, but rose 1.7% compared to a year earlier, while industrial production rose 1.3% compared to the previous month and 4.8% compared to a month earlier.

-Annual Estonian export growth fell to 30% in September, the lowest so far this year, but still relatively high.

In Latvia export growth was 16% in September, while preliminary annual third quarter GDP growth was 5.7%, compared to 5.6% in the second quarter.

-China's economy cooled in September as inflation fell from 6.1% to 5.5%, while the rate of increase in industrial production fell from 13.8% to 13.2% and the rate of increase in retail sales fell from 17.8% to 17.2%.

-Employment in South Korea rose by 2.1% in the year to October, enabling both an increase in the labor force participation rate and a drop in the seasonally adjusted unemployment rate to 3.1%

Worse Than Latin

2011-11-07T16:30:00.005+01:00

A reader offered Bryan Caplan's "Why I Am Not an Austrian Economist" as an example of a defense of the use of mathematical models in economics.

Yet if you see the methological section of Caplan's essay, he doesn't really defend it, as he says that "The empirical evidence on their contribution is decidedly negative" and also says that it makes it more difficult to understand and it is a "waste of time". His disagreement with Austrians on this subject is that this is the established "language" of modern economics, and though there are no rational reasons for this, we should just accept it, similar to how people within the Catholic church must accept the use of Latin, which also has no rational basis. In other words, "yes, it's stupid,just like the use of Latin within the Catholic church, but we should accept it anyway because that's just the way it is".

Caplan is right in the sense that if you want an academic economic position right now, you need to learn mathematical economic modeling, no matter how much you dislike it because it is mandatory for anyone pursuing such a career. However, that doesn't mean we should stop arguing against it, just like the fact that just because it is mandatory for anyone working outside of the "underground economy" to pay high taxes doesn't mean that we shouldn't argue against high taxes.

Furthermore, Caplan's likening of mathematical economics with latin in the Catholic church understates how bad it is. As far as I know, the use of the otherwise extinct Latin language instead of the native languages of the different Catholic countries doesn't really mean that its beliefs are altered. In this case, the problem is indeed only that it is a waste of time to learn it. That's bad, but perhaps not that important.

What's worse is that the mathematical modeling means that the theories are adapted to fit mathematical equations, instead of reality. That is why for example entrepreneurship is disregarded in economic models, despite being an important part of the real life economy, since it is incompatible with the equilibrium required by some of the mathematical functions use. The problem is thus not just that it's a waste of time, it also makes economic theories more unrealistic.

Always Check The Details

2011-11-06T15:54:00.000+01:00

Technically, they didn't lie to him as 72 virgins did in fact wait for him, though not the kind of virgins he had hoped for,,,,,

Question For Readers

2011-11-05T10:26:00.001+01:00

I am now writing a paper on the (lack of) usefullness of mathematical methods in economics. I have plenty of arguments against it, but I feel I don't have enough arguments for it that I can reply to, particularly when it comes to pure theory (though I welcome arguments for econometrics too, but that is not as urgent).

So whether or not you agree with them please send these arguments too me, either by commenting on this post or by e-mailing them (stefankarlsson49@gmail.com) to me.

Statistical Notes Friday November 4

2011-11-04T15:49:00.000+01:00

-The British service sector PMI fell significantly in October, just like its manufacturing PMI, but unlike the manufacturing PMI, it was at 51.3 still somewhat above the 50 level.

-The U.S. job market continued to be fairly strong in October, with the payroll survey showing gains of 80,000 jobs and the household survey a gain of 277,000 jobs, the latter resulting in an increase in the employment rate to 58.4% from 58.3% and a decrease in the unemployment rate to 9% from 9.1%. Previous months payroll gains were also revised up.

The average work week was unchanged both on the month and the year, while nominal average hourly earnings rose by 0.2% compared to the previous month and 1.8% compared to the previous year. It is unknown what the real change was since the inflation numbers aren't yet available, but at least the yearly real change was almost certainly negative, probably about a 2% decline.

Meanwhile, the ISM non-manufacturing index fell slightly, from 53 to 52.9.

-The October job numbers from Canada was a lot weaker, with employment declining by 54,000 (since Canada is one ninth the size of the U.S., that's equivalent to nearly half a million jobs), erasing almost all of the large gains from the previous months, and increasing the unemployment rate to 7.3% from 7.1%. Much of both the previous months gain and the latest months drop was probably due to measurement errors and/or temporary factors.

-German factory orders in September came in a lot weaker than expected, dropping by 4.4% compared to the previous month, the third monthly drop in a row. As a result, the annual gain fell to just 2.4%

-Industrial production in Spain fell by 1.7% in the year to September, compared to a 0.3% gain in the year to August.

-Mixed economic news from the Baltic states. Estonia saw industrial production drop as much as 10% in September compared to August, lowering the yearly growth rate to just 6% (previously more than 20%). This monthly drop was driven by a 48% drop in production of electronic production. It seems likely that most of this drop, and perhaps also the previous increases, were driven by erratic, temporary factors.

By contrast, Latvia saw industrial production rise by 1.2% compared to the previous month and 9.6% a year earlier. Lithuania's GDP growth rose according to preliminary estimates in the third quarter to 6.6% compared to 6.5% in the previous quarters.

-Preliminary third quarter GDP in Taiwan fell by 0.3% (1.1% at an annualized rate), reducing the annual gain to 3.4%.

Devaluation Not (Main) Cause Of Argentina's Boom

2011-11-03T16:22:00.002+01:00

After suffering a deep contraction in 1999-2002 (GDP down by 11% in 2002 alone), Argentina had according to official statistics a strong boom in the 2003-07 period, with growth at 9% per year. Some argue that this strong recovery proves that the devaluation in early 2002 was a great success and that it shows that devaluation can boost the economy, and so if Greece and others were able to re-introduce their currencies and devalue them then they would recover too.

It should be acknowledged that under certain conditions, devaluation can boost growth, namely if deflation causes real interest rates to rise above the natural interest rate level, something that we saw during the Great Depression. Argentina had deflation in 1999-2001, but because deflation was so moderate (1-2% per year compared to the 10% deflation during the Great Depression), it played at most a very small role.

But why did it grow so fast then? Well, first of all it should be noted that official statistics in Argentina exaggerates growth. Although the government angrily denies it and even prosecutes some who points it out, it is widely known that it has in recent years systematically underestimated inflation. And given a level of nominal growth, a too low estimate of inflation means a too high estimate of real growth.

Still, although not as high as the official numbers there is little doubt that the economy has grown fast since 2002. However, that is mainly due to the commodity price boom since 2002. Argentina's exports consists mainly of commodities, particularly agricultural commodities like soy beans, wheat, corn and beef, but also for example oil and gold. Soy beans for example, which alone is 25% of total exports has increased by 150% since 2002.

The story behind Argentina's boom is thus pretty much the same as that of North Dakota's, whose boom is obviously not due to devaluation since its U.S. dollars has had the same 1:1 exchange rate to U.S. dollars in the other 49 states during the period.

"Occupy Wall Street" & Green Crony Capitalism

2011-11-02T15:43:00.000+01:00

I previously discussed how "Occupy Wall Street", if they're serious about fighting inequality, should target the Fed and its inflationary policies.

Here Todd Myers points to how certain environmenalist policies similarly exacerbate inequality. He focuses on the effects of the "cap and trade" scheme, which would be a massive government give-away to Wall Street, but one could also mention how government subsidies further enrich already rich people like Al Gore.

As with monetary policy, "Occupy Wall Street" faces a choice between their love for big government and environmentalism and their professed opposition to inequality.

Statistical Notes Tuesday November 1

2011-11-01T15:31:00.002+01:00

-British quarterly growth rose according to preliminary estimates from 0.1% in the second quarter to 0.5% (2% at an annualized rate) in the third quarter. However, much of this increase was probably due to temporary factors in the second quarter like the royal wedding and yearly growth was only 0.5%.

Meanwhile, the British manufacturing PMI fell to a new low of 47.4 in October, down from 50.8 in September, suggesting that fourth quarter growth will probably be non-existent or perhaps even negative.

-Monthly GDP in Canada rose by 0.3% in August, following increases of 0.4% in July and 0.2% in June.

-The U.S. manufacturing survey also dropped but by less, from 51.6 to 50.8. September construction spending rose by 0.2%, but the level for the previous month was downwardly revised by 1.7%, meaning that September construction spending was actually 1.5% below the previously reported August level.

-The Swedish manufacturing PMI rose by contrast, but is at 49.8 still slightly below the 50 threshold for expansion.

-Spain's current account deficit fell in August to €1.45 billion from €2.7 billion a year earlier. The decline in the entire January to August period was however more moderate, falling to €30.4 billion from €34.8 billion a year earlier.

-Italy's current account deficit also fell in August, but by less, from €5.95 billion last year to €5.4 billion this year. Also, unlike in Spain, the yearly change is negative.

-Retail sales in Hong Kong increased in September by 24.1% in nominal terms and 15.2% in real terms. That is a slower rate of increase than in previous months, but still faster than just about everywhere else.

Go Ahead, Make Our Day

2011-10-31T20:51:00.001+01:00

Now let's see, the Greeks are getting an unjust €100 billion give away in debt write downs and are despite this allowed to spend more of other people's money, and they are angry about the deal. Well, do please make our day, and reject the deal, so that (hopefully) you will be on your own then. Given your primary deficit, the required austerity will be a lot greater then. It will be really funny to see how much the crybaby moocher "protesters" like that.

Republican Hypocricy On Spending

2011-10-29T18:11:00.001+02:00

For once, I agree with leftists like Paul Krugman and Matthew Yglesias: Republicans that argue that reductions in military spending because it could make people depending on it unemployed are hypocritical and self-contradictory.

These same Republicans have been arguing for reductions in non-military spending on the ground that it would boost confidence and thus create jobs. But if that argument is true, then reductions in military spending would have the same effect There is no reason to believe that the economy would be affected differently from military and non-military spending. Conversely, if reductions in military spending really is job-killing, then so is reductions in non-military spending. Either way, Republicans stand for a position in one of those areas which according to their arguments in the other area is job-killing.

This doesn't necessarily mean that the Republican position is contradictory. One could perhaps argue that military spending shouldn't be cut because the Russians or the Chinese (or space aliens!) would invade otherwise, or because having a global empire and intervening in various third world civil wars is such a good thing. I don't agree with these other arguments, but at least they're not self-contradictory.

Statistical Notes Friday October 28

2011-10-28T15:16:00.001+02:00

-Quarterly GDP growth increased in the U.S. to 0.6% (or 2.5% at an annualized rate) in the third quarter according to preliminary estimates. However, September real disposable income declined for a third straight month, causing the savings rate to drop to 3.6%-the lowest since December 2007.

-Consumer price inflation in Australia fell to 3.5% in the third quarter, from 3.5% in the second.

-Employment in Spain fell by 2.1% in the year to the second quarter, increasing its unemployment rate to 21.5%. In the province of Andalucia, the unemployment rate is as high as 30.9%.

-Retail sales fell in Sweden in September by 0.6% compared to a year earlier, while its trade surplus rose.

-Real retail sales in September rose in Latvia by 0.9% compared to the previous month and 8.1% compared to September 2010.

-Employment in Japan fell by 0.5% in the year to September but since the labor force shrank, the unemployment rate fell to 4.1%, Note that this excludes the area around the Fukushima reactor. If that had been included employment would have fallen even more and unemployment would have been higher.

The Worst Possible Deal

2011-10-27T22:22:00.000+02:00

Markets reacted seemingly positive on the new deal on Greek debt. However, I believe that this reaction is mistaken.

The underlying, fundamental problem about Greece is that as they are a nation of freeloaders. While I should of course clarify that this description isn't applicable to all individual Greeks, it certainly is applicable to the people of Greece as a collective. The nation which once spawned history's greatest philosopher, Aristotle, has sunken really low. The key facts illustrating this is that both the government budget deficit and the current account deficit is roughly 10% of GDP, meaning that Greece spends more than 10% more than they earn.

If this extra spending had been spent on good investments then it wouldn't have been a problem, but in practice nearly everything has been spent on excess consumption (and to a lesser extent in some cases malinvestments). The Greeks have demanded and mostly gotten a lavish welfare state while they have through tax evasion refused to pay the taxes needed to finance the lavish welfare state they have demanded. In short, the Greeks have as a group demanded the right to live at the expense of others. Few foreigners however pitty the Greeks enough to willingly simply give them money especially since Greece already receices a large net gain from the EU budget so they "cooked the books" and tricked foreigners into giving them money.

Now a deal has been made which says that private lenders will "voluntarily" write down their holdings by 50%. As a result, the Greek fraudsters will get away with living at the expense of others in the past. But unlike what would happen in an outright default, the Greek debt writedown won't mean that their credit line will be cut off. Outrageously enough, EU leaders won't just reward the Greeks for spending too much in the oast, they will actively enable them to spend too much now.

The end result of this is of course that Greece will continue too mooch from the outside world, and that the problem will thus remain unsolved.

Funny Argument About 9-9-9 Plan

2011-10-27T07:47:00.002+02:00

Regarding Herman Cain's 9-9-9 plan there are four things to remember. First, it is actually more like 9-9-9-9, because one of the 9:s is two 9:s, namely the business tax which is 9% of all value added, both profits and labor cost, meaning it is a combined 9% payroll tax and 9% corporate income tax. Second, because it reduces marginal tax rates it will boost growth. Thirdly, despite the former point it would likely mean lower revenue. And fourth, because it also has the effect of redistributing the tax burden from the rich to the poor and the middle class, it is politically impossible. If Cain became the Republican nominee, the Obama campaign would have a field day pointing to how it would increase the middle class tax burden while reducing taxes for the rich. And even if by some miracle Cain became President, it wouldn't pass Congress.

The funniest (but obviously not valid) argument against the plan was this point from Cain's rival Michelle Bachmann.

Shocking News

2011-10-26T15:53:00.000+02:00

When monetary policy is more loose, banks are more likely to make risky loans. Who would have thought that if risky loans became more profitable for banks, banks would make more risky loans?

Statistical Notes Tuesday October 25

2011-10-25T15:36:00.000+02:00

-Retail sales in the U.K. rose by 0.6% in September both compared to the previous month and September 2010. Meanwhile, the budget deficit fell from £71 billion in April-September 2010 to £63.5 billion in April-September 2011.

-Consumer prices in the U.S. rose in September by 0.3% compared to the previous month and 3.9% compared to September 2010, while initial unemployment claims fell slightly to 403,000.

-Preliminary Euro area PMI fell in October to a new low of 47.2, but August industrial new orders rose by 1.9% compared to the previous month and 6.2% compared to August 2010.

-Portugal's current account deficit fell in August to just €37 million from €971 million in August 2010. For the entire January-August period, the deficit dropped more moderately, from €11.4 billion in 2010 to €8.75 billion.

Greece's current account deficit also fell, but by a lot less than in Portugal, from €200 million in August 2010 to €145 million in August 2011. For the entire January-August period the deficit fell from €15.15 billion to €13.9 billion.

-Exports in Japan rose in September by 2.4% compared to a year earlier, while imports rose by 12.1%, reducing the surplus from 774 million yen (about $10 billion) to 300 million yen (about $4 billion).

-Employment in Taiwan fell in September by 0.3% compared to the previous month, but were still up by 2.1% compared to September 2010. And because of a drop in the labor force, the unemployment rate fell to 4.3%, the lowest since 2008.

Average wages in Taiwan similarly fell compared to the previous month, but were up by 4.6% compared to a year earlier in nominal terms,m which given Taiwan's 1.35% inflation rate means that real wages were up by 3.2%.

Matthew Yglesias Strange Critique Of ABCT

2011-10-24T12:01:00.000+02:00

After being asked by a reader to refute the Austrian business cycle theory, Matthew Yglesias after linking to Paul Krugman's old attack on it, ( Which I refuted here), he attacks the concept of malinvestments.

First he seems to try to make a distinction between "making society worse off than it otherwise would have been" (which he at this point admits that malinvestments do) and "makes society worse off (which he denies there is). But there is in the context off analzsing the effects of malinvestments no distinction between these two conepts. Whether or not the economy because of other factors improves or not is irrelevant, the only relevant thing is whether the malinvestments makes it worse or not compared to how it otherwise would have been.

Then he argues that later after the malinvestments have been made, they are "sunk costs" and therefore not a problem. But because the capital invested could have been invested more usefully, they result in a lower living standard, or resulted in a lower living standard in the past if it had been consumed. And more importantly, because of the problem of sectoral immobility of workers, mass unemployment is created. Because of that, and the depressing effect on investments, output is permanently lowered because of these malinvestments.

Inequality Driven By Stock Market

2011-10-22T17:49:00.000+02:00

Robert Frank points out that while in the past the incomes of the rich in America fluctuated less during cyclical booms and busts than the incomes of the rest, they are now fluctuating a lot more than those of the rest.

The reason for that is that while in the past much of their income came from interest income they now depend more on dividends and capital gains as the top 1% own 50% of stocks. And as the stock market is highly cyclical, this means that the incomes of the rich will also be highly cyclical.

This also explains why inequality after having fallen during the 2007-09 contraction again has widened despite the fact that the recovery has been anything but impressive. For various reasons, most notably the inflationary policy of the Fed, the stock market has disconnected from the general economy and recovered very strongly despite the weakness of the general economic recovery.

Good Ron Paul Article About Financial Crisis

2011-10-21T15:34:00.001+02:00

In case you haven't seen it yet, Ron Paul has a good article about the financial crisis and the Fed in Wall Street Journal.

My one objection is that he thinks (or at least gives the impression in the article that he thinks) that the abolition of the Fed (and other central banks) would mean no more financial crisis. But as the existence of financial panics before the creation of the Fed in 1913 illustrates, that is not true. The really crisis generating institution is instead fractional reserve banking.

Robert Reich Misleads On Clinton Era

2011-10-20T16:39:00.000+02:00

In an article arguing against austerity, Robert Reich ironically holds the Bill Clinton presidency as a role model. Yet even setting aside the issue of the tech bubble, the Clinton era was in fact characterized by austerity, tax increases were combined with spending cuts. During the Clinton years federal spending dropped from 22.2% in 1992 to 18.2% in 2000, a much bigger drop than under any other modern President.

China Likely To Surpass U.S. Faster Than Previously Thought

2011-10-19T15:48:00.000+02:00

Ryan Avent notes that China's GDP deflator increases faster than its consumer price index, implying according to him an even faster real appreciation of the yuan.

As I've noted before, one should be careful in using aggregate price indexes for estimating competitiveness because they are composed of different goods and services in different countries.

One implication that is certain however is the fact that the Chinese GDP deflator grows so fast means that the relative size of China's economy is growing even faster than the published real GDP numbers suggests. This means that China's economy could overtake the United States as the world's biggest economy even faster than previously thought. I previously estimated that it would happen in 2024, but considering this factor, it seems that it will probably happen even sooner.

Statistical Notes Tuesday October 18

2011-10-18T14:33:00.001+02:00

-British consumer price inflation rose from 4.5% to 5.2% in September. During the latest 6 years, inflation has averaged 3.2%, meaning that it has systematically exceeded not just the 2% target, but also the supposed 3% ceiling that according to law compels Barn of England Governor Mervyn King to write an explanatory letter to the Chancellor of the exchequer.

-Consistent with the latest manufacturing survey, U.S. industrial production rose 0.2% in September, while retail sales rose 1.1% in nominal terms.

Meanwhile, producer prices rose in September by 0.8% compared to the previous month and by 6.9% compared to September 2010.

-Canadian house prices rose 6.5%, meaning that the Canadian housing bubble continues to grow larger.

-Third quarter GDP growth in Singapore was just 0.3% (1.3% annualized) compared to Q2 2011, but yearly growth still increased from 1% to 5.9% because third quarter growth was negative last year.

-Third quarter GDP growth in China fell back to a lower than expected 9.1% from 9.5%, but growth in both retail sales (from 17% to 17.7%) and industrial production (from 13.5% to 13.8%) increased in September compared to August.

-Employment in Hong Kong grew by 3.8% and full-time employment grew by 4% in the latest year. Full-time unemployment therefore fell from 4.2% to 3.2% and part-time unemployment from 1.9% to 1.7% even as the labor force grew by 2.8%

Real Commodity Prices In The Long Run & The Penn Effect

2011-10-17T13:37:00.001+02:00

The below chart shows that though there are occassional periods of commodity prices booms (like the latest decade) in the long run, commodity prices have fallen relative to the prices of finished goods and services. This of course contradicts the views of those who claims that the world is running out of natural resources.

Does this mean that the future will necessarily be the same? No, not necessarily, but probably because the same mechanisms that have held back commodity prices in the past will continue to be there, Namely, that whenever a commodity has increased in price, this has increased supply by increased exploration and extraction (or planting in the case of food commodities) as well as increasing demand for substitutes and technological solutions to use it more efficiently. All of this causes the price increases to be self-reserving.

However, it is possible that for slow growing economies in America, Europe and Japan relative commodity prices could rise, while they fall in fast growing economies in for example Asia excluding Japan. The reason is that the relative price level in weaker growing economies because of the Penn Effect will, either because of lower price inflation, depreciating currencies or a combination of the two. Since commodity prices are basically the same across the world, a falling relative general price level in weaker economies means that for them inflation adjusted commodity prices could rise while the relative increase in the price level of stronger economies means that for them inflation adjusted commodity prices.

Good Article About The Methodology Of Economics

2011-10-16T16:21:00.001+02:00

"John" at the "money life reason" blog has written a really good article about the proper methodology of economics, arguing against the mathematical/instrumentalist approach that for example Milton Friedman has advocated, a subject more relevant than ever after the unfortunate awarding of a Nobel prize in economics for the creation of misleading mathematical models.

The article is quite long, but is definitely worth the time it takes to read it, so read it here.

Monetary Policy, Income Distribution & "Occupy Wall Street"

2011-10-15T21:16:00.000+02:00

I haven't yet written about the so-called "Occupy Wall Street" movement, which is a left-wing version of the Tea Party, though unlike the Tea Party it seems to be spreading across the world.

I have no sympathy for the movement because of its goal of expanding government, but one of their grievances is at least in America partly legitimate, namely the record high level of inequality.

If all rich people were real creators like the late Steve Jobs, then it wouldn't have been a problem, but because many people have become rich because of bank bailouts and inflationary monetary policies then it is not entirely unproblematic.

The problem is that almost all leftists, including those in "Occupy Wall Street" fails to understand this and in fact supports these policies. As for example the Rortybomb and Free Exchange blogs note however, a few people seems to have been convinced by the Ron Paul campaign and other Austrians that Fed policy is a significant cause of inequality.

Rortybomb dismisses this with the pathetic argument that this view can't be right because the AFL-CIO doesn't believe in it. Free Exchange makes the somewhat more sophisticated argument that because Fed policy pushes down Treasury yields, it will in fact hurt bankers.

But as superficially plausible as this argument may be, it doesn't hold for closer scrutiny. On securities they alread hold, the yield is already fixed and the lower yield in current trading is therefore fully compensated for by higher prices of those securities. And on the new securities they because of the expanded Fed balance sheet, they will see their profits increase because on the margin they still generate significant profits. Not to mention how much profits they can gain by buying other assets.

Both of course also completely ignore the distributional effects of higher stock prices (disproportionately benefiting the top 1%) and higher commodity prices (disproportionately hurting the poor).

It is true that a few rich people might be hurt, namely those that hold their wealth in cash in for example giant money bins. But though the fictional Scrooge McDuck does that, extremely few, if any, real life people do that. More common would be people who save in bank accounts or short-term securities who also loses from inflation. However, that is far from enough to offsett more than a small part of the inequality increasing mechanisms that I mentioned.

Leftists Need To Learn About Long & Short Term

2011-10-14T20:22:00.002+02:00

Matthew Yglesias argues that Rick Perry's comment that it would be treasonous to try to help Obama by inflating more proves that Republicans want to wreck the economy in order to prevent Obama from being re-elected, because the only way that inflating more would help Obama is if the economy became stronger by re-election day.

Now, it is likely that some Republicans (and non-Republican opponents of Obama) may feel that it is worth weakening the economy for the purpose of hurting Obama, because they think that without Obama economic policy will become better and so make the economy stronger in the long term or because they for other reasons resent the fact that Obama is President so much that a permanently weaker economy would be worth it if it meant ending Obama's Presidency. However, it is not the case that Perry's statements or any other statements against more inflation necessarily implies this.

The reason for that is that inflationary policies can sometimes (but not always) strengthen an economy in the short-term, but still weaken it in the long-term. Alan Greenspan's inflating of the housing bubble probably meant a short-term boost to the U.S. economy, but it also meant the problems America has seen in the last few years. And there is certainly a risk that inflationary policies from Bernanke now while boosting the economy in the coming year or so, will similarly create new troubles a few years from now, and that these problems will be so serious that the short-term benefits won't be worth it.

Statistical Notes Thursday October 13

2011-10-13T21:47:00.000+02:00

-The British unemployment rate rose to 8.1% in the three months to August, the highest since 1996, as the employment rate fell from 70.7% in the three months to May to 70.4% in the three months to August.

These numbers will likely not improve as claims for jobless benefits rose in September from August. Meanwhile, annual earnings growth for those who have jobs fell from 2.9% to 2.8% in nominal terms, something that given the 4.5% inflation rate means a reduction in real wages.

The U.K. trade deficit fell to £1.9 billion as both imports and exports fell.

-The U.S. trade deficit was unchanged at $45.6 billion in August, while the July deficit was upwardly revised from $44.8 billion. Compared to a year earlier, exports rose 14.7%, while imports rose 11.3%. Because imports was larger than exports to begin with, the trade deficit still rose slightly from a year earlier.

Meanwhile, initial jobless claims fell slightly to 404,000 from an upwardly revised 405,000 (initially reported as 401,000.

-Employment in Australia rose 0.2% in September compared to August, and 1.1% compared to September 2010. Unemployment fell to 5.2% from 5.3% the previous month, but is up from 5.1% a year earlier.

-Inflation in Germany rose in September to 2.9% from 2.5%, a higher than initially estimated increase.

-Euro area industrial production rose by 1.2% in August compared to July and 5.3% compared to August 2010. The annual rate of changed ranged from +22.7% in Estonia to -12.3% in Greece.

-China's trade surplus

-Employment in South Korea rose by 1.1% in September compared to a year earlier, pushing down the unemployment rate to 3.0% from 3.4% a year earlier.

Weak Economy Reducing Population Growth

2011-10-13T14:03:00.001+02:00

The link between population growth and economic growth goes both way. Higher/lower population growth should (assuming it increases the labor force) increase/decrease economic growth all else being equal, but it is also the case that higher/lower economic growth increases/decreases population growth.

We can see the latter in the case of Spain, whose population growth increased during its housing fueled boom, from 1.07% in 2000 to 1.82% in 2007, only to collapse to 0.36% in 2010, with population population growth expected to be negative this year.

Similarly, Ireland's population growth increased from less than 1% in 1999 to about 2.5% in 2006, only to drop to 0.3% in 2010.

Similarly, Nevada had really rapid population growth during the bubble, but now the population has stopped growing.

There are two reasons for this. The most important is that a booming economy will make more people want to move to a state or country, while an economic downturn will prompt people to leave. The other reason is that a boom will make people more likely to feel that they can afford to have children, while an economic downturn and the job losses or fear of losing your job in the future will make more people unable to afford to have children, or fear that they might be unable to afford it in the future.

We can see this in this interesting graph in the Wall Street Journal. The states with the sharpest downturns have seen their fertility rates drop sharply, with a drop between 2007 and 2009 of 5.3% in California and 7.7% in Nevada. By contrast, booming North Dakota has seen its fertility rate increase by 1.2%.

Interestingly, the fertility rate hasn't however dropped in Ireland, and has remained at a very high level. The sharp drop in its population growth is thus entirely due to a swing from large scale net immigration to significant net emigration.

Statistical Notes Tuesday October 11

2011-10-11T15:47:00.000+02:00

-British industrial production rose in August by 0.2% compared to July, but fell by 1% compared to August 2010.

-Both factory orders and industrial production fell in Sweden in August compared to July, but was up compared to August 2010. The EU-harmonized rate of inflation fell slightly, from 1.6% to 1.5%.

-In August Danish exports increased 7% and imports 10% compared to a year earlier. The current account surplus however still rose somewhat due to a bigger surplus in net factor income from abroad.

-German exports rose in August by 3.5% compared to July and by 14.6% compared to August 2010, causing its trade- and current account surplus to increase.

-Estonia's export boom continued, increasing by 45% in August compared to a year earlier, while imports increased 42%.

Latvia's foreign trade in August increased at a lower, but still high rate, with exports up 27% and imports 20%. In Lithuania exports increased 22% and imports 26%.

-Industrial production in Ireland rose in August by 3.6% compared to July and 11.4% compared to August 2010.

A Nobel Prize For Useless Econometrics

2011-10-10T16:30:00.005+02:00

Thomas Sargent and Christoper Sims received the 2011 nobel price in economics. According to the official "information for the public" page from the Nobel web site, they receive it basically for developing new econometric models for estimating the link between economic policy measures and macroeconomic variables like GDP, inflation and unemployment.

The usefulness of such models are highly questionable to say the least because first of all, many of the variables impacting the economy are unknown, and secondly even if somehow this problem was overcome (or ignored), it would at most tell as the link during a particular period of time and place. The response of economic actors to for example tax or interest rate changes will be different in different countries-and different even in the same country during different periods of periods of time. Thus, these models can at most provide economic history, but it can't provide any universal quantitative economic laws because such laws don't exist.

One example of this is how Sims in the application of his model has concluded that monetary policy can't affect price inflation before 1-2 years after its implementation (a conclusion mentioned in the release linked to above). Yet after QE2 was announced and implemented, price inflation started rising pretty much immediately, and within a year had risen from about 1% to nearly 4%.

So I really do not think Sargent and Sims deserve this price. And unfortunately this will promote the excessive use of and over-belief in mathematical models that are making academic economics (particularly the "advanced" courses) in most universities irrelevant for understanding the economy.

China's $240 Billion Foreign Aid

2011-10-08T18:26:00.003+02:00

I have argued for a long time that it is wrong headed to blame China for the economic woes in America or other places and that it might not benefit the outside world if the yuan became significantly stronger. Furthermore, considering the recent dramatic drops in other Asian currencies except the yen and the continued slow appreciation of the yuan, it is questionable whether China is really holding down its currency that much compared to the level it would have had if it were freely floating (For reasons that I explained here, China's foreign exchange reserve accumulation doesn't prove that a floating yuan would be more expensive) . If it had been freely floating it would have likely dropped dramatically along with other non-Japanese Asian currencies because of the "flight to [perceived] safety" demand for U.S. dollar and yen assets.

It is however probably in China's best interest to end its policy of slow appreciation and allow faster appreciation. One reason is that it would better contain inflation. Another reason is that China is losing big from its accumulation of foreign exchange reserves. By for example investing in U.S. Treasuries they receive a lower interest in a currency that is depreciating, creating big losses. According to estimates made here, China loses as much as $240 billion per year by investing in loss creating assets like U.S. Treasuries.

This means that China is in effect giving away $240 billion to the rest of the world through its exchange rate interventions, making China the world's biggest foreign aid donor. It is true (assuming that the yuan really is undervalued or at least not significantly overvalued) that this is at this point more or less a sunk cost given that these asset purchases have been made. However, by ending foreign asset purchases it can stop the continued increase in losses. If it by contrast persists in these purchases, future annual losses will rise far above $240 billion.

Strong U.S. September Jobs Report

2011-10-07T14:49:00.001+02:00

Contrary to previous months this year, the September jobs report was unequivocally strong. While most analysts tend to focus only on the payroll job number (which rose a higher than expected 103,000), other elements were in fact even stronger.

-First of all, the payroll number for previous months were upwardly revised by a total of 99,000.

-Secondly, like the previous month, but unlike the months before that, the household survey number was even stronger, showing a gain of 398,000. As a result, the employment to population ratio rose to 58.3% from 58.2%.

-Thirdly, average hourly earnings rose 0.2% and average weekly earnings rose 0.5% in nominal terms, though that just reflects a reversal of the previous months drop in both cases, meaning that in real terms September real wages are likely lower than in July.

This report clearly contradicts the "double dip" scenario.

BTW, the United States' northern neighbor Canada had even stronger job growth in September.

Statistical Notes Thursday October 6

2011-10-06T15:02:00.000+02:00

-U.K. second quarter GDP growth was revised down to 0.1% compared to Q1 2011 and 0.6% compared to Q2 2010. Adjusted for terms of trade, growth was 0.2% compared to Q1 2011 and 0 (zero) compared to Q2 2010.

-The ISM non-manufacturing survey fell somewhat, from 53.3 to 53 while the manufacturing index rose, from 50.6 to 51.6. Construction spending rose in August by 1.4% compared to July, but was still lower than in June.

Meanwhile, initial jobless claims rose just 6,000 to 401,000, a smaller than expected increase given the dramatic drop the previous week.

-Australia's trade surplus rose from $1.8 billion in July to $3.1 billion in August due to a big increase in exports.

-Real retail sales fell in the euro area fell in August by 0.3% compared to July 2011 and 1.0% compared to August 2010.

-German factory orders fell by 1.4% in August, the second monthly drop in a row, but were still up 3.6% in seasonally adjusted terms compared to a year earlier.

-Industrial production in South Korea fell by 0.3% in August compared to the previous month, but was up by 3.9% compared to the previous year.

-Retail sales in Hong Kong continued to rise rapidly in August compared to a year earlier, up by 20.7% in real terms and 29% in nominal terms. The rate of increase was however somewhat lower than previous months, particularly in real terms.

-Employment in Israel rose by 3.3% in the year to July, while real wages rose by 0.2%.

Death Of A Great Capitalist Creator

2011-10-06T08:26:00.001+02:00

As most of you have probably already heard, Steve Jobs has died from cancer. Which is tragic for many reasons.

Unlike all too many other rich persons, including those on Wall Street that got rich from creating the U.S. housing bubble, Steve Jobs deserved his wealth as he created even more than he got for himself.

His positive role was apparent not just from the fact that he created Apple, but also from the fact that during the time he was absent from the company, Apple was in big trouble, only to become successful again after Jobs' return. While more people than Jobs deserves credit for both the initial creation and the later revival of Apple, Jobs played a big role in both. And for that, the world should be grateful.

About The Canadian Housing Bubble

2011-10-04T20:48:00.000+02:00

A Canadian reader sent me this interesting analysis of the Canadian housing bubble. It hasn't bursted yet, and won't as long as commodity prices stays high, but if the recent drop in commodity prices continues, it will burst.

The Irony Of China Bashing

2011-10-04T14:35:00.001+02:00

For the past few months, only one currency apart from the yen, has appreciated in value against the U.S. dollar. That currency is of course the Chinese yuan. By contrast, the currencies of several other Asian countries and also Nordic countries with larger current account surpluses relative to GDP than China, like Denmark, Norway and Sweden have dropped more than 10%.

Yet the morons that have most of the seats in the U.S. Congress decides to target the country with the strongest currency, China, for having a too weak currency. What's next, they're gonna bash Saudi Arabia (who BTW also has a bigger relative surplus and a weaker currency than China) for not enforcing Islamic religious laws zealously enough?

Statistical Notes Friday September 30

2011-09-30T15:05:00.003+02:00

-Initial unemployment claims in the United States fell significantly in the latest week, though that may have been largely due to seasonal adjustment problems.

Real personal income fell in August by 0.3%, the second monthly drop in a row, while spending was unchanged, causing the savings rate to drop to 4.5%, the lowest since November 2009.

Meanwhile, second quarter GDP was upwardly revised while GDI was downwardly revised.

-Monthly GDP in Canada rose 0.3% in July, following a 0.2% gain in June.

-Preliminary September euro area inflation rose to 3.0% from 2.5%, reducing the probabilty of an ECB interest rate cut.

-The employment rate in Germany rose while unemployment rate fell in August. During the latest year the employment rate has risen from 61.9% to 63% while the unemployment rate has dropped from 6.9% to 6%.

-Real retail sales in Latvia rose in August rose by 1.6% compared to July and 7.4% compared to August 2010.

In Estonia, real retail sales fell by 1% in August compared to July, but rose 4% compared to August 2010. Industrial production fell by 1.8% compared to the previous month but rose 22.7% compared to a year earlier.

-Household spending in Japan fell by 2.8% compared to a year earlier, and employment also fell. Industrial production however rose, but less than expected.

Do People Earn More Or Less In Texas?

2011-09-29T16:10:00.000+02:00

Average income in Texas is lower than the national average in the United States. Yet as Tino Sanandaji points out, this is entirely and more the result of the fact that groups that typically have low income, primarily Hispanics, are over-represented in Texas. However, Whites, Blacks and Hispanics all have higher income in Texas than in the rest of the country.

Adjusting for the lower cost of living in general and lower cost of housing in particular would make Texas look even better.