Sunday, April 30, 2006

Fed "Falling Behind The Curve"?

New blog post at the Mises blog.

Saturday, April 29, 2006

Social Democrats Better Than Centre-Right On Spending

I previously noted here how the burden of government spending have fallen in recent years in some European countries, including Sweden.

Here is the economics editor of Sweden's third largest news paper, Johan Schück, noting the declining trend in government spending and how this is likely to continue until at least 2008, barring too costly election promises during the coming election.

One noteworthy aspect is that during the times when Sweden have had centre-right governments (1976-82 and 1991-94) the burden of government spending rose, while the social democratic governments between 1982 and 1991 and after 1994 have reduced the burden of government. While this comparison is partly unfair (As Schück notes) because the burden of government spending tends to be counter-cyclical and the centre-right governments ruled during cyclical downturns while the Social Democrats ruled during cyclical upswings, it nevertheless demonstrates the uselessness of the centre-right parties.

And with the centre-right parties pledging to spend even more than the Social Democrats on government consumption, taking away much of the small savings they plan in unemployment benefits and sick leave benefits, I don't think they will perform much better if they win this year's election.

Friday, April 28, 2006

New Data Increases Urgency of ECB Rate Hikes

Today we saw yet more reports that increase the urgency for the ECB to raise interest rates. First and perhaps most importantly, we saw the M3 money supply growth rate accelerated to 8.6% (from 7.9%) in March while private sector debt growth rose to 10.8% (from 10.4%). Meanwhile, consumer price inflation rose to 2.4% in April and the February current account balance showed a deficit of €1.8 billion, compared to a €4.8 billion surplus in February 2005.

All this comes after several reports indicating that the cyclical growth have strengthened considerably in recent months in the Euro-zone and that commodity prices have soared.

The ECB would in this context be simply crazy to abstain from raising rates at its next meeting in early May, like ECB chief Jean-Claude Trichet hinted. Some analysts are now suggesting that they will do it after all or that they will raise rates by a full 50 basis points in June. That is a absolute minimum necessary for them to retain any credibility with regards to "fighting" (i.e. not creating) inflation and financial imbalances. However, while that is clearly what they should do, Jean-Claude Trichet's latest statements indicate that they might not do it. If so, then Trichet will follow the same path as Alan Greenspan of having created mayor economic imbalances by keeping rates too low for too long and then raise them too little too late.

First Quarter U.S. Growth Number Strong-But Weakness Lies Ahead

Today, the "advance" estimate of first quarter U.S. growth was released. The 4.8% growth number were somewhat stronger than I thought, although it was marginally lower than the number Wall Street had betted on.

The specifics are fairly solid with no real negatives apart from a rising burden of government spending and a rising trade deficit. The trade deficit is however assumed to fall in March compared to February, which I find unlikely given how trade surpluses in China and most others who have already reported on March trade have risen sharply. This is likely to contribute to a possible downward revision. Somewhat curious is also how the price index for investment goods is assumed to be rising more slowly, which is puzzling given how the prices of industrial commodities have soared in recent months. This too could be a source of downward revision of the real number, although it could also take effect in the second quarter numbers

Even if the numbers are downwardly revised, it will still be very strong, especially considering that America's terms of trade improved slightly for the first time in several years (something which reflected the temporary decline in oil prices late last year).

However, we should keep in mind that this strong number was largely a bounce back from the weak fourth quarter number. Growth for the last two quarters were 3.25% at an annual rate, which is lower than the previous six months.

Moreover, the fact that prices of oil and other imported commodities are soaring will reduce American purchasing power in the months ahead. And with interest rates rising rapidly it will become increasingly difficult for Americans to keep up spending by borrowing ever more. It therefore seems like a sure bet that growth in the quarters ahead will be a lot weaker. Just how much weaker remains to be seen.

Tuesday, April 25, 2006

Mugabe Invites Back White Farmers

After black racist dictator Robert Mugabe stole the land of thousands of white farmers in Zimbabwe and gave it to his cronies and the thugs who called themselves "war veterans", farm output in Zimbabwe have fallen dramatically, turning what was once a great agricultural exporter into a aid recipient.

Now the Mugabe regim have been forced to reverse course partially and have now invited a limited number of the dispossed white farmers to lease the land they once owned for a 99-year period.

Some of these white farmers seem so desperate that they are willing to accept this. I for one would have been hesitant to say the least to accept this as long as Mugabe or anyone else with his attitude were in power. When the situation worsens again at some later point, whites are again likely to be made scapegots and be dispossessed again and see all of their assets stolen again.

Monday, April 24, 2006

Here We Go Again.....

With oil prices and therefore gas prices reaching new record highs, the scapegoating of "big oil" continues. Now, I'm not gonna say that "big oil" is America's most persecuted minority as they are good at securing government favors.

But the fact is that high oil prices are driven by factors which are not controlled by oil companies, soaring world demand, artifical limitations of U.S. oil drilling as well as worsening geo-political unrest in the Middle East. Oil and gas are internationally traded commodities whose price is determined by global supply and demand. If corporate greed from oil companies are the explanation for high prices, does that imply that when oil and gas prices fell dramatically in the late 1990s, oil companies were run by altruists?

As Alan Reynolds put it when the issue was discussed the previous time:

"Exxon-Mobil's recent profit margin was up to nearly 9 percent of sales. Suppose they tried to cut that to a nickel out of every dollar by offering to sell crude oil for $3 a barrel less than the going price on the Chicago mercantile exchange. Refiners around the world would instantly commit to buying every drop. By the next day, the world price of crude would be same as before.

Suppose the Big Five oil companies got together and agreed to cut retail gasoline prices at their company-owned stations by 20 cents a gallon. Motorists would soon drain those stations dry, leaving the much larger number of independent gas stations in a position to charge even more. Meanwhile, independent station owners would file a complaint with the antitrust division of the Department of Justice accusing the majors of collusive predatory pricing to drive them out of business."

The angry denounciations of high oil and gas prices from U.S. Senators are extremely hypocritical as they themselves are partially responsible for it by banning the drilling of oil in Alaska.

As usual, politicians are complaining about and blaming the market for problems they themselves have created.

Interesting Points in Eurostat Report on GDP And Government Finances

Eurostat today released a report on nominal GDP and government finances for 2005. It contains many interesting facts.

First, it confirms what I have been reporting earlier with regards to the rapid expansion of government spending in the U.K. under "New Labour" leaders Tony Blair and Gordon Brown. My previous post only dealt with direct government purchases and how they have been expanding rapidly in recent years as a share of GDP. In this report, the two other forms of government spending, transfer payments and interest costs are also included. And it shows that total government spending rose from 40.9% of GDP in 2002 to 44.8% in 2005, a spending increase which in part have been financed by higher taxes and in part by a higher deficit.

By contrast, the Euro-zone saw its government spending to GDP ratio decline slightly, from 47.7% to 47.5%. The British advantage thus fell from 6.8%:points in 2002 to a mere 2.7%:points in 2005.

The two countries who in 2002 had the heaviest burden of government spending, Sweden and Denmark, saw some relief between 2002 and 2005. Government spending to GDP fell from 57.9% to 56.4% in Sweden and from 55.2% to 53.1% in Denmark. Because of this, Denmark have now lost its second place in the burden of government to France, where spending rose from 52.6% to 53.9%.

The lightest level of government spending can not surprisingly be found in the rapdily growing baltic states. Government spending relative to GDP in 2005 was 35.9% in Estonia, 36.2% in Latvia and 33.7% in Lithuania. Ireland have formally lower spending than Estonia and Latvia at 34.5%, but adjusted for the fact that some of Ireland's GDP is an accounting fiction created by tax planning multinational corporations, the baltics have lower spending.

Cyprus saw its burden of spending increase even more than the U.K., at 4.1%:points (from 40.6% to 44.7%), followed by Portugal with 3.5%:points (from 44.3% to 47.8%), Malta with 3.2%:points (from 44.3% to 47.5%) and Luxembourg with 2.9%:points (from 41.4% to 44.3%).

The biggest decline were noted in Slovakia with 6.5%:points (from 43.3% to 36.8%). Other big spending cutters include the Czech Republic at 3%:points (from 46.7% to 43.7%), Greece at 2.8%:points (from 49% to 46.2%) and Denmark at 2.1%.

Another noteworthy aspect in this report is the shift in relative economic weight in the Euro-zone. The relative importance of Germany have decreased significantly (From 29.6% of the total in 2002 to 28% in 2005), while the importance of Spain (From 10% to 11.3%), Greece ( From 2% to 2.25%) and Ireland ( From 1.8% to 2%) have increased.This shift from slow growing Germany to rapidly growing Spain, Greece and Ireland means that even if growth is unchanged in all individual countries, aggregate Euro-zone growth will accelerate.

Friday, April 21, 2006

Higher Housing Prices Really Does Mean Higher Housing Costs

It seems that ordinary people ignore the view by the Bureau of Labor Statistics and many economists that higher housing prices really does not mean higher housing costs. As pointed out in this article, domestic migration in the United States tend to be negative for areas with high housing prices in the North East and the West Coast, particularly New York, Washington D.C., Los Angeles and San Francisco and their sub urbs while net migration is positive for states with lower housing costs in the Sun Belt.

While the domestic net outflow for the high price are compensated by a large inflow of foreign immigrants (they're the ones that keep prices high when the natives sell), it seems that most ordinary Americans take the correct view that higher housing prices really does mean higher housing costs.

Swedish Riksbank Sells Dollars, Buys Euros

Sweden's Riksbank today announced that they have been selling U.S. dollars and used the money to instead buy euros and Norwegan kronor.

Good move, as it is likely that the dollar will fall this year against the euro and most other currencies. However, euros wouldn't have been my first choice as I believe the Japanese yen is more undervalued than the euro. Or, even better would have been if they bought gold, which is even more likely to rise than the yen.

Previously, the Riksbank made the very bad move of in fact selling gold and instead buying government bonds. Since that sale, in September 2005, gold have risen nearly 50%, while the yield on the bonds they bought was likely only about 2 to 3%.

The current move is far smarter, although it could have been even more profitable had they been buying yen or gold instead of euros.

Thursday, April 20, 2006

Doveish Fed Comments Raises Inflationary Expectations

Although gold prices fell today, they have still increased sharply in recent days. One of the reasons for the gold price rally is likely higher inflationary expectations. During the recent gold price rally, the spread between the yields of regular bonds and inflation-procected bonds, so-called Treasury inflation-protected securities (TIPS), have only increased slightly as TIPS yields have increased almost as much as yields from regular bonds. This could indicate that the gold rally is driven by other factors than higher inflationary expectations, although it likely also partially reflects a divergence between the inflationary expectations of bond traders and commodity traders and possibly also a belief that government inflation statistics (which is what is relevant for the spread between regular bonds and TIPS)is manipulated to underestimate inflation.

But during the gold price rally this week, we can clearly see that this reflects higher inflationary expectations. Last week, when the yield on the 10-year Note rose from 4.97% to 5.05%, the TIPS yield rose nearly as much, from 2.41% to 2.48%, meaning that the spread only rose from 2.56% to 2.57%. Yet when yields on the regular 10-year security fell from 5.05% to 4.99% the first two days of this week following doveish comments in the minutes from the latest FOMC meeting, the TIPS fell even more, to 2.38%, raising the spread to 2.61%. And when yields rose again to 5.04% following higher than expected "core" inflation numbers and sky-rocketing commodity prices, the TIPS yield was unchanges, raising the spread to 2.66%. This indicates that an increasing number of bond traders now believe that the Fed is going to inflate more than previously expected. A rational belief, in my view. Indeem I think the 2.66% spread is far too small. While I wouldn't recommend anyone to buy any U.S. government securities even after the recent increase in yields, it is far more rational (less irrational) to buy TIPS rather than regular securities.

Wednesday, April 19, 2006

The Confused Thinking of the IMF

The IMF, with a long track record of calling for countries to pursue policies which then aggravated their economic crisis, have now offered its advice for the ECB. The ECB should according to the IMF "not rush" to normalize interest rates from its current absurdly low levels. In a time when commodity prices are going through the roof, the IMF claims that inflation is "subdued" and that domestic demand is "fragile", overlooking the fact that the switch from a current account surplus to a current account deficit indicates that domestic demand is growing rapidly, more rapidly than supply.

It gets worse, as they in the same report notes that "``Elevated'' house prices in Spain and Ireland could also undermine the economy, it said.". Actually, it's not just in Spain and Ireland that house prices are "elevated" and this imbalance is of course caused by the fact that the ECB have followed the IMF:s advice not to rush to normalize interest rates. Thus, in this report IMF calls for the ECB to aggravate the problem they worry about in the same report. This is a clear example of the incompentence that is behind the fact that countries that implement IMF policies usually see their economic crisis worsen.

Tuesday, April 18, 2006

"Analyst's Estimates" of Corporate Earnings

I've been following financial markets for nearly 15 years by now, and one thing I've noticed is how every quarter, every year it have been the case that actual published earnings have on average exceeded "analyst's estimates", at least in America. And with earnings season now starting, I can bet you a million dollars it will be the case this quarter again. And the next quarter. And the quarter after that and so on. A majority of companies will have headlines showing their earnings to be better than the so-called estimates. A minority will "meet estimates" and a handful will have "lower than expected" earnings. But again, most will have "better than expected" earnings and on average actual earnings will be higher than the so-called estimates.

This does not necessarily imply that earnings are good per se, or even that current earnings will be better than what those analysts forecasted a year ago earnings will be now (In fact, studies have showed that on average analysts overestimate what earnings will be a year from now). It's just that it is alway the case that the published earnings will on average be higher than the so-called estimates are just before they are published.

This consistent error could indicate two things.
1) The so-called analysts are grossly incompetent.
2) The so-called analysts are dishonest, and are trying to create a artificial impression of good news, by downwardly adjusting their "estimates" just before publication so that the headlines will always be mostly about "better than expected" earnings, a illusion they have an economic self-interest in, since this would make more people buy stocks something which they as brokerage houses would make money on.

Both of these explanations are possible and it could of course be a combination, but I am quite frankly more inclined to believe in the latter.

Bush's Big Government School Reform Encourage Test Score Deception

Interesting article about how one of the all too many big government reforms implemented by Bush, the "No Child Left Behind" act encourages schools to lie about the progress they are required to make.

While American conservatives have traditionally opposed federal involvement in education and called for the abolition of the Department of Education, Bush have done the exact opposite and sharply increased federal education spending and increased the role of the federal government in education. This was made in the so-called "No Child Left Behind" act which sharply increased federal spending on and control over education.

One element in this law is that all schools must every year demonstrate improved test scores for students of all races or face penalties. But as the article showed, this have only encouraged schools to exclude students with dismal test scores. An estimated 2 million students -mostly non-white- have been deliberately excluded to deceive the Department of Education and therefore escape penalties.

It also seems likely -although no direct proof of this is available yet- that many schools are directly faking test scores in order to escape penalties.

How High Will Oil Prices Go?

It seems that Larry Kudlow was right, sort of, when he in March 2005 predicted that "$55 oil won't last". It didn't last-it have since risen to an all-time high of $72.

The oil price boom is part of the general boom in commodity prices that we have seen recently. Many other commodities have risen as much or more as oil in price, although the oil price surge have a much greater effect since it is the most important commodity in terms of impact on the world economy.

In the long run, oil prices simply cannot continue to increase this fast. Rising prices will both encourage increased exploration and encourage the use of alternative sources of energy, such as nuclear power and hybrid cars. And as prices go higher and higher, the pressure to increase production and switch to alternative sources of energy will intensify. And as oil prices at these levels will slow world economic growth, this will naturally reduce demand.

And if the combination of rising interest rates and rising commodity prices causes a recession in America, something which together with the protectionist policies which would likely follow, this could seriously reduce growth in China, whose rising demand for oil are one of the main reasons for the price increase, this could cause a significant correction in oil prices.

However, there is a significant risk that oil prices will go even higher before they start to turn lower, particularly if there is a military confrontation between the United States and Iran (the world's fourth largest oil exporter after Russia, Saudi Arabia and Norway)) over Iran's nuclear weapons program. While the direct effects of an American attack on Iran's nuclear facilities on oil supply from Iran will be limited, the counter-strikes that the Iranian leaders have pledged could cause a larger scale confrontation which would cut off Iranian oil from the world market, something which in turn could cause oil to rise to $100 per barrel or so.

Nuder's Strategy of Repeating Lies

Swedish finance minister Pär Nuder seems to think that if you repeat a lie often enough, it becomes "truth". I don't know how many times he have claimed that Sweden have the strongest growth in Europe, but it must be a dozen times at least. And he repeated this claim today, albeit now with the modifying disclaimer of "with the possible exception of our Nordic neighbors". Yet according to the latest Eurostat statistics, Sweden have a shared (together with Finland) 11th place of the 24 EU countries which have presented fourth quarter growth. And according to the Economist (not online for non-subscribers ), the number for Poland is higher too. Yet of these 10-12 (Depending on what number is correct for Poland and the number for Luxembourg) EU countries which have higher growth, only one (Denmark)is Nordic. In addition to these EU countries, there are also several non-EU countries in Europe which have higher growth than Sweden.

Yet Nuder just keep repeating the lie that "Sweden have the highest growth in Europe". Just repeating this lie won't make it more true. However, it is unfortunately likely to convince more people as journalists don't challenge this lie, and as regular Swedes who don't read economic statistics see that Nuder can repeat this claim without being corrected, they are in many cases likely to be deceived.

Sunday, April 16, 2006

China's GDP Growth Tops 10%

China's president Hu Jintao today revealed four days days before the official announcement, that GDP growth in China was 10.2% in the first quarter. Of course, given how growth was 9.9% last year, this is hardly per se extraordinary for being China, but it is actually the first time since the early 1990s that Chinese officials admit that growth is currently above the 10% milestone. Like the statistics of many other non-democratic third world countries, China's statistics have been viewed as being more unreliable than Western statistics, only that unlike the others who are suspected of overestimating growth, China have been widely suspected of underestimating growth, a suspicion that was confirmed when GDP was upwardly revised by 16.8% last year. Particularly suspicious is how growth have been reported to be just under -but never above- 10% quarter after quarter for years. It is believed that the Chinese leaders think that reporting numbers above 10% could help provoke anti-Chinese and protectionist sentiment in the West, so it is safer to report it to be just under 10%.

The fact that they now admit that growth is over 10% could either indicate an increased willingness to make their statistics honest-or that real growth have increased so much that they would lose all credibility were they continue with their just below 10% numbers.

Chinese leaders have for long set out 7 to 8% as the target for growth, yet these numbers have almost always been exceeded, apart from the slowdown associated with the financial crisis in the rest of Asia in the late 1990s. This indicates that the Chinese private sector is far more productive and innovative than the politicians.

President Hu commented the numbers by expressing concern that growth is too fast. Actually it's not the fast growth per se that should concern them, but the extent to which growth is driven by cheap credit, as is indicated by the rapid money supply and
credit growth in China. The money supply growth figures is actually not as bad as a similar numbers in the West would be, as it is only natural to have higher money supply growth in faster growing regions. If separate money supply figures were
being kept for Detroit and Las Vegas, Las Vegas would certainly be shown to have far higher money supply growth and there would be nothing wrong with that. However, at nearly 18%, money supply growth is too high to be attributed solely to the naturally higher growth rates in economically expanding regions. Clearly, we are seeing real inflationary excesses, something which is expressed in over-capacity in some industries.

This is yet another reason why it would be wise for China to give in to U.S. demands and revalue their currency at a much faster pace than we have seen in recent months. A stronger currency would allow for interest rates to rise in China and thus contain the inflationary excesses.

Thursday, April 13, 2006

10-Year U.S. Treasury Yields Above 5%

Today the yield on the 10-year U.S. Treasury Note rose above 5% for the first time since 2002. Less than a year ago, the yield was less than 4%.

Ultimately, this is a sound development that will help limit global economic imbalances, but this will mean short-term pain for the over-indebted U.S. households and the over-indebted U.S. federal government as their interest costs now rises sharply.

And perhaps most significantly, this could help burst the housing bubble, something which will mean a recession in America, unless the U.S. somehow will be so lucky as Australia and get a boost from some other source that counteracts the negative effects of a bursted housing bubble.

Wednesday, April 12, 2006

Government Expansion Under Berlusconi

Another reason why Italy have performed so badly under Berlusconi apart from those listed in the previous post was found here: government consumption relative to GDP have increased significantly, draining resources from the private sector (Contrary to the NY Times assertion that it provided "stimulus").

Tuesday, April 11, 2006

Devaluation Would Not Solve Italy's Problems

Following up on my recent post on Italy's election, which seems to have been as even as an election can be,with Romano Prodi's left-wing bloc winning 49.8% of the votesversus 49.7% for Silvio Berlusconi's right-wing bloc, I will now analyze the claim, made by both Berlusconi (seeking to deflect blame for the problems from himself) and various Friedmanite floating-exchange rate advocates, that the main cause of Italy's economic problems are its entry into the euro-zone, and the related claim that Italy's economy would regain its strength were Italy to re-introduce the lira and then use this to try to inflate and devalue its way.

It is sometimes claimed that the root cause of Italy's problem is that unit labor costs (wages adjusted for labor productivity) have risen 10% versus the Euro-zone average since 1999 (when the euro was introduced, while Germany have seen its unit labor costs fall 10% versus the euro-zone average, meaning that unit labor costs have risen 20% in Italy relative to Germany. Yet the economy need not be damaged by a relative rise in unit labor costs as long as it is driven by market factors, as this will increase purchasing power of the domestic economy and strengthen domestic demand, helping to offset the weakening trade balance. This effect is re-inforced in a monetary union, where the higher domestic price inflation will imply lower real interest rates, womething which will further boost domestic demand.

This fact is clearly demonstrated by the economic trends in other euro-zone countries. One would have thought that the advocates of "unit labor cost trends determine economic performance"-theory would be somewhat shaken in their beliefs when they cite the relative trend of unit labor costs in Italy relative to Germany. Germany have had as low level of economic growth as Italy despite the sharp decline in relative unit labor costs. Meanwhile, unit labor costs in Ireland, Spain and Greece have risen as much or more than in Italy, yet they have been the three fastest growing economies of the old 15 EU countries.

If higher unit labor costs were really the cause of Italy's problems, then surely we would have expected Ireland and Spain to experience weak growth too, but in reality they outperform all other Western European economies. And we should also if that theory were correct expect Germany to boom, but Germany's growth have been as weak as Italy's.

Instead the root cause of Italy's problems is as I've stated before a combination of a highly burdensome level of regulation that in particular inhibits the growth of the private service sector, a very old and rapidly aging population which in combination with´a low retirement age is a very heavy burden (already state pensions costs 14% of GDP, far higher than elsewhere) and also the bad luck of having a export structure concentrated in areas like clothing, shoes, white goods, machine tools and other goods where China and other super competitive East Asian and Eastern European economies have their strenghth. These are problems which would have existed with or without the euro.

But, someone might object, even if the euro weren't the root cause of Italy's problems wouldn't a re-introduction and heavy devaluation of the lira solve at least the last problem, that of Italian exporters getting out-competed on the world market by the Chinese?

Well, if the devaluation were big enough (we're talking about a really big devaluation now) it would indeed help Italian exporters regain lost marketshare. But even setting aside the damage such a devaluation would inflict on other countries, this would come at a very heavy cost as it would sharply reduce domestic purchasing power and thus damage the domestic economy.

Moreover, the success of such a move would depend on the Italian government and also private debtors being able to in effect default on their debts by re-denominating their debt in euros to the much lower valued liras. Given that the loans were issued in euros and the fact that euro would continue to exist, the legality of a move to re-denominate them into much lower valued liras (and in effect steal from creditors) would be dubious. If such a move failed and debts taken in euros would remain nominated in euros, it would imply a sharply increased real debt burden, something which would cause mass bankruptcies among private debtors and also increase Italian government debt to intolerably high levels, all of which would send Italy's economy into a crisis as deep as that seen in East Asia in 1997-98.

Italy did try the Friedmanite solution to devalue its way out of troubles in 1992, and while this boosted exports, overall growth continued to lag behind the rest of Europe as the devaluation damaged the domestic economy. The failure of devaluation to solve Italy's problems in 1992 illustrates that devaluation would fail again now and that the only thing that could solve Italy's economic problems are dealing with the statist policies that inhibits re-structuring of Italy's economy.

Monday, April 10, 2006

More Empirical Evidence on the Negative Effects of Taxes

I have previously dealt with the effects of taxes on a theoretical level, like when I here demonstrated that on a economy-wide basis the income effect will not cancel out any of the negative substitution effects from tax and spending policies (although it will cancel out some of the positive effects from tax cuts financed by higher government borrowing), so the effects of tax and spend policies on economic growth can only be negative.

Here I linked to a few empirical studies on the subject.

Now there is a new study on the issue, from Magnus Henrekson and Steven Davis. Just as one would have expected, high taxes on labor will reduce private sector employment, particularly in highly labor intensive sectors. An excerpt from the summary:

"They find that higher tax rates on labor income and consumption expenditures lead to less work time in the legal market sector, more time working in the household sector, a larger underground economy, and smaller shares of national output and employment in industries that rely heavily on low-wage, low-skill labor inputs.

The estimated tax effects are large for the authors' preferred tax measures. Cross-country comparisons in the mid-1990s indicate that a tax hike of 12.8 percentage points (one standard deviation) leads to 122 fewer hours of market work per adult per year and a 4.9 percentage point drop in the employment-to-population ratio. It also increases the size of the shadow economy by 3.8 percent of official GDP, and it reduces by 10 to 30 percent the share of national output and employment in "Retail Trade and Repairs," in "Eating, Drinking, and Lodging," and in a broader category that includes "Wholesale Trade and Motor Trade and Repair." The evidence suggests that tax rate differences among rich countries are a major reason for large international differences in market work time and in the industry mix of market activity."

See, I Told You So

Nearly two weeks ago, I predicted that Jacques Chirac would again prove himself to be a cheese-eating surrender monkey, at least with regard to that "surrender monkey"-part (I don't know how much, if any, cheese he eats)by caving into the protests from unions and the spoiled, wealthy youths who calls themselves "students" and withdraw the far too modest proposed liberalization of the French labor "market".

For Europe's sake, it would have been best if I had been proven wrong, but unfortunately I wasn't as Chirac now withdraws the proposal. As I've stated before, the worst part about this is not that the proposal itself is dead. Since it was so modest it would only have meant a modest improval of the situation. The problem is that it will discourage politicians not only in France but in other European countries to abstain from other more important reforms of the welfare statist system that inhibits the economies of Western Europe.

Friday, April 07, 2006

Italian Election: The Bad vs The Bad

On Sunday and Monday, Italy will hold a general election. The left-wing opposition led by former EU president Romano Prodi holds a slight lead in the polls over the right-wing governing coalition led by Silvio Berlusconi, but given that the margin is so small, both blocs stand a realistic chance to win.

The sad thing however is that regardless of whether Berlusconi or Prodi wins, Iitaly will lose as both alternatives are appalingly unattractive. Not that this is unique to Italy of course. In the latest U.S. presidential election, both candidates, Bush and Kerry were highly unattractive. The same thing was also true in the latest German election.

Berlusconi and his party Forza Italia are in policy terms the lesser evil in Italian politics but (as the last few years have showed) he have little possibility of implementing the modest free market reforms he advocates because he governs with the help of Alleanza National and the Christian Democrats who -in sharp contrast to the third coalition partner, the erratic populist and separatist Northern League- likes big government in general and the vast subsidies to the poorer southern parts of Italy. Berlusconi might also have to rely on the support of self-described fascist Alessandra Mussolini, the grand-daughter of fascist dictator Benito Mussolini.

Berlusconi also have a habit of coming with strange statements, such as when he denied that [Benito] Mussolini ever killed anyone, his reference to a German member of the European parlament as a Nazi concentration camp guard or his latest statements of how the Chinese used to boil babies under Mao.

Romano Prodi on the other hand is a typical statist bureacrat, who is even less likely to implement any of the reforms Italy needs because he is for one thing even more statist than Berlusconi and also because he relies on communist support, something which will make it nearly impossible for him to implement free market reforms.

In short, the one thing certain about the Italian election is that the outcome will be bad for Italy and the rest of the world. Italy whose economy have been Europe's worst performing in recent years is in great need of radical reform. Yet Berlusconi denies that any problems exists and to the extent he occasionally acknowledges them he blames them on the euro. Just how the latter factor could explain that Italy have performed so much worse than the other euro zone economies, not least the other big Southern European country Spain is not clear. Prodi for his part tries to blame the problems on Berlusconi, but this is only true to the extent that Berlusconi have not
implemented reforms radical enough. The basic problems cannot however be blamed on Berlusconi.

Instead of being the result of the euro or Berlusconi, Italy's problem have three basic causes. One is the high regulatory burden, which is even worse than in the rest of Europe. Two is the old and rapidly aging population. Italy have the world's highest median age after Japan, but the problems from this are much greater than in Japan as Italians in general retire much earlier than the Japanese. And three is the fact that Italy have had the bad luck of having a similar export structure as super-competitive China, which have reduced Italian exports.

To overcome these problems, Italy must raise the retirement age dramatically and liberalize the economy. Berlusconi have made modest moves in the right direction but
they have been nowhere near good enough.

Commodity Price Boom Reflected In North American Job Numbers

Today employment numbers were released for both the United States and Canada. The U.S. report were mixed with fairly strong employment growth and slightly falling unemployment rate, but with only a slight increase in average hourly earnings, a increase so weak that it will likely be negative after taking into account for inflation. The Canadian report were unequivocally strong, with very strong employment growth, falling unemployment and wage increases well above inflation. Compared with a year earlier however, Canadian employment growth were somewhat weaker than in the U.S.

One interesting aspect neglected by most economic analysts is the strong effect of the commodity price boom on these numbers. I have previously covered how Australia have benefited from the commodity price boom. Yet other net exporters of commodities have also benefited, and that includes Canada. The U.S. have as much natural resources as Canada and Australia, but because the U.S. have more than 9 times as many people as Canada and nearly 15 times as many people as Australia, it consumes so much natural resources that it is a net commodity importer. For that reason, the a whole loses from rising commodity prices, unlike Canada and Australia.

But U.S. commodity producers benefit of course, something we can see in this report. Overall, aggregate hours worked in the U.S. private sector rose 2.6%, while nominal average hourly earnings rose 3.4%, implying a increase in nominal labor income of about 6%. But in the natural resource sector, aggregate hours rose a full 7.2%, while average hourly earnings rose 6.7%, implying a total increase in labor income from the natural resource sector of 14.2%.

The same thing goes in Canada where overall employment rose 2.1%, but employment in the sector "Forestry, fishing, mining, oil and gas" rose a full 8.6%. No sector breakdown for hourly wage increases is available for Canada, but as hourly earnings in the most natural resource rich Canadian province, Alberta, were a full 7.0% versus the Canadian average of 3.5%, it seems safe to assume that wage increases in the commodity sector greatly exceeded that of other sectors.

Alberta have had much stronger growth than the Canadian average in recent years for two reasons. First is the already mentioned factor of its vast natural resources and second is the fact that it is a more conservative province than the rest of Canada and so have lower taxes and less regulations. Alberta have a employment rate of 70.6% versus the Canadian average of 62.9% and its unemployment rate is only 3.4% versus 6.3% for Canada as a whole. The strong income gains in Alberta have pushed up the value of the Canadian dollar to multi year highs against the U.S. dollar, something which have increased problems in manufacturing intensive Ontario and so increased the regional divide in the Canadian economy.

Thursday, April 06, 2006

Gold Reaches $600

Gold today reached the important $600 level. It was only late last year that it reached $500. As the euro fell against the dollar following the ECB:s strange and irrational decision to rule ot a interest rate hike next month, gold rose even faster versus the euro. With the kind of irresponsible policies the ECB and other central banks pursue it is no wonder that investor prefers honest money that can't be debased by politicians and bureaucrats.

The ECB Will Not Raise Rates?

Given the high level of money supply and credit growth in the Euro-zone, the fact that consumer price inflation remains well above the supposed 2% ceiling and given the fact that all indicators imply that the Euro-zone is in a cyclical upswing, a interest rate increase next month seemed like a sure bet.

Yet today ECB chief Jean Claude Trichet went out of his way to make it clear that there wont be any rate hike next month. When even the last excuse for not raising rates, the weak economic growth in Europe have been removed, one can ask just what he is waiting for. If this is not a time to normalize the artificially supressed rates, then it seems like there will never be any time for that.

One thing is for sure, however. By waiting, the ECB is following the mistakes of the Federal Reserve and creating increasing economic imbalances that in time will mean big trouble for Europe.

Tuesday, April 04, 2006

Norway's Biggest Party Quotes Mises, Rothbard, Hoppe in Ideology Course

New blog post at the Mises blog.

Monday, April 03, 2006

Estonian Economic Growth Upwardly Revised

Estonia's already impressive preliminary growth estimate of 10.5% for the fourth quarter of 2005 was upwardly revised to 11.1%.

This have had the effect of reducing unemployment from 8.9% to 6.2% in the latest year. As a result of the increasingly tight labor market, worker's compensation rose 14.2% in nominal terms, or about 10% in real terms. The Western European politicians and labor unions worried about Eastern European immigrant workers will soon have nothing more to worry about-at least not with regards to Estonians-or Latvians.

For 2005 as a whole, growth was 9.8%. Composition of growth seemed mostly sound, with fixed investments rising from 28.4% of GDP to 29.1%, even as the trade deficit fell. Meanwhile, government consumption fell from 19% to 18.2%, allowing the Estonian government to lower the already relatively low tax rates while maintaining a budget surplus.

Australia Continues to Benefit From Chinese Boom

Few countries have gained so much from China's economic boom as Australia. While most countries receives net benefits from China's boom due to the lower prices of finished goods and lower interest rates, these gains are partially (but only partially except for those countries -like Italy- whose main export products compete directly with the Chinese) cancelled out by lower wages and higher costs for commodity imports.

Australia by contrast exports little that competes with Chinese exports, and benefits instead by the lower prices of imported finished goods that China's boom have caused. Moreover do they benefit greatly by the commodity price boom that soaring Chinese demand for the commodities needed for the investments needed to expand Chinese production capacity and the finished goods that China exports. Because of that Chinese growth generates more demand for commodities than growth elsewhere and therefore helps push up commodity prices.

The benefits for Australia from the Chinese boom is evident in two news stories today. First it was reported that the Australian trade deficit fell to its lowest level in 4 years as the value of its commodity exports rose sharply.

Then it was reported that China will agree to buy uranium from Australia to a value of A$100 billion (US$71 billion). Australia with 40% of the world's known uranium reserves stands to benefit greatly from the great expansion in nuclear energy capacity in China and India, as these countries tries to diversify from the unreliable and increasingly expensive energy source of Middle Eastern oil.

EU Commission Smarter Than Swedish Government on Energy

While the EU Commission may do many stupid things, at least it have a better understanding of the energy market than the Swedish government. While the Swedish government hypocritically blames deregulation for the increase in electricity prices that their policies of higher taxes and supply limitations have caused, the EU commission points out that deregulation will other things being equal lower prices and is therefore threatening to sue the various countries that have failed to deregulate energy markets.

Sunday, April 02, 2006

Mariah Carey Sued-Found Violating Anti-Trust Laws

Finally, the Department of Justice have decided to deal with Mariah Carey's Monopolistic practices! Rolling Stones and other monopolistic music artists have also been charged for their anti-competitive behavior.

Saturday, April 01, 2006

Chirac's Appeasement of "Students" Proves to be in Vain

I recently predicted that the French government would prove themselves to be the "cheese-eating surrender monkeys" that Francophobes claim that French people are, by giving into the demands of "students" and unions by withdrawing the proposed modest liberalisation of the French labor "market".

Now Jacques Chirac have tried to appease the left by modifying the already modest proposal by shortening the period under which employers who hire people younger than 26 are exempt from usual extremely rigid labor regulations from 2 years to just 1 year and by moreover saying that employers would now have to give a reason for any sacking of young employees-just what reasons would be considered legitimate and how employers would prove they were acting on legitimate reasons is not clear.

But the "students" and the union now say they settle for nothing less than full withdrawal of the plan, proving the failure of Jacques Chirac's attempted appeasement:

"It seems that Mr Chirac's attempt to please everyone has ended up pleasing no-one, says the BBC's Caroline Wyatt in Paris.

It leaves his government looking weak and indecisive, exactly what his Prime Minister Dominique de Villepin had wanted to avoid, she says.

And it will upset those who want real reform to France's economy, while doing little to quell the anger on the streets, our correspondent adds."