Tuesday, April 30, 2013

Deutschland Über Alles

Well, "über alles" is a bit of an exaggeration as there are other countries with even lower unemployment (including two other mainly German-speaking countries, Switzerland and Austria) and/or higher growth, but you get that sense when you on the one hand see how unemployment keeps rising in most other countries in Europe, yet in Germany it remains at 5.4%, the lowest in several decades. And this actually underestimates  the strength of the German labor market as the labor force participation rate keeps rising, and so the employment rate (in the age group 15 to 74) has increased from 63.3% to 63.9%-a new all time high

Saturday, April 27, 2013

More On National Accounting

Perhaps I wasn't clear enough when I explained this in the previous post, so I'll make another attempt.

Some readers seems confused by how I related Net Domestic Income (NDI) to GDP (Gross Domestic Product). But Net Domestic Income is really the same as Net Domestic Product (NDP), and similarly GDP is really the same as Gross Domestic Income (GDI), the only difference being that GDP and NDP come from different data sources than GDI and NDI. In principle GDP should always be equal to GDI, and NDP should always be equal to NDI, but because of data collection problems there is almost always some discrepancy though usually only a small one. Note that because given perfect data collection it would always be the case that GDP=GDI and NDP=NDI, the difference between GDP and NDP should always be equal to the difference between GDI and NDI. The difference between both is that the two Gross numbers include capital depreciation (or "consumption of fixed capital" as the BEA calls it) while the two Net numbers exclude it.

But why does this mean that upwardly revising GDP by calling corporate expenditures for intellectual property "capital investment" instead of "input cost" won't mean that America is richer despite the larger GDP? That is because when companies buy stuff that are considered input, these purchases are excluded from the value added that the national accounts estimates that the company has added. For example when a super market purchases food and other goods from its suppliers or when it purchases ads to get people to the store, the value the store adds is the difference between their sales revenues and the cost of these purchases. By contrast, when the super market buys some other things, things that are considered to be more long lasting, like cash registers, that is not subtracted from the perceived value added they contribute to GDP, as it is classified an investment. That cash registers and other investments usually eventually lose their value is disregarded entirely in the GDP number, and is instead classified as "consumption of fixed capital".

The implication of this is that without really affecting real world cash flows or long-term profits, a re-classification of a specific type of corporate purchase as "investment" rather than "input" can raise firms perceived value added, and because GDP is the aggregate of all corporations (and governments) value added, this will also raise GDP/GDI (though as we shall see, without raising NDP/NDI).

For example, assume that someone at the BEA, has gotten the idea that the ads the super market purchases shouldn't be considered input but investment (because he thinks it creates great good will, or whatever) this would mean that these purchases would no longer be subtracted when calculating companies value added, and therefore also not subtracted when calculating GDP, and since less is subtracted, GDP will suddenly become higher.

But does this re-classification really mean that the companies adds more value? Of course not, they have the same revenue as they would have had with the old classification and they still have the same expenditures. The difference in corporate accounting is that the same profit (at least in the long term) is derived by subtracting a larger sum of depreciation from a larger gross profit, and in national accunting that the same NDP/NDI (at least in the long term) is derived by subtracting a larger sum of "consumption of fixed capital" from a larger GDP/GDI

This should illustrate why the net numbers are better. In real life, no investors care how big profits for a company will be before depreciation, they care about what it will be after depreciation, they care about long term cash flows. For the same reason, we shouldn't care what corporations aggregate gross profits (their contribution to GDP/GDI) is, we should care about what aggregate net profits (their contribution to NDP/NDI) is.

Note that this irrational focus on GDP/GDI instead of NDP/NDI creates misleading perceptions in other areas as well. For example, when the burden of taxation and government spending is discussed, tax revenues and government spending is set in relation to GDP. But because GDP overestimates how big aggregate income really is, this means that the burden of taxation and government spending is underestimated

Thursday, April 25, 2013

IP Becomes Part Of GDP Illustrating Problem With GDP

Washington Post reports that the U.S. will, starting this, summer start to include "research and development and the creation of artistic works", or in other words IP as part of capital expenditure, rather than as input cost. The relevance of this is that it will raise GDP (likely by about 3%) as input costs are subtracted from GDP while capital investment is included.

There are three possible way to measure output. One is to include the value of all transactions, the second is to include the value of only consumption and gross investment, the third is to include only consumption and net investment. GDP is essentially the second approach.

The problem with the first approach is that makes no distinction as to how much value was created in a certain transaction, creating the result that if a company outsourced one step in the production process rather than performing with its own employees then output would be considered higher even if the value of the final product wasn't bigger.

The second approach however also has problems as this revision is an example of. GDP will be about 3% higher even as the value of production isn't higher-after all, corporate profits won't be higher* and salary/wage income for workers certainly won't be higher as a result of this revision meaning that America won't really be richer despite the fact that its GDP will be 3% higher. This also creates problems when comparing U.S. GDP with GDP in other countries, unless they make the same methodological change. The reason why this problem has arisen is that it is not always obvious whether a certain corporate expenditure should be counted as "input cost" or "capital investment".

That is one of the reasons why I prefer the third approach. I usually use the GDP measure here simply because 1) Most other people use that measure, so to make myself understood I have to adapt 2) Usually the change in GDP is pretty much the same as the change in net domestic income so it makes little difference when analyzing economic trends. But net domestic income is nevertheless in principle the measure that makes most sense

*=at least real life corporate profits won't be higher. However, if the BEA fails to properly measure capital depreciation then its measure of profits might be higher.

Wednesday, April 24, 2013

Rising EU Government Spending & Other Notes

Due to computer problems, my internet access has been very limited the last few days, which explains the lack of posts. Now that problem has been resolved (at least I think it is) and so posting will become more frequent again. One very interesting that was published during this period was this eurostat report on government finances in the EU in 2012.

It contains several interesting points.

-While the weak performance of Greece and other crisis countries is often attributed to "excessive spending cuts", government spending has actually increased there relative to GDP with Greek government spending for example increasing to 54.8% of GDP in 2012, compared to 52% in 2011. Similarly, government spending in Spain rose to 47% from 45.2%. Deficits still fell mostly (except in Spain) but that was entirely due to higher revenues, or in other words higher taxes.

-There were some countries that did cut government spending dramatically, with for example Ireland reducing spending to 42.1% of GDP from 48.1% in 2011 and 66.1% in 2010 and Latvia from 43.4% to 36.5%, both countries that has now seen their economies recover. Now, in Ireland's case most of the 2010-11 decline and also some of the 2011-12 decline was due to lower expenditures for bank rescues, but even excluding that spending declined. And in Latvia that was not a significant factor at all.

-Germany was the only country with a budget surplus, though 5 countries (Estonia, Sweden, Luxembourg, Bulgaria and Latvia) had deficits close to or below 1% of GDP. At the other end, Spain had the largest deficit at 10.6% of GDP even greater than Greece' 10%.

Despite its small surplus, the German government debt still increased by more than €80 billion. In part this can be explained by a €36 billion increase in lending to Greece and other crisis countries. The explanation for the rest of the increase is unclear, but presumably it is related to an increase in government financial assets of unexplained purpose

Wednesday, April 17, 2013

British Employment Growth Has Stopped

During the latest year, there has been a seemingly puzzling divergence in British statistics, with employment increasing at a very strong rate of about 2% per year, while GDP has stagnated or declined. This divergence can either be explained by some error in employment statistics, some error in GDP statistics or a decline in productivity. Overall, falling productivity seems like the most likely and most important explanation, though some statistical error could also be involved.

The latest employment report which showed that even as real wages continues to decline, employment griowth in Britain seems to have ceased supports the view that the British economy is in fact contracting.

Tuesday, April 16, 2013

Quite To The Contrary

Scott Sumner asserts:

Lots of people confuse policies aimed at nominal exchange rate depreciation (monetary stimulus) with policies aimed at real exchange rate depreciation (high government saving.) The two policies are so different that they ought not even be covered in the same course. To say the Japanese government is not engaged in excessive saving would be an understatement.

No, deliberate attempts at reducing the real exchange rate while avoiding inflation is aimed at strengthening the trade balance (reducing deficit, increasing surplus or turning deficit into surplus), not the budget balance. And while a stronger budget balance will, other things being equal, cause the trade balance to get stronger, there exist no causal link in the opposite direction. (Unless it increases growth, but there is no reason to believe in such a link in most circumstances).

By contrast, what Sumner calls "monetary stimulus" (a euphenism for what most people call inflation) will strengthen the government budget as the real value of debt and real interest rates are pushed down. As I discussed in the previous post, that is likely the most important motive behind Shinzo Abe's inflationary surge.

Thursday, April 11, 2013

The Purpose Of "Abeonomics" Is To Rip Off Japanese Savers To Bail Out Its Government

Often Keynesians asserts that they're not always for a more inflationary policy, they're only that when there is  "an output gap" as manifested mainly by a high unemployment rate. So why are they so enthusiastic about Japanese PM Shinzo Abe's massive "shock and awe" inflationary surge?

They might try to justify it by pointing out that growth has been weak in Japan in recent years. But that is basically entirely a result of its demographic implosion-over 40 years of birth rates well below the replacement rate in combination with a "no gaijins allowed"-immigration policy means that the number of Japanese younger than 65 declines by nearly 1% per year. Set in relation to its working age population, Japan has actually had stronger GDP- and employment growth than most Western countries. And as it happens the employment to population ratio for 15 to 64-year olds is at an all time high, while the unemployment rate is only 4.3%, lower than in all EU countries and also lower than in New Zealand, Australia, the United States and Canada.

Even assuming that Asian countries have a naturally structurally lower unemployment rate (in Singapore, Hong Kong and South Korea, the unemployment rate is about one percentage point or somewhat more lower), the "natural" Japanese unemployment rate is likely at most only about a percentage point below the current rate.

This means that even using Keynesian models, Abe's policies will only have a very modest effect on output and employment. So why are Keynesians so enthusiastic about it, and perhaps more importantly, why is Shinzo Abe so eager to implement it?

The secret is that they all want to confiscate money from Japanese savers to bail out the highly indebted Japanese government. Japan as a nation have a positive net international investment position, but the Japanese government is extremely indebted. Total government debt is 245% of GDP, significantly higher than even Greece. And as we all know, Greece isn't exactly a nation with a low government debt burden.

So the plan is basically to bail out the highly indebted Japanese government by ripping of its private savers. Strangely, this hasn't caused anyone of those outraged at the alleged confiscation of Cypriot savers' holdings.

Wednesday, April 10, 2013

Advanced Math Overrated More Generally?

That the use of advanced math in economics is at best a useless waste of time-and often directly harmful is a subject which I've repeatedly discussed in the past. According to this article by E.O. Wilson, math might be overrated even in some natural sciences as well.

Monday, April 08, 2013

Britain's Lost Thatcher Boom

So Margaret Thatcher is now dead. I disagree with some of the things she said and did, but it can't be denied  that by slashing absurdely high marginal tax rates (top rate at 83% for labor income and 98(!)% for capital income), deregulating, bringing down inflation and reining in the, at the time, super crazy British unions, she helped revive the British economy.

Real GDP growth increased from an average of 1.9% in 1973-79 to 2.5% in 1979-90, and to 2.9% in 1990-2007 while most other Western countries saw unchanged growth at best.

After 2007, the British economy has as we all know weakened dramatically, with GDP in fact shrinking by 0.3% on average since then.

This is mostly because of how international problems, most notably the bursted U.S. housing bubble and the European debt crisis, have negatively affected Britain. But it also reflects how the Thatcher economic policy legacy has been partially squandered by a lot of re-regulations, and increases in tax rates, government spending and inflation.

Saturday, April 06, 2013

NGDP Growth Within The Euro Area

Here is the cumulative NGDP-growth in the latest 5 year period, 2008 to 2012 for 12 euro area countries:

1)  Luxembourg +18.5%
2)  Slovakia       +17.1%
3)  Austria         +13.1%
4)  Germany      + 8.9%
5)  Finland         + 8.1%
6)  France         + 7.5%
7)  Estonia         +5.8%
8)  Netherlands  +5.1%
9)  Italy              +1.9%
10) Spain          - 0.2%
11) Portugal       -2.3%
12) Greece        -13.2%

That Greece is last probably surprises nobody, nor the relative weakness of Spain, Portugal and Italy.  Almost all probably also knew about Germany's relative strength. However, the fact that three countries, Luxembourg, Slovakia and Austria all had significantly faster growth than Germany was probably unknown to many.

It is interesting that the two richest countries, Luxembourg and Austria shared the top spot, with the second poorest, Slovakia. Luxembourg was unchanged first in per capita income, while Austria's higher growth allowed it to surpass the Netherlands and Slovakia's higher growth allowed it to surpass Estonia. It should be  noted though that as Luxembourg had the by far highest population growth, its relative per capita growth was in line with the average.

With cumulative average euro area inflation (domestic demand  deflator) at about 6-7%, this means that about half of the countries saw real gains and the other half still had a smaller economy in 2012 than in 2007.

Thursday, April 04, 2013

So It's Only A 15.5% Gain

Hong Kong's statistics authority reports that the volume of retail sales rose 21.9% in February compared to February 2012. However, it cautions that one should be cautious in interpreting January or February numbers separate due to the potential distortive effects of the timing of the Lunar New Year holiday, and that one should therefore look at January-February as a whole. After that adjustment, real retail sales only rose 15.5%.....

Monday, April 01, 2013

David Stockman Annoys Several Liberal Pundits

Well, it seems that David Stockman has really upsetted leading liberal pundits through the article he got published in the NYT.

Paul Krugman's first response contained basically no factual content and instead just asserted that Stockman is "a cranky old man" (being as much as 6 years older than Krugman himself....) who won't accept reality and rants incoherently. His second response was more factual, but simply focused on a few numbers presented by Stockman that was of almost no relevance for his case.

Jared Bernstein's response was somewhat better than Krugman's reponses, but still failing. Bernstein for example criticize Stockman for supposedly failing to differentiate between years governed by Republican and Democratic Presidents, not noting that Stockman is explicitly critical to Republican Presidents too, especially Bush Jr. but also the others including the one he worked for (Reagan).

Bernstein's least bad theoretical argument against Stockman was that "Sovereign debt is neither bad nor good–its assessment must be situational. " and that if politicians assess the situation better than private investors then government debt to finance investments can be good. Indeed, but that's of course a very big "if", and requires evidence that government politicians and bureaucrats are smarter than private entrepreneurs, and Bernstein doesn't present any evidence for it and simply asserts it.

It is true that Stockman often in the article simply asserts rather than proves his points, such as his assertion that the auto bailout simply shifted jobs around rather than saved them. That's probably true, but wasn't proven through either theoretical or empirical analysis. But then again, given the fact that the article was already quite long, the NYT probably wouldn't have allowed it.