Wednesday, July 31, 2013

U.S. GDP Increased-National Income Basically Unchanged

The most interesting thing about today's U.S. GDP report isn't that it indicates that second quarter growth was moderate.

The most interesting thing instead that it asserts that first quarter GDP was $551 billion, or nearly 3.5%, higher than previously reported, $16,535 billion instead of the $15,984 billion previously reported.

The upward revision is the result of a previously announced methodological change, which entailed classifying corporate outlays on intellectual property as "investments" as opposed to input cost. This matters because investments are included in GDP while input purchases are excluded.

But as I pointed out in my previous analysis of this issue, this change doesn't make America any richer because in the long term investments are in effect input purchases to achieve production. The difference just lies in whether it should be subtracted immediately or gradually through several years through what in national accounting is called "capital consumption" and what in corporate accounting is called "depreciation". In the long term, any re-classification of something as "investment rather than "input purchases" won't increase net income as the increase in "gross income" is cancelled out by an equal increase in capital consumption/depreciation.

And indeed, as Q1 2013 GDP was upwardly revised by $551 billion, capital consumption was upwardly revised by an almost equal amount of $540 billion, from $2,063 billion to $2,603 billion.

There are however two implications of this. One is that it will make cyclical fluctuation look bigger as in the short term in periods of rapid increses in investments, this will briefly raise estimated net income, but once the investment boom is halted capital consumption will catch up.

Another is that unless other countries make the same methodological change this will make America appear richer even as it really isn't.  The illusion of increased cyclical fluctuations and the increased international incomparability are two more reasons why economists should stop focus on comparing GDP and instead compare national income/net national product.

Friday, July 26, 2013

High Taxes One Reason For Detroit's Decline

While high taxes isn't the only cause of Detroit's problem, a high violent crime rate (with 385 murders per year in a city of less than 700,000) is also an important factor, clearly high taxes is a factor. Here is a comparison of the taxation level in Detroit and a few nearby jurisdictions:

Detroit almost certainly is on the wrong side of the Laffer curve, and would probably see revenue increase if rates were reduced.

Thursday, July 25, 2013

Proposal To Limit NSA Snooping Narrowly Voted Down

An amendment by libertarian Republican Justin Amash to strongly limit NSA snooping was defeated, but only narrowly despite the fact that both Democratic minority leader Nancy Pelosi and Republican leaders John Boehner and Paul Ryan opposed. Both parties were split with substantial numbers of yes and no votes among both. Among Republicans 134 voted no and 94 voted yes while among Democrats 111 voted yes and 83 no.

It would have been good if it had been passed because it would have symbolically been a gigant middle finger pointed at Obama and the NSA, but it wouldn't have changed anything, at least not in the short term, because it was extremely unlikely to be passed in the Senate. And even if it had been passed, Obama would have just vetoed it. What is particularly interesting though is the blatant hypocricy of many of the Democrats that once opposed this invasion of privacy. Democratic minority leader Nancy Pelosi for example once rightly condemned the so-called "Patriot act" as "a massive invasion of privacy"  Now she in effect voted to reauthorize it.... I guess having a fellow Democrat as President trumps alleged principles.

Saturday, July 20, 2013

Democratic Bastion Detroit Goes Bankrupt

As most of you have probably already heard, the City of Detroit has declared bankruptcy. Many people thinks that this means Detroit is like Greece. And there are indeed strong similarities, both Detroit and Greece have had a habit of constantly spending more than it earned, which is very risky for political enitities in monetary unions as they can't pay off their debts by printing money. And now because of that Detroit goes bankrupt, as Greece has already in effect done when it got that debt writedown.

Detroit also has a very high unemployment rate at 16%, twice the U.S. national average though about 10 percentage points lower than Greece. On the other hand, Detroits is far worse than Greece when it comes to crime. Even though Detroit has only 700,000 inhabitants, it had 386 homicides last year, more than twice as many as in Greece whose population is 15 times larger than Detroit's. The murder rate in Detroit was in other words more than 30 times higher than in Greece. Needless to say, this high rate of violent crime scare away many businesses from Detroit.

One aspect that can be noted is that Detroit is an extreme bastion for the Democrats . In the general election when current mayor, Democrat Dave Bing was elected, the other candidate was another Democrat, Tom Barrow. That's right, Democrats dominate so completely that the general election is in effect a Democratic primary election.

Thursday, July 18, 2013

Non-German Euro Area CA Balance Turns Positive

As late as 2011, the Euro area only had a very small (€15 billion, or about 0.16% of GDP) aggregate current acoount surplus, as the large €147 billion surplus in Germany was almost entirely cancelled out by large deficits in countries like Spain, Portugal, Greece and Italy.

The German surplus has continued to increase, but the euro are surplus has increased more than 12-fold, and was €184 billion in the 12 months to May, up from €122 billion in 2012 and as previously stated €15 billion in 2011.  That €184 billion number is now higher than the €172 billion German surplus, meaning that the balance excluding Germany has improved from a deficit of €132 billion in 2011 and a deficit of €45 billion in 2012, to a surplus of €12 billion in the 12 months to May 2013.

Spain, Portugal and Italy now all have surpluses and though Greece still has a deficit it has fallen dramatically.

Paul Krugman once asserted that it was impossible for the deficit countries of the Euro area to eliminate their deficits while Germany kept their surplus, but that is exactly what has happened.

Tuesday, July 16, 2013

Prank Name List

As readers may recall, back in the 1990s, The Simpsons, was actually really funny, hard as that may be to believe when you watch any of the humorfree episodes produced the latest decade.

One of my favorite gags was when Bart made prank calls to Moe's Tavern, asking for someone with a made up name that made Moe look silly when he asked if that person was there. My favorite was when Bart  (4:43 into the video clip) asked for Amanda, last name Huginkiss. Moe then called out " Just one second I'll check. Amanda Huginkiss (sounds like "A man to hug and kiss")! I'm looking for "A man to hug and kiss! Why can't I find "A man to hug and kiss!"" This caused all the bar denizens to laugh with resident drunk Barney Gumble sarcastically and hilariously replying "maybe your standards are too high" to Moe's unintentional question of why he can't find a man to hug and kiss, causing everyone except Moe to laugh even harder.

Anyway, the supposed "racist scandal" when a news announcer was fooled into reporting fake Asian names like "Ho Lee Fuk" seems more like a not so successful attempt to make fun of the network than anything else.

Saturday, July 13, 2013

Why Farm Subsidies Survive Politically

Some people find it puzzling that even though farmers are only about 1-2% or so of the population, there is strong political support in both the U.S. and the EU for farm subsidies.

I think there are two reasons. One is that although farmers are few they care deeply about farm subsidies because they gain so much per person which means that they will almost all vote on the basis of that issue. By contrast, the majority of non-farmers lose so little per person that almost no one will vote on that issue, and of course many non-farmer voters don't even know about the issue.

A second reason is that a lot of people feel sympathy for farmers. Food is after all the most important product in the economy since we would all die without it, so many feel that the producers of it should be supported. This of course doesn't follow since while it is of course necessary that food is produced any potential shortage of farmers due to too low incomes for farmers would be self-corrected on the free market with higher prices. However, that is probably how some people think and some perhaps also have a emotional/sentimental sympathy for farmers.

As a result, far from all non-farmers who care about the farm subsidy issue are opposed to it

Wednesday, July 10, 2013

What USA Stands For

This was a projection made at the U.S. embassy in Berlin:

To be fair, the surveillance made by the Stasi was done to surpress political dissidents in East Germany. Though the NSA and its employees often abuse the information they collect they probably don't, with perhaps only a few exceptions, do it to surpress critics of Obama. Nevertheless, the person who did this still has a point.....

Tuesday, July 09, 2013

Why Earnings Will Mostly Be "Better Than Expected"

It's the beginning of a quarter, meaning that it is time for earnings reports for the preceding quarter. One thing that we can say for sure is that most reports, at least in the U.S., will be "better than expected". The reason I can say this is not because I'm psychic (I'm not, unfortunately) nor because there is evidence to suggest companies really are doing better than expected, but because the official "earnings estimates" produced by official analysts are always lowered just before the reports so that they will almost always be "better than expected"

The case of Alcoa illustrates this. Until recently, the average official forecast was for quarterly per share earnings of about 20 cents, but the report showed a profit of only 7 cents per share. But since forecasts had been reduced to 6 cents just before the report, the headline still said "better than expected".

Why is this done? Because the companies producing these estimates have an economic interest in making people buy stocks. And by presenting most reports as "better than expected" while producing extremely over optimistic forecasts about the future, they hope to make people wanna buy those stocks, hoping that people won't notice how they almost always quietly lower these forecasts shortly before the reports.

Latvia Joins Euro

While certain people have predicted the end of the euro ever since the trouble in Greece began in late 2009, these predictions have yet to materialize. Not only hasn't it ended, not a single country has exited, with one country, Estonia, in fact joining in 2011 and with Latvia now set to join as well on January 1 next year.

Estonia's and Latvia's entries have/will strengthen the northern German-led faction in the ECB, as they have demonstrated a commitment to sound public finances even in a crisis, also likely making them supporters of the German sound money policies.

However, apart from the influence Latvia will gain in the ECB governing council, this move won't change anything in terms of exchange rates and monetary policy as Latvia has had during a long time a fixed exchange rate against the euro for its currency.

This also means that as the number of euro area countries increases from 17 to 18 (excluding micro states Andorra, Monaco, San Marino and the Vatican as well as Kosovo and Montenegro which have unilaterally adopted the euro without being formal members) the number of EU countries with a national currency with a fixed exchange rate drops from four to three, with the remaining being Lithuania, Bulgaria and Denmark. Of these remaining three, Lithuania seems eager to follow the path of their fellow Baltics and adopt the euro, while Bulgaria and Denmark are content with the status quo of a national currency pegged to the euro.

Saturday, July 06, 2013

American Oil Boom Illustrated

Mark Perry has made this illustration of the American oil boom, that is a key factor fueling the American economic recovery

This chart only covers Texas, but the increase in recent years goes for America as a whole too as for example North Dakota has also seen a dramatic increase in oil production (Unlike Texas, North Dakota didn't have much oil production in the past and so it didn't have the same kind of drop that Texas had from the late 1980s to the early 2000s).

Friday, July 05, 2013

An Offer Hard To Refuse

Rumor has it that former Russian spy Anna Chapman has proposed marriage to Edward Snowden. If true, he should accept it. This is for two reasons. One is that this would give him legal residence in Russia, protecting him from the Obama regime's unjust attempt to apprehend and jail him. The other reason is apparent when you look at these pictures of Anna Chapman

The "Despite Obama" Recovery

Today's U.S. employment report indicates that growth in the U.S. economy remains steady. While the recovery is still weak compared to for example the 1980s, it looks impressive when contrasted with the negative growth in many European countries.

Why then is the American economy stronger than the European? Keynesians of course blame the weak European performance on "austerity", but the U.S. has in fact implemented austrity too in the form of both tax increases and spending cuts (the so-called "sequester").

Instead it is because of two things. One is that the U.S. economy is despite Obama still relatively flexible and free. This factor is illustrated by the fact that relatively flexible European economies like the Baltic countries and Ireland have performed best recently.

Another factor is the massive increase in production of oil and natural gas in America (with daily oil production increasing by 1 million per year!) . This isn't strenghtening the economy just because of the incomes that workers and capitalists in the sector receive from it, but also because it lowers the cost of energy. The latter means not only higher real wages for workers outside of the sector, but also strengthen the competitiveness of U.S. manufacturers and other businesses that use a lot of electricity.

The irony is that both of these factors are things that Obama oppose. Obama wants to make the economy less flexible by for example raising taxes and the minimum wage, and Obama is also negative towards oil in particular because of all the carbon dioxide emissions it creates. And indeed, by for example stopping the Keystone pipeline, Obama has made the oil boom smaller than it could have been.

So this is certainly not an "Obama recovery", more like a "despite Obama recovery" or "Recovery due to things Obama oppose".

Wednesday, July 03, 2013

Those Western European Terrorist Governments

After having been exposed by the heroic Edward Snowden, the liars of the U.S. government, kept asserting that their mass invasion of people's privacy was meant to stop terrorists. If you really believed that, then you could just as well believe that Bill Clinton didn't have sexual relations with that woman, Miss Lewinsky.

The obvious falseness of this claim is illustrated by the revelation that they specifically targeted Germany and many other European governments in their surveillance. This means that either the U.S. government thought that their so-called NATO allies in Western Europe are terrorist governments or that they were lying when they said surveillance is meant to stop terrorism. It should be obvious which of these explanations is true.

Tuesday, July 02, 2013

Estonia's Remarkable Lowering Of Unemployment

A few years ago, Estonia was mired in a depression almost as bad as that in Greece, with unemployment rising to 20%. But instead of whining, rioting and striking like the Greeks have done, the Estonians decided to try to become productive instead, and because of this the unemployment rate has fallen dramatically and was at 8.3% in April according to Eurostat, significantly below the averages for both the EU and the Euro area.

To some extent this was achieved by emigration, mainly to neighboring and linguistically related (Estonian and Finnish are both Finno-Ugric languages) Finland. but mostly by a 12% increase in employment.

Because Estonia's unemployment rate is no longer higher than Finland's, emigration will almost certainly drop significantly, but not end entirely as wages are still much higher in Finland.