Friday, November 11, 2011

Major Economic Reporting Breakdown at the New York Times


I sometimes carp about minor missteps, but this is big.  In a front page “explanation” of how the eurozone got into a sovereign debt crisis, there is criticism of myopic banks, lax regulators and spendthrift peripheral governments, but no mention of the fundamental underlying cause, the swelling imbalances between surplus and deficit countries in the currency union.

The Times reporters and editors need a refresher in introductory economics.  The fundamental identity that connects financial balances to a country’s international position is

BP + BG ≡ CA

where BP is the net savings of the private sector (income minus spending for households and firms), BG is the government's fiscal surplus or deficit, and CA is the current account balance (mostly trade).

Over the decade of the 00's, the peripheral countries were running ever larger trade deficits with the core countries, especially Germany.  At first these deficits were financed by private sector borrowing, but after the financial crisis hit private sector leverage froze, economies contracted, and governments stepped in to do the borrowing themselves.  Before 2008 the problem was too much borrowing in real estate, banking and other sectors; after it was too much borrowing by the government.  Yet, as long as the trade imbalances grew, one or the other was unavoidable.

(From a macro identity point of view, if governments had not increased their deficits post-2008, incomes would have collapsed.  This would sustain the identity by curbing imports on the right hand side, but would have allowed an economic freefall.)

So the real story, the one that the Times should have told, is about how the imbalances grew, why few noticed, and how the eurozone framework, with its utterly irrelevant “Stability and Growth” criteria, was unable to cope.

Skip the Times and get your news and views from the econ blogosphere.

Footnote: Nothing Greece and Italy do by way of budget policies or “reforms” can solve their sovereign debt problems.  They might as well sacrifice goats to the gods.  The only practical significance of the current political drama is that it will or won’t persuade the core countries to open the liquidity spigots, write down debts and resolve the banks.

Thursday, November 10, 2011

Moral Mythology and Economic Reality in the Eurozone


What more is there to say?  Europe is on a precipice, political as well as economic.  Eurozone leaders think they have time to slowly habituate their constituencies to incrementally greater commitments, as if we didn’t know from centuries of experience that financial crises descend with terrifying speed in the form of bank runs, panicked asset dumps, and other spasms of runaway positive feedback.  Greece, Portugal, Spain and Italy will not edge gently toward insolvency; one or more of them will undergo a sudden phase change, and the game will be up as soon as it has started.

And incantations of austerity and reform are pointless.  Simple arithmetic demonstrates that the peripheral countries cannot pay their way out of debt through primary fiscal surpluses: at current real interest rates and debt loads it just can’t be done.  Moreover, fiscal tightening throughout the zone can only lead to a severe recession, and as indicators of the slump materialize the panic dynamics will intensify.

Worse, the “reform” imperative—the demand that deficit countries privatize and deregulate—is punitive nonsense.  Politics in the surplus countries seems to demand that there be a story about wayward prodigals to the south who must be stripped of their comforts and put to the yoke.  Put aside this morality tale and there is no economic logic whatsoever.  There is no theoretical or empirical reason to believe that Greece, Italy and the rest are in deficit because they have too much public employment or their workers have too many rights.  (Where there is corruption and clientelism, any sort of employment, public or private, can be uneconomic.)  In fact, those who want to force-feed these reforms, with public displays of abject political submission to them, have never even tried to make this case.  There is no argument to critique, no evidence to rebut.  “Reform” is not a rational economic program for restoring trade balances; it is about exacting a cruel price on entire populations so that bailouts come with a quid pro quo.  Receive a transfer and you must sacrifice.

Of course, the bailout funds go directly to the creditors, mainly private banks, so even this attempt at moral equivalence is beside the point.

Eurozone policy, and most journalistic coverage of it, is in a parallel universe of virtue and vice, benefactors and supplicants, industrious and indolent, modern and honest versus traditional and corrupt.  It satisfies a craving for moral order.  Unfortunately, the real universe is about to crash into it and smash it to pieces.

Wednesday, November 9, 2011

Only Once In A Century: 11/11/11/11/11/11

At eleven seconds past eleven minutes after 11 AM this Friday, November 11, 2011, the time/date in succeeding digits will be for the only time this century a sequence of a single digit repeated a dozen times, 11/11/11/11/11/11. Enjoy it while it lasts.

Since the century began on 01/01/01 (no year zero, 2000 was indeed the last year of the 20th century), I have been thinking about those once a year days when one has the same two-digit number repeated three times for the date. There will be one more of those next year for this century on 12/12/12. I think the only one of these that got much attention was 07/07/07, which somehow became a faddish day to get married, one of my faculty colleagues (not in my dept) doing so then.

While thinking about this upcoming event this year, I was thinking about the fact that it was the old Armistice Day and remembered hearing when much younger that the armistice that ended WW I between France, Germany, Britain (and its empire), and the US was signed on "the eleventh hour of the eleventh day of the eleventh month" in 1918 (the war went on for several more years in some other locations). This got me thinking about time as well as date and how this one was full of elevens.

Then on Nov. 1 I was sitting in a piazza in Trento, Italy drinking some macchiato (gave a lecture there the next day) and saw a sign for the date, 1/11/11, and realized that we were dealing this time with a sequence of a single digit. Putting that together with my thoughts about both time and date led me to the conclusion I am posting on now here, which I think I am the first person to point out.

So, on Friday, when the moment comes for you wherever you are, have a happy onece-in-a-century 11/11/11/11/11/11.

Tuesday, November 8, 2011

Bribing Doctors to Abandon the Poor

Do I have this right?  The New York Times has an article today about the Cuban medical mission in Haiti.  After describing the modest perks doctors get for signing up, it says:
They are not allowed to bring their families with them, but the other incentives make it “a pretty good deal,” she [Katrin Hansing, a Baruch College professor] said, that has helped keep down defections. Still, a program the United States has run since 2006 that is tailored to attract Cuban medical professionals abroad has enticed several hundred to defect.  
Does the US really have a program to bribe Cuban doctors who are serving the poorest and most at risk populations in the world to quit, emigrate, and join the dysfunctional American medical establishment?  Is this cynical or what?

If the article is saying what I think it says, I have even more respect for the Cuban medical authorities, who continue their life-giving services abroad even though they lose many of their best and brightest in the process.

Tomorrow’s News Today

Care to know the future?  Then read Michael Pettis, who has been on top of things for many years running.  Nothing is certain, but I think his scenario, where a bank run crashes eurozone policy and forces Greece (for starters) out of the common currency, is the one we’ll probably see.

Euro Clarity


Let’s take a moment to sort out the euro mess.

Monday, November 7, 2011

The missing link

Science and Random Trials

Don't read this while drinking coffee, as you might snort it out your nose laughing !

http://www.bmj.com/content/327/7429/1459.long

Sunday, November 6, 2011

Attack of the Killer Seniors


They are gathering in coffee shops, gyms and multiplexes, conspiring to wreak havoc on the US economy.  You know who they are: the boomers and near-boomers, the demographic bulge that will rip a giant hole in fiscal budgets and push working-age taxpayers into martyrdom or worse.

Don’t take it from me.  David Leonhardt, in today’s New York Times, talks about the impending collision of slow economic growth with “sharply increasing claims” that “come from the aging of the population”.  He quotes Benjamin Friedman of Harvard: “These are very difficult moral issues.  We are really talking about the level at which we support the elderly retired population.”

This is common wisdom, one I’ve heard more times than I care to remember.  Does it matter that it’s wrong?

1. Aging, and increases in the proportion of the population no longer active in the labor force, is nothing new.  The US and other industrialized countries have been adapting to this trend for generations.  In fact, the increase in retirees we face in the future is not nearly as dramatic as those we’ve dealt with in the past.

2. The secret weapon against the attack of the seniors is not growth per se but productivity growth, output per worker.  As long as this increases faster than the ratio of retirees to active workers—and it has ever since we started gathering statistics on it—we can afford to take of our elders and improve living standards for the young and spry simultaneously.

Demographics is a false issue.  I’ll trust the motives of those who pound that drum when I start seeing articles about how the economic burden of the defense (i.e. war) budget poses a moral issue that demands courage and sacrifice, etc.  The demographic bulge I worry about is predator drones.

Thursday, November 3, 2011

Question

How can the right wing blame unemployment on educational (skill) deficiencies and then shortchange the entire educational system?

Tuesday, November 1, 2011

This day in 1963 - The President of South Vietnam assassinated.

1963 was a pivotal year. It was the year that OPEC acted unilaterally to raise prices for the first time. It was a time when a charismatic new American president, John Fitzgeral Kennedy, presented his proposals for tax reform for his nation. Included was a plan for the removal of the special-privilege oil depletion allowance enjoyed by large oil companies. He also issued Executive Order 11110. Its aim was to strip the US Federal Reserve Bank of its power to loan money to the United States Federal Government at interest. Kennedy ordered the printing and release of $4.2 billion in US notes, paper money issued through the Treasury Department ‘without paying interest’ to the Federal Reserve System.


In 1963 E Howard Hunt, Chief of Covert Action in America's Central Intelligence Organisation's Domestic Operations Division was involved in the subsidizing and manipulation of news and publishing organisations. Hunt was eventually implicated in the November 1963 assassination of President Kennedy .

But on this day, 2nd November, of that year, the assassination of the President of South Vietnam was another careless step toward the long drawn-out Vietnam War that cast such an ugly shadow over the decade that followed.
"The coup was very swift. On November 1, 1963, with only the palace guard remaining to defend President Diem and his younger brother, Ngô Ðình Nhu, the generals called the palace offering Diem safe exile out of the country if he surrendered. However, that evening, Diem and his entourage escaped via an underground passage to Cholon, where they were captured the following morning, November 2. The brothers were executed in the back of an armoured personnel carrier by Captain Nguyen Van Nhung ...Diem was buried in an unmarked grave in a cemetery next to the house of the US ambassador.
...
Upon learning of Diem's ouster and death, Ho Chi Minh is reported to have said, "I can scarcely believe the Americans would be so stupid." ....After Diem's assassination, South Vietnam was unable to establish a stable government and numerous coups took place during the first several years after his death...."[1]

A White House tape of President Kennedy and his advisers, published in 2003, confirmed that top U.S. officials sought the coup against Ngo Dinh Diem "without apparently considering the physical consequences for Diem personally." [2]

The previous month US President John Fitzgerald Kennedy had been insisting that one thousand U.S. troops in Vietnam, "euphemistically referred to as advisers", be recalled.
"He was a prudent executive, not inclined to heavy investments in lost causes. His whole presidency was marked precisely by his capacity to refuse escalation-as in Laos, the Bay of Pigs, the Berlin Wall, the missile crisis. [3]"
Indeed, Kennedy was deeply skeptical of the recommendations presented by his Joint Chiefs of Staff for military intervention in South Vietnam.
"The military proposals for Vietnam, he said, were based on assumptions and predictions that could not be verified - on help from Laos and Cambodia to halt infiltration from the North, on agreement by Diem to reorganisation of his army and government, on more popular support for Diem in the countryside and on sealing off Communist supply routes. Estimates of both time and cost were either absent or wholly unrealistic. [4]"
In an interview with one of America's cold war warriors, Dr Walt Rostow was asked to comment about the consequences of "the war for South East Asia?"

WR: Well, for South East Asia it's turned out to be fine, because at last Indonesia has gone in to take off very fast, seven per cent now, and Singapore, Malaysia, Thailand, Taiwan, Hong Kong, South Korea are doing fine, even Philippines is coming along. So, South East Asia is... Lyndon Johnson achieved what he was after in South East Asia. ...As a development economist I have to say, when a country does well, like South Korea or Taiwan or something, it's because of the people in the country, otherwise you're pushing on a string. But we did play a very useful part in helping them. It's amazing, but in this period of 1960 to, what 1975, '80, they were going on average at eight per cent a year for wages. That means they more than doubled in ten years. So they're four times the size, as it were, GNP per capita at the end of this period and the beginning. They were different countries....[5]"
War to increase GNP: 'managed' capitalism.

[1] http://en.wikipedia.org/wiki/Ngo_Dinh_Diem
[2] JFK and the Diem Coup, by John Prados
Posted - November 5, 2003
http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB101/index.htm
[3]Arthur Schlesinger
http://www.spartacus.schoolnet.co.uk/JFKschlesinger.htm
[4] 'Kennedy', Theordore C Sorenson, special counsel to the late president. Hodder and Stoughton 1965. Page 652-653.
[5] INTERVIEW WITH WALT ROSTOW
http://www.gwu.edu/~nsarchiv/coldwar/interviews/episode-9/rostow1.html

Monday, October 31, 2011

Does Italy Really Deserve To Be A Scary Halloween Story?

Last week after the latest European summit, most of the markets were jumping, with the Russell Index rising over 5% on Thursday, Oct. 28. Then word came that the spread over their German equivalents for Italian ten-year bonds had risen to over 6%, pushing the level in August just before the ECB began buying Italian and Spanish bonds, with the ECB this time supposedly doing so again, but not succeeding in halting the rise (maybe needed to do more, but the Germans and their constitution won't let them?). Now everyone is freaking out that perceived failures by Italy to reform will doom the euro and the EU, with the Daily Mail even fancifully forecasting major European war by 2018. Is all this really justified?

Of course, the simple answer is "yes" because the markets say so, and it is clear that Italy is so big that nobody can bail it out if it defaults. But how likely is that really? Yes, its debt-GDP ratio is about 120%, but it has had a greater than 100% such ratio for a majority of years over the last half century, with nobody much bothered as Italians have a high savings rate and most of this debt is internally owned. Indeed, for years Italy was the poster boy for Ricardian equivalence (high deficits, but high savings rate offsetting its stimulative effects). Furthermore, Italy is running a primary fiscal surplus, before interest payments on debt, generally viewed as not warranting such panic. More is going on here, and I think there are two parts, a short-term one and a long-term one.

The short-term one is simple: Silvio Berlusconi. Both Merkel and Sarkozy have barely been able to restrain their justified contempt for this 75-year old clown, who continues to hang onto power despite disastrous polls and multiple investigations about matters personally fiscal and sexual. His reform plan might actually be credible, although much of the problem is outsiders do not think he can get it through parliament, and his coalition is as shakey and quakey as they come. The centerpiece of raising the general retirement age from 65 to 67 looks like a mostly symbolic matter, given the budget is already in primary surplus. But, even though he continues to be "Il Cavaliere" strutting about in fancy suits on his TV channels and the front pages of the Italian papers, his support is less than 25%, reportedly confined mostly to elderly rural women who have not yet heard that the Roman Catholic Church has tired of fronting for him. He is the short term problem, and indeed he should go, as everybody says. But, the rascal is hard to get rid of, surviving a no-confidence vote (narrowly) a few weeks ago.

The longer term problem is that growth has slowed, now a ten year phenomenon of barely 1% per year growth. This is what has opened up the divergence of competitiveness between Italy and Germany and made for a need for Italy to devalue, thus ultimately straining the Eurozone with trade imbalances. It is easy to forget that Italy was a growth wonder back in the 70s, 80s, and even 90s, with its small clusters of exporting firms praised by Michael Porter. It is the increasing weakness of these firms that lies at the heart of Italy's longer run problems, and it is not obvious what can be done about it. Some say they are too small to deal with larger Chinese competitors or even the Mittelstand firms of Germany. I am in Florence where high-end textiles have been a big deal since the Benedictines produced them in the 1200s. Gucci, Pucci, and Salvatore Ferragamo all started here. Gucci has a production facility a block and a half from where I am staying, but they were bought out long ago by LvMH, the giant French firm. They are still hanging in there. Salvatore Ferragamo is still run by a widely admired family member, but can they continue to produce in Italy rather than China? I do not know. Many call for labor reforms in Italy, and some would help (including of academia), but this is indeed a longer term problem, and getting growth going again will not be helped by forcing a useless recapitalization of banks that will probably lead to cutbacks in lending and a return to outright recession in much of Europe.

Sunday, October 30, 2011

Krugman of Mass Destruction

UPDATE: See also Krugman, Ike, Keyserling, Keynes and Kalecki: "Siphoning Off a Part of the Annual Increment of GNP" in response to today's column by Krugman, "Bombs, Bridges and Jobs."

Paul Krugman, check your thoughts and your sources! In a blog post titled More Thoughts on Weaponized Keynesianism, Krugman wrote:
Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks.
Economics is not a morality play but spending on bombs is NOT "as good as" spending on parks. In a comment, reader valuethinker from London pointed out that the lowest multiplier estimate for stimulus spending was for defense manufacture. This is not a trivial side issue but the core of the problem. Spending on the wrong things ultimately defeats the purpose of Keynesian stimulus. Keynes knew this. It's a shame Krugman doesn't know his Keynes.

In his post, Krugman also cited "the Kalecki point that admitting that the government can create jobs undermines demands that policies be framed to cater to all-important business confidence." Krugman linked to Rortybomb who linked to MRZine for the Kalecki paper. In that paper, Kalecki had more to say that is germane to Krugman's argument that "spending on bombs is as good as spending on public parks":
One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.

The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of 'sound finance', which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.

The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, 'discipline in the factories' and 'political stability' under full employment are maintained by the 'new order', which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.

So, yes, "spending on bombs is as good as spending on public parks" -- even better if you're a fascist! By the way, Professor Krugman. You still haven't replied to my earlier letter.

Friday, October 28, 2011

WSJ Oped Defends Perry’s Tax Proposal with More Supplyside Silliness

Yesterday’s oped can be found here:

One attack on a flat tax is that it won't raise enough revenue to fund the government—as if the current tax code is doing that well. But Mr. Perry and other Republicans shouldn't play this static revenue game. The flat tax is desirable precisely because of its spur to faster growth and more job creation, and the dynamic effect those would have on government revenues. The Perry campaign yesterday released a revenue analysis of its plan by John Dunham and Associates that estimated revenues of $2.781 trillion by 2014 and 19.5% of GDP by 2020 (compared to $2.3 trillion and 15.3% in fiscal 2011). All such estimates are speculative, but the point is that revenue history is on the side of the reformers. After the Reagan reform of 1986 that reduced tax rates to 28% from 50%, tax revenues rose by 36% from 1986 to 1990.


Oh boy – the old dynamic scoring canard that somehow fiscal irresponsibility would lead to faster growth! I find it fascinating, however, that the WSJ editorial page has now turned to the second half of the 1980’s rather talking about that alleged doubling of nominal Federal tax revenues (which of course included payroll taxes) following the 1981 tax cut. Memo to the WSJ editorial board – much of what happened since 1981 under Reagan included tax increases. But never mind that.

This John Dunham and Associates “analysis” was ably discussed by Matt Rognlie:

I never thought I’d see the day when I had to lecture a Republican presidential candidate on the importance of supply-side analysis, or the dangers of overexuberant demand-side logic. Apparently that day has come! The truth, of course, is that neither Rick Perry nor his staff have any idea of the analysis behind their numbers. Instead, they hired a consulting firm that specializes in using IMPLAN to create exaggerated estimates for the effect of particular industries (“Meat! Responsible for 5 trillion jobs!”) in order to please its lobbyist clients. The firm evidently knows nothing about tax analysis; it has no credentialed public finance economists on its staff and no experience in analyzing tax policy. When asked to conduct a study, it turned to the only game it knew: IMPLAN, which just happens to be a absurd way to analyze national fiscal policy.

Thursday, October 27, 2011

Weak GDP Growth and Fiscal Contraction

The advance estimate for real GDP during the 3rd quarter of 2011 is out showing annualized growth of only 2.5 percent with final sales growing by 3.6 percent (inventories fell). Consumption and fixed investment both grew but the said news is that real government purchases were unchanged. As BEA notes:

Real federal government consumption expenditures and gross investment increased 2.0 percent in the third quarter, compared with an increase of 1.9 percent in the second. National defense increased 4.8 percent, compared with an increase of 7.0 percent. Nondefense decreased 3.7 percent, compared with a decrease of 7.6 percent. Real state and local government consumption expenditures and gross investment decreased 1.3 percent, compared with a decrease of 2.8 percent.


In terms of 2005$, real government purchases were running at an annualized rate of $2508.2 billion in 2011Q3 according to this advanced estimate which is where we were in 2011Q2. This is actually below the $2509.6 billion figure for 2009Q1. Real government purchases peaked in 2010Q3 at $2570.3 billion (a mere 2.4 percent increase) but having been declining ever since. While this decline is most evident at the state and local level, Federal purchases (both defense and nondefense) are below their 2010Q3 peaks.

Our attempts at fiscal stimulus a couple of years ago were meager at best. Over the past year, we have been cutting government purchases. Isn’t any wonder why the Great Recession continues?!