Archive for February 2013


Do imbalances matter?

I’ve noticed that intellectuals like to talk about “imbalances,” especially pundits interested in international issues.  I don’t see how it’s a useful concept, although I’m willing to be enlightened.

I do understand the concept of market failure, or bad public policy.  But I don’t see how a term like ‘imbalances’ adds anything to the statement that “policy X reduces aggregate welfare.”

When I lived in Queensland back in 1991, the Australians I met were very worried about their chronic current account deficits surpluses.  And they’ve run huge CA deficits every year since.

On the other hand Japan has run current account surpluses year after year, decade after decade.

In a deeper sense there is no such thing as exchange imbalances, all international transactions merely involve the swapping one type of product (goods and services) for a difference type of product (assets.)  Why should we care?

Once counterargument is that CA imbalances are often the symptom of a deeper problem, say excessive indebtedness.  For instance, the Greek CA deficit reflected excessive government borrowing, and the Spanish CA deficit reflected excessive real estate speculation.  Fine, but then why talk about “imbalances?”  Why not talk of excessive government borrowing, or a dysfunctional banking system?

Oddly Japan is almost universally viewed as a country with a bleak future, despite its CA surpluses.  Its population is aging fast, and beginning to decline.  Its nominal GDP is trending downward as its public debt keeps increasing.  On the other hand Australia is a relatively fast growing country, with a high level of immigration and a trivial public debt.

So what do the persistent CA deficits tell us about Australia, and what do the persistent CA surpluses tell us about Japan?

All countries have “imbalances.”  All countries have problems.  I simply don’t understand what the former tells us about the latter.

Income, inflation, interest rates, imbalances.  I hate i-words.  Replace them with consumption, NGDP growth, asset prices, and bad public policies.  Those are what really matter.

The British miracle: Explosive jobs growth during a recession

The endlessly perplexing British economy continues to post bizarre jobs numbers:

The employment numbers continue to be surprisingly strong, with a rise of 154,000 to 29.73 million in the October-December 2012 period, and a huge 584,000 increase over 12 months. Interestingly, the rise in employment was more than accounted for by an increase in full-time employment of 197,000 in the latest three months, with part-time employment down 43,000.

To put that in perspective for American readers, that would be the equivalent of 2.9 million jobs over 12 months in the US, far more than we’ve actually be able to generate.  (America has roughly 5 times the population of the UK.)

How did this jobs miracle happen?  Well let’s start with the fact that it may not have happened, the data might be wrong.  After all, RGDP has been flat, and Britain has been in recession during much of this time.

If it did happen, this might be one reason why:

Pay continues to be weak, up just 1.4% over the past year. More here.

If this refers to hourly nominal wages, it might help explain the jobs gains.  If it’s not hourly data, it’s meaningless.

However NGDP growth also seems to have been slow.  I say “seems” because Europe appears incapable of creating a St Louis Fred-type data set that doesn’t require a PhD in computer science to navigate.  And then there’s the question of whether the Brits even know how to calculate NGDP; last time I looked they calculated RGDP one quarter before NGDP, which is, well, mathematically impossible.

So if it’s not NGDP, what is the explanation?  Probably a combination of things.  For instance, falling North Sea oil output diverts production from areas using very few workers per dollar of NGDP, to areas using lots of workers per dollar of NGDP.

NGDP, hourly nominal wages, and employment are the key macro variables.  The goal is to stabilize employment growth (or more precisely to prevent suboptimal employment fluctuations due to sticky wages.)  Stable NGDP growth helps, but is not perfect.  In any case the UK could use a bit more monetary stimulus—it’s a pity that only three of their nine monetary policymakers understand that fact:

Also yesterday, three members of the Bank of England’s monetary policy committee – Sir Mervyn King, Paul Fisher and David Miles – voted to increase quantitative easing by £25 billion. This was a surprise. More here.

That doesn’t bode well for Mark Carney.

PS.  Keynesian models are completely silent on the question of how much real output we can expect from a given rise in employment.  That’s the supply-side of the economy, which the Keynesian multiplier model does not even attempt to explain.

Keep this in mind when you read prominent Keynesians telling us about the impact of the so-called “austerity” program adopted by the Cameron government.  They aren’t even addressing the real puzzle–why so many jobs?

They’ll always have Paris

This post is about the incredible shrinking European welfare state utopia.  Please don’t take it for more than what it is—a series of random observations, not a comprehensive examination.

Many American progressives like the European welfare state.  But which welfare state?  Surely not the Mediterranean welfare state, which is now bankrupt.  And even if the bankruptcy is partially attributable to the euro, there’s no doubt that the statist model in Greece/Italy/Spain/Portugal is flawed.  So most progressives focus on Northern Europe.  But not Britain, where Thatcher’s radical policy of neoliberalism opened up “savage inequalities.”  No, it’s the Northern European model of Germany, France and the Nordics.  Of course the Nordics have gone in for some fairly extreme forms of privatization—so much so that the conservative Heritage Institute rates Denmark as the most laissez-faire economy in the world, in the 8 out of 10 categories unrelated to size of government (taxes and spending.)  Indeed Germany and the Nordics don’t even have national minimum wage laws.

Maybe that’s why Paul Krugman likes to talk about France so much.  It’s got a huge government, and yet is relatively successful.

Nicolas Goetzmann recently sent me some data on Germany and France:

Germany has no minimum wage (for the moment)?

France has one, 9 euro /hour.

Germany has 5.000.000 workers below this level.

Germany has 5.5% unemployment

France has 10.5% unemployment

Same monetary policy.

Since that time we’ve had some back and forth, and Goetzmann discovered that the French minimum wage was recently raised to 9.43 euros/hour, and the following suggests that Germany now has more like 8 million workers making below that level:

The number of badly-paid Germans is rising, with around eight million (23 percent) German workers earning less than €9.15 an hour – 2.3 million more than in 1995, a new study published on Wednesday shows.

The study, which debunks the image of Germany as Europe’s last bastion of high wages, found that as many as 4.1 million Germans earned less than €7 an hour, 2.5 million less than €6. A further 1.4 million people’s hourly rate did not even clear €5 an hour.

Here’s another article:

Anja has been scrubbing floors and washing dishes for two euros an hour over the past six years. She is bewildered when she sees newspapers hailing Germany’s “job miracle.”

“My company exploited me,” says the 50-year-old, sitting in the kitchen of her small flat in the eastern German town of Stralsund. “If I could find something else, I’d be long gone.”

Stralsund is an attractive seaside town but Anja, who preferred not to use her full name for fear of being fired, cannot afford the quaint cafes.

Wage restraint and labor market reforms have pushed the jobless rate down to a 20-year low, and the German model is often cited as an example for European nations seeking to cut unemployment and become more competitive.

But critics say the reforms that helped create jobs also broadened and entrenched the low-paid and temporary work sector, boosting wage inequality.

Labor office data show the low wage sector grew three times as fast as other employment in the five years to 2010, explaining why the “job miracle” has not prompted Germans to spend much more than they have in the past.

Pay in Germany, which has no nationwide minimum wage, can go well below one euro an hour, especially in the former communist east German states.

“I’ve had some people earning as little as 55 cents per hour,” said Peter Huefken, the head of Stralsund’s job agency, the first of its kind to sue employers for paying too little. He is encouraging other agencies to follow suit.

.  .  .

The contrast between Germany’s record levels of employment and the dire jobs situation elsewhere in Europe is stark.

Last year, the number of people in employment in Germany rose above the 41 million mark for the first time.

.  .  .

In 2005, Schroeder’s last year as chancellor, he boasted at the World Economic Forum in Davos: “We have built up one of the best low wage sectors in Europe.”

In some respects it seems Germany has followed the “EITC yes, minimum wage no” mantra that American conservatives claim to support (but are often too cheap to pay for.)

One out of five jobs is a now a “mini-job,” earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.

And the following is really odd, unless you understand that conservatives don’t actually favor free markets:

Angela Merkel’s conservative government is trying to water down the effects of some labor reforms brought in by her Social Democrat (SPD) predecessor Gerhard Schroeder, a year-and-a-half before the next federal election, when she is expected to seek a third term.

.  .  .

Chancellor Merkel plans to introduce a minimum wage for the sectors which do not already have one and Labour Minister Ursula von der Leyen is campaigning for temp workers to get paid as much as staff.

I don’t want to make too much of all this; it’s very dangerous to compare the overall performance of countries by focusing on a single dimension.  Unemployment rates change for all sorts of reasons.  And minimum wage laws tend to be complex.  Thus Australia has a very high minimum wage (although not nearly as high in PPP terms) but also has lots of loopholes.  Germany has no official minimum wage, but lots of industry level wage minimums.  So it’s not day and night.

What interested me most about the German data provided by Goetzmann is the huge number of German workers making low wages.  Combine this with the fact that Germany had very high unemployment as recently as the early 2000s, and then the rate plunged as the Schroeder reforms took effect.  Those stylized facts are suggestive, at a minimum.

I don’t think any of this is a definitive refutation of any single welfare state policy.  But I do think this shows that it’s an open question whether even a small homogeneous European country with a high degree of civic virtue can successfully do all of the things progressives like (avoid radical privatization, have fairly high minimum wages, provide a big welfare state, strong unions, etc.)   It’s even more doubtful that the full range of progressive policies would work in a huge, messy, complex society like America.  I think Matt Yglesias understands this.  Not sure if other progressives do.

PS. I am pretty sure that the Nordic wage policies more closely approximate a minimum wage than does Germany.  Can anyone confirm?

PPS.  Nicolas Goetzmann also told me that Berlin’s housing costs are barely one third the level of Paris.

PPPS.  After I wrote this I noticed a good article in The Economist suggesting Hollande may do a U-turn, but not too aggressively:

THE longer François Hollande spends in office, the more it takes sharp eyesight and a clear head to follow his economic policy. Since his election last May, the Socialist president has mixed tax-and-spend measures with efforts to improve competitiveness. The rich feel squeezed; firms are annoyed by anti-business talk. Yet,with GDP shrinking in the fourth quarter of 2012 and job losses mounting, the man elected on a leftist programme is accused of a swerve to the reformist centre. What is Mr Hollande up to?

In his first few months he ticked off items on his manifesto. He lowered the pension age for certain workers. He raised a family benefit. He capped petrol prices. He vowed to stop companies closing factories. He prepared a budget for 2013 that tried to keep the budget deficit to 3% of GDP, but chiefly through tax increases: it soaked the rich with a 75% income-tax rate, and hit companies and individuals with other higher taxes. Returning from his summer break, Mr Hollande seemed like a man with the luxury of time on his side.

What followed in October was, therefore, sprung on an unsuspecting public. After a damning report on French competitiveness by Louis Gallois, a left-leaning industrialist, Mr Hollande announced €20 billion of tax breaks for companies employing low-wage labour, to compensate for high social charges. A sense of urgency and realism began to creep in. Mr Gallois talked of an “emergency situation”. For the first time, the government acknowledged labour cost as a factor behind France’s loss of competitiveness to Germany over the past ten years. Mr Hollande even started talking of cutting public spending, which accounts for over 56% of GDP. This was followed in January by an unexpected agreement with the unions to soften labour-market rules, making it easier for companies to reduce hours and wages in a downturn.

.  .  .

Across the country, factories have been closing. Industrial production has stalled. Entrepreneurs feel penalised. Investment plans are on hold. Anecdotes abound of rich families leaving the country. Faced with this, and with poor poll ratings, Mr Hollande has begun to recognise the limits of state power, and of a tax-and-spend policy in a country that breaks records for both. Now Jean-Marc Ayrault, his prime minister, wants “to reinvent the French model”. Pierre Moscovici, the finance minister, even claims there has been a “Copernican revolution” on the left. By conceding the need for supply-side measures to reduce labour costs, he says, the French left has made a big shift. Indeed. Some say that those around Mr Hollande in charge of economic policy, including Mr Moscovici, Michel Sapin, the labour minister, and Emmanuel Macron, the economic adviser in the Elysée, have long understood what is really needed to solve France’s competitiveness problem.

The trouble is that the rest of the Socialist Party, particularly in parliament, does not agree.

Neither does the American left.

PPPPS.  55 cents an hour?!?!?  Who says labor markets can’t reach equilibrium?

What would a “tight money” recovery look like?

After most recessions the Fed allows above trend NGDP growth, to spur the recovery.  In the first quarter of the 1983-84 recovery NGDP rose at an 11% annual rate (7.7% real, 3.3% inflation.)  But suppose they kept money so tight that NGDP actually grew slower than trend?  What kind of recovery would we expect?

1.  Contrary to what you might expect, we would expect a recovery.  Wage growth would gradually slow and unemployment would fall.  But the recovery would be far slower than normal.

2.  Interest rates would stay very low, held down by both the slow NGDP growth and the low level of RGDP relative to trend.

3.  During a recession highly cyclical industries such as housing and autos decline more sharply than overall GDP.  If the recovery was very slow, then over time the housing and auto industries would pickup due to growing population, and also the depreciation of cars.  You’d see RGDP growth move from services to autos and cars, but importantly the overall rate of RGDP growth would not be affected by this “rotation.”  Autos and housing growth would pick up, causing growth to slow in other sectors.  Recall that the Fed controls the overall increase in NGDP, not individual sectors of the economy.

And of course this is exactly what’s happened:

Federal Reserve Chairman Ben S. Bernanke has something to tout before Congress in hearings this week: job growth in the auto and housing industries.

Consumers rely on loans to buy cars and homes, so these segments of the economy are among the most responsive to Bernanke’s strategy of holding interest rates low and pressing on with bond purchases of $85 billion a month.

“The rate-sensitive sectors, most notably housing and autos, are kicking into a higher gear,” said Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania. “This reflects the Fed’s aggressive monetary policy and resulting rock-bottom interest rates,” along with “working off the excesses of the boom and bubble.”

Bernanke and his colleagues on the Federal Open Market Committee have pledged to continue buying bonds until the labor market improves “substantially.” Climbing employment in construction and vehicle manufacturing bolsters the case that asset purchases can help spur the improvement.

Zandi predicts total job growth this year of “close to 2 million,” about the same as last year.

“About the same as last year.”  Hmmm, doesn’t that undercut the argument that easy money is spurring a faster recovery?

For those who think housing is important, consider these data points:

January 2006:  Housing starts = 2.303,000  U = 4.7%

April 2008:  Housing starts = 1,008,000  U = 4.9%

December 2012:  Housing starts = 973,000  U = 7.8%

January 2013:  Housing starts  = 890,000   U = 7.9%

Yes, unemployment is high, but not because of housing.  It’s the NGDP, stupid.

Flawed masterpieces (Barry Lyndon and Planet Waves)

Commenters occasionally ask me for my movie list.  Due to blogging I haven’t seen as many films as usual (I used to see about 75 a year, all at the theatre).  At the end of this post I have provided a few comments on each film I saw on the big screen last year (both old and new.) Three stars means barely worth seeing. Some films should only be seen on a big screen—preferably film, not digital. (I hate digital. I’m so happy I wasn’t born 30 years later.) The best new film I saw was Once Upon a Time in Anatolia, but it wouldn’t work on TV.  So don’t complain it is “too slow.”  That’s not the point.

Recently I’ve been thinking about flawed masterpieces.  I’d much prefer to watch a flawed film like “The Master”, over a well made piece of corporate product like “Argo” or “Silver Linings Playbook.”  Recently I saw Barry Lyndon for the first time in nearly 40 years.  As I recall the film was mostly panned when it came out, but it actually holds up far better than any other period costume drama that I recall seeing.  The glorious faces alone are worth the price of admission.  Marisa Berenson looking like a dazed Goya princess.  Card sharks right out of a La Tour painting.  Why was it panned by critics?  Perhaps for a combination of reasons. Kubrick doesn’t always go for easy crowd-pleasing techniques.  And despite its excellence, it’s a significant drop-off from his two 1960s masterpieces. Perhaps the subject matter seems less “important.”

About the time I saw Barry Lyndon I’d been listening for the first time in nearly 40 years to a CD made at exactly the same time–Planet Waves.  Once again, a flawed masterpiece that was panned by critics.  A CD that mostly avoids crowd-pleasing techniques.  A CD where the subject matter seemed less important, more simplistic, than earlier works.  A CD in the shadow of even greater works from the 1960s.  I wondered what the critics would have thought of Planet Waves if it had been the only CD made by a little known artist.  Or what if Barry Lyndon, or Lynch’s Inland Empire, or Tarantino’s Django Unchained had been the only film made by a nobody?  What would the critics make of it?  And did I overrate the Aussie film on my list, for exactly that reason?

Tonight is the Academy Awards.  The Nobel Prize in literature is just about plausible enough to merit ridicule.  Unfortunately the Oscar’s fall short of even that low threshold.

2012 List

Blow-Up  (British/Italian)  4.0  It’s been over 40 years since I first saw Blow-Up, and it seemed like a completely different film.  Or maybe I’ve changed.  It’s now obvious that Blow-Up was hugely influential (Blow Out, The Conversation, A Clockwork Orange, etc.)

Once Upon a Time in Anatolia (Turkish)  3.8  Ceylan is now one of the world’s best directors, and still doesn’t seem to have reached his peak.  Stunning cinematography and excellent acting. But I wouldn’t watch this film on TV if you paid me to.

The Conversation (US)  3.8  The weakest of Coppola’s four 1970s masterpieces, and yet still a masterpiece.

Barry Lyndon (US/British)  3.8  Holds up very well after nearly 40 years””an underrated film.

Wake in Fright (Australian)  3.7  A real freak of nature here.  The print was recently discovered in a Pittsburgh warehouse—it was about ready to be destroyed.  One of the best movies of the 1970s, indeed one of Scorcese’s favorite films.  More testosterone per second than any other film I can recall.  Saw it at the Brattle in glorious Technicolor.  Reminded me of when I went kangaroo hunting back in 1991.

Django Unchained (US)  3.7  Bill Clinton was once called America’s first black President.  Not quite sure what that means, but I was reminded of it during an interview with Tarantino. He said he grew up in an African-American neighborhood, immersed in black culture.  He certainly seems to have a comfort level riffing on styles like “blaxsploitation,” which most white directors lack.  The film has all the usual Tarantino qualities. It probably won’t be rated as highly as it should be, because the film won’t be seen as serious enough for the subject matter, and we’ve seen this style before in his earlier films.

A Separation (Iranian)  3.7  Excellent film that touches on issues of gender, class, politics, youth, etc, presented in a compelling way that never talks down to the audience.

The Master (US)  3.6  An impressive film with the sort of acting performances loved by “The Academy.”  (I.e. actors acting like crazy people.)  I didn’t think the director (Anderson) quite pulled it off, but scene for scene it’s one of the best films of the year.  Similar to “There Will Be Blood.”  Excellent cinematography””see it in 70 mm.

The Day He Arrives (Korean)  3.6  The older I get the more I like Hong Sang-soo’s films.  The black and white cinematography is great, and a reminder of how much “information” gets lost in color films.

In Another Country (Korean)  3.6  Another gem by Hong Sang-soo.

Nausicaa of the Valley of the Wind  (Japanese) 3.6  The best of three Japanese anime I saw last year, all by Miyazaki.  Surprisingly erotic for a kids film.

Laputa: Castle in the Sky (Japanese)  3.5  Another outstanding anime from Miyazaki.  Lots of ideas in Avatar seem to have been stolen from Laputa and Nausicaa.

My Neighbor Totoro  (Japanese) 3.5  Another excellent Miyazaki film””this one aimed at little kids.

Moonrise Kingdom  (US)  3.5  I was ten years old in 1965, and a cub scout.  Wes Anderson does a beautiful job evoking that era.  A charming film.

A Foreign Affair  (US)  3.5   A 1948 Billy Wilder film made in the rubble of post-war Berlin.  Does a nice job showing that the Washington elite was just as out of touch with reality in 1948 as they are today.  But the real reason to watch is Marlene Dietrich.

Beasts of the Southern Wild (US)  3.5  A new filmmaker who clearly has some talent.  Reminds me a bit of Spielberg, but grittier.

Skyfall  (British)  3.4  One of the best of the recent Bond films.  Scene by scene it was extremely well made, with Bardem being a very effective villain.  The one weakness is that the Bond franchise doesn’t quite know what it wants to be.  James Bond, or the Bourne Identity?  That indecision takes it down a couple notches.

Damsels in Distress (US) 3.3  It’s great to see Whit Stillman is back.  Some of the reviewers complained the film wasn’t “realistic.” (rolls eyes)

Argo  (US)  3.1 Affleck’s weakest film so far, but still fairly entertaining.

Zero Dark Thirty.  (US)  3.1  Sort of like a documentary, with some Hollywood-style acting added in.  In other words neither fish nor fowl.  Worth the price of admission to see the raid on Abbotabad.

The Hobbit (New Zealand) 3.0  The book version of the Hobbit was a story that seemed like it was just a story.  The book version of LOTR was a story that seemed so real that you believe it actually happened.  Ditto for the movie version of each.

The Outcry (Italian) 3.0   An early film by Antonioni.  Very depressing, but interesting in parts.

Silver Linings Playbook (US) 3.0  Standard Hollywood rom-com with fake crazy people.

The Story of Pi  (US)  3.0  I get tired of the CGI look of modern films, so perhaps I’m too old for this sort of thing.  But it also had some nice features, and was certainly watchable.  Clever ending.

Jiro Dreams of Sushi  (Japanese)  2.8  How much I like a documentary depends partly (but not entirely) on how much interest I have in the subject.  I have little interest in food.  I love Japanese films and I love Japanese food””just not films about food.

Dark Shadows  (US) 2.8  Maybe I’m getting too old, but I find it increasingly difficult to get interested in Hollywood films, even when directed by Tim Burton and starring Johnny Depp, Michelle Pfeiffer and Helen Bonham Carter.

Headhunters  (Norwegian) 2.6 Mildly entertaining thriller that suffers from too much violence.  Starts out entertaining but after a while it become so implausible that you begin to lose interest.

Inni  (Icelandic/American)  2.3  Sigor Ros in concert. Visuals were disappointing.

Salmon Fishing in Yemen (British) 2.0  A romantic comedy that was neither funny nor romantic.