Here are some short posts for today:
1. When I complain about how tight money in the euro zone is causing a depression, some conservatives respond that the real problem is the dysfunctional, statist economic policies in the Mediterranean countries. But now we see that even thrifty, “hard-working” countries such as The Netherlands are suffering from the decline in eurozone nominal GDP.
That option should terrify both the Liberals and Labour. After over a year of recession and austerity, polls show confidence in Mr Rutte’s government at a miserable 12%. On the right, small-business owners feel betrayed by a Liberal-led cabinet that has raised value-added tax and imposed a surtax on high incomes. On the left, union members are abandoning a Labour Party that has accepted lay-offs and pay freezes in the public sector.
The big winners of a tough year have been the parties that have consistently opposed austerity, above all the PVV. As the recession drags on, Mr Wilders, a master of political rhetoric, has capitalised on the crisis and austerity fatigue by savaging the EU, which demanded the extra €6 billion effort. Opinion polls now show the PVV getting over 20% of the vote.
The Dutch are a famously thrifty people and their government has been among Europe’s strongest advocates of austerity. But two years of cuts and recession have made a dent in these Calvinist attitudes: fully 80% of the public now thinks austerity is doing more harm than good.
A few weeks back I pointed out that a reasonably good center-right government in Sweden was likely to be undone by its own tight money policies. Now we see an anti-immigrant, pro-big government, populist, right-wing party in the Netherlands gaining ground as a result of the policies of the European Central Bank.
2. Here’s Casey Mulligan:
To appreciate the added burden that the two redistribution waves put on the labor market, look at what people keep, on average, when they decide to retain or accept a job, or to take on a longer work schedule. Before the recession, a decision to work would benefit public treasuries by an amount equal to 40% of the compensation from the job. The worker and his family got the other 60%.
In the years 2015 and beyond, full-time workers with median incomes will keep only half of the compensation created by their decisions, with the other half going to the government in the form of additional taxes and savings on subsidy payments. By keeping 50% rather than 60%, workers will find that the reward for holding a job will have fallen a damaging 17%.
Advocates of redistribution try to perpetuate the income-maximization fallacy that business continues as usual as long as tax rates are less than 100%, because receiving even 1% of your compensation is supposedly better than getting no compensation at all. But even if full confiscation were the only way that taxes would depress the labor market, recall that the nearby chart is just an average: The average rate rising to 50% and above involves millions of people with rates far higher.
America absolutely must have taxes and safety-net programs, even though they reduce the reward for working. But advocates for the recent program expansions have failed to acknowledge that redistribution necessarily increases marginal tax rates and contracts the labor market.
Don’t be surprised if the second redistribution wave coincides with a recessionary double-dip.
I will be surprised if there is a double dip recession in the US. But here’s what I do believe:
a. That part of the drop in labor force participation that is not due to demographics is due to bad supply-side policies.
b. The 7.3% unemployment rate reflects a lack of aggregate demand, i.e. insufficient nominal GDP.
Call me a “supply and demand-sider.”
3. If the Communist Party of China could vote in US elections, they’d vote Libertarian:
An editorial on the state-run Xinhua news service, considered a channel for Beijing’s official views, said: “The United States, the world’s sole superpower, has engaged in irresponsible spending for years.”
4. Despite the government shutdown, weekly unemployment claims came out today. The four-week average fell to 304,200. The ratio of the four-week average of new claims to the US population (in thousands) fell to 0.96. The only lower figure in the past 40 years was during April 2000, when NASDAQ peaked at 5000 and the ratio fell to 0.955.
There is always talk about the “new normal.” The Great Stagnation. Low interest rates. The tendency of Americans to move less often than they used to. Young people don’t drive as much. Now you can add a new, new normal; people don’t get laid off as often. (Or perhaps they get laid off but don’t qualify as often for unemployment.)
5. Marcus Nunes shows that the RBA has once again kept Australia out of recession, despite the global commodity slump:
According to the WSJ: “Proactive Central Bank is Behind Australia´s Rebound”:
Australia’s economy is showing signs of a tentative recovery — and the country’s central bank deserves much of the credit.
A year ago, Australian newspaper headlines were full of recession warnings as iron ore prices fell sharply and the mining industry convulsed. The economy grew 2.6% on-year in the second quarter, down from growth rates as high as 4% early last year. Economists predict respectable but not spectacular growth next year.
Now, several recent indicators are spurring hope that the slowdown is ending.
Australia is one of the very few countries that didn´t tank with the onset of the “Great Recession”. In fact Australia´s last recession was in 1991!
The RBA has certainly done a better job than most central banks, particularly by not letting nominal spending tank like it did in the US, UK, Japan and the Eurozone. Australia was not explicitly targeting NGDP but it would have performed even better if it was.
Recall that people excused Australia’s success in 2008 by pointing to exports of iron, despite the fact that Australia ran a huge CA deficit. That excuse no longer holds.
Oh, and when is that Australian housing bubble going to pop? And how about the British, Canadian and New Zealand bubbles? You can be sure that if prices decline in 2045, those claiming bubble in 2005 will say they were right all along.
6. Some have argued that QE is contractionary because it reduces the amount of “safe assets.” David Beckworth has a new post that uses a VAR model to show that QE is indeed expansionary. As you may know I don’t have a lot of confidence in VAR studies, however the markets seem to agree with David and that’s good enough for me.
PS. I am blocked from Free Exchange, despite the fact that I pay for a paper subscription to The Economist. Does anyone else have that problem?