Archive for October 2015


Enough of this ****, let’s try liberalism

Since they kicked out the Jews and the Moors, Spain has “enjoyed” 500 years of illiberal policies, from both the left and the right.  Now there are some signs that Spanish voters are beginning to get tired of failure, tired of 21% unemployment:

As Spain’s rising political star, Albert Rivera has charmed many Spaniards with his easy-going manner and his critique of the political establishment. His pro-market agenda is also reassuring bond investors.

Having overtaken the anti-austerity group Podemos in polls for the first time this month, Rivera’s Ciudadanos party is likely to be kingmaker after an election in December. Whether he opts to support Prime Minister Mariano Rajoy’s People’s Party or the main opposition Socialists, investors are just happy it’s Rivera who holds the key.

.  .  .

Ciudadanos went national last December with Rivera announcing he would be running for prime minister six months later. Since then, the 35-year-old lawyer has become inescapable for Spaniards, debating policy on news shows, talking family life on morning TV and discussing his fashion choices in style magazines.

Four national surveys released in October showed Ciudadanos in third place and one placed the group in a statistical tie with the traditional parties. The most recent, Telecinco’s poll of 1,800 people published Tuesday put Ciudadanos at 18 percent with the PP at 27 percent and the Socialists at 24 percent.

With neither Rajoy’s PP nor the Socialists within reach of an outright majority, that would make Rivera’s party the go-to option to support the next government. Podemos, the ally of Greek Prime Minister Alexis Tsipras that led in one January poll, dropped to fourth place with 16 percent.

“Having Rivera play this role would be seen as a positive by the market,” said Geoffrey Minne, an economist at ING Bank in Brussels. “His party is coming with a pro-business program, a willingness to improve transparency in government and tackle the issue of labor market duality.”

Staying Sensible

Campaigning on a platform of “sensible change,” Rivera combines pro-market measures with socially liberal views. His party wants to cut taxes, simplify the sales tax and reduce duplication at regional government level. But he’s also advocated legalizing prostitution, investing in innovation and modernizing the education system.

By blurring the lines between conservative and progressive ideas, Rivera is attracting support from traditional supporters of both the PP and the Socialists and can seal alliances with both groups. According to a Metroscopia opinion poll published Oct. 11, Rivera has the highest approval rating among Spanish politicians.

With Spain set to move beyond the two-party system that has controlled parliament for the past three decades, Rivera’s ability to draw support from across Spain’s polarized political map could be his biggest asset.

Let me anticipate the inevitable complaints from the usual grouchy commenters who are lacking in imagination:

1.  Yes, Ciudadanos is not a purist libertarian party, those sorts of parties have no chance in Europe, or anywhere else in the world for that matter.

2.  Yes, they will only be the junior party in a coalition, and powerful special interest groups will prevent many of their proposed reforms from being enacted.

But I’d rather focus on the positive.  Finally, Spain is considering liberalism, and the appeal seems to be strongest among the young.  This is surely a good sign for the future.  If they join up with the right they are likely to get at least some of their economic reforms enacted.  And if they join with the left they should be able to enact some of their social agenda.

In my view the most important characteristic of Ciudadanos is not its position on this or that issue, but rather it’s strong opposition to Spain’s culture of corruption, its culture of crony capitalism.

PS.  By encouraging Syriza to reject the EU bailout in a referendum, Krugman, Stiglitz and Sachs greatly helped Ciudadanos, by discrediting Podemos.  Thank you.

More evidence of creative destruction in China

Brent Buckner sent me the following story from Business Insider:

Some commodities, like iron ore or cement, are necessary for massive industrialisation, and Chinese demand for them exploded during the boom years. Goldman [Sachs]’s note refers to them as capex (capital expenditure) commodities.

Growth in others, like gasoline and coffee (opex or operational expenditure commodities) indicate that something else is going on “” that a population is getting richer, and spending more on things like food and personal travel.

In China, consumption of capex commodities is slumping, against rapid growth in opex commodity consumption.

The more capex-intensive the commodity, the weaker the demand growth, while the more opex-intensive the commodity, the stronger the demand growth. Demand has declined by 5.0% for cement, yet demand for gasoline is up 19.1%. This pattern suggests that policymakers are, at least to a degree, successfully creating the conditions for the much-anticipated rotation in economic growth away from investment and towards consumption.

And that’s pretty important. Beijing is currently trying to rotate away from being the world’s investment-heavy, export-driven industrial powerhouse and towards an economy more driven by domestic consumption and services.

When investment declines in a well functioning economy, you should see a move along the PPF toward more consumption.  When both C and I decline at the same time, and you move inside the PPF, then you have major problems.  Think about the US in 1929-33 or 2008-09.

When falling investment is offset by rising consumption, however, employment tends to be stable.  Think about how the US created jobs in the January 2006 to April 2008 period, despite residential construction falling in half.  So far China seems to be doing it the right way.

As an aside, you might wonder why I am a bit skeptical of the claims that China has overinvested in housing and infrastructure.  Read this tragic story about the 70 million children left behind in China’s industrialization drive, as their parents went off to work in the cities.  There is no greater priority in China than building an urban capital stock capable of supporting 1.2 billion people, so that these families can be reunited.  (Of course it would also help to abolish the hukou system.)

PS.  I was asked about the new Chinese GDP figures.  They have switched from a bizarre year to date cumulative system to a year-over-year reporting system. Thus RDP is 6.9% higher than the 3rd quarter of last year.  The quarter-over-quarter growth was 1.8%, or an annualized 7.2%.  (HT:  Ben J)

PPS.  Lars Christensen reports that NGDP growth in China continues to slow.  This suggests that China needs more monetary stimulus (perhaps a weaker yuan.)  Marcus Nunes suggests that it also points to a need for easier Fed policy.  Some believe that the actual inflation rate is higher than the reported rate, and hence RGDP growth is slower that reported.

James Alexander notes that the new Labour leadership is looking at NGDP targeting.  However they have virtually no chance of taking power, so I’m not sure it matters.

Is China successfully transitioning to consumption?

In recent years, people have been arguing that China needs to shift its economy from investment and heavy industry toward consumption.  My own view on that issue has been somewhat agnostic.  It’s inevitable that investment will slow as China becomes a developed economy, but it’s hard to say whether that transition has been happening too slowly or too quickly.

The 3rd quarter RGDP figures were just announced, and came in at 6.9%.  That’s ahead of analysts expectations, and well ahead of my 6% forecast for the next year.  I now think I was too pessimistic.  Here are some of the internals, from the FT:

Yet services growth remained strong in the third quarter, with nominal growth falling only slightly to 11.9 per cent annually from 12.1 per cent in the second quarter.

Stagnation continued in the industrial sector, however, where nominal growth was roughly flat at 0.2 per cent, down from 1.6 per cent in the second quarter. The statistics bureau does not break down real growth figures by sector.

Chart: Composition of China GDP growth

Economists agree that a long-term slowdown in Chinese growth is inevitable due to structural factors such as a shrinking labour force and the end of “catch-up growth” as China completes the transition from a rural to industrial economy.


Notice that in 2015 consumption is becoming the key driver of the economy.

There are a number of signs that growth may begin to pick up from this point forward:

Economists also expect the central bank to cut benchmark interest rates again before the end of 2015, as well as make another reduction in banks’ required reserve ratio. That would follow five rate cuts since November and three RRR cuts in 2015.

Though still weak, the real estate sector is now recovering modestly, with property sales growing 7.5 per cent in the year to September in floor area terms, up from 7.2 per cent growth in the first eight months. Property sales had contracted for 17 consecutive months through June on a year-to-date basis.

In addition, the first week of October (called “Golden Week”) saw very strong sales at restaurants and retailers, up over 11%.  Movie theatre growth during this week was astounding, up 200% between 2013 and 2015.

Meanwhile stocks are rising on speculation that there will be another round of SOE reforms:

Chinese stocks rose to an eight-week high as a government plan to reorganize the telecom industry raised speculation policymakers will accelerate reforms of State-owned companies to stem slowing economic growth.

The Shanghai Composite Index climbed 2.3 percent to 3,338.07 points at the close, the highest level since Aug 21. The CSI 300 Index gained 2.4 percent. China United Network Communications Ltd and China Mobile Ltd gained at least 2.7 percent after the government injected 231.4 billion yuan ($36 billion) of network assets such as base stations into a new company called China Tower Corp.

There is “speculation regarding another wave of SOE reform”, said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group Co in Shanghai. “The economy is slowing down and a clear, but challenging way of supporting the economy would be to speed up the SOE reform. SOE reform remains one of the most solid investment themes.”

Hong Kong’s Hang Seng China Enterprises Index advanced 2.1 percent, while the Hang Seng Index added 2 percent.

Overall, China looks on track to achieve a successful transition from a heavy industry and investment-oriented economy to a consumer/services economy.  This will also pay big dividends in terms of pollution reduction.

I predict that the Chinese government will eliminate the one child policy within 2 years—that will help.

And I’m raising my Chinese RGDP growth forecast to 6.5% over the next year—I think I was too pessimistic at 6.0%.

For the US, I see 1.7% RGDP growth over the next year, slowing after that.

Markets set interest rates

Patrick Sullivan sent me a link to a talk by John Taylor.  Around the 15 minute mark Taylor recounts an amusing conversation he was part of with James Tobin and Paul Volcker, back in 1982:

I remember very well Jim [Tobin] asking Paul “Why don’t you lower interest rates, Paul?”  And Paul Volcker said, “I don’t set interest rates; I set the money supply and the market reacts [with] the interest rate.”

John seemed to say “to” not “with”, but in context I think he meant, “reacts with changes in interest rates.”

I love that quote.  Great to know that central bankers occasionally see the light.

Those who want higher interest rates need to tell me precisely what they want the Fed to do to cause rates to be higher.

PS.  I have a new post at Econlog.  The first of many, many posts to comment on Bernanke’s new memoir.

PPS.  Bob Murphy has a new post criticizing my recent post on real shocks.  He starts off as follows:

Sumner’s whole purpose with this post is to argue that shocks in “real” factors can have huge impacts on welfare. However, they do not correspond to the business cycle. So long as the central bank exercises wise monetary policy, real shocks can be offset and full employment can be maintained. In contrast, we don’t need a real shock to get a recession and rising unemployment; all we need is the central bank to stupidly let NGDP growth fall below trend.

Actually, there are real shocks like a $20 minimum wage that could cause recessions and much higher unemployment.  I was trying to show that as a practical matter the fluctuations in unemployment in the US and Australia are mostly about NGDP shocks. I probably should have been clearer; sometimes I assume there are certain things that “go without saying.”

In the rest of his post Bob belatedly discovers something I have said dozens of times here over the past 5 years, that for commodity exporters like Australia I view total nominal labor compensation as better than NGDP.  I’ve also explained why this compromise is a clear implication of the musical chairs model.  Bob seems to think that somehow undercuts my whole message, but I’m not quite sure why nuance is worse than fanatical devotion to fitting one single model into all conceivable circumstances. I’m a pragmatist, so sue me.

But yes, I should have made that point explicit in the post.

Getting to Switzerland

Matt Yglesias has a good post on Denmark.  He points out that Denmark has far higher taxes than the US, especially on the middle class.  He also points out that Denmark has much more efficient provision of public services.

Consider health care, which is almost 18% of US GDP, and more like 10% in Western Europe.  Now suppose the US moved to complete socialized medicine, without dramatically cutting the pay of doctors and nurses. Assume we also adopted the other aspects of the Danish social welfare model. Denmark’s government currently spends about 57% of GDP.  If the US tried to deliver the same services, without reducing costs from the current level, it would cost at least 65% of GDP.  It’s not possible to raise that much money without dramatically reducing total GDP—making us much poorer.

Matt points to some other examples of waste, such as the fact that transportation projects in America are far more expensive than in Denmark (or in the rest of Europe, for that matter).  So it might require even more than 65% of GDP. Democrats don’t tend to talk about this problem, because part of it is caused by their constituencies. And we know that when push comes to shove, they care more about public employees than social welfare programs (recall the education voucher debate.)

And of course Denmark is actually more capitalist than America, a point that Yglesias overlooked.

The fact that Bernie Sanders is being fundamentally dishonest about the nature of Scandinavian “socialism” does not mean that we shouldn’t try to emulate Danish policies.  I do view their system as superior to the US, because it’s more capitalist and more utilitarian.  But that’s a low bar—why not aim higher?

Matt shows a list of the happiest countries in the world, where Denmark comes in third.  It’s kind of a bizarre list (the US is at 15, squeezed between Mexico and Brazil.) But suppose you actually believe this stuff.  It’s worth noting that the US scores higher than every single large European country (over 40 million people); higher than Germany, France, Britain, Italy, Spain, Poland, Ukraine, Russia.  That suggests to me that the US policy regime is superior to the European policy regime.  Or any other large country regime, except . . . Mexico??

And let’s go one step further.  The very highest country in the happiness rankings is Switzerland.  Soon after Matt provides this ranking, he asks:

3) How did Denmark get to be so awesome?

Taxes. Denmark does it with really high taxes.

Taxes certainly explain the social benefits Matt discusses, but what about the happiness ranking?  Since the Swiss are much richer than the Danes and also seem happier, why not emulate Switzerland?  The Swiss have the smallest government in Western Europe (as a share of GDP), indeed even smaller than in the US.  So let’s shrink our government to be more like the Swiss.

When I mention this proposal to progressives they invariably say:

“Switzerland is a small homogenous country, its model is not applicable to the US.”

I then ask; so which model should the US copy?  And they respond:

“Denmark” or “Sweden”

I usually spend the next 10 minutes rolling on the floor laughing, before pointing out that at least Switzerland has four different languages.  They also have more immigrants than other European countries.

I wish we could have an honest debate.  The Dems could say, “We want to be more like Denmark.”  The GOP could say, “We want to be more like Switzerland.”  Then show American voters the taxes paid by the middle class in both countries, and the public services provided in both countries, and let them decide.

Unfortunately, the Dems don’t actually want us to be anything like Denmark, nor does the GOP want us to be anything like Switzerland.  Hence the debate over “big government” is all a sham.

HT:  TravisV