Tyler Cowen links to a recent paper by Aedín Doris, Donal O’Neill, and Olive Sweetman, studying wage flexibility in Ireland.  This is from the paper:

The Irish case is particularly interesting because it has been one of the countries most affected by the crisis. We find a substantial degree of downward wage flexibility in Ireland in the pre-crisis period. Furthermore, we observe a significant change in wage dynamics since the crisis began; the proportion of workers receiving wage cuts more than trebled, rising from 17% in 2006 to 56% at the height of the crisis. Given the large number of workers receiving pay cuts it seems unlikely that wage rigidity played an important role in unemployment dynamics in Ireland over this period.

Tyler comments:

One question is what then caused so much Irish unemployment.

That one is easy—sticky nominal hourly wages combined with falling NGDP.  The authors of the study could have saved themselves a lot of time by simply looking at the aggregate wage data (nominal hourly wages).  Here are the 12-month rates of change, and also the change in NGDP over the same period:

Period ending   Wage Growth   NGDP Growth

2008:2                +3.6%             -5.7%

2009:2                +2.3%             -7.9%

2010:2                 -2.4%             -2.7%

2011:2                 -0.9%              +5.3%

2012:2                +1.0%              +2.9%

2013:2                +0.5%              -2.7%

2014:2                -0.6%              +4.7%

2015:2                +0.9%             +12.3%

[Warning:  Eurostat is a nightmare to use, and I am a bit doubtful about the second quarter 2015 data–can anyone confirm?]

This fits the sticky wage model very well.  Notice that NGDP plunged by 15.5% between 2007 and 2010.  Wages actually rose over that three-year period.  Unemployment soared, and indeed I’m surprised it didn’t soar even more, given the stickiness of wages.  (Perhaps output fell the most sharply in capital-intensive manufacturing and construction?)  Also notice there was a double dip in NGDP in 2012-13.  And finally, notice that in both the original deep recession, and the later smaller double dip, the very small wage declines occurred with a long lag—just what the sticky wage model predicts.

Tyler continues:

A second question is why Ireland seems to have higher than normal nominal wage flexibility.

Could it be a greater than average willingness to endure living standard cuts without complaining?  The Irish after all didn’t protest austerity as much as did most of the other Europeans in a comparable position.  Maybe that means their wages can be cut without incurring the same morale costs.

Or could it have something to do with the “dual” nature of the Irish economy, namely that you either work for a multinational or you don’t?  If you work for a multinational, maybe they can lower your wages and still you will work hard to keep that job.

Any takers on these questions?

There sure is a taker!  This one is also easy to answer; Ireland doesn’t have higher than normal wage flexibility. If you look at any other country with big NGDP plunges (Portugal, Greece, Spain, Estonia, etc.), you’d also observe declining wages occurring with a lag after the big NGDP plunge.

And indeed this also occurs in the US.  We saw huge falls in NGDP in 1920-21 and 1929-33, and 1937-38, and in all three cases we saw lots of wage reductions.  Indeed in the case of 1920-21 the wage cuts were far steeper and more rapid than in Ireland, and hence the subsequent fall in unemployment was also much more rapid.  Wage flexibility helps to stabilize an economy (contra Keynes/Krugman.)

But what about the recent recession in the US?  OK, but NGDP fell by only 3% vs. 15.5% in Ireland.  So naturally the slowdown in wage growth in the US was far smaller than in Ireland.  Not enough to make it slightly negative, just less positive. If our NGDP had fallen by 15.5%, then nominal wages would certainly have also declined here.  But just as certainly they would not have declined enough to prevent a big rise in unemployment.

The more I look at the data from different times and places, the more I like the sticky wage/NGDP shock model (AKA musical chairs model.)  I think Tyler focuses too much on the fact that wages do eventually respond, and that when there are big NGDP shocks wages do fall in absolute terms.  But the term “sticky wages” was created for the express purpose of distinguishing the model from “rigid wages.”  Wages are not rigid.  They change over time.  But they adjust far to slowly to prevent big swings in unemployment. Indeed even in 1920-21, the poster child of wage flexibility, beloved by Austrians everywhere, the unemployment rate soared over a period of about a year, before falling rapidly as wages adjusted.  Even then wages weren’t instantaneously flexible, and hence wage stickiness plus a huge NGDP decline caused a severe recession in 1921.

BTW, the authors finding that 56% of workers took pay cuts at the height of the crisis is exactly what you’d expect from the aggregate data, showing that aggregate hourly wages declined slightly in 2010. Looking at disaggregated wage data doesn’t really tell us anything important that we didn’t already know about Ireland.  It’s represents another success of the sticky wage/NGDP shock model.

A couple months ago there was concern about the possibility of a global recession. This was based on falling commodity prices, a slowing economy in China, and a weak economy in Europe and Japan.  There were also fears of a September Fed rate increase. Equity markets fell, as did bond yields.

My own view was that the risk of recession (both US and global) was rising modestly, but still far less than 50-50.  I think I mentioned a 20% risk for the US next year.  Now I suspect even that risk has declined a bit.  Here is some data out today:

South Korean GDP rose 1.2 per cent quarter-on-quarter, ahead of economists’ average forecast of 1 per cent and of the 0.3 per cent expansion in the second quarter, when consumer spending was affected by fears around an outbreak of Middle East Respiratory Syndrome. This is the fastest rate of quarterly growth since the second quarter of 2010.

.  .  .

Government figures* show that South Korea’s exports declined 6.6 per cent in dollar terms in the first nine months of this year, with exports to the EU declining 11.2 per cent while those to China – by far South Korea’s biggest trading partner – fell 3.8 per cent.

And from Japan:

Manufacturing activity in Japan rose more than expected in October, with a closely watched PMI survey showing the highest reading in over eighteen months.

The Nikkei/Markit manufacturing PMI reading for October came in at 52.5, compared to expectations of 50.5. This was the highest reading since March 2014, when it was 53.9.

BTW, in a few weeks the media will probably report another Japanese “recession” which will be just as phony as the one last year.  Again, trend Japanese RGDP growth is zero.

Both the Japanese and Korean economies are closely linked with China.  These are not the sorts of numbers you’d expect if China were sliding into recession (even with the weak Korean exports).  Nonetheless the Chinese government is concerned enough about the slowdown to ease policy today:

China’s economy beat expectations in the third quarter but still expanded at its slowest pace since 2009 at 6.9 per cent in inflation-adjusted terms. Growth was even slower in nominal terms at 6.2 per cent, with much of the manufacturing sector suffering from deflation.

“The PBoC’s two-pronged monetary policy action signals an intensification of policy measures intended to combat the economic slowdown in China,” said Eswar Prasad, Cornell University professor and former China head of the International Monetary Fund.

“It heightens concerns that the economy may be losing growth momentum somewhat faster than suggested by the headline official GDP growth rate.”

Analysts say the latest rate cut is aimed at industrial borrowers, who are struggling to service debt that is fixed in nominal terms, even as falling prices decrease their revenue. The cut brings the one-year benchmark deposit rate to 1.5 per cent “” its lowest level on record “” from 1.75 per cent. The required reserve ratio was lowered by 0.5 percentage points to 17.5 per cent.

Weak NGDP growth hurts borrowers with nominal debts—where have we seen that point emphasized?

Just a couple days ago a commenter dared me to produce a recent example of Chinese economic liberalization.  There are lots of such examples, if you bother to pay attention. Here’s one that occurred today:

China scrapped a ceiling on deposit rates, tackling what the central bank has called the “riskiest” part of freeing up the nation’s interest rates.

The move came as the central bank cut benchmark rates and banks’ reserve requirements to support a faltering economy. The changes take effect on Saturday, the People’s Bank of China said in a statement on Friday.

Scrapping interest-rate controls boosts the role of markets in the economy, part of efforts by Premier Li Keqiang to find new engines of growth. While officials must be on guard for any excessive competition for deposits that could increase borrowing costs for companies or lead to lenders going bust, weakness in the economy may be mitigating the risks.

Some people just can’t accept the fact that the “Communist” Chinese are gradually converting to capitalism, and desperately point to the gradually diminishing number of areas that are still statist (such as heavy industry/banking and utility SOEs.)

In the US, long-term interest rates are somewhat higher today, because monetary policy is getting more expansionary, pushing up NGDP growth forecasts.  The ECB is also doing its part, as we saw yesterday.  But eurozone interest rates were lower, as the direct impact of the expected bond purchases overwhelmed the indirect effect of faster growth.  Never reason from an interest rate change.

Over the past 5 years we’ve seen a few global “growth scares”, notably in 2011. Equity markets fell significantly, but then in each case later recovered. That might mean the growth scare was not real, or it might mean that it was real, but policymakers did enough to address growth concerns. Later this month the Fed and BOJ will meet—it will be interesting to see if they help to end the recent global recession scare, or end up reviving the worries.

The view that QE is ineffective is pretty widely held—except in the asset markets. Earlier today, Mario Draghi hinted than another round of QE might be coming later in the year, if the global economy continues to be weak.  The euro fell 2% against the dollar, and European stock indices rose sharply.  Even Wall Street rallied on the news (so much for “beggar-thy-neighbor” theories.)  For an ineffective policy QE sure has a big effect on asset prices.  (And note that the big move down in the euro means that imported oil, and other commodities, are immediately more expensive, and hence the eurozone cost of living rose a few basis points today.)

At the same time these steps are much too weak to solve “the problem”, they merely make the eurozone economy a bit less weak.  The ECB should do much more.  One possible step is a further cut in interest rates:

“The ECB will almost certainly be delivering an early Christmas present this year,” said Nick Kounis, head of macro and financial markets research at ABN Amro.

“This could include an adjustment of the QE programme but also further policy rate cuts, something which had been ruled out before.”

Analysts at Barclays said: “We do not rule out the possibility of a deposit rate cut in December, although this is not our baseline. The likely trigger for a deposit rate cut, in our view, would be a further material appreciation of the euro, possibly in a scenario where the Fed remains on hold for longer.”

Wait, I thought the zero bound was the lowest that rates can fall.  I guess not. Lower interest rates will help, but what they really need is a better policy target, as explained by James Alexander:

Nominal GDP growth and thus Real GDP growth cannot get that much better in the Eurozone as a whole while the overarching target remains the self-defeating one of the <2% inflation ceiling. Draghi can prevent tail risks with the QE programme, lower rates for longer and even more negative rates. But it will never be enough to see healthy growth. The inflation ceiling offsets almost of the good work from the other policies.

Overall, monetary policy is just not that accommodative. Draghi says he and his fellow governors and their staff are working hard:

“the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.”

Please, Mr Draghi, it is the mandate itself that is the obstacle. In the UK we may be looking soon at the mandate  and there were hints that the European Parliament is also looking into the mandate. At least talk about NGDP Targeting and you can then “Feel The Power” in time for the pre-Christmas release of Star Wars 7.

Amen.

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.

The more I find out about Bernie Sanders the more I like him.  But I just can’t get past that “socialist” label.

1.  For years people like me have been called “McCarthyite” if we label someone a socialist.  And now we are suddenly to believe that socialism in America is perfectly acceptable?  So I’m no longer a McCarthyite?

2.  Bernie Sanders claims he wants to make the US more like Denmark.  But Denmark scores higher on the Heritage “Economic Freedom” ranking than does the US.  How will Sanders boost economic freedom in America up to Danish levels?  He doesn’t tell us.  Although Denmark scores only slightly higher than the US, his social welfare plans would push the US far lower on the Heritage Economic Freedom ranking.  So to catch Denmark he’d have to make the US massively more market-oriented in other areas. Will we have Denmark’s private fire companies?

It’s true that there are many countries in the EU with socialist parties.  Here they are, with unemployment rates in parentheses:

Belgium (8.6%), Bulgaria (9.6%), France (10.2%), Greece (25.6%), Hungary (7.0%), Italy (12.7%), Luxembourg (5.7%), Portugal (12.4%), Spain (22.5%)

OK, Luxembourg is doing well.

And here are some European countries without (AFAIK) any major party that calls itself “socialist”:

Austria (6.0%) , Britain (5.6%), Denmark (6.0%), Finland (9.5%), Germany (4.7%), Ireland  (9.7%), Netherlands (6.9%), Sweden (7.5%)

[Update:  I should not have relied on Wikipedia.  Garrett M points out that the Netherlands does have a socialist party.]

Bernie Sanders likes to say that he favors the Scandinavian model, but doesn’t seem to realize that the Nordic countries view the socialist label as toxic.  The term ‘socialism’ used to actually mean something.  It meant opposition to capitalism. It meant government ownership of the means of production.  The socialist parties in southern Europe actually favored socialism when they first choose their name.  Yes, they did edge somewhat away from government ownership of industry in the neoliberal era, but the name stuck.  And they are still more socialist than northern Europe.

So why would Bernie Sanders call himself a socialist, and not a social democrat?  I’m going to give him the benefit of the doubt, and assume he’s a little bit ignorant and a little bit eccentric.  However, not only does he not favor the Nordic economic policies that earned those countries high rankings in economic freedom, he doesn’t seem to favor their paternalistic social policies either.

You might say this stuff doesn’t matter, what matters is “substance.”  Really?  Is American politics about “substance”? What is the “substance” of Donald Trump’s tax plan to go after the hedge fund owners? How will he do that? What is the “substance” of Hillary Clinton’s true underlying views on the TPP?  American politics is about many different things, but “substance” is certainly not one of them.

Almost overnight the term ‘socialism’ has gone from being toxic in America, to non-toxic.  As I indicated, that doesn’t really tell us anything interesting about Bernie Sanders, he’s just confused.  But it just may tell us something important about America.

PS.  The left in America likes to think of itself as “reality-based” and the right as being “faith-based.”  But that’s not how things work in the rest of the world.  Elsewhere, Socialists oppose reforms to make the economy better, they are the new reactionaries. Here’s a recent example from the FT:

Portugal’s bonds started the day looking queasy, and they haven’t picked up since.

The problem is politics. Acting prime minister, the centre-right Pedro Passos Coelho, has still not been able to forge the coalition he heeds to govern with the opposition socialists. (Elections were held at the start of this month, and while Mr Passos Coelho won the most votes, he did not snag large enough share of the vote to govern alone.)

Analysts at RBS warn that the political situation in the country is more complicated than many assume.

The ball is in the court of the defeated Socialist party – they could either support centre-right PàF, or form a coalition with the radical left. The first has always been the base case of analysts; yesterday however Socialist leader Costa declared his party was closer to an agreement with anti-austerity parties and negotiations with PàF were interrupted.

We now see a 50% probability of a left-wing government, which would halt the country’s reform momentum and would likely start rolling back the reforms already implemented. Such political risk adds up to Portugal’s worrying economic fundamentals.

And check out how Brazil’s socialists are doing.  (A few years ago Krugman praised their policies.)  And how about Venezuela?  (praised by Corbyn)  How about Greece? How’d that negotiating advice from Stiglitz and Sachs work out?  Yes, I’m cherry picking.  But when I read America leftists I sometimes have the impression that they have no idea what’s going on in the rest of the world.  If America ever adopts socialism is will look far more like the Brazilian variety than the Danish variety.

PPS.  From the list above, it sort of looks like socialism appeals to Catholic and Greek Orthodox countries. But my hunch is that the true cultural divide is language, not religion.  Northern Belgium, Bavaria, Ireland, and Austria are all Catholic regions, and all speak non-Latin languages.  And all four places are prosperous.  The cultural dividing line in Europe is not at the Belgium/Netherlands border, it runs right through the center of Belgium.  It’s probably more correlated with language than religion.

PS.  I have a much more important post over at Econlog.