According to wikipedia, “overdetermination is a phenomenon whereby a single observed effect is determined by multiple causes at once, any one of which alone might be enough to account for (“determine”) the effect.That is, there are more causes present than are necessary to generate the effect”. In this strictly technical sense Japan’s deflation problem is overdetermined – there are multiple causes at work, any one of which could account for the observed phenomenon. Those who have been following the debate can simply choose their favourite – balance sheet recession, liquidity trap, fertility trap – each one, taken alone, could be sufficient as a cause. The problem this situation presents is simply epistemological – in a scientific environment the conundrum could be resolved by devising the requisite, consensually grounded, tests. Continue reading
Here’s one simple chart which illustrates why I think Japan style deflation is now more or less inevitable in Spain. Curiously it comes from the Ministry of Employment and illustrates the relation between the movement in average wages caused by actual movements in the real wage and those caused by what is known as the “compositional effect”. This latter is known by this name because it is the result of movements in the composition of the workforce, whether this be in terms of the average skill level or the average level of experience (or seniority premium, if you prefer). Seniority has historically played a very important part in the Spanish wage structure – ie the longer you have worked the more you are likely to earn.
Now if you look at the data superficially, you find that in the first years of the crisis average real salaries went up sharply (the blue line). This surge in average salaries was not due to salaries actually rising to this extent, rather it was the result of the composition of the workforce having changed (the average skill level went up) as unskilled workers in construction lost their jobs. Hence the 2009 spike in the composition effect.
According to Bank of Spain data in 2008 skilled workers represented 23.55% of the total while by 2012 the proportion had risen to 28.2%. On the other hand, over the same time period unskilled workers fell from 14.8% to 10.2% of the total.This naturally had an impact on average wage levels.
Now, however, the labour market has stabilised, and unskilled workers are no longer losing their jobs (at least not in net terms). According to the Spanish newspaper Expansion the Spanish statistics office estimate average hourly labour costs (not unit labour costs, note) fell in Spain by 2.9% en 2012, 1.9% in 2013 and they are expected to fall another 1.7% this year.
Again, looking at the chart you can see that the green (compositional effect) line which surged in 2009 has now flattened. It has flattened but the impact is still there and has stabilised at a more or less constant rate. Subsequently it is quite possible that the compositional effect will even turn negative due to the impact of the 2012 labour market reform: average salaries are no longer falling due to labour shedding producing a changing skill composition but due to AGE CHURN. Older workers with long term contracts and lots of seniority are being steadily replaced by younger ones on less well paid contracts, thus dragging down the average wage. The line is flat and extends out in to the future. This can go on for years now, and indeed the compositional effect can even turn negative.This is exactly what has been happening over the years in Japan, and is the principal reason why Abenomics isn’t working.
Incidentally, here I have been talking about average hourly labour costs NOT those famous unit labour costs. These, as we all know, fell significantly in Spain after the onset of the crisis. What isn’t so well understood is that this fall wasn’t due to falling hourly wage costs (these didn’t really start falling till mid 2010, see blue line in chart) but due to massive labour shedding. Spain’s GDP has fallen by something like 7% while employment is down by around 20%.
On the surface this shows a large gain in productivity. Where this gain is actually coming from hasn’t been sufficiently analysed yet, but part surely comes from a compositional shift in the labour force. One thing is, however, reasonably clear and that is that it hasn’t come from industrial productivity, since industrial output is down by some 30% since the pre-crisis peak, even more than the reduction in employment.(I’m afraid you’ll have to stare very hard at the industrial output chart if you want to see signs of the much proclaimed recovery – you’ll have to stare very hard since there is so little sign of it).
So why do I think this suggests deflation may become endemic in Spain? Well, with average real wages falling, real pensions falling, and credit still shrinking by around 6% a year it is hard to see where the demand is going to come from, especially with very little happening in the way of new employment – the shortfall is becoming structurally implanted.
For more argument on all this (in Spanish) see my book which is being published by Ediciones Deusto next week. You can find a list of chapter headings here.
What a convoluted title! Still, the lack of formal elegance might just be compensated for by its communicative efficacy. The aim of the above header is to link two names in people’s minds, both of them Italian: Mario Draghi and Matteo Renzi. Naturally the idea is not original, the FT’s Peter Spiegel recently published an entire blog post ( Does Renzi owe his job to Draghi?) trying to establish some sort of connection between the arrival in office of Italy’s Matteo Renzi and the recent German Constitutional Court ruling – in the process casting the central bank President in the role of midwife. Indeed, according to the FT, Italy itself is currently rife with rumours about what might actually lie behind Renzi’s meteoric rise, and again the role alloted to Mr Draghi seems to be rather more than an incidental one. Continue reading
I’ve been wanting this for a while. What happened to the powerhouse Italian SMBs of the 1980s? We’ve known for quite a while that it was productivity, not wages, not hours, not savings that gapped-out between northern and southern Europe in the 2000s. I made the point back in 2011 and again that this is the responsibility of management, and perhaps of government.
Here is a great VoxEU post on productivity in Italy from Fadi Hassan and Gianmarco Ottaviano.
It is productivity that’s the problem.
It’s not the labour market. This chart shows a measure of “Strictness of overall employment protection”.
It might be the banks, or if not banks, finance. This chart compares the change in investment and the change in productivity in detailed sectors of manufacturing, between Italy and Germany.
It may also be to do with computers. This chart shows the percentage of non-residential investment made up by information and telecommunications technologies.
Hassan and Ottaviano think Italian human resources managers are at fault.
The basis of this scoring is as follows:
- Italian firms promote workers primarily on tenure, rather than actively identifying and promoting top performers;
- Managers tend to reward people equally, irrespective of performance level, rather than providing targets with performance-related accountability and rewards;
- Poor performers are more rarely removed from their positions;
- Senior managers, rather than being evaluated on the strength of talent pool they actively build, are more likely to not see attracting and developing talents as a priority
The first seems to conflict with the second chart, as does the third, and the second is arguable. The fourth, though, reminds me of Diego Gambetta on Italian professors and incompetence as a costly-signalling mechanism. I wrote about him here and here.
European Central Bank’s Financial Stability Review November 2013, page 19. The left chart is output gaps (blue 2007, red 2013) i.e. differences between current and estimated potential or “full employment” GDP. Most eurozone countries have output gaps below 2.5 percent, including some with extremely high unemployment, like Ireland. Output gaps were large and positive in 2007. Current unemployment rates associated with these small output gaps can be surmised from the right-hand chart — many are in double digits. Among the many implicit assumptions of the typical analysis that accompanies such charts is that if two extreme points have been attained, then somewhere in between must be feasible.
The Commission has taken an interest in the German trade surplus. As you know, Bob, they took an interest in the government deficit in the early 2000s as well. This isn’t mere snark, though. Here’s a really interesting chart from Jared Bernstein‘s blog.
Germans haven’t had much of a pay-rise for years, but neither have Americans. To put it another way, German export success isn’t driven by cheap labour or indeed cheap anything. Bernstein is swinging off a post of Paul Krugman’s about intra-eurozone trade issues, but because he’s a nonrespectable palaeokeynesian like me, he looks at this from an industrial policy point of view.
There ought to be some room for manoeuvre here, and this is the sort of thing that the UK Labour policy community is obsessed with. How does the industrial machine work? If it wasn’t low, low prices, what happened? It’s not an abstract saveyness of pure virtue, either, because savings rates aren’t what you might think they are.
It’s not a timeless truth, either, as Mark Schieritz charts.
So you might think this blog ought to have written much, much more about the German elections and the coalition process that came after. Mea culpa, but the truth is that it just wasn’t interesting or new and the reasons are well defined here, with the notion of the post-political situation. Germany had an election as post-political as anything you might get in Italy. The biggest row was about the idea of having a compulsory vegetarian day in schools. The opening of talks between the parties is well satirised here as a vacuous media pseudo-event.
Even now, in the coalition process, the SPD has been essentially competing with Angela Merkel to agree with her own policy, by ruling out any European funding for bank resolution that doesn’t come with a troika programme and the concomitant 25% reduction in GDP. Perhaps the only genuinely political moments were the periodic Snowden eruptions (apparently the biggest clown over this, Roland Pofalla, wants to be a cabinet minister. we’ll see).
The original reading of the election was that it was an awe-inspiring triumph for the Right. The evidence of this was that they did well in Bavaria, demonstrating only that a lot of journalists don’t read their own newspapers, and that the CDU had a historically high score. On the other hand, the parties of the Left actually ended up with more seats, through the moderately countermajoritarian voting system and most of all because of the crash of the German liberals, the FDP, who lost all their seats. Merkel had to pick between an unstable rightwing coalition beholden to Bavarian pols who are unelectable in the rest of Germany, which would be vulnerable to the parties of the Left picking off individual centrists, and something else.
The something else is a new version of the grand coalition of 2005, with the CDU and the SPD in government together. This is much more stable, and importantly permits the chancellor to have an independent political role. In a government that has to tack to the hard right to please the rightmost Bavarian MP and then back to the centre, Merkel is a weathervane. In one that’s spread right over the range of German politics it declares to be respectable, she’s the boss.
On the other hand, viewing it from either flank, it’s utterly vacuous. If you don’t like the EU, or even if you don’t like the current macroeconomic settlement of it, there is nothing for you here. It is deeply post-political, in the sense that the SPD and the Greens get to compete for the role of second coalition partner so long as they don’t propose anything new or interesting.
It should also give pause to everyone who likes the idea of breaking up the great social democratic parties. This project is further ahead in Germany than anywhere else, and the result seems to be a Left party that doesn’t achieve much or increase its vote much, a SPD whose main argument is that the Left are all commies and wasn’t it that lot who cooperated with the Nazis in 1932 to kill the Prussian SPD government*, and a Green party that’s not much better on its key issue than everyone else but doesn’t seem to know or care that wage-earners exist as such.
It’s because the SPD and the Left party loathe each other so much, and the Greens are as ECB-minded as anyone, that the numerical majority of the left in the Bundestag is not a political majority and the numerical minority of the Right is a political majority.
SPD members’ experience of grand coalition was basically horrible, and the effort to sell the project to the 470,000 members seems to rely heavily on pompous old men telling the base off. Like so.
In France, the push to the left from Mélénchon is at best like one of those solar sails – it might be just perceptible over 30 years – and at worst immeasurable. And the reality of post-politics is that however many votes SYRIZA or Grillo gets, does anyone really imagine it will matter?
That said, that said, German politics may be post-political but it is not yet post-democratic. The SPD’s biggest outstanding issue in the coalition talks is a €8.50/hour national minimum wage, which is more impressive when you realise that about 40% of German workers (including part-timers) earn less than that. There is a Billiglohnland inside Germany that is rarely discussed. Gesamtmetall is already on board.
This is largely because low wages in Germany are mostly in the non-tradable bits of the economy. IG Metall and Gesamtmetall can agree on this because it’s not their problem. As I often point out, nobody buys a Mercedes because they’re cheap. But if the services workers get a coup de pouvoir d’achat, it ought to provide at least some additional aggregate demand and suck in some imports.
And, after all, it was the FDP’s Lambsdorff paper back in 1982 that introduced neoliberalism to Germany, or rather reintroduced it if you believe the Freiburg school was its originator.
It’s something. It’s not much, but it’s something. Of course, the SPD membership could still vote it down, in which case we get the Right with veggie days.
*well, it was, and I’ve said this to people I know on the extreme left, but it’s depressing to see that Sigmar Gabriel has nothing better to offer as an argument.
**ok, Siggab has worse to offer.
***as a general theme, Steinbruck, then Siggab, what is it with the tiresome Sir Mucho Pomposo types?
As you’ll know if you’ve been near any economics-oriented blogs, secular stagnation is the hot topic i.e. that advanced economies are prone to needing negative real interest rates to achieve full employment and in the inability to achieve that at low inflation, bubbles might be helpful. One surprising thing about the debate is that given the Cambridge Mass. lineage of those involved in it, the concept of “dynamic inefficiency” has not been raised in tandem.
This was something that emerged in the modeling of overlapping generations economies by Paul Samuelson and Peter Diamond, and referred in particular to the possibility of the economy where “the” interest rate was less than the growth rate and thus in a sense the economy’s saving vehicles were less efficient at transferring wealth to the future than its growth process. The intuition was that such an economy had accumulated too much capital and driven down its return, while the saving needed to maintain the capital at that level (due to depreciation) was squeezing current consumption.
Such an economy has the possibility that weird stuff — like bubbles, paper money, and unfunded social security — can make everyone better off. Also, the government can pile up debt, and seemingly dubious investments like land are good for everyone.
Indeed, such an economy is essentially a long-term version of the liquidity trap, where the standard instincts about good and bad policy don’t work very well. It’s also mathematically interesting, which perhaps is why it’s such a staple of graduate level textbooks.
So why is no one talking about it, at least not explicitly? Is it that the intuition of overinvestment doesn’t sound right for economies seemingly short of infrastructure, like the USA and Germany? Or correspondingly that the high saving part doesn’t sound right, at least for the USA? Perhaps it’s the fact that various means of increasing current consumption at the non-expense of future generations — like selfish tax cuts! — are helpful.
In any event, much of the secular stagnation discussion has been conducted in terms of the static relationship between saving and investment. The dynamic inefficiency tradition has the merit of looking at the cumulative impact over time of all that excess saving. In the secular stagnation world, where is all that capital going?
Following up on the last post, here’s a quick review of Simon Carswell’s Anglo Republic: The Bank that Broke Ireland.
Anglo Irish Bank was the biggest, noisiest, brashest, and most extreme representative of the financial crisis in Ireland, and Anglo Republic is a carefully reported history of the bank and how it got that way. One of the real standout points in it is that Anglo was the relationship bank par excellence.
Relationship banking is often seen as a good thing that we need more of, counterpoised to faceless trading-floor turbo-finance. But relationship banking was precisely what Anglo did. Anglo tended to keep clients for many years, to involve itself deeply in their businesses, and to go to extraordinary lengths to serve them. It would also take risks to win or retain them. Its unique selling point was that it would do anything to get your deal done, and it would do it quickly. They frequently closed property transactions up to a billion euros within the week. In exchange for this, its clients put up with interest rate spreads and fees that were much higher than its competitors’.
This raises a second point, which is that you know it’s a bubble when capital gains come in so fast that changing the interest rate is irrelevant.
The relationships it served so fanatically were, to the exclusion of almost all else, with property developers. Anglo bankers may have thought they were something like a local German or Italian bank serving the local speciality industry. From the outside, though, the bank was a ferociously geared-up bet on property in general, and Irish residential and UK commercial property in particular.
There was also another kind of relationship they carefully cultivated, specifically, corrupt ones. There is just an endless flow of people whose relatives turned up on the other side of the table, or in politics, or in the regulator or the central bank. Carswell tackles this with understated sarcasm and careful inquiry. He also deals with the political, class, and sectarian issues involved with delicacy and good prose. I liked the remark about the bank’s brand, in which he notes that although Anglo’s advertising sometimes implied it was an Anglo-Irish, and therefore aristocratic, company, “Anglo Irish in fact never used the hyphen”.
Its CEO, Sean Fitzpatrick, may have resisted selling the bank to Bank of Ireland because BoI was, in fact, an Anglo-Irish or at least Protestant company. However, the source for this is the same guy who suggested guaranteeing the whole liabilities of the banks, so take it as you will.
Carswell is also good on the financial guts, for example, on the key relationship with Sean Quinn, property developer and their whale client. Quinn was a huge borrower from the bank, under several different company names, a major depositor in the bank, and a shareholder in the bank. After his disastrous speculation in contracts for difference on the bank’s shares went wrong, Anglo was lending him money to meet margin calls, while at the same time worrying that he might no longer be good for the property loans, and also that if his broker had to sell him out, the stock overhang was so monumental that it might finish off the company.
Another detail that sticks out was that their private client operation largely existed to recycle some of the property capital gains into the bank’s funding, in essence juicing it with even more leverage, as most of its clients were themselves Irish property developers. If they weren’t the bank’s own executives, that is. The bank often structured property transactions so that some of its private clients could take some of the equity, somewhere between an investment banking and a brokered deposit model. This helped set up some of the transactions for tax purposes, but it mostly created an opportunity for Anglo executives to buy in. Inevitably, they tended to do so by borrowing from the bank.
Golf plays a special role in the book. Anglo was dedicated to the belief that nothing built relationships like golf, and it constantly took borrowers, depositors, competitors, regulators, analysts, journalists, and random members of Westlife* golfing. It took Irish-American clients and investors to Ireland to play golf, on courses owned by other clients, and then took its Irish clients to meet them while golfing. It gave away as much as €200,000 worth of golf balls a year. Carswell includes a table of spending on hospitality by type. Golf even surpasses drink in it, and there was plenty of that too – one banker recalls deciding to drink only bottled beer at Anglo events in order to stay relatively sober, and being told that “This is Anglo and you drink pints.” That said, at least Sean Fitz didn’t prepare for an appearance before parliament by following a vapour trail of meth and crack all the way around Grindr, like the CEO of the Co-Operative Bank, or if he did we don’t know.
Very often, the business discussed on the golf course was the creation of further golf courses. Not rarely, the clients who golfed their way to a giant loan to build a golf course got the loan because they also played golf with Bertie Ahern and could therefore help Anglo with other issues, for example, getting planning permission for golf courses. One wonders if the point of golf, anthropologically speaking, is to demonstrate that you have well-watered land to waste on totally unproductive activity.
Another interesting point is the role of good old Rabobank, famously the safest and most conservative financial institution in Europe and possibly the world, and all savey and nearly German to boot. Except when it spent ages and millions of money trying to buy not just Anglo but other gamey Irish property lenders as well, and in retrospect only avoided pulling an RBS by good fortune.
*Not actually random at all, but you’ll have to read the book.
After soziale Marktwirtschaft, the social market economy, and freie Marktwirtschaft, the free market economy, what about Weihnachtsmarktwirtschaft, the Christmas market economy?
So there’s one of those packaged German Christmas markets outside the Royal Festival Hall at the moment. I was down there last night having a bratwurst and I thought: That’s like Europe! This does remind me a bit of both Thomas “Airmiles” Friedman’s vast collection of highly informative cab drivers and also the vicar in my home village who one Christmas night preached that “Have you ever been at the airport, waiting for your luggage, watching all those strange bags come around, when suddenly, there’s yours? Well, that’s like Jesus“, but I do have an actual point here.
And after all, England Rugby League legends Sam and George Burgess were hitting the bratwurst about the same time and you know they’re right:
— Sam Burgess (@SamBurgess8) November 17, 2013
Obviously the beer was imported. So were the sausages. But even the bread rolls came out of a box from “Der Heimatbäcker” that promised 80 Stück of Turbobrötchen. All the cooking gear had German brand names on it. The only local contribution was labour, either British, Portuguese, or Polish. It reminded me of a post on my own blog about the introduction of Passivhaus building standards into the UK, and the problem that for a long time this is likely to be a drag on the economy because until the supply chain builds up, it’s basically importing houses.
However, this has much wider applicability. As I keep blogging, ever since 2009 or thereabouts, the core of the EU’s economic problem is trade. It’s not just me; the official line on Spain and Italy’s problems is that they’ve got to move their current accounts towards balance or indeed surplus. That is why they’re ordered to wreck as many generations as it takes to achieve internal devaluation.
The problem, though, or rather one of the many problems, is the Christmas market economy. Getting final products out that compete with the world’s top exporter depends on intermediate products out of the supply chain. And one thing we know is that a hell of a lot of small industrial companies have died the death in southern Europe over the last few years.
One of the worst things about deflations is that they kill the rich ecosystem, the so-called industrial commons, that supports the tall trees of the industrial canopy. This happened in the UK in the 1980s and 1990s, and it’s one of the reasons why trying to reduce the UK’s trade deficit has been so difficult. In the 1970s, the Treasury was astonished by how much of industry was in “Engineering: Not otherwise classified” and concluded that the statistics were useless. But I think an important lesson since then was that the losses to those everything-is-miscellaneous small manufacturers in the 80s permanently weakened the economy.
So, Spain, Italy, and UK “rebalancing”: même combat. Of course, the UK has options that aren’t available to the others here – like devaluation, reflation, and QE.
Update: Another example of the Weihnachtsmarktwirtschaft is Apple’s iGadget production in China. It used to be widely believed that only design lived in Cupertino and all the work was done in China, and this was either disgraceful or brilliant depending on partisanship. In fact, Apple owns and sometimes even invents the tools, both at the Foxconn final assembly line and in the German, Japanese, Korean, and British suppliers. A corroborating lesson is that the other behemoth of mobile to survive the shakeout is Samsung, which produces components on an enormous scale and is of course a key supplier to Apple. As a result, very little of the value content in an iPhone is actually Chinese.
The fact that cheap final assembly elsewhere in Europe with the high value intermediate manufacturing as well as the design work staying in Germany would suit German manufacturers as much as it does Apple should be too obvious to need saying. This is of course largely what the German auto industry does in Poland, Slovakia, and the Czech Republic.