What follows is an interview I did over the summer with the Madrid based publication The Local.
Let’s start with the basics: what are Spain’s current economic problems?
Spain’s economic problems are a knock-on effect of the end of Spain’s property boom. The collapse of the property market led to a drop in incomes, depressed demand for goods and — slightly — lower wages.
Above a suggested choice for the single take-away chart from the presentations at the Kansas City Fed’s economic policy symposium in Jackson Hole, Wyoming. It’s from Helene Rey’s paper (London Business School). It shows all types of capital inflows expressed a percentage of world GDP on a quarterly basis since 1990, plotted against the VIX, which is a measure of perceived volatility embedded in options markets (in green, higher level=lower risk).
The argument (which has been confirmed by deeper research of herself and others) is that there is a remarkably simple (conceptually) component in capital inflows worldwide which seems to correspond to a single driver across many markets, countries, asset types, and exchange rate regimes.
As she notes, the implication is that these capital flows might need to be regulated, including by various instruments that wouldn’t have been mentioned in polite economic society a few years ago.
The open question may be that if this capital flow beast is so virulent and global, are normal means of country policy and international coordination strong enough to do anything about it? We might actually need one of these global super-regulators that people seem to think we already have.
So I was arguing with Jamie Kenny about Obama’s economic record.
It was Friday night, so I had no inclination whatsoever to do economics. Anyway, I got around to it.
The top, blue line is the civilian unemployment rate in %, on the left scale. The next, red line is average weekly wages, on the right scale. The next, orange line is the average hourly wages for nonsupervisory, production employees, seasonally adjusted, multiplied by 40 to be comparable to the economy-wide, weekly series. Of course, this may be misleading if there is a big difference in average hours between them, but I wanted a measure that wouldn’t be skewed by Wall Street or Silicon Valley executive salaries. And the green line, on the left scale, is real-terms GDP growth per quarter.
Growth could certainly be higher and unemployment could be going down faster, but both are going clearly in the right direction, and at least in cash-terms, wages are up. This is, in a word, recovery. It’s far from obvious from these data that it constitutes “economic royalism”, even if the economy-wide wages measure is growing faster than nonsupervisory production.
The Czech republic has been making the news recently. On the one hand the country has been on the receiving end of massive, devastating floods, while on the other the country’s government was brought to the brink of collapse (and beyond) by the resignation of Prime Minister Petr Necas following the arrest of one of his most trusted aides on corruption charges. After the deluge I suppose.
From the Bank for International Settlements Annual Report, the topic is the difficulty that central banks might face in exiting from the current stance of ultra-low interest rates and massive balance sheet expansion –
Central banks also face various political economy challenges as they consider
exiting. History has shown that monetary policy decisions are best when insulated
from short-term political expediency considerations; hence the importance of
operational autonomy. This applies with particular force in extreme conditions such
as those prevailing today. On balance, political economy pressures could make exit
harder and work towards delaying it [...] Second, central banks’ finances could easily come under strain, raising questions about their use of public money, reducing government revenues and possibly even undermining the institutions’ financial independence. The public’s tolerance for central bank losses may be quite low. (p73)
Thus, the so-called “central bank for central banks” believes that central banks are essentially just regular banks that have been given a specific mandate by the government. That may reflect a loose extrapolation from the history of central banking in the USA and UK, but it’s not correct. Karl Whelan explains here. It’s no wonder that central banking attracts so much conspiracy-theorizing when central banks themselves are so obtuse about what they do.
According to legend and some historians, by making a stand in the Thermopylae pass 300 brave Spartans valiantly saved the day for the entire Greek army in the face of a Persian force of overwhelming strength and manpower. More than 2,000 years later some 11 million Greeks might be considered to have carried out a rather similar operation by single handedly facing-off a massed horde of frantic global speculators on behalf of the entire Euro Area population – at no mean cost to themselves in terms of wealth, employment and general well-being. Or at least that is the conclusion which could be drawn from reading through the latest self-critical review issued by the IMF dedicated to the lessons which can be learned from the to-date handling of the country’s deep economic and social crisis. Continue reading
Niall Ferguson in the Wall Street Journal ahead of his new book The Great Degeneration –
In only one category out of 22 (in World Economic Forum Global Competitiveness Report) is the U.S. ranked in the global top 20 (the strength of investor protection). In seven categories it does not even make the top 50. For example, the WEF ranks the U.S. 87th in terms of the costs imposed on business by “organized crime (mafia-oriented racketeering, extortion).” In every single category, Hong Kong does better.
The chart above is the actual responses from the WEF survey of US executives asked to rank the top 5 constraints on business (page 360). The weighted response is 1.1 percent for any kind of crime. That’s lower than the responses for “foreign currency regulations.” Apparently moving dollars around is somewhat difficult too. Somehow WEF is able to translate these country-specific responses into a global ranking that conveys American businessmen cowering in the executive suite as mobsters rampage on the factory floor. It’s a miracle the country has any growth at all!
Q&A portion with Mario Draghi during the ECB news conference yesterday –
Q: [...] Are you telling the Spanish, Portuguese, Irish or even Italian people that the ECB can’t do anything else with inflation actually lower than 2%?
Draghi: Well, I am not sure I get the point, but I think I get it. First, the fact that inflation is low is not, by itself, bad; with low inflation, you can buy more stuff.
Advice to students of economics: don’t begin your essay on inflation with the claim “with low inflation, you can buy more stuff,” even if cited to Draghi, M, 2013.
UPDATE: More from Paul Krugman.
From the IMF assessment of its 2010 program for Greece, the section dealing with relations within the Troika i.e. European Commission (EC) and ECB (p31) –
And from the Fund’s perspective, the EC, with the focus of its reforms more on compliance with EU norms than on growth impact, was not able to contribute much to identifying growth enhancing structural reforms.
Two issues here. First, aren’t EU norms supposed to be growth enhancing? But second, does the Fund really think there is a definitive account somewhere of specific structural reforms that will surely result in growth within a couple of years? The back to reality reading list might want to start with Adam Smith.
I picked up this OECD chart from Sigrun Davidsdottir on twitter:
This is something interesting, and possibly worth watching for the future. Obviously, wondering about the problems of Cyprus’s economic recovery is very much long-term thinking, but what is the betting that we won’t see more capital controls in the future?
In the event of recovery, and even more so, boom inside an economy under capital controls, there would be a substantial potential for a housing bubble, or a bubble in some asset. Depending on your preferences, as nominal incomes rose, or the money supply rose, or bank credit expanded, you could easily get a bubble as there would be a much restricted tendency for capital to get exported. That is after all the point.
On the other hand, the experiences of the European periphery, very much including the UK, suggest that inflows into an open capital account are also dangerous in this sense. My intuition is that they are more so because they can reverse quickly, and also that after all, if people whose wages go up can’t buy a house, who can? Thoughts are appreciated.