Comments on: The Minister for Weblogs

By: Edward

Edward — Sun, 09 Nov 2003 15:37:05 +0000

“Population increase accounts for the faster total GDP growth in the US”

Two things Elliott, working age population growth and increasing participation rates. But remember gross population increase doesn’t necessarily give per capita improvement, it’s the participation that does that. But then if you have more people as a proportion in the 15-65 group you automatically get more participation and higher per capita GDP. Economics is easy really, I don’t know why so many people spend so much time trying to make it difficult.

The thing is the averages hide a lot here. Germany has had a serious growth slowdown since the mid-ninetees, and the jury is still out on what happens next. Of course in my case factoring in ‘population ageing’ would be part of the explanation.

In Spain this increasing working age pop as a part of the population is the big part of the ‘growth miracle’. I would throw Harrod-VBalassa-Samuelson out of the window here. Where I think it could be important is in China and India where high productivity in the traded sector could well feed into higher productivity in non tradeables. But then they are having to do this standing on their own two feet, without subsidies and without structural funds.

By: Elliott Oti

Elliott Oti — Sat, 08 Nov 2003 23:24:30 +0000

I recall reading recently (sorry, no links – may well have been on your site, Edward) that the GDP growth per capita for the US and EU was almost identical. Population increase accounts for the faster total GDP growth in the US (minus the last quarter, of course, but unless that 7% is sustainable it doesn’t matter).

By: Edward

Edward — Sat, 08 Nov 2003 17:09:25 +0000

BTW: you do alert us to the difficulty that if the recovery doesn’t come in the manner expected, even the Netherlands can be crashing the limit next year. I mean what’s your growth at the moment: I can’t remember but it is in the -1

By: Edward

Edward — Sat, 08 Nov 2003 17:02:35 +0000

“from a 1.5% surplus to a 2.7% deficit”

Yep, but remember Frans, this was the whole point of the pact, to allow fiscal deficits (up to 3%) in difficult moments. This means surpluses in the good times. But if you start with a deficit, then things only get worse – fiscally speaking that is.

By: FransGroenendijk

FransGroenendijk — Sat, 08 Nov 2003 14:52:01 +0000

Since Edward correctly accuses me of going off-topic (although the issues are all related through the subject of worldwide economic stability and growth…) I’ll make an attempt to come back to the topic.

Remarkably short after his announcement that he gave up trying to get the European commission to act against France’s repeated breaching of the rules of the Stability and Growth Pact Dutch finance minister Zalm had some row with German finance minister Eichel on the subject. Eichel told Zalm to restrain a little bit: in the past 3 years the Netherlands went from a 1.5% surplus to a 2.7% deficit while Germany moved from a 1.2% deficit to a 4.2%.
In a way you could say the German government achieved better.
Most remarkable to me is that Zalm (through his spokesperson) reacted with more rigidness:
“How can you be criticized when you plead to observe the SGP?”
(source: NRC-Handelsblad).
Disquieting. Looks like this is mainly for the Dutch audience. Again.

By: Edward

Edward — Fri, 07 Nov 2003 12:28:39 +0000

Before this one finally goes to bed, I’d just like to thank Elliott for his Zalm translation which has contributed a lot to making this an informed discussion.

Now being lead off-topic by Frans, check this ChinaBiz piece out:

http://www.c-biz.org/articles/show.asp?id=1959

“EADS, the Franco-German aerospace group that owns 80 per cent of Airbus, plans to invest up to US$ 35 million to buy five per cent of AviChina Industry & Technology Company, said the Financial Times on Tuesday. Less than a week after putting its first man into space, China launched a satellite on Tuesday jointly developed with Brazil to study the Earth’s surface, state press reported.

The European Aeronautic Defence and Space Company, EADS and AviChina, a unit of China Aviation Industry Corporation II (Avic II), the state-owned military conglomerate and the largest maker of small cars and helicopters in the country, agreed on a strategic co-operation that involves the joint development, manufacturing and modernization of helicopters, regional aircraft and training aircraft.

The deal comes ahead of AviChina’s initial public offering this month under which the company plans to raise up to up to US$ 242 million through the sale of 35 per cent of its enlarged share capital. The sale, the first attempt by Avic II to spin off one of its units in Hong Kong, promises to test international investors’ appetite for companies linked to China’s military, which has been criticised for its human rights record and has occasionally clashed with the US over Taiwan, said the financial Times on Tuesday.”

Obviously both China and India present great opportunities for Europe, they are also going to present great challenges: it is important to bear both parts in mind.

By: FransGroenendijk

FransGroenendijk — Fri, 07 Nov 2003 02:16:03 +0000

My newspaper (since I blog I read the economics section with much more interest) reported that Galileo (the European GPS-system) is going to be supported by both China and India with 300 million Euro !

On the success of European technology: if I remember well the last decades the European space-program has been very successful.

By: Edward

Edward — Thu, 06 Nov 2003 23:36:33 +0000

Woof. Frans and Joerg, I think you are setting an agenda for debate which will last us quite a way into the future. Remembering that this is not an economics blog, I will conveniently shy away from the major topics now (and come back to them one by one in subsequent posts). However:

‘Recent evidence also shows that the Pentagon has been subsidising Boeing to the tune of 5-6$ billion’

So in the end the Chinese are even cleverer than I thought, they are keeping Washington happy by picking up a share of the subsidy.

‘although Edward paradoxically also insists that “things get faster faster”; apparently only productivity doesn?t’

I think this is a fair representation of my position: the ever more rapid pace of technological change means we get computers which are a lot more powerful for the same price or cheaper, but this doesn’t necessarily mean that making computers gets any more profitable – everything depends on the income share which goes to computers. Since Joerg and I have been arguing the toss over this for months now, I won’t go further. One day……….

By: Joerg Wenck

Joerg Wenck — Thu, 06 Nov 2003 20:27:10 +0000

1) The rate of change with which countries have moved into deficit is appreciably larger in the U.S. now than in Europe.
2) The German government has reduced the numbers of federal employees at a rate of 1% per year for several years in a row, whereas the Bush administration is creating new jobs for bureaucrats. The emphasis on investment is definitely more pronounced in Europe than in the U.S.
3) If demographic concerns are to be factored in, then the EU should be given more leeway than the U.S. Look at Japan, and you might come to the conclusion that the relative deficit ratios among the largest economies are about right – just excepting the elements of a militarized and bureaucratized version of Keynesianism in Bush?s policies.
4) A balanced budget does nothing to directly support pension benefits under either a paygo or a “fully-funded” system. The third alternative – a system like the Danish one (or a composite variation thereof, like that in Switzerland) – relies on taxes to pay for benefits, but also clearly legitimizes the significantly higher tax rates the Danes pay.
5) Government borrowing costs are determined by the interest rate – which is set by the issuer of the currency, not the market. Both the current Japanese and the historical U.S. experience clearly demonstrate that the interest rate can be stabilized at very low levels for very long times. Accepting Edward?s worst-case scenario (which he claims is guaranteed to be what reality will look like without adducing any evidence) – namely that productivity advances and improving participation ratios will not compensate for worsening dependency ratios (although Edward paradoxically also insists that “things get faster faster”; apparently only productivity doesn?t), a demographic crisis of the sort Edward envisions could be a legitimate reason for following a long-term low-interest-rate policy (since it would compensate for a one-off generational readjustment).
6) Currently many New Keynesians underestimate both the potential for and the consequences of higher inflation, esp. in the U.S. This year Brad DeLong wrote that he thought 10% inflation would be an o.k. price to pay for escaping from the clutches of deflation. On the other hand they make exaggerated claims about the inflation-curbing effects of higher interest rates. Nowadays there is a saver for every borrower. How was the cost-push inflation of the 1970s subdued? It was caused by rising energy costs and subsequent fruitless attempts by labour unions to ensure nominal wage rises would be equal to real rises. Instead of taxing energy use, the U.S. decided to attract foreign capital and squeeze the domestic private sector by instituting a high-interest-rate policy. As a consequence, outsourcing of production emerged as a major problem-solving strategy for the U.S. private sector. Subsequent bouts of deficit spending relieved the pressure on the private sector, whereas Clinton?s balanced budget announced the crash to come and further deepened the private sector?s emphasis on outsourcing production. This development can be characterised as a long-term trend of U.S. inflation exports – my preference – or as an American inclination for importing productivity (Stephen Roach?s version). The import-of-producivity variant, however, might entail the misunderstanding that foreign labour productivity is higher, whereas, in fact, we have to look at capital and energy productivity to explain the observable phenomena. In summa: a mature, financially highly developed economy characterised by a large public sector cannot exclusively or predominantly rely on interest-rate policy to fight inflation. Its elites then either adopt ultra-conservative policies in order to cut the public sector in half (the agenda Krugman senses to be the long-run goal of U.S. conservatives), or they recognize that government spending reductions (at times of significant actual inflation) and tax policies geared towards rewarding efficient resource usage are called for (which would have been the correct response to the stagflation scenario of the 70s, when the Keynesians committed the error of continuing to support inflationary spending and falling back on wage and price control regimes to mitigate the effects.
7) Since money is endogenous, the only way to ensure that pension claims will be met in the future is to put people to work now. The problem of economic efficiency can be addressed by avoiding overspending on public works and emphasizing subsidies to jumpstart new industries and technologies, preferably concentrating on investments that private industry wouldn?t have initiated. Even though Boeing has just landed a big deal in China, we should not forget that this year Airbus surpassed Boeing for the first time. Recent evidence also shows that the Pentagon has been subsidising Boeing to the tune of 5-6$ billion – invalidating any claims that Airbus? success is in reality just a loss to the European taxpayer inflicted by inefficient European aircraft manufacturers that are being shielded from superior competition. The EU investment programme recently unveiled thus passes the tests for what constitutes a sensible policy proposal. Unfortunately the ECB seems to think the best Europe can do is to retrace the steps the U.S. took during the last 20 years of economic development. Since the political decision-making process in Europe is much more fragile than that of the ECB and European politicians tend to have good intentions but usually lack arguments and information to successfully confront the monetarist worldview expounded by the unelected officials at the bank, they will probably have to succumb to the tide they cannot stem. Since this is not a short-term prognostication, I would like to point out that none of this would prevent Europe from having the same kind of foreign-financed Ponzi boom the U.S. experienced under Clinton. Given current ideological preoccupations, however, massive outsourcing to Asia (without any hope of ever closing the ensuing trade gaps again) would seem to be as much of a necessary outcome as it was in the U.S.
9) I am not at all arguing against free trade. I am arguing against monetarist and Austrian ideology and their offshoots in New Keynesianism. Upholding unsustainable interest-rate and/or exchange-rate-regime policies is in the long run detrimental rather than conducive to free trade. Creating a nominal comparative advantage for your country that is not based on production efficiency and resource availability never translates into a real comparative advantage: it only causes a financialization of the economy (witness the U.S.: during the last few decades the share of profits stemming from the finance sector quadrupled to 40% of the total, meaning that domestic industrial investment has become a very unattractive proposition. This development echoes that of Britain during the earlier globalization cycle that peaked in the first half of the 20th century.)
10) The change in the political climate in the U.S. towards right-wing-sentiment will entail a switch toward protectionism. The manufacturing story is not going to be repeated in the services arena (putting India at a relative disadvantage vis-?-vis China). When someone like Andy Grove – one of the world?s most successful high-tech managers and an immigrant from Hungary to boot – voices indirect support for restricting job exports (or at least legitimizes it as as the logical thing for government to do), the free-trade agenda is very much in danger of being abandoned. A large part of the blame rests on the shoulders of those who always considered the high-dollar-policy sacrosanct since it put the low-hanging fruit of short-term economic expansion within such easy reach.
11) Many people insist that we will never again be subjected to the beggar-thy-neighbour policies that initiated the race-to-the-bottom also known under the name “Great Depression” (Yes, it was initially caused by a stock crash – which itself is the result of everybody believing he can pass off overvalued shares to his neighbour -, but kept in motion by Smoot-Hawley which slapped tariffs on imports without taking account of the fact that the price to be paid was a collapse of exports at a time when the U.S. had a huge surplus – thus lots more jobs to lose by export reductions than it could gain by import substitution. In a few years, the Chinese could presumably cause the same kind of disruption by abolishing tax rebates for their exporters in one go.) Apparently it has been preordained that we are not collectively dumb enough to ever again succumb to the temptations of such policies. However, current news dispel that illusion. Putin has just given an example of the logic underlying negative feedbacks: “Speaking about nuclear security issues, Mr. Putin said that all nuclear nations were enhancing their potential, and Russia would do the same.”
Everybody does it, so we got to get into the racket, too, right? The French concur and have just decided to direct their Force de Frappe at the “rogue states”. (In all fairness, it has to be acknowledged that the first major power taking the route down this particular slippery slope after the 1989 peace dividend had been exhausted was Bush?s America. After all, Putin continued to state that “force can only be used with the sanction of the UN Security Council.”)

By: Patrick (G)

Patrick (G) — Wed, 05 Nov 2003 22:38:25 +0000

Edward,
you’ll need to offer up some specifics as to what you see as long-term problematic. Keynesianism is about spending/catalysing the economy when times are bad, *and* tightening up when the economy improves, to dampen the extremes of the business cycle.

I admit I haven’t followed France’s situation all that closely, but I was under the impression Raffarin was embattled domestically precisely because he was also pushing for necessary but unpopular long-term reforms.