With the arrival of Romania and Buglaria as full members of the EU the issue of migration is once more attracting a lot of attention. Stefan Wagstyl recently had an FT piece which gave a fair overview of the kind of debate which is presently going on in the UK, where the substantial (and largely welcomed) movement of large numbers of migrants from Poland and other Eastern Accession countries has now lead to an ongoing reflection over whether a repeat performance with its origins in the latest member countries would be considered so desireable. Immigration obviously has the capacity to bring out both the best and the worst in us, often at one and the same time.
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Category Archives: Economics and demography
Have Global Interest Rates Peaked?
With the ECB adamant that it will continue to raise rates this would seem to be the most untimely of questions, but there are now signs that this may well be the case.
Firstly this in Bloomberg today:
Federal Reserve to Cut Rates in 2007, Corporate Bond Sales Show
Thinking about refinancing your mortgage in the U.S.? Wait a year. Considering a certificate of deposit? Sign up now. While economists debate whether the Federal Reserve will cut its target interest rate for overnight loans between banks from 5.25 percent, investors have already decided the central bank will reduce borrowing costs next year. Nowhere is that clearer than in the market for floating-rate notes, whose interest payments rise and fall with central bank policy. Sales of so-called floaters are slowing for the first time since the Fed started raising interest rates in June 2004. They’ve fallen to $21.5 billion in September from a monthly average of $35 billion this year through August, according to data compiled by JPMorgan Chase & Co.
Now one swallow doesn’t make a summer, and it is early days yet, but take a look at ten year US Treasury Bonds:
U.S. 10-year Treasuries fell, halting a five-day rally, before a report today forecast to show consumer confidence gained this month.The gains ended on speculation yields at their lowest since March will deter some investors. The yield on the benchmark 10-year note rose 2 basis points, or 0.02 percentage point, to 4.56 percent as of 6:37 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 7/8 security due August 2016 fell 5/32, or $1.56 per $1,000 face amount, to 102 15/32. Bond yields move inversely to prices.
So today we have nudged the yield back up a little, but the rate has been dropping steadily since March. And yesterday Bloomberg were being even more explicit:
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Hungary: Well That Didn’t Take Long!
It was only just over two weeks ago (two weeks, which following the logic of a historical time which seems far from uniform, now seem like half a lifetime) that guest poster P. O’Neill, said this:
For understandable reasons — the addition of 10, and soon to be 12, new member countries, and the constitutional crisis, the European Union has been preoccupied with foundational questions in recent years. But an older concern is working its way back onto the agenda: how to handle an economic crisis in a member country……However, the risk of the latter type of crisis in a member country is now quite high.
The warning lights are flashing again – this time in eastern Europe, and especially in the recent or imminent member countries of Hungary, Romania, and Bulgaria. Poland is also a source of concern. Some combination of profligate governments, political uncertainty, EU spending booms, and capital inflows have created precarious economic positions for these countries.
Well, well, well, scarcely three weeks later, and here it is, all on the table. Sometimes, in the field of interest of what is sometimes erroneously termed the dismal science, things do indeed move quickly.
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Italy’s Supply Constraint
The OECD estimates the current potential capacity growth rate of the Italian economy at 1.25% a year. Actually I suspect even this very low number is over-optimistic. Growth since 2002 has been as follows: 2003 – 0.1%: 2004 – 0.9%: 2005 – 0.1%. To be sure forecast growth for this year is somewhat higher, at 1.4%, and optimists are expecting this to be more or less repeated next year. But I suspect this outcome is unlikely simply because the global economy now seems to be slowing (and in particular the ever important US economy),so the strongly advantageous situation of 2006 is unlikely to be repeated, while next year the Italian government has promised to introduce an important package of spending reductions which are bound to negatively affect growth, at least in the short term..
But why is potential growth capacity in Italy so low?
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Greg Mankiw Wakes Up: Demography Does Matter
I recently berated Greg Mankiw (and the top ten world economists he pretends top cite) for the folly of suggesting that fertility rates don’t matter to economists. Well today Mankiw seems to be having (an implicit) rethink. Dependency ratios, it seems, do matter.
Now since dependency ratios are really a function of three factors – fertility, life expectancy and net migration – it is hard to deny the obvious: that fertility is important.
Mankiw also cites approvingly the opinion of US economist Jeremy Siegel to the effect that the “way to finance the baby boomers’ retirement is persistent capital inflows and trade deficits with developing countries”. Now Siegel doesn’t quite have this right here. The way to finance a high old-age dependency ratio, is through a high level of saving, and running persistent capital *outflows* and trade *surpluses*. This, of course, is precisely what Germany and Japan are now doing, (and also, incidentally, steering the currency down to reduce deflationary pressure, which is again what has been happening in Japan) and this is one of the reasons I give so much importance to this phenomenon. It is also one of the reasons why I discount the likelihood of domestic-demand-driven growth in these countries.
So all I can say is, well, well, well, welcome onboard Greg. As is well known both time consistency and cognitive dissonance are phenomena which constitute important problems for economic theory, but normally not in the sense that we can see them at work here.
A topic whose time has finally come? We will see. To quote the evolutionary biologist Linda Partridge (in another context) “there is much to do”. Would that economists were as aware of this as theoretical biologists seem to be.
Update: the problem is more perplexing than I initially imagined, since I now discover that on July 20th Greg approvingly cites a paper by Nir Jaimovich and Henry Siu. The title of the paper is The Young, the Old, and the Restless: Demographics and Business Cycle Volatility , and the extract he cites is this one:
“changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the US and other G7 economies“.
Greg says that this was the most intriguing hypothesis he had heard all day (he was at the NBER Summer Institute), which is fair enough, and I don’t expect him to agree with the hypothesis simply because he finds it intriguing, but I *am* stumped to understand how he can then go on on August 26 to describe the idea that low fertility posed a serious economic problem as one of the most wrong headed ideas he had heard recently, since, obviously, it is fertility levels which in part determine age structures which in part influence volatility in business cycles (according to the intriguing hypothesis). So come on Greg, which is it, wrong-headed or intriguing?
Seriously though, my point here is not to have a go at Greg Mankiw (although I have rather done that haven’t I?). My point is to draw attention to all the confusion which is knocking about on this topic. Material not unrelated to all of this is to be found in a recent article in the FT by John Kay. Kay asks hijmself why it is that Eureka moments seldom happen to economists. Basically he suggests that the reason is down to the difference between the natural and the social sciences. I don’t buy that, and I think that we social scientists sell ourselves too cheap if we succumb to it. But by the by Kay touches on another point, and it is one which brings us back to the struggle Greg Mankiw is having with the recalcitrant phenomena, since:
“It will rarely, if ever, be the case in economics that an old account of the world will be shown to be simply wrong, like the medieval account of planetary motion, or the phlogiston theory of heat.”
Well sorry John, but we have just found one that is: the neo classical account of steady state growth, there is no real factual basis for this theory, and theoretically it isn’t hard to see that it must be flawed, if, that is, the ‘intriguing hypothesis’ which Greg was scratching his head about is a valid one, and thus, since age structures constantly change, so must rates of economic growth. In which case both steady state growth and convergence theory go quietly west, off into the sunset. The intriguing question is then of course what exactly it is which modulates the changes in age structure. This is, of course, just the kind of problem that Archimedes was toiling away with in the relatively unturbulent waters of his bathtub. Aha, now I know why it is economists seldom have Eureka moments: they all take showers.
Now just let me step outside a moment, what is going on out there, is that the sun going round the earth, or could it just be that somehow or another the earth – unbeknownst to me – is actually turning round the sun.
Noted With Pleasure: Reindeer People
One of the other books that I picked up while in Helsinki was Reindeer People
I got much more: how reindeer are partially domesticated, what the coming of Soviet power meant to the far North, how people are surviving its ebb, how reindeer migrate, what Arctic cold means in practical terms, to name just a few. Vitebsky writes well, he’s chosen interesting ground to cover, he can sketch people, relate key anecdotes and sustain narratives about their conflicts. Layer upon layer, like the clothing the Eveny wear in winter, Reindeer People envelops the reader, imparting something of those distant lands.
Of Population Pyramids and Value Chains
It is by now well known that the main hope for developed societies subject to rapid population ageing who wish to maintain their relative standard of living lies in increasing their collective productivity more rapidly than they increase their dependency ratio via-a-vis the older age groups. Now in the comments thread on the recent ‘Reform is a Dirty Word‘ post I ventured to say that I found it obvious that at some stage we would reach a point where the rate of population ageing was going to outstrip the rate of productivity increase (in which case relative income per capita would inevitaby start to fall). David, unsurprisingly, asked me why I thought this to be the case. I was not happy with the response I offered (which was essentially some ‘rigmarole’ about the biology of ageing which is coming in a separate post), and since that time I have been scratching my head trying to find a simple way to get this point across. Perhaps I now have one.
All you need to get to grips with what follows is a basic understanding of geometry and a vague interest in football.
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More Sweden, less tidbits
Well, I just lost a long post about the so-called Swedish model due to my own stupid carelessness the combined malevolence of Windows XP and MS Word.
Anyway, the main point was to say that the article on the subject (free for non-subscribers) in last week’s issue of The Economist was really a dishonest hack job. And my critique went roughly like this :
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Italy and the Eurozone
John Kay had an article in the Financial Times earlier in the week, and this seems to have caused quite a ripple around the blogsphere (Eurozone Watch, Economonitor, Claus Vistesen at Alpha Sources). The article was about whether or not it was technically possible for Italy to leave the Eurozone. (Update: Sebastian has a fresh post over at Eurozone Watch Blog continuing the discussion).
John Kay’s conclusion, and it is supported by a very reasoned commentary by Sebastien Dullien at Eurozone Watch Blog (welcome Sebastain and Daniela), is that there is no in-principle technical difficulty in exit. The most authoritative piece of work on this topic that I know of comes from Harvard International financial law specialist Hal Scott. The paper was written back in 1998, and was provocatively entitled “When the Euro Falls Apart“. Despite the title the paper is a tightly reasoned piece of work whose main conclusion is that not only is euro-exit technically perfectly feasibe, in fact the mechanisms which would make this possible were incorporated from the start (in particular keeping independent central banks with their own reserves). I think those who were able to think clearly back then – and were able to use some emotional intelligence – were always aware that there were question marks over Italy’s ability to go the distance.
So the problem is not a technical one. But as John Kay indicates it *is* a political one:
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State of the World Population
I’ll keep this brief since there are some excellent guest posts just a little bit further on down the page just waiting for you to read and comment on. I’m not sure whether this is more about form or content, but the UN has a supremely interesting and readable report out today, as part of its State of the World Population programme, entitled A Passage to Hope, Women and International Migration, and whatsmore the report is presented in an extremely blog-like format, as I say highly readable and with the content readily available. And as if that wasn’t enough, the ‘traditionalist’ Financial Times (traditionalist in terms of content, not in terms of format) actually has a hyper-link to the report itself inside its article (bravo FT!). People often ask what kind of importance and influence blogs have, well sometimes I feel you only have to cast your eyes around a little bit.
On the substance front the contents of the report are obviously very relevant to our recent debate about Sub-Saharan migration to Spain. Indeed on the SotWP homepage you can find a link to a fascinating first person account by a Burkinan migrant (Adama) of his convoluted 3 year journey up through Mali, Algeria and Morocco, before finally reaching Spain via the Canary Islands. Clearly in migration terms people like Adama are the pioneers (anthropologists tend to call them the ‘heroes’, those who blaze the trail) who struggle against all adversity to find land and establish themselves (and tragically many do not make it all the way). What the arrival of Adama means is that many more will inevitably come behind, following a network logic which I have attempted to describe in the previous post.
But the new UN report isn’t about Adama, it is about the relatively new phenomenon of female-lead migration. Obviously the report highlights the situation of sex workers et al, but I would like to underline the fact, which is absolutely evident here in Spain, that the welfare services in Southern Europe at least simply cannot handle the rapid population ageing which is taking place without the massive arrival of female care-workers from outside the EU. The later economic development of Southern Europe and the comparative underdevelopment (not to say virtual non-existence in many cases) of institutional care make this inevitable.
One last thing while I am here, we have often talked about the economic growth imbalances which comparatively small migratory movements are causing between and within countries. The outward migration of skilled and highly educated workers from Germany is one such case, while the regional tensions which might arise inside Spain is another. Well today Randy McDonald has a timely and very interesting post about how oil revenues and subsequent economic growth differential in Alberta have produced a migration and fertility phenomenon which may well change the face of Canadian politics as a linguistic divide becomes a growth-model and socio-political one. Finally (the last thing after the last) anyone interested in looking into earlier European ties with Senegal (now being renewed) might like to glance at this link that Randy sent me on Senegalese participation in the European revolution of 1848, or read about the fate of one group of Senegalese soldiers who fought on the allied side in WWII, as described by Senegalese director Sembène Ousmane in his film Camp de Thiaroye (my input). And for those who still want to ask what all these Senegalese may have to offer the future Europe we are collectively building, maybe I could recommend the little known but excellent work of the Senegalese group Orchestra Baobab.