untouchable tender mafias

A nice piece on the re-emergent Julia Tymoshenko which gives us a clue as to why Yanukyovich became unsupportable:

Vyacheslav Konovalov, a criminology researcher, explains that “the initial idea behind ‘Dear Friends’ was a transparent system for monitoring public finance in place of the Soviet model. To do so, a system of tenders and a tender chamber were set up. Specially “favored” people with Western degrees were appointed to control the system. Soon enough the initiative produced many thirty year old ministers and deputy ministers, dubbed at the time ‘Kinder Surprises.’” They are an “untouchable tender mafia” presiding over a system where brokers enjoy kickbacks of thirty, fifty, up to seventy percent.

The tenders made it easy for Yulia and her allies to enjoy luxurious lifestyles without actually owning anything on paper. According to court documents, by the end of her trial, the only property they could confiscate from Yulia was a modest apartment in Dnepropetrovsk. But Yulia, as many others political elites in Ukraine spent much of her time in police-protected, luxurious villas.

"Untouchable tender mafia" is such an excellent phrase, even if the sense is just 'contracts'. Amusingly, Y and his people couldnt get her on any of these things because they were too involved  themselves, so they had to semi-fabricate charges against her, which in turn helped the gas queen reinvent herself as a martyr. Anyway, Yanukyovich:

The Yanukovych family has gone even further on a larger, more grotesque scale. According to the PEP Watch anti-corruption center, the net-worth of Yanukovych’s son Oleksandr has gone from 7 to 510 million UAH since 2010. His dacha in Mezhyhirya, showed off to the public on February 22nd, was a rude awakening. Luxury cars, gilded toilets, a lakeside galleon, and a private zoo were found. Acres and acres of tasteless, overpriced junk that cost millions of dollars.

So under Yanukyovich, the system reverted in Mancur Olson style terms from stationary to mobile banditry. He stole with both hands and spent money which had actually passed through his own mucky paws on his absurd country retreat. Apparently he also robbed his own support base blind, which is why backing for him from that sector and from across the general apparatus of state seemed remarkeably soft. The downside of that is that it  allowed fascist street muscle to play an overly prominent part in his ouster. Still, at least the crowds at the Maidan seem to have caught on to Tymoshenko

The Growing Mess Which Will Be Left Behind By The Abenomics Experiment

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

A Simple Chart Illustrating Why Japan Style Deflation Is Now More Or Less Inevitable In Spain

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.

Could Mario Draghi Implementing QE At The ECB Possibly Help Matteo Renzi Raise the Italian Deficit?

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

Maidan Voyage

The scenes from Yanukovych’s private zoos, and the very post-Soviet opulence in his residence and summer house give off a bit of a Ceausescu vibe. The melting away of the police and other security forces remind me of Lenin’s observation that he found power lying about in the middle of the street, so he picked it up.

Some of Ukraine’s institutions are functioning again, but this is certainly not the end, nor even the beginning of the end, nor likely even the end of the beginning. There are just too many open questions. Will the parties of the Maidan be able to work together? How much daily corruption will they be able to get rid of? Do they even really want to? (I wonder if any of the new leaders knows how Georgia did it.) What about the governors and mayors in the eastern part of the country? What about the Crimea?

How will the Russian government and state-owned companies respond? What kind of time frame will that response come in? How much are EU countries willing to pony up? Will EU aid be just throwing good money after bad? Can EU leaders see past “everything but institutions,” i.e. everything except what really matters?

But for the first time in a while, there’s a chance for things to go right.

Lvov Offensive

Does Herman van Rompuy really need to be telling the people of western Ukraine that if it wasn’t for some pesky border-drawing issue, they would be 3 times better off than they are now? For a Brussels elite that likes to pitch every European Union achievement in terms of the aftermath of World War 2, it’s a remarkably tone-deaf boast.

ECB uses legal word games to dodge bailout accountability

The European Parliament sent a questionnaire to the Eurozone bailout “Troika” members (ECB, IMF, and European Commission) so as to better understand their specific roles in the 4 lending programme countries (Ireland, Greece, Portugal, and Cyprus). The ECB has published its response. One set of questions and answer is as follows –

Continue reading

These Five Charts We Totally Stole Explain What’s Up With the Italian Economy

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.

ottaviano fig1 29 nov

It’s not the labour market. This chart shows a measure of “Strictness of overall employment protection”.

ottaviano fig4 29 nov

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.

ottaviano fig3 29 nov

It may also be to do with computers. This chart shows the percentage of non-residential investment made up by information and telecommunications technologies.

ottaviano fig5 29 nov

Hassan and Ottaviano think Italian human resources managers are at fault.

ottaviano fig7 29 nov

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.

In search of requisite variety: central banks and property bubbles

After last week’s festival of secular stagnation (StagFest?), this week’s trend kicks off from Paul Krugman’s post wondering why the Swedish central bank is raising rates. Simon Wren-Lewis gets into it more. The Riksbank is worried about property prices, and the banks that love them. They’re afraid that a property bubble might break out, and hope that cranking up interest rates for everybody will stop it.

At the same time, the Reserve Bank of New Zealand and the Bank of England are taking a different approach. The New Zealanders have imposed a regulatory limit on big mortgages, defined by loan-to-value. They’re not totally banned, but each bank has a limit in how many they can give out above a given LTV. The Bank of England has vetoed any more funding for property loans under the joint Bank-Treasury Funding for Lending scheme. Meanwhile, Germany may be going to impose rent controls, which is important if you think property is worth the net present value of its rent.

So what’s up here? Consider the case where the market for property is rocketing while the rest of the economy is far from full employment on some metric like…uh…employment. The interest rate that would be appropriate for the property sector is different from that in the wider economy. Theoretically, the market for capital ought to smooth this out but observably it doesn’t happen. (Like the difference in interest rates within the Eurozone between German and Italian SMBs.) Lowering interest rates for the wider economy will cause even more trouble in housing, while upping them to stop the insanity will impoverish still more people. We could call this the UK case, as it happens in Britain all the time. Another example would be a strong, indeed overheating, macro-economy and a housing market that is already far enough along the Minsky scale that pulling up the interest rate to slow the wider economy will cause a financial crisis starting in the property market.

These are, in a sense, the same problem. What’s happened in both is that monetary policy control has been lost. We can look at this in two ways – either it’s impossible to use monetary policy effectively, because the consequences are so bad, and therefore it’s no longer a practical instrument of control, or else the central bank no longer controls monetary policy itself. To see how this might happen, think of the second case. Whether the crisis is because a marginal buyer can’t afford to buy at the new interest rate, or because the policy change is taken as a signal and sellers unload, asset prices dive and financial institutions end up in trouble. The magnitude of the increase in market interest rates, or the volume of credit provided in the market, is decoupled from the policy input. This is what it means to lose control.

In some circumstances it might even be possible to have a perverse response to control – Mike Konczal explains, and foreshadows a point that will be important later.

It’s worth thinking about the relationship of bubbles and monetary policy for a moment. A good working definition of a bubble is a situation where the capital gain an investor expects over their operating horizon is much greater than the potential change in interest rates in that time.

J. K. Galbraith made this point about the Wall Street crash of 1929 in The Great Crash. The typical speculator of the time bought on margin, borrowing from a stockbroker, who themselves borrowed from the world capital market. Brokers’ loans in the summer of 1929 were repayable on call and attracted a 20% interest rate, but even with these terms, people made money fast, as long as the market went up. Galbraith pointed out that, therefore, no movement in interest rates the Federal Reserve could bring about would stop the bubble.

He also pointed to the role of foreign companies and wealthy individuals who invested directly in brokers’ loans, attracted by the high rates and call terms, who unlike banks didn’t draw on Fed funds and therefore didn’t care about its rates. But this is beside the point. If the bubble is going up fast enough, the change in interest rates required to stop it may be either unachievable because the policy instruments can’t deliver it, or else it may be so large that the consequences for the wider economy are unacceptable.

Minsky’s three phases are interesting here. In phase one, hedge finance, the cash flows from a typical asset pay the interest and principal and something more. In phase two, speculative finance, they pay the interest, and the resale value of the asset has to go up to make the deal work. In phase three, Ponzi finance, they don’t even pay the interest. Another way of saying this is that the interest rate is now irrelevant. It’s win or Sing Sing.

A further point here is that the market interest rate determines the boundaries between the phases. Innovation in financial services tends to increase their power to create credit, to increase the spread between policy and market interest rates, and therefore to escape from monetary policy control. Charles Kindleberger would point out that bubbles have happened in every known monetary regime, very much including gold, and I think we can summarise the point by saying that financial innovation is the microeconomic reality of the macroeconomic concept of endogenous money.

Why care? The argument here is capable of general application to all kinds of asset bubbles, but housing plays a special role in the economy. It is BULLish – Big, Universal, Leveraged, and Life-Essential. Everyone has to live somewhere and it’s not optional. Because houses are themselves a large investment of capital, building or buying them usually requires credit and lots of it. The combination of the two means that it is big. Therefore, this is a highly leveraged market that touches whole nations in the pocket, unlike (say) technology startup shares or even commercial real estate. Edward Leamer made this point to the Kansas City Fed back in 2007 in a paper called Housing Is The Business Cycle.

How to look at this? The cybernetic tradition, I think, is the right way. Cybernetics, the study of control systems in general, was concerned from the word “go” with the problem of what happens if there are more questions than there are answers. One version of this was imported from psychiatry, the notion of the double bind. A patient is forced by their situation to respond to two mutually incompatible expectations, so that whatever they do is wrong. The result is that they go mad (to be brief), and the shrinks of the time did horrible experiments in inconsistent conditioning with dogs to prove the point.

Various cyberneticians, especially Stafford Beer and Ross Ashby (himself a psychiatrist and quite the pre-ethical review board creep), identified an important principle here: the principle of requisite variety. To exercise control over something, you need a range of responses – a degree of variety – that matches the variety of its outputs.

If its outputs can change along more than one axis, you need at least as many responses. If you want to determine both the air speed and the vertical speed of an aeroplane, you need both the elevators and the throttle. If you want to determine both its course and its attitude, you need both the ailerons and the rudder. If I need to please my mother and my husband…you may see the point. To some extent, you can get away with less variety in the more forgiving bits of the flight envelope. In that case the variety adds to redundancy, which is good. But the problems arise when things become more challenging.

So, we’ve already done too many of them words. The point is, I think, that you can’t have effective monetary policy at the macro-level if monetary policy has to do micro-level interventions. You may not even be able to do those interventions at all, and I have my doubts about doing the whole of macro policy with monetary policy. And we already assume that macro-level monetary policy exists in order to avoid doing micro-level interventions. Central banks getting interested in regulatory intervention do so, in part, to get enough requisite variety so that monetary policy can work.

And if you don’t like this for libertarian reasons, well, it is what it is. We tried that.

Was the Ukraine shambles avoidable?

With Saturday bringing news of police in Kiev brutally breaking up what had been a peaceful pro-EU protest, it’s even clearer now than before the botched partnership summit in Vilnius that things could get out of hand on a large scale. Perhaps what stands out the most about Ukraine is the sense of slow-motion crisis: an indigenous “colour revolution” that was diverted, every economic indicator pointing to an old-style IMF program very soon, and months of signals from Russia that its Eurasian Customs Union would be an offer that its neighbours couldn’t refuse.

The day also brings a fairly toughly worded statement of condemnation of the protest break-up from the European Commission, but what hope it has of generating any momentum is not clear with the world into its weekend (and for the USA, Thanksgiving) distractions. But the question for the EU has to be: what did they expect? The noises were there for months when Armenia wavered at the Eastern Partnership. There was a further message in how aggressively Russia played its cards on Syria, but maybe that was given a pass for having headed off US military action.

Even over the last few days though, the mis-steps mounted. It was clear ahead of the Vilnius Summit that President Yanukovich was boxed in by pressure from Russia. So why maintain the pretense that a deal could be done, why go ahead with the summit theatrics, why release the video of him getting a dressing down by Angela Merkel, and then put a bullseye on Moldova as what a country might get if its plays nicely with the EU?

There were other pitfalls embedded in the EU-Ukraine negotiations process. Writing in the New York Times, Oleh Kotsyuba notes the way that social conservatives in Ukraine used the partnership component on tolerance of sexual orientation against it. For others, it became a polarised personality dispute with the focus on Yulia Tymoshenko ($ link).

Of course, we don’t know the dynamics inside the EU capitals and Brussels about who wanted what (was Iran consuming their attention?). But there seems to be several points at which expectations could have managed and temperatures lowered. Perhaps the bigger question is whether the EU has a full understanding of what kind of Russia it is dealing with. It’s going to be a fun Russian G8 Presidency in 2014!