Tuesday, June 30, 2015

Program Notes for the Greek Endgame: Austerity, Cyprus, and How to Exit a Currency Area

The Greek government has rejected the latest austerity and reform proposals from the EU, the ECB, and the IMF.  It has declared a national referendum, scheduled for Sunday, and urges a "No" vote. "We ask you to reject it with all the might of your soul, with the greatest margin possible," says Prime Minister Alexis Tsipras. Greek banks, which have been hit by an accelerating run, are to remain closed until after the vote. Yet rumors swirl of behind-the-scenes talk and a last minute deal.

We don’t yet know what lies ahead—default? Exit from the euro? Exit from the EU? Some kind of muddling through with a parallel currency and a declaration that any default is “only technical”? Answers to those questions will come only after Greek voters make a choice.

Meanwhile, here are some program notes and links to background material that should help place the Greek crisis in the context of similar episodes elsewhere.

How Tough has Greek Austerity Really Been?

To hear Greeks tell it, their country has undergone a deeper slump and tougher austerity measures than any other European country. Some of their EU partners, on the other hand, portray the Greek government as unwilling to take moderate, common-sense measures that everyone else has already successfully implemented. What do the numbers say?

This post, published at the time of the elections that brought the radical left Syriza party to power, shows that the Greek perception is largely correct. The slump in Greece, as measured by the gap between current and full-employment levels of GDP, has been catastrophic, a plunge of more than 20 percentage points. At the same time, budget cuts and tax increases have moved the best indicator of austerity—the underlying primary budget balance—nearly 20 percentage points toward surplus. Those movements far exceed what has happened in the United States or in any other European country. Read more

Wednesday, June 17, 2015

A Critique of the ShadowStats Alternate Unemployment Rate

A few weeks ago, I posted a critique of the alternate inflation measure devised by John Williams for his popular website ShadowStats.com. Several responders asked if I could also comment on Williams’ alternate unemployment rate.

Here, reproduced with permission is the latest unemployment chart from ShadowStats. Like William’s inflation rate, his unemployment numbers run far higher than the official data from the Bureau of Labor Statistics (BLS). This post addresses two questions: First, what is the intended purpose of the ShadowStats alternate unemployment indicator? Second, given what it tries to do, is it calculated in a reasonable way?

 In search of the employment gap
The standard unemployment rate from the BLS, known as U-3, focuses on a very narrow segment of the labor market. It tells us how many people are not working but who have actively looked for work in the past four weeks, expressed as a percentage of the civilian labor force. (The civilian labor force includes all people 16 years and older who are not in prison or the armed services.)The ratio of active job seekers to the labor force is highly sensitive to ups and downs in the business cycle. For that reason, monetary and fiscal policymakers watch it closely in deciding whether the economy needs stimulus or restraint. It is not perfect, but if what we want is a short-term business cycle indicator, it is probably good enough.

Williams, however, is looking for something different. His alternate unemployment rate should be understood as a broad measure of the employment gapthe difference between the amount of work that people would like to do and the amount they actually do. >>>Read more

Monday, June 1, 2015

Spillover from Russian Crisis Hits Latvian Economy, but So Far the Damage is Limited

From the beginning, it was clear that the economic crisis in Russia would pose multiple problems for Latvia and its Baltic neighbors. Until recently, many businesspeople in Latvia had seen close trade, transportation, and financial linkages as strengths that allowed their country to serve as Russia’s economic portal to the EU. Since the middle of last year, a collapse in oil prices, compounded by sanctions and countersanctions arising from the Ukraine conflict, have sent the Russian economy into a tailspin. Latvian ties to Russia have become liabilities rather than assets.

As the chart shows, growth of the Latvian economy has slowed since the Ukraine conflict began in the spring of 2014, but not come to a halt. According to preliminary data for the first quarter of this year, growth remains equal to the Eurozone average, which itself is improving. In that regard, Latvia has done better than neighboring Estonia and Lithuania, which have also felt the impact of conditions in Russia. >>>Read more

Wednesday, May 27, 2015

How to Maximize the International Impact of US Climate Mitigation Policy

A recent post by David Bailey and David Bookbinder on the Niskanen Center blog Climate Unplugged addresses a common Conservative criticism of unilateral climate mitigation efforts by the United States or other developed countries. As the critics point out, emissions from developing countries are expected to grow so rapidly that even if the US or EU reached zero carbon, it would reduce global temperatures in 2100 by only a few one-hundredths of a degree.

Bailey and Bookbinder acknowledge that developed countries cannot do the job by themselves. However, they argue that our mitigation efforts are not wasted, since US leadership is needed to induce others to act in concert:
Without the industrialized countries acting to—as the developing nations would say—put their own houses in order, it is impossible to believe that developing countries will act on their own. Action by the industrialized nations is thus necessary in order to secure the required collective action, while being insufficient on its own.
They make a valid point, but I would like to add that in order to maximize the effectiveness of US leadership, we need to pursue the right kind of mitigation policy. A comment on the Bailey-Bookbinder post by the Cato Institute’s Chip Knappenberger explains why. Knappenberger agrees that that unilateral US emissions reductions have little if any direct impact. He says that their purpose, instead,
is to attempt to spur technological innovation and set an example as to what can be done to reduce emissions—with Americans serving both as the experimenters and the  guinea pigs. It is not the climate impact of our experiment that is of any significance, but instead it is the tools that we may develop in attempting to achieve major emissions reductions. For the only truly effective course of action we have available to us in attempting to control the future course of global climate is to tell the rest of the world what to do and how to do it.
What we see here is that there are two mechanisms by which unilateral US efforts could induce others to act in concert, one diplomatic and one technological. The two have different implications for the kind of policy that would be most effective. >>>Read more

Wednesday, May 13, 2015

A Case Study in Natural Monopoly: China's Fading Dominance of Rare Earths

Rare earth elements (REEs) are a group of seventeen elements with exotic names like neodymium and yttrium that are key ingredients in many high-tech products, many important for national defense. Imagine the consternation of Western officials when they woke up one morning in September 2010 to learn that China held a near-monopoly in the production of these vital materials. In retaliation for the collision of a Chinese fishing boat with a Japanese Coast Guard vessel near a group of disputed islands in the East China Sea, China threatened an embargo. Prices of REEs soared.

How did China become the world’s leading producer of REEs? Did the 97 percent market share it held in 2010 represent a true natural monopoly? At the time, I wrote that its hold on the market was more fragile than it appeared. The erosion of China’s dominance of REEs holds important lessons for all supposed natural monopolies.

The first clue should have been that rare elements are not really rare. All seventeen rare earth elements are more abundant in the earth’s crust than gold, and some of them are as abundant as lead. The thing that makes them hard to mine is the fact that they do not occur in highly concentrated deposits like gold and lead. Even the best REE ores have very low concentrations. On the other hand, such ores exist widely throughout the world. Until the 1960s, India, Brazil, and South Africa were the leading producers. From the 1960s to the 1990s, the Mountain Pass Mine in California was the biggest source. China’s began to dominate of REE production only in the late 1990s. >>>Read more

Follow this link to view or download a classroom-ready slideshow version of this post

Thursday, April 16, 2015

Open Memo to Rand Paul: An Outline for a Libertarian Fiscal Policy

“As President,” says candidate Rand Paul, “I will work to authorize common sense solutions that will solve our nation's fiscal crisis.” He has floated a broad proposal for a constitutional amendment that would require the federal government to balance its budget. Soon he will need to start filling in the specifics. Here are some ideas that would combine common sense and fiscal prudence while remaining true to Paul’s libertarian principles.

Toward a Libertarian Fiscal Policy

Rand Paul is no anarcho-capitalist. He sees a legitimate, but limited, role for government in national defense, law enforcement, the justice system, and certain other areas. As Ralph Benko notes in a recent Forbes article, that places him in the classical liberal wing of the libertarian movement. With the option of zero government off the table, the remaining minimal state must raise revenue and spend it. A libertarian of classical liberal inclinations cannot get along without some kind of fiscal policy, so what should it look like?

The first principle should be, “Do no harm.” In a medical context, that precept will be familiar to a physician like Senator Paul.  In economics, “do no harm” means a policy of fiscal neutrality—one of managing both the revenue and spending sides of the budget in a way that disrupts the functioning of the market economy as little as possible.

Unfortunately, many past Republican proposals for budget balancing do not meet the standard of fiscal neutrality. Take, for example, the balanced budget amendment proposed not long ago by Utah Senators Orin Hatch and Mike Lee. As I discussed in an earlier post, that proposal, and others that would require  the federal budget to be exactly balanced each year, would be the opposite of neutral.

Because tax revenue falls when the economy contracts, a rule like Hatch-Lee would mandate sharp cuts in spending or increases in taxes each time the economy entered a recession. Those measures would deepen the slump and prolong the recovery. Even worse, from a libertarian perspective, they would provide little or no restraint on spending when tax revenues rose in good times. Lobbyists would descend on Washington like locusts, full of ideas on how to spend the surplus. In short, requiring strict annual balance for the current budget is anything but common sense. >>>Read more

Wednesday, April 8, 2015

UK Election: Did Austerity Work? This Chart Casts Doubt on the Claim

The general election campaign is in full swing in Britain, and it seems it’s all about austerity. From London, The New York Times reports that the campaign revolves around a single issue: the economy, and whether its rebound is the result of an austerity policy championed by the Conservative-led government of David Cameron, or in spite of it.

When in doubt, we should let the facts speak for themselves. This chart tells it all:

The points in the chart represent thirty of the high-income democracies that comprise the OECD. It covers the years 2010-2014, the Cameron government’s term in office. The vertical axis shows the average annual rate of growth during the period. The horizontal axis shows the degree of austerity, or fiscal consolidation, as economists prefer to call it, applied in each country. The UK is right in the middle, just slightly below average in terms both of austerity and growth. >>>Read more