Ratner and Europe

 

Apparently the NY Times feels the need to give equal time on their oped page to disgraced investment bankers but I am not sure why we should read the pieces. Today, Ratner is trying the make the case that it is a bad thing if wages rise in Europe. While Dean Baker does a nice take down of his argument I think it points to a deeper issue which is that somehow what is good for workers is bad for business. It is a fundamental rule in economics that one person's expense is another person's income. After all, where is the business supposed to come from? I suppose if our cause for concern is the fortunes of makers of 50 foot yachts you might make the argument that paying skilled blue collar workers better is not going to help sales.

It is not clear from his graphics what his baselines are for "output" and what currency he is measuring. My guess this is just another screed on behalf of oppressed rich investment bankers everywhere.

 

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Greece and a Moment for Hope

There was a bright moment this week as voters in Greece opted for radical change from the course that has crippled Europe since the beginning of the economic crisis. The election of a government lead by Syriza, as well as a decent showing for other center-left and leftist parties, holds up hope that a democratic movement might grow across Europe to fight austerity and provide an alternative to the cynicism and despair of the radical right.

But there are those that would stand in the way. The Troika (EU, IMF and ECB) lead by voices from Germany rail against the demands for lessening of the mutual economic destruction pact that is represented by arbitrary deficit goals. In the case of Greece and other countries, the assistance from the Troika to stave off default on sovereign debt came with crippling restrictions. The result has been internal devaluation (severely lower incomes), high unemployment and mass misery. The parties of bigotry, such as the National Front in France or Golden Dawn in Greece or UKIP in the UK, have an appeal that capitalizes on the anxiety of people suffering at the whim of the distant (seemingly anyway) powers.

The parties of the left that have tried to make their peace with austerity have suffered at the polls. Some have suffered division or worse (Pasok the former governing party of the left in Greece is a shadow of its former self). Can the other parties looking at a general election such the Socialists in France or the Labour Party in the UK learn a quick lesson from Syriza and support their cry for a people oriented solution to stagnation and speculation? The next steps by these parties may tell the tale of their fate in elections soon to come.

Deflation and the current economy, Part II - The Swiss Case

Today the other shoe dropped in that the European Central Bank announced its formal program for extraordinary measures to combat economic stagnation and the spectra of deflation. The size of the program, 60 Billion Euro per month for at least 18 months, should certainly impress the markets. Whether they will accomplish the goal, is another question. Again the central bankers are trying to inflate the economy to push back on levels of unemployment that are deemed to be too high. However, because they and so many "very smart people" are pushing further into an age of austerity the normal lever of fiscal policy is not being used in Europe.

While fiscal policy in the US is nothing to write home about it has been used a bit, whereas in Europe the concern over sovereign debt has lead governments to cut back worker pay and therefore standards of living. This contributes to the deflationary pressure in Europe which is spreading to other parts of the world. In part the Euro common currency is to blame. Since 19 European countries are part of a single currency, those that need a devaluation like Greece or Spain, could not get it because their partners included Germany which wanted to keep the currency stronger. The currency devaluation makes the countries (or zones) products less expensive and is designed to help balance trade through higher exports and lower imports. For countries that needed a rebalancing they were forced to internally devalue through lower wages, lower social benefits and higher taxes. Theoretically, this gets them to the same place but it requires sacrifices by specific members of society rather than the across the board cuts if a currency was revalued.

The shoe that dropped last week was Switzerland. The Swiss (not part of the EU or the Euro Zone) years ago pegged their currency to the Euro in order to maintain a stable exchange rate. The method of maintaining the peg involved going into the currency markets to purchase Euros and supplying Swiss Francs in order to bolster the value of the Euro, versus the Franc. This action resulted in that more or less stable rate that the Swiss banking authorities wanted but ballooned the balance sheet of the Swiss central bank as they accumulated more and more foreign currency. Last week, in the face of the effective devaluation of the Euro (QE and lower interest rates will decrease the value of the Euro versus other currencies) the Swiss gave up on the peg and let the currency rise to a market level. The change was a drop of over 20% (see the cliff graphic above).

The pressure for the rise in value of the Franc comes from the fact that Switzerland has been running persistent trade surpluses with the rest of the world for many years. Economic theory tells us that under this circumstance the country's currency should rise and that will make their products more expensive and exports will fall and imports rise (they can buy more from overseas) and the balance will be reestablished. This is great for economists but not so great for politicians as they have a hard time explaining to people their recessionary activities to create balanced international trade. But the Swiss are not going to get away free here as they were already facing deflationary pressure (their CPI peaked in 2010 and has been declining since) and the strengthened currency will only make it worse.

Switzerland has a very low unemployment rate at 3.4%  but they have seen a small upswing since the summer when it was at 2.9%. The currency float should force some higher levels of unemployment in the near term. Why didn't they continue their peg? Too much foreign currency. Why didn't they just use the currency for something like a sovereign investment fund? They are Swiss after all and don't like entanglements in other countries.

We will see bad things happen to companies with Swiss HQ and operations abroad. The currency will make foreign profits disappear. The deflation (that everyone is facing) will put pressure on profits and prices everywhere. More unemployment will result from the contracting economies. All because Europe refuses to take the more direct path to recovery … reverse austerity. End a very bad idea.

Deflation and the current economy, Part I

As part of The Great Moderation mainstream economists thought they had rid themselves of the scourge of inflation. Since the double recession of the early 1980's the US inflation rate has operated within a band that did not cause policymakers to react harshly to price fluctuations. In fact, the Federal Reserve has acted in order to prevent the rise in price level (see late 1980's and 1990's increases in interest rates). These actions which constrict the money supply are designed to increase interest rates and raise unemployment. All in order to hold the line on prices.

Since the technical great recession ended in 2009 the thrust of central bank action in the US has been to try to get around the monetary policy restrictions of the zero lower bound by trying extraordinary action called Quantitative Easing (QE). This involved purchases of government bonds and mortgage backed securities, a process that ended last year. The hope is that the increased purchases would help lower longer term interest rates and spark investment in depressed areas of the economy (housing) and business expansion. Its effectiveness is still under debate.

Other parts of the world basically rejected that approach. Until now. The European Central Bank is working this week on a plan to engage in its own form of QE. But as always they are cowed from doing the important things correctly because of pressure from Germany. Why the concern? Deflation. Yes, a spectre is haunting Europe (and the rest of the world). Deflation. As we see from the above chart of the US we have been seeing disinflation here … lower and lower rates of inflation. We are on the path to deflation too.

Why the deflation? Because of the premature rush to austerity that the world engaged in since 2009 economies have absorbed that by lowering public expenditures, lowering incomes and lowering prices. So the problem with deflation is that it means lower incomes too. This is what has plagued Japan (much of the period since 1990 has seen low rates of inflation or outright deflation), Europe and perhaps soon the US and China.

This problem intensified The Great Depression. It is now wrecking the living standards of Europe particularly in those countries suffering from internal devaluation. Remember that the same people that thought that inflation was a solved problem came up with this cure that is looking worse than the problem. What can we do about this?

Rank hypocrisy on the Paris march

All sort of commentators particularly Republicans have criticized the Obama Administration for the low key support for the March in Paris on Sunday. While leaders from various countries did attend the highest ranking US rep was the Ambassador with Secretary of State Kerry in India and the President and VP in Washington. Some of the criticism has even been bizarre and disgusting resulting in an apology.

Dana Milbank of the Post did an excellent job documenting some of the hypocrisy in the criticism not the least being the denigration of all things French while their government opposed the War in Iraq or the fact that John Kerry is fluent in French and spoke to the French people in their tongue after the horrible attack.

However, there is an even bigger flaw in their logic. When terrorist killed over 200 in Madrid in 2004 and then millions marched in Spain the Bush Administration did not send any high ranking officials to the affair. Rather the President and First Lady signed a condolence book at the Spanish Embassy much as did President Obama. Did Republicans denounce the Administration for not showing more support for an ally in an unpopular war? Not a word.

That is until the 2008 Republican Presidential candidate wouldn't commit to inviting the Spanish Prime Minister to the White House. Again, it is all about political posturing, and amounts to rank hypocrisy.

Employment Not Near Full

On many fronts the news from the Bureau of Labor Statistics was good today. The December 2013 unemployment rate was down and firm hiring was up. Revisions from previous months continue the good news of higher levels of hiring.

"The change in total nonfarm payroll employment for October was revised from +243,000 to +261,000, and the change for November was revised from +321,000 to +353,000. With these revisions, employment gains in October and November were 50,000 higher than previously reported."

As other observers comment, there are other signs of the continuing slack in the labor market. Dean Baker of CEPR comments that while the unemployment rate has decreased over the last few months from 5.8% to 5.6% that wage rates continue to stagnate. A major issue is the still declining employment to population ratio.

Jared Bernstein points out that employment growth accelerated over the course of 2014. Why? He makes the case that the decline in fiscal drag ... the turn to fiscal neutrality (no tax increases or spending cuts from the big ones of 2013) ... means that the tepid economic recovery actually created jobs.

Given these comments and other aspects of context, low inflation in the US, low growth and deflation in Europe and apparently China, why would the Federal Reserve still float the possibility of raising interest rates? The interest rate increase would act the same as the fiscal drag from spending cuts. In the absence of any inflation, why? The actions would wind up dis-employing those people who just got jobs. This recovery has been painful and slow and the Fed should take actions to improve employment, not discourage it.

Keep rates low. Encourage Congress to invest in our country.

ASSA 2015 and the intellectual fight against inequality

At the annual ASSA conference this past weekend in Boston there was an excellent panel called "Debating The Minimum Wage" and it was one of many such panels this year concentrating on the broad set of issues that define the issue of inequality. The subsections of the ASSA including URPE, the Association for Evolutionary Economics and The Association for Social Economics were very aggressive in this thrust. Why? Certainly in part because of the phenomenal impact of Thomas Piketty's book "Capital in the 21st Century". In fact there were at least three panels devoted to just this book. This is exciting as it means the professional economics profession is focused on the issues of the growing chasm of inequality in the US and the response.

In the panel under discussion, John Schmitt (The Center for Economic Policy Research), David Cooper (Economic Policy Institute) and Robert Pollin (University of Massachusetts) all presented research and analysis about the impact of the minimum wage on employment. The discussants were researchers in the field and represented the "mainstream" views on the issue. It breaks two ways ... those that see a measurable effect on employment (negative) and those that see a small amount of impact or insignificant impact.

Schmitt, Cooper and Pollin all have excellent approaches to the examination of the impact of the minimum wage. Cooper shows how an increase reduces the reliance on reliance on social safety net programs. Schmitt explores the conflicting literature in employment impact to conclude that the unemployment impact is negligible. Pollin and his colleague explored how food service companies could absorb a $15 minimum wage over time with minimum impact on employment. As is always the case with academic discussions much of the time is spent debating methodologies with the discussants and panelists tossing phrases back and forth that loses all but the most knowledgable researchers (two stage fixed effects model anyone?).

The most interesting point I found was the political and policy nature of the papers and discussions. These weren't exercises in refining abstract models of economic behavior but rather a debate on the real world impact of public policy that has a foot in the economic realm. Why only a foot? The unaddressed issue is why we have a minimum wage anyway and what does that tell us about microeconomic theory.

As I write elsewhere, in liberal democracies we depend on the market to allocate most economic resources and we reallocate those resources when we find a failure of the market. By market failure we mean that resources are not distributed in a fashion that society views as appropriate. Pollution transfers costs from a producer to the general public allowing the producer to capture profits above what is justified based on value. Another example is a monopoly which transfers consumer surplus to producers. In labor markets firms are the consumers of labor, they hire people to do specific jobs. But sometimes they hire people at wages which society deems as to low to maintain a minimum standard of living. It is a market failure. We offer a social safety net to compensate but starting in the Great Depression we pegged a specific wage from which employers must only move up. A minimum wage.
The question remains as to why conservative economists and policy makers are concerned about the potential employment effects of the minimum wage? In this model we have decided that the minimum wage makes up for a flaw in the market. Meaning that if the justifiable wage for a specific job is below the minimum, society is making the determination that the work is not worth doing. Why would they object to society adjusting their peg over time to account for changes in assumptions about a minimally acceptable return on work? It seems as too often the case is that the judgement on policy prioritizes politics over philosophy/morality or even microeconomic theory.

As the theoretical and practical policy work continues on the problem of inequality, we can't forget the other basis for judging policy, does it get us to the society we want? The minimum wage has become a critical element in the political fight over actions to reduce economic inequality. We need to discuss other actions which would help the economy and help us achieve this critical policy goal.

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