Hans Werner Sinn recently wrote a piece in WSJ discussing anemic growth prospects of the German economy (link). The German economy is expected to decline by about 6 percent annually, following a major decline in export sector. Foreign orders decreased by 43 percent in January and February. Many commentators emphasized the risk of Germany's exposure to foreign trade and its vulnerability to global economic shocks.
In spite of absorbing a rather strong shock from a decline in exports, the major backlash of the German economy is the rigid labor market and the lack of wage flexibility. In recent years, German policymakers launched the increase in minimum wages as an attempt to ward-off international low-wage competition from emerging market economies. What happened? In turn, workers in low-wage industries were protected againist labor-intensive producers from India, China and so forth.
In addition, as minimum wages grew, the labor cost of low-wage workers increased to such an extent that employers couldn't afford to hire them. Consequently, the creation of high-wage jobs was discouraged as "skills" were less abundant than low-wage jobs. High tax burden and extensive labor cost discouraged job formation and thus many young German minds voted with their feet and moved abroad to places such as neighboring Switzerland, Canada, United States and Australia.
It is simply not true that the expected output contraction will accelerate only because of the near collapse of export and manufacturing sector. Economists and policymakers often discuss the backbones to economic growth. The empirical studies showed that the rigidity of labor market comes at the cost of less job creation and productivity decline. This is exactly what happened in Germany.
When I was writing one of the forthcoming papers, I estimated the potential daily working time in OECD. While Korea hits the top with a stunning average of more than 9 hours of daily labor supply, Germany hits the bottom with no more than the average of 6 hours of daily labor supply. In microeconomics, this is a pure substitution effect - higher tax wedge discourage labor supply and induces individuals to consume more leisure. To stimulate labor supply, the policymakers should liberalize labor market and remove the disincentives to work. Second, the liberalization of the labor market goes hand in hand with the reform of the old-fashioned German welfare state. Keeping minimum wages above the wage rate in the private sector will not diminish the unemployment rate and stimulate job creation.
Also, providing the unemployed with generous entitlements and welfare benefits, will not cure the disease of low productivity. Third, in 2008, government spending reached equaled 45.7 percent of the GDP should be reduced. German economic performance lagged behind the EU. Between 1995 and 2009, the economies of EU15 grew by 27.1 percent on average. German economy expanded by 14.3 percent, only surpassing Italy, whose economy expanded by 11.9 percent during that period. A wise combination of deregulation of labor market, reform of the welfare state and reduction in government spending is the right path for German economic recovery.
Wednesday, August 05, 2009
Tuesday, August 04, 2009
THE IMPACT OF RECESSION: GERMANY vs. AMERICA
Douglas J. Elliott of the Brookings Institution compares the impact of this year's recession in the U.S and Germany (link):
"Equally importantly, Germany is justifiably proud of its prowess in exports, particularly industrial machinery and automobiles. Somewhere between 40% and 50% of Germany’s GDP comes from exports, depending on when and how you measure it. This is more than three times that of the U.S., although it is important to note that Germany is a considerably smaller country and is closely integrated with its European neighbors, who are the largest importers of German products. (If the U.S. counted sales from the Northeast to California as exports, our figure would be sharply higher than it is.) Germans view their trade surplus as a sign of virtue and the source of overseas investments that will carry the country through a future in which their aging population cuts back on output and necessarily lives more on the fruits of past labor."
"Equally importantly, Germany is justifiably proud of its prowess in exports, particularly industrial machinery and automobiles. Somewhere between 40% and 50% of Germany’s GDP comes from exports, depending on when and how you measure it. This is more than three times that of the U.S., although it is important to note that Germany is a considerably smaller country and is closely integrated with its European neighbors, who are the largest importers of German products. (If the U.S. counted sales from the Northeast to California as exports, our figure would be sharply higher than it is.) Germans view their trade surplus as a sign of virtue and the source of overseas investments that will carry the country through a future in which their aging population cuts back on output and necessarily lives more on the fruits of past labor."
Monday, August 03, 2009
CANADIAN AND THE U.S HEALTH CARE SYSTEMS COMPARED
A study by June O'Neill and Dave M. O'Neill (link) suggests that the U.S health care system provides more choice, efficiency, better delivery and capacity than the Canadian system:
"Does Canada's publicly funded, single payer health care system deliver better health outcomes and distribute health resources more equitably than the multi-payer heavily private U.S. system? We show that the efficacy of health care systems cannot be usefully evaluated by comparisons of infant mortality and life expectancy. We analyze several alternative measures of health status using JCUSH (The Joint Canada/U.S. Survey of Health) and other surveys. We find a somewhat higher incidence of chronic health conditions in the U.S. than in Canada but somewhat greater U.S. access to treatment for these conditions. Moreover, a significantly higher percentage of U.S. women and men are screened for major forms of cancer. Although health status, measured in various ways is similar in both countries, mortality/incidence ratios for various cancers tend to be higher in Canada. The need to ration resources in Canada, where care is delivered "free", ultimately leads to long waits. In the U.S., costs are more often a source of unmet needs. We also find that Canada has no more abolished the tendency for health status to improve with income than have other countries. Indeed, the health-income gradient is slightly steeper in Canada than it is in the U.S."
"Does Canada's publicly funded, single payer health care system deliver better health outcomes and distribute health resources more equitably than the multi-payer heavily private U.S. system? We show that the efficacy of health care systems cannot be usefully evaluated by comparisons of infant mortality and life expectancy. We analyze several alternative measures of health status using JCUSH (The Joint Canada/U.S. Survey of Health) and other surveys. We find a somewhat higher incidence of chronic health conditions in the U.S. than in Canada but somewhat greater U.S. access to treatment for these conditions. Moreover, a significantly higher percentage of U.S. women and men are screened for major forms of cancer. Although health status, measured in various ways is similar in both countries, mortality/incidence ratios for various cancers tend to be higher in Canada. The need to ration resources in Canada, where care is delivered "free", ultimately leads to long waits. In the U.S., costs are more often a source of unmet needs. We also find that Canada has no more abolished the tendency for health status to improve with income than have other countries. Indeed, the health-income gradient is slightly steeper in Canada than it is in the U.S."
THE ORIGINS OF OBESITY
David Cutler, Ed Glaeser and Jesse Shapiro provide the evidence of high rates of obesity in the United States (link):
"Americans have become considerably more obese over the past 25 years. This increase is primarily the result of consuming more calories. The increase in food consumption is itself the result of technological innovations which made it possible for food to be mass prepared far from the point of consumption, and consumed with lower time costs of preparation and cleaning. Price changes are normally beneficial, but may not be if people have self-control problems. This applies to some population."
"Americans have become considerably more obese over the past 25 years. This increase is primarily the result of consuming more calories. The increase in food consumption is itself the result of technological innovations which made it possible for food to be mass prepared far from the point of consumption, and consumed with lower time costs of preparation and cleaning. Price changes are normally beneficial, but may not be if people have self-control problems. This applies to some population."
HAPPY BIRTHDAY, MILTON
Milton Friedman died on November 16th 2006. July 31st remarks his birthday and an opportunity to reflect his profound legacy of economic thinking and ideas promoting individual liberty.
I first came across Friedman's ideas through one of his first research papers, Income from Independent Professional Service (link), coauthored with Simon Kuznets, wherein Friedman and Kuznets showed how shortage of physicians emerges from restrained labor supply and upward wage pressures. Together with Kuznets, Friedman applied statistical models to the analysis of income from professional services. The empirical results indicated that the regulation of professional services raises general income level for existing practitioners while, at the same time, reduces incentives for market entrants by raising fixed entry costs and compliance cost.
The paper was written in 1945 when orthodox Keynesian economic policies took a full-fledged march. Friedman's strong analytical rigour successfully challenged Keynesian economic establishment of that time. In Theory of the Consumption Function, Friedman showed how Keynesian theory of consumption fails to capture long-run behavior of households. In General Theory, Keynes postulated that household's consumption is determined by autonomous consumption and consumption induced by income. Since Keynes assumed that consumption is a linear function of income, higher income is ought to result in higher savings. Later on, Simon Kuznets showed that Keynesian consumption function suffers from empirical incosistencies. Even though it had been seemingly accurate in short-run cross-section data, it failed to predict household income pattern in time-series data over the long run. If Keynesian assumption was held true, the savings-to-income ratio would grow over time. On the contrary, the ratio remained constant over time in spite of relatively large income changes. Keynesian theory of consumption was further shook by new theories of consumption. Franco Modigliani, Nobel Laureate in Economics from 1985, challanged Keynesian consumption theory by introducing life-cycle hypothesis, showing how savings-to-income ratio changes over the entire lifetime, depending on household's life stage. Franco Modigliani and Richard Brumberg proposed the life-cycle income hypothesis with a more realistic assumption. He tested the following equation: C = aW + cY where a is marginal propensity to consume wealth (W), and c is marginal propensity to consume income (Y). The empirical results for the United States estimated the marginal propensity to consume from disposable income (c) at 0.7 and marginal prospensity to consume from wealth (a) at 0.06. The estimates were used to examine household consumption patterns. Thus, over the lifespan, as household's income went up by 1 percent, consumption expenditures wemt up by about 0.7 percent on average. Meanwhile, as household's wealth increased by 1 percent, the consumption expenditures grew by 0.6 percent on average.
The research by Modigliani and Brumberg in 1957 and Kuznets paved way for Friedman's Permanent Income Hypothesis. In a proposed hypothesis, Friedman argued againist Keynesian consumption theory. Its major inability is the weakness of prediction and the inconsistency in consumption patterns between short-run and long-run results. Contrary to Keynes, Friedman argued that disposable income arises from permanent and transitory income. Permanent income held by household was defined as household's preference for a stable consumption over the long run. Friedman showed that consumer's choices are made not by transitory income but by permanent income expectations. Thus, transitory changes in income have little effect on consumption behavior. The empirical assessment of permanent income hypothesis showed that households with lower income tend to have higher marginal propensity to consume. Friedman concluded that consumer's spending is not affected by static expectations but rather by real wealth such as physical assets and human capital assets. These determine consumer's earning ability and enable consumers to forecast their lifetime income.
When Friedman received a Nobel prize in economics back in 1976, the Nobel Commission entitled the award for "...his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of complexity of stabilization policies..." Back in 1963, Friedman and Schwarz wrote the Monetary History of the United States 1867-1960 where they examined the monetary trends in the United States since the end of the civil war.
Through an extensive empirical observation of money supply, monetary policy and business cycles they showed that monetary intervention by the Federal Reserve System, which was established in 1913, in an attempt to stabilize the short-term cyclical shock in the financial market resulted in the worst economic depression in world history. Fed's intervention reduced the broad money supply, destroying the depository base. The intervention led to the banking panic. Lending operations were disabled and the banking system suddenly went insolvent. When Federal Reserve cut the money supply by one-third in 1929, the ordinary recession turned into the depression in the light of deflationary shock. As the leading voice of the monetarist school, Friedman showed that inflation is a monetary phenomena resulting excessive growth of money supply relative to output growth.
Friedman's empirical research on monetary trends over time led to important conclusions. The most notable conclusions were that (1) short-run changes in money supply affect output while (2) long-run changes in money supply affect price level. Friedman's empirical work on monetary economics dropped the Keynesian myth of inflation caused by oil price increases or upward wage pressures. Friedman suggested that Fed should increase the quantity of money by a rate, ranging from 3 to 5 percent, determined in advanced. In a debate with Walter Heller, the chairman of Council of Economic Advisers to President Kennedy, Friedman argued that fiscal policy is an inefficient demand management tool in stabilizing economic fluctuations.
Milton Friedman was also a leading and indispensable libertarian voice throughout the world. Back in 1962, he published Capitalism and Freedom. The book spread the ideas of economic and individual liberty around the world. Friedman wrote that economic freedom is a neccesary condition for individual and political freedom. The ideas of ending all currency controls, removing barriers to trade, drastically cutting government spending, privatizing social security, introducing school vouchers and ending progressive income tax structure, spurred the creation of liberal freedom movements around the world.
As one of the rarest voices around the world, Friedman proposed the negative income tax as an alternative to progressive income taxes. As the wealthy take advantage of various loopholes, exemptions and tax breaks, progressive income tax does not achieve its purpose but, contrary to expectations, it further increases the income inequality. The basic idea behind the negative income tax is that general allowance would be raised to guarantee the minimum income level while the income above basic exemption would be taxed at the flat rate. The books written by Milton Friedman truly revolutionized the world. Free to Choose, coauthored with Rose Friedman, introduced free-market ideas to the general public by popularizing cases for limited government, the rule of law, and various way to end government monopolies.
Friedman's ideas reached the arena of public policy in many countries. Although heavily criticized by the left-wing intellectuals, Friedman visited Chile and delivered a lecture in Santiago on economic freedom. He advocated deregulation, privatization and the case for floating exchange rate. Due to the decision of Chilean Ministry of Finance, the exchange rate was fixed to the U.S dollar as a cure to heel rampant inflation. Since the Central Bank of Chile hadn't reduce the money supply, dollar-denominated foreign loans deteriorated Chilean trade balance. The decision to fix the exchange rate in the absence of accomodative monetary policy, imports were inflated. Because exchange rate was not floating, the elimination of fixed exchange rate and a disinflationary policy of the central bank unavoidably resulted in a two-year recession.
However, nothing could be further from the truth than then assertion that free-market reforms destabilized Chilean economy. Output contraction is a natural consequence of disinflationary policy, following the reduction of money supply. After exchange rate controls were eliminated, and after the launch of the privatization of state-owned companies and the social security, deregulation and free trade, starting in 1985, Chilean economy grew at the robust rate. Industrial production increased and the unemployment went down. In the long run, Chile's GDP per capita has been the highest in the region with a vibrant economy facing stable institutions and an enviable Friedman's ideas influenced many leaders around the world.
His ideas inspired Margaret Thatcher to undertake the course of free-market reforms. Prior to the launch of fiscal and monetary policy reforms, the British economy was recognized as the sick man of Western Europe, facing high annual rates of inflation and unsuccessful Keynesian economic policy attempt to cure the ailing economy by boosting aggregate demand through government deficits. After Lady Thatcher slashed marginal tax rates, introduced deregulation, liberalized labor market and proposed the privatization of state-owned industries, the British economy thrived with economic growth rates reaching historic highs.
Milton Friedman left a wealthy legacy of free-market thinking and efforts to promote individual liberty, free economy and political freedom. The financial crisis of 2008/2009 that spurred the economic recession intiated the beginning of heavy government intervention. The pursuit of ideas in favor of individual liberty and economic freedom is the best weapon againist the growth of government and the welfare state. With an iron will of the classical liberal, he successfully battled the failures of the welfare state and government intervention. He surely is one of the greatest economists and thinkers of the time.
I first came across Friedman's ideas through one of his first research papers, Income from Independent Professional Service (link), coauthored with Simon Kuznets, wherein Friedman and Kuznets showed how shortage of physicians emerges from restrained labor supply and upward wage pressures. Together with Kuznets, Friedman applied statistical models to the analysis of income from professional services. The empirical results indicated that the regulation of professional services raises general income level for existing practitioners while, at the same time, reduces incentives for market entrants by raising fixed entry costs and compliance cost.
The paper was written in 1945 when orthodox Keynesian economic policies took a full-fledged march. Friedman's strong analytical rigour successfully challenged Keynesian economic establishment of that time. In Theory of the Consumption Function, Friedman showed how Keynesian theory of consumption fails to capture long-run behavior of households. In General Theory, Keynes postulated that household's consumption is determined by autonomous consumption and consumption induced by income. Since Keynes assumed that consumption is a linear function of income, higher income is ought to result in higher savings. Later on, Simon Kuznets showed that Keynesian consumption function suffers from empirical incosistencies. Even though it had been seemingly accurate in short-run cross-section data, it failed to predict household income pattern in time-series data over the long run. If Keynesian assumption was held true, the savings-to-income ratio would grow over time. On the contrary, the ratio remained constant over time in spite of relatively large income changes. Keynesian theory of consumption was further shook by new theories of consumption. Franco Modigliani, Nobel Laureate in Economics from 1985, challanged Keynesian consumption theory by introducing life-cycle hypothesis, showing how savings-to-income ratio changes over the entire lifetime, depending on household's life stage. Franco Modigliani and Richard Brumberg proposed the life-cycle income hypothesis with a more realistic assumption. He tested the following equation: C = aW + cY where a is marginal propensity to consume wealth (W), and c is marginal propensity to consume income (Y). The empirical results for the United States estimated the marginal propensity to consume from disposable income (c) at 0.7 and marginal prospensity to consume from wealth (a) at 0.06. The estimates were used to examine household consumption patterns. Thus, over the lifespan, as household's income went up by 1 percent, consumption expenditures wemt up by about 0.7 percent on average. Meanwhile, as household's wealth increased by 1 percent, the consumption expenditures grew by 0.6 percent on average.
The research by Modigliani and Brumberg in 1957 and Kuznets paved way for Friedman's Permanent Income Hypothesis. In a proposed hypothesis, Friedman argued againist Keynesian consumption theory. Its major inability is the weakness of prediction and the inconsistency in consumption patterns between short-run and long-run results. Contrary to Keynes, Friedman argued that disposable income arises from permanent and transitory income. Permanent income held by household was defined as household's preference for a stable consumption over the long run. Friedman showed that consumer's choices are made not by transitory income but by permanent income expectations. Thus, transitory changes in income have little effect on consumption behavior. The empirical assessment of permanent income hypothesis showed that households with lower income tend to have higher marginal propensity to consume. Friedman concluded that consumer's spending is not affected by static expectations but rather by real wealth such as physical assets and human capital assets. These determine consumer's earning ability and enable consumers to forecast their lifetime income.
When Friedman received a Nobel prize in economics back in 1976, the Nobel Commission entitled the award for "...his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of complexity of stabilization policies..." Back in 1963, Friedman and Schwarz wrote the Monetary History of the United States 1867-1960 where they examined the monetary trends in the United States since the end of the civil war.
Through an extensive empirical observation of money supply, monetary policy and business cycles they showed that monetary intervention by the Federal Reserve System, which was established in 1913, in an attempt to stabilize the short-term cyclical shock in the financial market resulted in the worst economic depression in world history. Fed's intervention reduced the broad money supply, destroying the depository base. The intervention led to the banking panic. Lending operations were disabled and the banking system suddenly went insolvent. When Federal Reserve cut the money supply by one-third in 1929, the ordinary recession turned into the depression in the light of deflationary shock. As the leading voice of the monetarist school, Friedman showed that inflation is a monetary phenomena resulting excessive growth of money supply relative to output growth.
Friedman's empirical research on monetary trends over time led to important conclusions. The most notable conclusions were that (1) short-run changes in money supply affect output while (2) long-run changes in money supply affect price level. Friedman's empirical work on monetary economics dropped the Keynesian myth of inflation caused by oil price increases or upward wage pressures. Friedman suggested that Fed should increase the quantity of money by a rate, ranging from 3 to 5 percent, determined in advanced. In a debate with Walter Heller, the chairman of Council of Economic Advisers to President Kennedy, Friedman argued that fiscal policy is an inefficient demand management tool in stabilizing economic fluctuations.
Milton Friedman was also a leading and indispensable libertarian voice throughout the world. Back in 1962, he published Capitalism and Freedom. The book spread the ideas of economic and individual liberty around the world. Friedman wrote that economic freedom is a neccesary condition for individual and political freedom. The ideas of ending all currency controls, removing barriers to trade, drastically cutting government spending, privatizing social security, introducing school vouchers and ending progressive income tax structure, spurred the creation of liberal freedom movements around the world.
As one of the rarest voices around the world, Friedman proposed the negative income tax as an alternative to progressive income taxes. As the wealthy take advantage of various loopholes, exemptions and tax breaks, progressive income tax does not achieve its purpose but, contrary to expectations, it further increases the income inequality. The basic idea behind the negative income tax is that general allowance would be raised to guarantee the minimum income level while the income above basic exemption would be taxed at the flat rate. The books written by Milton Friedman truly revolutionized the world. Free to Choose, coauthored with Rose Friedman, introduced free-market ideas to the general public by popularizing cases for limited government, the rule of law, and various way to end government monopolies.
Friedman's ideas reached the arena of public policy in many countries. Although heavily criticized by the left-wing intellectuals, Friedman visited Chile and delivered a lecture in Santiago on economic freedom. He advocated deregulation, privatization and the case for floating exchange rate. Due to the decision of Chilean Ministry of Finance, the exchange rate was fixed to the U.S dollar as a cure to heel rampant inflation. Since the Central Bank of Chile hadn't reduce the money supply, dollar-denominated foreign loans deteriorated Chilean trade balance. The decision to fix the exchange rate in the absence of accomodative monetary policy, imports were inflated. Because exchange rate was not floating, the elimination of fixed exchange rate and a disinflationary policy of the central bank unavoidably resulted in a two-year recession.
However, nothing could be further from the truth than then assertion that free-market reforms destabilized Chilean economy. Output contraction is a natural consequence of disinflationary policy, following the reduction of money supply. After exchange rate controls were eliminated, and after the launch of the privatization of state-owned companies and the social security, deregulation and free trade, starting in 1985, Chilean economy grew at the robust rate. Industrial production increased and the unemployment went down. In the long run, Chile's GDP per capita has been the highest in the region with a vibrant economy facing stable institutions and an enviable Friedman's ideas influenced many leaders around the world.
His ideas inspired Margaret Thatcher to undertake the course of free-market reforms. Prior to the launch of fiscal and monetary policy reforms, the British economy was recognized as the sick man of Western Europe, facing high annual rates of inflation and unsuccessful Keynesian economic policy attempt to cure the ailing economy by boosting aggregate demand through government deficits. After Lady Thatcher slashed marginal tax rates, introduced deregulation, liberalized labor market and proposed the privatization of state-owned industries, the British economy thrived with economic growth rates reaching historic highs.
Milton Friedman left a wealthy legacy of free-market thinking and efforts to promote individual liberty, free economy and political freedom. The financial crisis of 2008/2009 that spurred the economic recession intiated the beginning of heavy government intervention. The pursuit of ideas in favor of individual liberty and economic freedom is the best weapon againist the growth of government and the welfare state. With an iron will of the classical liberal, he successfully battled the failures of the welfare state and government intervention. He surely is one of the greatest economists and thinkers of the time.
Tuesday, July 07, 2009
LOWER CORPORATE TAX RATE IN ONTARIO
Chris Edwards, an economist at the Cato Institute, reports that Tim Horton's (Canada's "Starbucks") is moving its headquarters to Ontario, as the provincial policymakers are cutting the federal-provincial corporate tax rate down to 25 percent (link). That is 15 percentage points lower than the federal corporate tax rate in the U.S.
GLOBAL ENABLING TRADE REPORT 2009
World Economic Forum recently published its annual report on enabling trade around the world (link).
The report estimated broader openness to trade after taking all indicators, regulatory and administrative factors into account. Notably, among these are the ease of market access, customs administration, difficulty of export and import procedures, quality of transport infrastructure, the availibility of transport services and the use of ICT. The report found a positive and moderate correlation between the GDP per capita and enabling trade index. Thus, it implies that countries with higher GDP per capita, on average, tend to be more trade-friendly.
There are, of course, some other factors, aside from GDP per capita, that affect broader openness to trade. The research by the WEF found that the customs regulations, quality of regulatory and business environment and the quality of transport infrastructure and services significantly explain country's openness to trade flows fairly well.
Countries with the highest Enabling Trade Index (ETI) are Singapore, Hong Kong, Switzerland, Denmark and Sweden, followed by Canada, Norway, Finland, Austria and the Netherlands. In spite of robust growth of trade volume before the economic crisis, Russia ranks 109th out of 121 countries in the report, accompanied by countries such as Syria and Nepal. This suggests that Russia's growth of trade volume before the crisis can be assigned to its factor-driven economic growth. WEF's report reveals that Russia's score poorly in terms of border administration, market access and the business environment while performing modestly in terms of quality of transport infrastructure. Index of Economic Freedom noted that Russia's trade freedom is inhibited by the inefficient arbitrary customs administration. The latter restrains trade and is a popular protectionist policy measure. The least trade-friendly countries, according to the report, are: Chad, Cote d'Ivoire, Venezuela, Zimbabwe and Nigeria.
The report estimated broader openness to trade after taking all indicators, regulatory and administrative factors into account. Notably, among these are the ease of market access, customs administration, difficulty of export and import procedures, quality of transport infrastructure, the availibility of transport services and the use of ICT. The report found a positive and moderate correlation between the GDP per capita and enabling trade index. Thus, it implies that countries with higher GDP per capita, on average, tend to be more trade-friendly.
There are, of course, some other factors, aside from GDP per capita, that affect broader openness to trade. The research by the WEF found that the customs regulations, quality of regulatory and business environment and the quality of transport infrastructure and services significantly explain country's openness to trade flows fairly well.
Countries with the highest Enabling Trade Index (ETI) are Singapore, Hong Kong, Switzerland, Denmark and Sweden, followed by Canada, Norway, Finland, Austria and the Netherlands. In spite of robust growth of trade volume before the economic crisis, Russia ranks 109th out of 121 countries in the report, accompanied by countries such as Syria and Nepal. This suggests that Russia's growth of trade volume before the crisis can be assigned to its factor-driven economic growth. WEF's report reveals that Russia's score poorly in terms of border administration, market access and the business environment while performing modestly in terms of quality of transport infrastructure. Index of Economic Freedom noted that Russia's trade freedom is inhibited by the inefficient arbitrary customs administration. The latter restrains trade and is a popular protectionist policy measure. The least trade-friendly countries, according to the report, are: Chad, Cote d'Ivoire, Venezuela, Zimbabwe and Nigeria.
Monday, July 06, 2009
CALIFORNIA'S DISMAL FISCAL LEGACY
At Bloomberg, Kevin Hassett wrote an article (link), discussing the shortcomings of California's fiscal crisis. According to the official estimates, California's annual budget deficit is likely to hit $26 billion. Dan Mitchell recently debated California's spending disease on CNBC (link). In addition, high government spending has deteriorated California's economic growth prospects. California has become a textbook case of gradual economic stagnation. Back in 1960, California's GDP per capita stood 24.5 percent above the U.S average. In 2008, it stood 7.4 percent above the U.S average. In recent decade, California has pursued an economic policy based largely on government's meddling into economic affairs.
The data from California's Department of Finance (link) reveal the outcome of economic mismanagement. In California, minimum wage has been growing steadily with a fascinating rate. In 1957, the minimum wage rate stood at $1.0 per hour. In 2008, the minimum wage rate was $8.0 per hour. That is 800 percent increase. In 2008, the minimum wage rate in California was 10.35 percent above the U.S average. The economics of minimum wage is simple: as unions set the minimum wage above the non-union rate, the employment drops and union members enjoy a wage premium and more employment protection. Larry Summers, the chairman of National Economic Council, nicely summarized how minimum wages, welfare payments and unemployment insurance spur long-term unemployment (link).
The macroeconomic outlook of California is not favorable. Seasonally-adjusted unemployment rate in May 2009 stood at 11.5 percent compared to 9.4 percent of the U.S average. Second, California's record-breaking budget deficit is largely a result of high tax burden and high government spending. In 2009, California's government spending is projected to reach $417.3 billion or almost 25 percent of California's gross state product (GSP). The share of government spending in the GSP is likely to climb higher when the 2009 GDP data will be released. Time-series data on fiscal policy (link) show that California's gross public debt in 2009 is set to hit $367.7 billion or 21.63 percent of state's gross product. A study conducted by Arthur Laffer & Moore Econometrics (link) showed that California's 10.3 percent top personal income tax rate is the second highest in the U.S, just behind the state of New York.
Not surprisingly, the overall employment grew only by 1.4 percent. In Texas, one of the most vibrant and highest-growing economies in the U.S, the overall employment grew by 2.9 percent. That is 107 percent difference. California's tax policy has also taxed dividends and capital gains by 10.3 percent tax rate, thus discouraging capital formation.
If California were an independent state, it would be the 8th largest economy in the world. However, tax and spending fine-tuning left a disastrous fiscal legacy of high public debt, deep budget deficits and stagnation of employment, productivity and income growth. To stabilize California's public finance and boost state's economic growth, the remedy of fiscal policy would include a drastic reduction of government spending, the ending of budget deficit and the creation of surplus. In addition, tax rates that penalize savings, work and investment should be slashed radically. It should not be neglected that entitlement spending is a hampering burden to the economy and is ought to be anchored by an official fiscal target. If California's public finances and fiscal policy continue the status quo, then, in a couple of years, California's economy will resemble France more closely than ever before.
The data from California's Department of Finance (link) reveal the outcome of economic mismanagement. In California, minimum wage has been growing steadily with a fascinating rate. In 1957, the minimum wage rate stood at $1.0 per hour. In 2008, the minimum wage rate was $8.0 per hour. That is 800 percent increase. In 2008, the minimum wage rate in California was 10.35 percent above the U.S average. The economics of minimum wage is simple: as unions set the minimum wage above the non-union rate, the employment drops and union members enjoy a wage premium and more employment protection. Larry Summers, the chairman of National Economic Council, nicely summarized how minimum wages, welfare payments and unemployment insurance spur long-term unemployment (link).
The macroeconomic outlook of California is not favorable. Seasonally-adjusted unemployment rate in May 2009 stood at 11.5 percent compared to 9.4 percent of the U.S average. Second, California's record-breaking budget deficit is largely a result of high tax burden and high government spending. In 2009, California's government spending is projected to reach $417.3 billion or almost 25 percent of California's gross state product (GSP). The share of government spending in the GSP is likely to climb higher when the 2009 GDP data will be released. Time-series data on fiscal policy (link) show that California's gross public debt in 2009 is set to hit $367.7 billion or 21.63 percent of state's gross product. A study conducted by Arthur Laffer & Moore Econometrics (link) showed that California's 10.3 percent top personal income tax rate is the second highest in the U.S, just behind the state of New York.
Not surprisingly, the overall employment grew only by 1.4 percent. In Texas, one of the most vibrant and highest-growing economies in the U.S, the overall employment grew by 2.9 percent. That is 107 percent difference. California's tax policy has also taxed dividends and capital gains by 10.3 percent tax rate, thus discouraging capital formation.
If California were an independent state, it would be the 8th largest economy in the world. However, tax and spending fine-tuning left a disastrous fiscal legacy of high public debt, deep budget deficits and stagnation of employment, productivity and income growth. To stabilize California's public finance and boost state's economic growth, the remedy of fiscal policy would include a drastic reduction of government spending, the ending of budget deficit and the creation of surplus. In addition, tax rates that penalize savings, work and investment should be slashed radically. It should not be neglected that entitlement spending is a hampering burden to the economy and is ought to be anchored by an official fiscal target. If California's public finances and fiscal policy continue the status quo, then, in a couple of years, California's economy will resemble France more closely than ever before.
Saturday, July 04, 2009
4TH OF JULY 2009
"The ground of liberty is to be gained by inches, and we must be contented to secure what we can get from time to time and eternally press forward for what is yet to get. It takes time to persuade men to do even what is for their own good."
Thomas Jefferson
Happy Independence Day!
Happy Independence Day!
Tuesday, June 30, 2009
Friday, June 19, 2009
INTERVIEW WITH PAUL A. SAMUELSON
Saturday, June 13, 2009
IS ASIA THE NEW CENTER OF WORLD ECONOMY?
Gary Becker (link) and Richard Posner (link) discuss whether the gravity of world economy is moving from the US and the EU to emerging Asian economies.
Rapid economic growth and steady institutional transformation are the key drivers of Asia's economic rise in the global economy. While the United States and the EU will likely suffer from this year's recession and pursue a U-shaped recovery, India, China, Indonesia and Vietnam will continue to grow in 2009 with favorable midterm growth projections. Even minor short-run differences in economic growth can lead to a profound impact on long-run income per capita. For example, if China and India's long-run economic growth rate is about 5 percent, it would take 14 years to double its income per capita.
If the growth rate were 6 percent, which is more likely after taking the productivity shocks into account, it would take 12 years for income per capita to double. The medium-term forecasts by the IMF suggest that the U.S and Europe will grow between 2.5 and 3 percent. Similarly, that would take 29 years and 24 years to double the income per capita. The gap can be further estimated by the empirics of real convergence.
Rapid economic growth in Asian tigers will also induce their bargaining power in institutions such as WTO, IMF and World Bank. In particular, Asia's fast growing economies play a stronger role in world trade. Thus, the bargaining power of India and China in negotiating regional and multilateral trade agreements is growing. The central challenge, however, is whether Asian tigers will recognize that free trade promotes economic growth, welfare and peace. The rise of trade protectionism in the U.S (link) and Europe is a significant concern from a countervailing perspective. Even the area of climate change policy is a potential source of conflict between the US and the EU on one side and China and India on the other side.
Of course, I disagree with pessimistic arguments that the U.S will lose its leadership in innovation, technology and human capital. Indeed, top U.S universities will still remain world's top-notch sources of human capital and the U.S high-tech firms are unlikely to lose their world leadership. However, rapid economic growth in Asia will induce China, India, Indonesia and Vietnam to pursue free-market policies alongside economic, civil and political liberties to give up the authoritarian political climate. In fact, the transformation to free-market economy with independent economic and political institutions will, in the long run, determine the scope of Asia's economic rise in the world.
Rapid economic growth and steady institutional transformation are the key drivers of Asia's economic rise in the global economy. While the United States and the EU will likely suffer from this year's recession and pursue a U-shaped recovery, India, China, Indonesia and Vietnam will continue to grow in 2009 with favorable midterm growth projections. Even minor short-run differences in economic growth can lead to a profound impact on long-run income per capita. For example, if China and India's long-run economic growth rate is about 5 percent, it would take 14 years to double its income per capita.
If the growth rate were 6 percent, which is more likely after taking the productivity shocks into account, it would take 12 years for income per capita to double. The medium-term forecasts by the IMF suggest that the U.S and Europe will grow between 2.5 and 3 percent. Similarly, that would take 29 years and 24 years to double the income per capita. The gap can be further estimated by the empirics of real convergence.
Rapid economic growth in Asian tigers will also induce their bargaining power in institutions such as WTO, IMF and World Bank. In particular, Asia's fast growing economies play a stronger role in world trade. Thus, the bargaining power of India and China in negotiating regional and multilateral trade agreements is growing. The central challenge, however, is whether Asian tigers will recognize that free trade promotes economic growth, welfare and peace. The rise of trade protectionism in the U.S (link) and Europe is a significant concern from a countervailing perspective. Even the area of climate change policy is a potential source of conflict between the US and the EU on one side and China and India on the other side.
Of course, I disagree with pessimistic arguments that the U.S will lose its leadership in innovation, technology and human capital. Indeed, top U.S universities will still remain world's top-notch sources of human capital and the U.S high-tech firms are unlikely to lose their world leadership. However, rapid economic growth in Asia will induce China, India, Indonesia and Vietnam to pursue free-market policies alongside economic, civil and political liberties to give up the authoritarian political climate. In fact, the transformation to free-market economy with independent economic and political institutions will, in the long run, determine the scope of Asia's economic rise in the world.
Friday, June 12, 2009
LABOR PROTECTIONISM IN THE U.S
Daniel Griswold, trade economist at CATO Institute, describes (link) how American labor unions oppose the free-trade agreement between the U.S and Columbia although the U.S International Trade Commission's estimates show that the free trade agreement between the two countries would boost U.S exports by about $1 billion annually. The AFL complains that Columbia is an unworthy of an agreement because of violence levied on union members (link). This may sound politically feasible, but the background is certainly much different from what AFL complains. In fact, Daniel Griswold showed that Columbian unions are as safe as American unions against political violence (link).
Recall the basics of international trade, H-O-S theorem (link) explains that international trade occurs because of the differences in relative factor abundance, i.e. differences between labor/capital ratio. Thus, a country with relative abundance in labor shall export labor-intensive products while the second country shall export capital-intensive products and services. Consequently, relative wages in labor-abundant country are lower compared to those in capital-abudant country. Why? Because in a more developed capital-abundant country, labor is scarce and, hence, relative wage is higher.
The complete liberalization of trade between the U.S and Columbia would reward the relatively abundant factor in the U.S (capital) and reduce the real reward to less abundant factor (labor). Thus, in the short run, relative wages may decline. Note that the Columbian level of productivity is less than half of the U.S level. In the long run, however, relative wages shall not decline given a staggering difference in productivity between the U.S and Columbia.
As a interest group, AFL is protecting labor againist the short-run decline in relative wages. The hindrance of free trade, in fact, harms everyone. The U.S exporters would suffer the loss of one the key Latin American markets while the Columbian exporters wouldn't absorb the benefits of free trade. On the other hand, the greatest victims of protectionist trade policy are consumers. The consumers in the U.S would be denied the freedom of choice of Columbian imports while Columbian consumers would lose the variety of choices from the U.S at a lower price, following the abolition of tariff protection.
Recall the basics of international trade, H-O-S theorem (link) explains that international trade occurs because of the differences in relative factor abundance, i.e. differences between labor/capital ratio. Thus, a country with relative abundance in labor shall export labor-intensive products while the second country shall export capital-intensive products and services. Consequently, relative wages in labor-abundant country are lower compared to those in capital-abudant country. Why? Because in a more developed capital-abundant country, labor is scarce and, hence, relative wage is higher.
The complete liberalization of trade between the U.S and Columbia would reward the relatively abundant factor in the U.S (capital) and reduce the real reward to less abundant factor (labor). Thus, in the short run, relative wages may decline. Note that the Columbian level of productivity is less than half of the U.S level. In the long run, however, relative wages shall not decline given a staggering difference in productivity between the U.S and Columbia.
As a interest group, AFL is protecting labor againist the short-run decline in relative wages. The hindrance of free trade, in fact, harms everyone. The U.S exporters would suffer the loss of one the key Latin American markets while the Columbian exporters wouldn't absorb the benefits of free trade. On the other hand, the greatest victims of protectionist trade policy are consumers. The consumers in the U.S would be denied the freedom of choice of Columbian imports while Columbian consumers would lose the variety of choices from the U.S at a lower price, following the abolition of tariff protection.
Wednesday, June 10, 2009
APPLYING ARROW'S IMPOSSIBILITY THEOREM
"For centuries philosophers, mathematicians, political scientists and economists have searched for the best method of voting. Fifty-eight years ago the economist Kenneth Arrow (later a Nobel laureate) decided to see whether any voting rule could avoid the problems we've illustrated. Fix them all at once, he found, and you get--a dictatorship. One voter calls the shots every time. Arrow's "impossibility theorem" demonstrates that no system of voting always gives the "right" result."
Source: John Mark Hansen, Allen R. Sanderson, The Olympics of Voting, Forbes, June 3, 2009 (link)
Source: John Mark Hansen, Allen R. Sanderson, The Olympics of Voting, Forbes, June 3, 2009 (link)
RUSSIA'S ECONOMIC CRISIS
As seen by The Economist (here and here):
"...a recent study by McKinsey, a consultancy. It looked into five sectors of the Russian economy and found that, although productivity has improved over the past decade, it is still only 26% of American levels. Bureaucracy and corruption are stifling it. It takes six times as long to obtain construction permits in Russia as in Sweden and, despite cheaper labour and land, the cost of building a distribution centre is a third more expensive than in London, according to McKinsey. When profit margins were 25%, construction firms could afford to pay off bureaucrats. Now they cannot..."
"...a recent study by McKinsey, a consultancy. It looked into five sectors of the Russian economy and found that, although productivity has improved over the past decade, it is still only 26% of American levels. Bureaucracy and corruption are stifling it. It takes six times as long to obtain construction permits in Russia as in Sweden and, despite cheaper labour and land, the cost of building a distribution centre is a third more expensive than in London, according to McKinsey. When profit margins were 25%, construction firms could afford to pay off bureaucrats. Now they cannot..."
THE COST OF FISCAL STIMULUS
The Economist observes that a growing public debt and exploding fiscal deficit is the foremost macroeconomic enemy of the U.S economy (link). Interestingly, Douglas W. Elmendorf, the head of CBO delivered a brilliant testimony (link) on the state of the economy, emphasizing the interest rate spread, the macroeconomic effects of financial crisis and the deflationary outlook for 2010. Below is a time series and the long-term projection of the U.S public debt in the percentage share of the GDP under three scenarios.
Source: Congressional Budget Office (link)
Source: Congressional Budget Office (link)
U.S TRADE DEFICIT AND CHINA
Today, Bloomberg reported (link) that April's trade deficit in the U.S increased by 2.2 percent. The recession in major trading partner sharply reduced external demand for U.S exports. As trade deficit has continued to grow, the U.S experienced significant investment inflows due to Fed's and external demand for Treasury bonds by which Chinese central bank accumulated massive foreign currency reserves. Consequently, the U.S dollar depreciated against the yuan, pushing up trade deficit. In the last three months, the yuan appreciated by 0.3 percent. In spite of the recession, the Chinese economy is set to expand by 7.5 percent annually in 2009. Thus, it is hard to understand why some U.S politicians repeatedly say that the yuan is overvalued.
Tuesday, June 09, 2009
THE 2009 RECESSION AND ECONOMIC RECOVERY IN SLOVENIA
Earlier this morning I was informed by Bloomberg (link) that Slovenia officially entered the recession for the first time in the last 16 years. The information has not been surprising since major economic forecasts predicted a significant downturn in the light of deteriorating exports and investment. The data pointed out to a significant economic decline. Gross capital formation shrank by an astonishing 32.3 percent. On the other hand, private household consumption grew slightly by 0.1 percent while government spending grew by 3.8 percent.
The outbreak of the financial crisis led economic policymakers to pursue a robust fiscal stimulus to compensate the decline of investment and consumption spending. Before entering the EMU, Slovenia had to comply with Maastricht criteria, including anchoring the budget deficit at the maximum level of 3 percent of the GDP. This year, the budget deficit soared over 6 percent of the GDP, suggesting a growing pressure on public debt. Earlier this month, John Taylor, a professor of economics at Stanford, wrote a great article in FT discussing the hidden dangers of a growing government debt (link). When credit rating agencies downgraded the sovereign debt outlook for the United Kingdom from "stable" to "negative", it should be obvious to economic policymakers that fiscal stimulus failed the cost-benefit analysis and hardly consolidated the midterm economic outlook and recovery.
Recently, Donald Kohn, the vice president of the Fed expressed concerns about fiscal deficit regarding inflationary outlook (link). The reaction of the fiscal policy included a typical fine-tuning infusion of government spending which produced little effect. Of course, it should be noted that a rather drastic expansion of public debt is not only a consequence of an expansionary fiscal policy but also of significant bailout loans from IMF. IMF's $2.4 billion bailout loan raised Latvia's public debt from 9 percent to 15.2 percent of the GDP in 2008 (link). By 2010, it is estimated to go up to 46 percent (link) of the GDP. The explosion of public debt is a particular concern and an obvious consequence of economy's overheating. The IMF recently reported that overall bank credit to private sector settled at 95 percent of the GDP. Complementary, external indebtedness rose to 130 percent of the GDP (link). Clearly, Bank of Latvia failed to act as a lender of the last resort with unbuilt foreign reserves basis and a balance sheet that couldn't sustain the bailout of the financial sector.
Iceland, definitely one of the biggest victims of the financial crisis has recently been downgraded on sovereign debt by Moody. The assets by the outward-oriented banking sector, fuelled by a stunning interest rate differential and carry trading against uncovered interest parity, skipped the size of the economy by 900 percent. The Moody predicted that Icelandic public debt will reach 145.3 percent in 2009 and shall decline slowly and gradually.
On the annual basis, Slovenia's small and open economy declined by 8.3 percent which is one of the most significant declines in the EU after Baltic tigers and Ireland. The European Commission predicts 3.4 percent decline in output by 2009. Exports are expected to decline by 11.8 percent. Small and open economies are vulnerable to economic crises and external shocks, particularly because its trade-to-GDP ratio stands at 60 percent of the GDP and beyond.
This year's quite striking decline has much to do with Slovenia's main macroeconomic backbones. The inflation rate, which grew significantly during the 2007 economic expansion when GDP growth stood at 6.8 percent annually, has not increased. That is because Slovenia, as other EMU members, experiences the recessionary output gap and also because there were no inflationary shocks from the oil market. The third frontier of explanation for a deflating pressure on economic activity in Slovenia is that during the recession spillovers from the tradeable sector strongly affected domestic retail and service sector. In March 2009, the unemployment rate stood at 8.4 percent. The combination of a weak labor market and significant downturn of private consumption spending weakened the bargaining power of unions over wage determination, although wages in the public sector recently grew by double-digit rates (link). In May, the monthly rate of inflation reached 0.6 percent respectively (link). The industrial production, one of the keenest signals of economic activity, for instance, declined by 20 percent in March 2009 (link). The lack of productivity shocks such as restructuring and innovation further worsened the outlook of industrial production.
In a Keynesian spinning turn, Slovenian government pursued a dramatic fiscal expansion coupled with an easy money policy from the ECB's lowest baseline interest rate since early 2000s. In addition to horrible state of public finance, the government enforced a set of measures to protect the major banks from the failure. After the failure of Lehman brothers, it became obvious that the credit flow to state-owned companies for purposes of acquisitions and oligpolistic consolidation will inevitably decrease significantly as the banks' balance sheets were too soft and, of course, too small to secure loans to the real sector. Not surprisingly, the banks performed dismally at the stock market. SBI20, Slovenia's headline stock market index shrank by an astonishing 68 percent between 2008 and 2009 (link), suggesting that P/E ratios and earnings forecasts were mostly overvalued and distorted by the insider information and inadequate and unreliable signals.
The recent staff report by the IMF on Slovenia (link) suggested the immediate enforcement of structural reforms to boost economic recovery. The historical track record of macroeconomic and structural reforms is quite sluggish. During the financial and economic crisis of 2008/2009, the Slovenian government raised government spending and tax burden.
Additionally, it further regulated the labor market by preventing firings through wage guarantees to temporary unemployed whom employers are obligated to reemploy as the economic recovery goes further. Is this a reminder that a totalitarian political economy is still alive? Yes. It seems that economic policymakers ignored the overwhelming regulatory burden in the business environment (link), extremely regulated, inflexible and costly labor market (link), the lack of scale to develop sound capital and financial markets (link) (link), unfinished privatization, high tax wedge and the lack of judicial enforcement in defending the rule of law and the protection of property rights.
These structural and macroeconomic reforms would strengthen the midterm growth outlook and significantly boost the economic recovery. Nonetheless, these reforms would not inhibit the economic growth in the long-run. The IMF's World Economic Outlook predicts weak growth in 2010 and a consecutive recovery until 2014 when the economic activity is expected to increase by 3.5 percent. However, the economic growth in Eastern tigers is expected to go steadily beyond 4 percent by 2012. By 2012-2014, Estonia's economic growth is expected to set up between 4 and 4.5 percent. Nonetheless, Slovakia, which smoothly matured in macroeconomic stability by entering the EMU in 2008, is set to expand 5.2 percent in 2011 and experience moderate growth ranging between 4 and 4.5 percent until 2014. Even a minor difference in economic growth has a significant long-term effect.
If Estonia and Slovakia steadily experienced 4.5 percent economic growth rate, it would take 16 years to double its GDP per capita. On the other hand, if Slovenia steadily experienced 3.5 percent economic growth rate, its GDP per capita would double in about 21 years. In my workshop on real convergence, I estimated that Estonia and Slovakia shall catch-up with Slovenian level of the GDP in about 12 to 16 years. In 1991, the catch-up gap between Slovenia and Estonia was between 45 and 50 years respectively.
Thus, without bold and strong economic reforms, the future of Slovenia shall be nothing more than a story of a slowly-growing and gradually stagnating economy with close and unfortunate similarities to Italy and France rather than to Singapore or Australia.
The outbreak of the financial crisis led economic policymakers to pursue a robust fiscal stimulus to compensate the decline of investment and consumption spending. Before entering the EMU, Slovenia had to comply with Maastricht criteria, including anchoring the budget deficit at the maximum level of 3 percent of the GDP. This year, the budget deficit soared over 6 percent of the GDP, suggesting a growing pressure on public debt. Earlier this month, John Taylor, a professor of economics at Stanford, wrote a great article in FT discussing the hidden dangers of a growing government debt (link). When credit rating agencies downgraded the sovereign debt outlook for the United Kingdom from "stable" to "negative", it should be obvious to economic policymakers that fiscal stimulus failed the cost-benefit analysis and hardly consolidated the midterm economic outlook and recovery.
Recently, Donald Kohn, the vice president of the Fed expressed concerns about fiscal deficit regarding inflationary outlook (link). The reaction of the fiscal policy included a typical fine-tuning infusion of government spending which produced little effect. Of course, it should be noted that a rather drastic expansion of public debt is not only a consequence of an expansionary fiscal policy but also of significant bailout loans from IMF. IMF's $2.4 billion bailout loan raised Latvia's public debt from 9 percent to 15.2 percent of the GDP in 2008 (link). By 2010, it is estimated to go up to 46 percent (link) of the GDP. The explosion of public debt is a particular concern and an obvious consequence of economy's overheating. The IMF recently reported that overall bank credit to private sector settled at 95 percent of the GDP. Complementary, external indebtedness rose to 130 percent of the GDP (link). Clearly, Bank of Latvia failed to act as a lender of the last resort with unbuilt foreign reserves basis and a balance sheet that couldn't sustain the bailout of the financial sector.
Iceland, definitely one of the biggest victims of the financial crisis has recently been downgraded on sovereign debt by Moody. The assets by the outward-oriented banking sector, fuelled by a stunning interest rate differential and carry trading against uncovered interest parity, skipped the size of the economy by 900 percent. The Moody predicted that Icelandic public debt will reach 145.3 percent in 2009 and shall decline slowly and gradually.
On the annual basis, Slovenia's small and open economy declined by 8.3 percent which is one of the most significant declines in the EU after Baltic tigers and Ireland. The European Commission predicts 3.4 percent decline in output by 2009. Exports are expected to decline by 11.8 percent. Small and open economies are vulnerable to economic crises and external shocks, particularly because its trade-to-GDP ratio stands at 60 percent of the GDP and beyond.
This year's quite striking decline has much to do with Slovenia's main macroeconomic backbones. The inflation rate, which grew significantly during the 2007 economic expansion when GDP growth stood at 6.8 percent annually, has not increased. That is because Slovenia, as other EMU members, experiences the recessionary output gap and also because there were no inflationary shocks from the oil market. The third frontier of explanation for a deflating pressure on economic activity in Slovenia is that during the recession spillovers from the tradeable sector strongly affected domestic retail and service sector. In March 2009, the unemployment rate stood at 8.4 percent. The combination of a weak labor market and significant downturn of private consumption spending weakened the bargaining power of unions over wage determination, although wages in the public sector recently grew by double-digit rates (link). In May, the monthly rate of inflation reached 0.6 percent respectively (link). The industrial production, one of the keenest signals of economic activity, for instance, declined by 20 percent in March 2009 (link). The lack of productivity shocks such as restructuring and innovation further worsened the outlook of industrial production.
In a Keynesian spinning turn, Slovenian government pursued a dramatic fiscal expansion coupled with an easy money policy from the ECB's lowest baseline interest rate since early 2000s. In addition to horrible state of public finance, the government enforced a set of measures to protect the major banks from the failure. After the failure of Lehman brothers, it became obvious that the credit flow to state-owned companies for purposes of acquisitions and oligpolistic consolidation will inevitably decrease significantly as the banks' balance sheets were too soft and, of course, too small to secure loans to the real sector. Not surprisingly, the banks performed dismally at the stock market. SBI20, Slovenia's headline stock market index shrank by an astonishing 68 percent between 2008 and 2009 (link), suggesting that P/E ratios and earnings forecasts were mostly overvalued and distorted by the insider information and inadequate and unreliable signals.
The recent staff report by the IMF on Slovenia (link) suggested the immediate enforcement of structural reforms to boost economic recovery. The historical track record of macroeconomic and structural reforms is quite sluggish. During the financial and economic crisis of 2008/2009, the Slovenian government raised government spending and tax burden.
Additionally, it further regulated the labor market by preventing firings through wage guarantees to temporary unemployed whom employers are obligated to reemploy as the economic recovery goes further. Is this a reminder that a totalitarian political economy is still alive? Yes. It seems that economic policymakers ignored the overwhelming regulatory burden in the business environment (link), extremely regulated, inflexible and costly labor market (link), the lack of scale to develop sound capital and financial markets (link) (link), unfinished privatization, high tax wedge and the lack of judicial enforcement in defending the rule of law and the protection of property rights.
These structural and macroeconomic reforms would strengthen the midterm growth outlook and significantly boost the economic recovery. Nonetheless, these reforms would not inhibit the economic growth in the long-run. The IMF's World Economic Outlook predicts weak growth in 2010 and a consecutive recovery until 2014 when the economic activity is expected to increase by 3.5 percent. However, the economic growth in Eastern tigers is expected to go steadily beyond 4 percent by 2012. By 2012-2014, Estonia's economic growth is expected to set up between 4 and 4.5 percent. Nonetheless, Slovakia, which smoothly matured in macroeconomic stability by entering the EMU in 2008, is set to expand 5.2 percent in 2011 and experience moderate growth ranging between 4 and 4.5 percent until 2014. Even a minor difference in economic growth has a significant long-term effect.
If Estonia and Slovakia steadily experienced 4.5 percent economic growth rate, it would take 16 years to double its GDP per capita. On the other hand, if Slovenia steadily experienced 3.5 percent economic growth rate, its GDP per capita would double in about 21 years. In my workshop on real convergence, I estimated that Estonia and Slovakia shall catch-up with Slovenian level of the GDP in about 12 to 16 years. In 1991, the catch-up gap between Slovenia and Estonia was between 45 and 50 years respectively.
Thus, without bold and strong economic reforms, the future of Slovenia shall be nothing more than a story of a slowly-growing and gradually stagnating economy with close and unfortunate similarities to Italy and France rather than to Singapore or Australia.
Tuesday, May 19, 2009
RUSSIA'S MACROECONOMIC OUTLOOK
The WSJ reports that Russia's economy recorded nearly 10 percent output contraction in Q1:2009 (link). In spite of surging oil prices and strong increases in stock market index, the midterm macroeconomic outlook on Russia is not favorable in terms of economic growth, fiscal policy and macroeconomic recovery. While the local currency appreciated 0.3 percent against the U.S dollar (link), the slow recovery in the financial sector is likely to deteriorate the macroeconomic outlook. The main ailing problems of the financial sector remain high credit and liquidity risk as well as default risk. The central bank could possibly mitigate the shocks in the financial sector by building up foreign reserves to act as the lender of the last resort. However, Russia's persistent obstacle to macroeconomic stability is high inflation rate and dismal fiscal policy record. When the inflation rate is high, building foreign currency reserves may be risky, letting domestic currency overvalued. Reduction in public spending and tightening of the monetary policy to stabilize the inflation rate could essential pursue stable midterm outlook.
Friday, May 15, 2009
ECONOMIC CRISIS AND RECOVERY IN EASTERN EUROPE
The Economist has published an article about the economic slump and recovery in Eastern Europe (link).
Wednesday, May 06, 2009
INFLATION IN THE OECD
The WSJ reports (link):
"Consumer prices in the 30 members of the OECD rose 0.9% in the 12 months ended March 31, the lowest level since records began in 1971. The previous record low was the 1.3% rate of inflation recorded in January and February of this year. As recently as July 2008, the OECD inflation rate stood at an 11-year high of 4.8%. The OECD said energy prices in its 30 member countries dropped 11.8% in the 12 months to March, having fallen by 8.6% in the 12 months to the end of February. Food prices rose 4.5% in the same period, having risen 4.8% in the 12 months to the end of February."
Interestingly, Iceland and Ireland had the most extreme movements in consumer prices in recent year. Iceland, which has been severely hit by the crisis, experienced 15.2 percent inflation rate in recent year, partly as a result of rapid domestic currency depreciation after its banking sector collapsed. On the other hand, Ireland experienced a modest deflation (-2.6 percent) in recent year, mostly due to a significant reduction in investment demand. As the interest rate kept falling steadily (link), the risk of deflation emerged because lower interest rates on overnight loans failed to boost the investment activity and credit flows in the light of credit crunch, falling stock market indexes and grimmy data from the labor market. The OECD countries, indded, face the lowest inflation rate in the last 30 years and the deepest output contraction after the oil shocks shackled the world economy in 1970s and 1980s. Meanwhile, cutting interest rates further could bloat the liquidity trap, the consequences of which are well-known and painful in ther long-run perspective.
"Consumer prices in the 30 members of the OECD rose 0.9% in the 12 months ended March 31, the lowest level since records began in 1971. The previous record low was the 1.3% rate of inflation recorded in January and February of this year. As recently as July 2008, the OECD inflation rate stood at an 11-year high of 4.8%. The OECD said energy prices in its 30 member countries dropped 11.8% in the 12 months to March, having fallen by 8.6% in the 12 months to the end of February. Food prices rose 4.5% in the same period, having risen 4.8% in the 12 months to the end of February."
Interestingly, Iceland and Ireland had the most extreme movements in consumer prices in recent year. Iceland, which has been severely hit by the crisis, experienced 15.2 percent inflation rate in recent year, partly as a result of rapid domestic currency depreciation after its banking sector collapsed. On the other hand, Ireland experienced a modest deflation (-2.6 percent) in recent year, mostly due to a significant reduction in investment demand. As the interest rate kept falling steadily (link), the risk of deflation emerged because lower interest rates on overnight loans failed to boost the investment activity and credit flows in the light of credit crunch, falling stock market indexes and grimmy data from the labor market. The OECD countries, indded, face the lowest inflation rate in the last 30 years and the deepest output contraction after the oil shocks shackled the world economy in 1970s and 1980s. Meanwhile, cutting interest rates further could bloat the liquidity trap, the consequences of which are well-known and painful in ther long-run perspective.
Monday, May 04, 2009
THE ECONOMIC CRISIS AND RECOVERY
Here's a speech delivered by CEA chair Christina Romerat Joint Economic Committee about the current economic situation and the outlook (link)
Thursday, April 16, 2009
TWO INTERESTING READINGS
Friday, April 10, 2009
THE NONSENSE OF DEATH TAX
Art Laffer discusses some negative implications of death tax in WSJ (link).
Wednesday, April 08, 2009
MACROECONOMIC OUTLOOK IN EUROZONE
European Commission has recently published the interim forecast for GDP, inflation, unemployment and balance of payments in the euroarea (link). The financial crisis and recessionary downturn induced by a negative demand shock have virtually stalled the European economy. The Commission predicted a -1,8 percent GDP decline and further forecasted a modest recovery starting in Q1 or Q2 in 2010.
In a comparative perspective, while the Japanese economy is facing an incredible -10 percent output gap (link) and prompting the government to infuse fiscal pumps, the US economy is set to decline by about 1.6 percent annually in 2009 as predicted by the IMF (link), but the US economy is expected to recover more responsively than the Eurozone. Eurozone's weakening domestic economy is a lingering worry for a long-term growth perspective. Germany, the main trading partner to European economies, is expecting -2,3 percent economic growth in 2009. France's GDP is set to plummet by 2,3 percent while Italian economy is expected to shrink by aout 2.0 percent annually. Basically, the eurozone is facing asymmetric shocks when different sets of fiscal policies throughout the continent impede the smooth functioning of optimum currency area and its monetary policy.
Following a dramatic fiscal expansion in all Eurozone countries (For instance, Slovenia's public debt is expected to soar from 23 percent in 2008 to 38 percent of the GDP in 2009), policymakers and interest groups have pledged a call for protectionism in labor market, public sector and trade. There is no doubt that tight and highly regulated labor market is causing European sclerosis - the inability of European economies to catch-up the U.S level of productivity and purchasing power parity.
An obscure size of European public sectors is the second sign of European sclerosis leading to higher-than-natural rate of unemployment, wage pressures and deadweight loss in the labor market when inelasticity of labor supply creates job-search disincentives resulting in a regulated labor market and a spiral of wages that is far behind the real level of productivity.
In a comparative perspective, while the Japanese economy is facing an incredible -10 percent output gap (link) and prompting the government to infuse fiscal pumps, the US economy is set to decline by about 1.6 percent annually in 2009 as predicted by the IMF (link), but the US economy is expected to recover more responsively than the Eurozone. Eurozone's weakening domestic economy is a lingering worry for a long-term growth perspective. Germany, the main trading partner to European economies, is expecting -2,3 percent economic growth in 2009. France's GDP is set to plummet by 2,3 percent while Italian economy is expected to shrink by aout 2.0 percent annually. Basically, the eurozone is facing asymmetric shocks when different sets of fiscal policies throughout the continent impede the smooth functioning of optimum currency area and its monetary policy.
Following a dramatic fiscal expansion in all Eurozone countries (For instance, Slovenia's public debt is expected to soar from 23 percent in 2008 to 38 percent of the GDP in 2009), policymakers and interest groups have pledged a call for protectionism in labor market, public sector and trade. There is no doubt that tight and highly regulated labor market is causing European sclerosis - the inability of European economies to catch-up the U.S level of productivity and purchasing power parity.
An obscure size of European public sectors is the second sign of European sclerosis leading to higher-than-natural rate of unemployment, wage pressures and deadweight loss in the labor market when inelasticity of labor supply creates job-search disincentives resulting in a regulated labor market and a spiral of wages that is far behind the real level of productivity.
Sunday, March 22, 2009
PENSION REFORM AND MACROECONOMIC STABILITY
The issue of pension reform is definitely the most challenging macroeconomic issue in the time to come. Faced with unfavorable demographic situation, economic policymakers in Western countries will need to reconsider the structure of the pension system to ensure the long-term sustainability of pension systems and overall macroeconomic stability as well. Negative demographic trends, namely a decreasing labor supply relative to increasing retirement rates as post-WW2 baby-boom generations retire and the burden of the welfare state is beared by the existing labor supply thru higher tax burden unless the reforms are launched.
Jose Pinera predicted (link) that Europe's aging population and the unsustainability of pension systems in the Euroarea could distort the functioning of optimum currency area and, consequently, launch a series of instability issue in the euroarea due to the inability of fiscal policies to cope with the exponentially growing net financial liabilities to the retirement system. Ageing population is, of course, more pronounce in the euroarea and Japan compared to the United States or Canada. In G7, assuming ceteris paribus, dependency ratio is expected to move from 40 percent to 70 percent by 2050.
The evidence from the OECD predicts that by 2050, Spain and Italy will face the highest dependency ratios. In Sweden, where private retirement accounts have been introduced (link) as a long-range supplementary to PAYG system back in 2000 (link), the trend of the ratio of population aged 65 and over is expected to reverse between 2030 and 2040. The United States is the only advanced country where the share of population aged 65 and over is not expected exceed 40 percent of the overall population (link).
Recently, Martin Neil Baily and Jacob Funk Kirkegaard of the Peterson Institute wrote a book entitled US Pension Reform: Lessons from Other Countries (link). The authors examined the prospects for the reform of the pension system in the United States considering the evidence from abroad. They showed that southern (Spain, Italy, Greece, Portugal) and continental (France, Germany, Belgium, Austria, Hungary, Slovenia) European countries are in the dead-end scenario of weak total assets of the pension system, unsound government finances. Although Austria, Spain and Belgium had a surplus structural fiscal balance in 2006, these countries are still unfamous for high corporate and personal income tax burden which has, by all empirical proportions, a negative overall effect on labor supply as working time is substituted for leisure activities, while as those of you who studied introductory micro and macro, productivity is the key to higher standards of living.
There is a three-step approach that European welfare states must face sooner or later if these countries want to avoid a continuous macroeconomic crisis whose effect is similar to oil supply shocks in 1970s. First, pension systems should be privatized by the introduction of private retirement accounts and PAYG net financial obligations should diminish gradually either in the framework of fiscal policy rule or in terms of partial lump-sum in the intragenerational transfer. Second, the transition to private retirement accounts must ensure the combination of risk-management approach to portfolio investment and returns managed by private pension funds. Sound and smart regulation should not be avoided such as the avoidance of investment into toxic assets backed by subprime mortgages where a decreasing interest rate has virtually inflated assets prices and propelled a the burst of the bubble that spurred the financial crisis in 2008/2009.
However, lessons from financial crisis and financial innovation will probably peer the question whether pension funds shall benefit from investing in asset-backed securities. Traditionally, pension funds diverse the portfolio structure by hedging or diversification into a stable and predictable rates of return with low beta coefficient on most of securities as pension fund managers aim to reduce the variability of return rates as risk fluctuates except for in optional accounts. And third, European countries should immediately deregulate its rigid and inflexible labor markets and also strongly decrease marginal and average tax rate on personal and corporate income and should nevertheless immediately raise the retirement age in the effort to stimulate labor supply and avoid early retirement. The combination of high tax burden, early retirement age and inflexible labor markets is a vicious circle where stagnation, ageing time bomb and macroeconomic crisis are the main consequence of delaying pension reforms into the future while such reforms never really happen.
Jose Pinera predicted (link) that Europe's aging population and the unsustainability of pension systems in the Euroarea could distort the functioning of optimum currency area and, consequently, launch a series of instability issue in the euroarea due to the inability of fiscal policies to cope with the exponentially growing net financial liabilities to the retirement system. Ageing population is, of course, more pronounce in the euroarea and Japan compared to the United States or Canada. In G7, assuming ceteris paribus, dependency ratio is expected to move from 40 percent to 70 percent by 2050.
The evidence from the OECD predicts that by 2050, Spain and Italy will face the highest dependency ratios. In Sweden, where private retirement accounts have been introduced (link) as a long-range supplementary to PAYG system back in 2000 (link), the trend of the ratio of population aged 65 and over is expected to reverse between 2030 and 2040. The United States is the only advanced country where the share of population aged 65 and over is not expected exceed 40 percent of the overall population (link).
Recently, Martin Neil Baily and Jacob Funk Kirkegaard of the Peterson Institute wrote a book entitled US Pension Reform: Lessons from Other Countries (link). The authors examined the prospects for the reform of the pension system in the United States considering the evidence from abroad. They showed that southern (Spain, Italy, Greece, Portugal) and continental (France, Germany, Belgium, Austria, Hungary, Slovenia) European countries are in the dead-end scenario of weak total assets of the pension system, unsound government finances. Although Austria, Spain and Belgium had a surplus structural fiscal balance in 2006, these countries are still unfamous for high corporate and personal income tax burden which has, by all empirical proportions, a negative overall effect on labor supply as working time is substituted for leisure activities, while as those of you who studied introductory micro and macro, productivity is the key to higher standards of living.
There is a three-step approach that European welfare states must face sooner or later if these countries want to avoid a continuous macroeconomic crisis whose effect is similar to oil supply shocks in 1970s. First, pension systems should be privatized by the introduction of private retirement accounts and PAYG net financial obligations should diminish gradually either in the framework of fiscal policy rule or in terms of partial lump-sum in the intragenerational transfer. Second, the transition to private retirement accounts must ensure the combination of risk-management approach to portfolio investment and returns managed by private pension funds. Sound and smart regulation should not be avoided such as the avoidance of investment into toxic assets backed by subprime mortgages where a decreasing interest rate has virtually inflated assets prices and propelled a the burst of the bubble that spurred the financial crisis in 2008/2009.
However, lessons from financial crisis and financial innovation will probably peer the question whether pension funds shall benefit from investing in asset-backed securities. Traditionally, pension funds diverse the portfolio structure by hedging or diversification into a stable and predictable rates of return with low beta coefficient on most of securities as pension fund managers aim to reduce the variability of return rates as risk fluctuates except for in optional accounts. And third, European countries should immediately deregulate its rigid and inflexible labor markets and also strongly decrease marginal and average tax rate on personal and corporate income and should nevertheless immediately raise the retirement age in the effort to stimulate labor supply and avoid early retirement. The combination of high tax burden, early retirement age and inflexible labor markets is a vicious circle where stagnation, ageing time bomb and macroeconomic crisis are the main consequence of delaying pension reforms into the future while such reforms never really happen.
Thursday, March 19, 2009
FRANCE'S ENORMOUS TAX BURDEN
WSJ reports that French president is under pressure of labor unions to raise taxes on the wealthy as an act of solidarity (link). Meanwhile, France's economy deteriorated significantly in the light of recession and turmoil of the financial crisis. The economy is expected to decline by 1,9 percent in 2009 on the annual basis. The forecasting prospect for French economy in 2010 is also a little grimmy. The IMF expects 0.7 percent economic growth in 2010 (link). The stagnation of France has been diagnosed as a consequence of high tax burden, inefficient and oversized public sector and rigid labor markets which hinder productivity growth and further deteriorate the already unsustainable social security and pay-as-you-go pension system when net financial liabilities increase exponentially in the share of the GDP. The OECD has shown an interesting comparison (link) of tax burden on labor supply in OECD countires. France, Belgium, Hungary and Germany are in the top ladder of tax burden on labor supply, where tax burden on average workers is very close or above 50 percent of labor cost while the OECD average is slightly below 40 percent.
WILL BOND PURCHASE SPUR GROWTH?
The Fed declared that it would buy as much as $300 billion of long-term treasury securities and even more in mortgage-backed securities. While the Fed has already targeted federal funds rate to 0,25 percent, the prices on US Treasury debt have soared, pushing the yield on 10-year notes from 3 percent to 2.53 percent. The WSJ reports:
The Fed will buy as much as $300 billion in long-term Treasurys in the next six months. It will increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to $1.25 trillion, up from $500 billion. The Fed also is doubling potential purchases of their debt, to $200 billion (link).
Zero-ground interest rate is a serious concern regarding the long-term conduct of the monetary policy. While the major central banks have already plummeted into a liquidity trap, it is surprising that stock markets and macro data on employment and output are not responding to the proposed policy measures. If the Fed is likely to buy more long-term Treasury securities in the following months, an unparalleled increase in government debt may occur which could deteriorate the state of macroeconomic stability which is unlikely to be mitigated by neither fiscal nor monetary policy. If the Fed really aims to tackle the economic recovery, then it should set time-consistent policy rule, declaring a stop to further policy rates with a clear and indisputable statement in mind.
The Fed will buy as much as $300 billion in long-term Treasurys in the next six months. It will increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to $1.25 trillion, up from $500 billion. The Fed also is doubling potential purchases of their debt, to $200 billion (link).
Zero-ground interest rate is a serious concern regarding the long-term conduct of the monetary policy. While the major central banks have already plummeted into a liquidity trap, it is surprising that stock markets and macro data on employment and output are not responding to the proposed policy measures. If the Fed is likely to buy more long-term Treasury securities in the following months, an unparalleled increase in government debt may occur which could deteriorate the state of macroeconomic stability which is unlikely to be mitigated by neither fiscal nor monetary policy. If the Fed really aims to tackle the economic recovery, then it should set time-consistent policy rule, declaring a stop to further policy rates with a clear and indisputable statement in mind.
Thursday, March 12, 2009
NEW BLOG ON GLOBAL ECONOMY
Antonio Fatas and Ilian Mihov of INSEAD have launched an interesting blog on global economic issues (link).
SLOVENIAN ECONOMY: 2009 FORECAST
UMAR has issued the latest edition of Slovenian Economic Mirror (link).
Tuesday, March 10, 2009
LESSONS FROM THE GREAT DEPRESSION
Here is a link to Christina Romer's speech about the lessons from the Great Depression and the economic recovery of 2009, presented yesterday at the Brookings Institution.
Monday, March 09, 2009
FISCAL POLICY IN ECONOMIC CRISIS
A new study by IMF (link) suggests a framework for fiscal policy during recessionary periods. IMF admits that discretionary fiscal policy could further deteriorate economic recovery, increasing budget deficits and public debt which already reached new heights in G20 countries (link). It also suggets that vulnerabilities from financial markets should be addressed in preventing economic downturns. Agreeably, IMF does not suggest an introduction of large-scale entitlement programs which are politically almost impossible to reverse as well as an increase in public sector bill that could downsize productivity performance and exert a growing pressure on cost inflation. The study also concludes that industry-specific subsidies are harmful and could escalate protectionism. The study, however, does not recommend lower corporate tax rate, saying that tax reduction is likely to be ineffective leading to tax fraud. Numerous empirical studies have shown that high corporate tax rate is the primary reason for tax evasion, pushing private sector to move to jurisdictions with lower tax rates. And second, it would be suspicious to claim that corporate tax cut is ineffective because business profits are low. It is true that corporate tax reductions lead to higher tax multiplier and exert strong upward pressure during expansionary period, but that does not mean that corporate tax cut is ineffective during recessions. In fact, cutting taxes during recession eases the economic downturn as well as the pace of the recovery.
Thursday, March 05, 2009
WHY INTELLECTUALS LOVE SOCIALISM
Back in 2005, Vaclav Klaus delivered a great speech (link) on why there is a huge and remarkable inclination of intellectuals towards the ideas of socialism.
"As we see both in Europe and in America, the intellectuals love such a system. It gives them money and an easy life. It gives them an opportunity to be influential and to be heard. The Western world is still affluent enough to be able to support and finance many of their unpractical and directly unpurposeful activities. It can afford the luxury of employing herds of intellectuals to use “poetry” for praising the existing system, for selling the concept of positive rights, for advocating constructivist human designs (instead of spontaneous human action), for promoting other values than freedom and liberty."
"As we see both in Europe and in America, the intellectuals love such a system. It gives them money and an easy life. It gives them an opportunity to be influential and to be heard. The Western world is still affluent enough to be able to support and finance many of their unpractical and directly unpurposeful activities. It can afford the luxury of employing herds of intellectuals to use “poetry” for praising the existing system, for selling the concept of positive rights, for advocating constructivist human designs (instead of spontaneous human action), for promoting other values than freedom and liberty."
Saturday, February 28, 2009
Thursday, February 26, 2009
DENSITY OF TRADE UNION MEMBERSHIP IN OECD 1960-2007
Here (link) is the availible data on density of trade union membership in OECD between 1960 and 2007. The membership in trade unions has been declining. In 1960, in the United States, 30.9 percent of the employees were engaged in trade union activities. In 2007, only 11.6 percent of employees were members of trade unions. Similar trendline occured in the UK, where the peak in trade union membership was 51,8 percent of the employees in 1978. From 1978 to 2007, trade union membership decline significantly. In 2007, it reached 28 percent of the workforce. In Canada, trade union membership was reversed in 1982 when it reached 36,8 percent of employees. In 2007, 29.4 percent of the working population were engaged in trade union activities. Compared to the U.S, trade union membership in Canada remained fairly steady throughout the period.
There is many empirical evidence arguing why trade union membership declined. In the U.S and UK, the reversal in trade union membership began in 1978 while in the U.S, the entire postwar period encountered a declining trend in trade union membership with a marked exception between 1975 and 1979 when Carter administration fostered pro-union policy measures.
In the UK, Thatcher's economic reforms, nicely summarized by Sir Alan Walters (link), aimed at the deregulation of the labor market which set a natural disincentive for union membership and, at the same time, stimulated productivity growth and reduced unit labor cost resulted from an excessive taxation of personal income and levies such as employer social security contributions. In 1978, for instance, the United Kingdom's overall productivity was 69 percent of the U.S productivity, down from 75 percent in 1960. In 1979, the marginal tax rate could reach as high as 98 percent, composed from 83 percent top tax rates and 15 percent tax surcharge on unearned income.
In continental Europe, trade union membership also declined significantly, showing a positive correlation between productivity growth a declining union membership although the continental European trade unions maintained a strong political power in collective bargaining as well as in economic policymaking. Not surprisingly, the output per capita gap between the U.S and Europe widened, starting in 1970s.
There is many empirical evidence arguing why trade union membership declined. In the U.S and UK, the reversal in trade union membership began in 1978 while in the U.S, the entire postwar period encountered a declining trend in trade union membership with a marked exception between 1975 and 1979 when Carter administration fostered pro-union policy measures.
In the UK, Thatcher's economic reforms, nicely summarized by Sir Alan Walters (link), aimed at the deregulation of the labor market which set a natural disincentive for union membership and, at the same time, stimulated productivity growth and reduced unit labor cost resulted from an excessive taxation of personal income and levies such as employer social security contributions. In 1978, for instance, the United Kingdom's overall productivity was 69 percent of the U.S productivity, down from 75 percent in 1960. In 1979, the marginal tax rate could reach as high as 98 percent, composed from 83 percent top tax rates and 15 percent tax surcharge on unearned income.
In continental Europe, trade union membership also declined significantly, showing a positive correlation between productivity growth a declining union membership although the continental European trade unions maintained a strong political power in collective bargaining as well as in economic policymaking. Not surprisingly, the output per capita gap between the U.S and Europe widened, starting in 1970s.
Wednesday, February 25, 2009
U.S, EUROPE AND RECESSION
Dan Mitchell wrote an article arguing against Obama's spending stiumulus (here and here). Meanwhile, major European economies are suffering from a deep recessionary downturn. German economy is expected to contract by 2.25 percent annually (link), which is the deepest decline in the postwar period. Across the channel, the British economy contracted by 1.5 percent in Q4 while the incoming data on investment, consumption expenditures and industrial output indicate that Britain's economy is unlikely to avert the recession and offset deflationary pressures. BoE has already cut the benchmark interest rate to 1 percent, creating a loop of liqudity trap and strengthening the length of the recovery.
Except for Switzerland and Ireland, European countries are unfamously known for an excessive public sector consuming as much as 50 percent of the GDP while empirical evidence, embodied in Rahn curve (link), show that growth-maximizing share of government in the GDP is less than 20 percent of the GDP. Excessive regulation of labor market and high tax wedge dash out the growth potential in European welfare states. Nevertheless, the deregulation of labor market and lower marginal tax rates on labor supply would ease the macroeconomic impact of the ongoing recession.
Except for Switzerland and Ireland, European countries are unfamously known for an excessive public sector consuming as much as 50 percent of the GDP while empirical evidence, embodied in Rahn curve (link), show that growth-maximizing share of government in the GDP is less than 20 percent of the GDP. Excessive regulation of labor market and high tax wedge dash out the growth potential in European welfare states. Nevertheless, the deregulation of labor market and lower marginal tax rates on labor supply would ease the macroeconomic impact of the ongoing recession.
Thursday, February 19, 2009
ANOTHER ATTACK ON TAX HAVENS
A campaign against tax havens has been launched by the British PM (link).
AN INSIGHT INTO ICELAND'S FINANCIAL CRISIS
Hannes Gisurarsson's opinion in the WSJ (link) summarized the timeline and details that flipped Icelandic economy into the financial crisis as well as the political turmoil in the country.
"Moreover, Mr. Oddsson is one of the few Icelanders who sounded the alarm bells before the crisis hit the island. At a breakfast meeting of the Icelandic Chamber of Commerce in November 2007 -- a year before the banking collapse -- the governor said: "Iceland is becoming uncomfortably beleaguered by foreign debt. At a time when the Icelandic government has rapidly reduced its debt and the Central Bank's foreign and domestic assets have increased dramatically, other foreign commitments [by private banks] have increased so much that the first two pale into insignificance in comparison. All can still go well, but we are surely at the outer limits of what we can sustain for the long term."
"Moreover, Mr. Oddsson is one of the few Icelanders who sounded the alarm bells before the crisis hit the island. At a breakfast meeting of the Icelandic Chamber of Commerce in November 2007 -- a year before the banking collapse -- the governor said: "Iceland is becoming uncomfortably beleaguered by foreign debt. At a time when the Icelandic government has rapidly reduced its debt and the Central Bank's foreign and domestic assets have increased dramatically, other foreign commitments [by private banks] have increased so much that the first two pale into insignificance in comparison. All can still go well, but we are surely at the outer limits of what we can sustain for the long term."
THE CURSE OF PUBLIC DEBT
John Steele Gordon wrote an article (link) about the history of U.S. national debt in the twilight of CBO's estimate of $1.2 trillion federal deficit before the stimulus package.
Monday, February 16, 2009
SLOVENIAN ECONOMY AND THE 2009 RECESSION
Bloomberg has published an article about the recessionary expectations in Slovenia (link). The article outlined concerns over a potential cooling of export demand and a decline in aggregate investment that could trigger a consecutive output decline or the rise in the rate of unemployment. Earlier, Slovenian Statistical Office reported a 17,5 percent decline in industrial output, 5,5 percentage points more than in earlier quarter. The greatest fear facing the Slovenian economy is an exogenous recessionary shock which is basically a decline in export demand as the Euroarea economy turmoiled a recessionary output decline (link). Germany, which remains Slovenia's largest trade partner, has already encountered the fastest GDP shrink since the last recession in 2001.
Although 93 percent of economists believe that tariffs and import quotas reduce general economic welfare (link), ideas to propel protectionism to cure the current economic downturn have recently been proposed. Slovenia is a small and open economy. The gains from free trade with the EU27, European Economic Area and European Free Trade Area have been huge as well as benefits from membership in the European Monetary Union. Following the accession of EU in 2004, robust output expansion was encountered and quarterly output growth rates varied from 3,3 percent in Q3 (2005) to 7,6 percent in Q1 (2007) although some economists noted that the economy will encounter a significant rise in unemployment after the EU accession due to the loss of exchange rate. Tolar/euro exchange rate parity has been problematic mostly because the Bank of Slovenia propelled currency depreciation as an attempt to cure the export industry from a declining competitiveness in regional and global markets. As the basics of monetary economics teach, the main effect of a discretionary currency depreciation is an increase in the rate of inflation which follows the rise in aggregate demand in the absence of productivity shocks that could ease the inflationary impact of currency depreciation. Openness and international trade is one of the main engines of economic growth. It is empirically evident that countries with free trade experience higher economic growth and greater welfare respectively.
The reason for a particularly mild extent of recessionary impact in Slovenia is the fact that there has not been a high-mark decline in consumption expenditure which could deteriorate the stability of output growth. However, the fears of ongoing recession have been highlighted by Gorenje, one of Slovenia's major export companies, which reports a 25 percent slump in demand in Eastern Europe. The company immediately demanded government aid (link).
As every student of introductory macroeconomics can tell, recessions are unavoidable while government interference can only extend the length and pain of the recession as it during the Great Depression of 1930s together with president Hoover's infamous increase of top marginal tax rates and disastrous Smooth-Hawley tariff raise. This year's economic downturn will hopefully crunch the old belief that Slovenian economy is immune to recessions. As I wroted in earlier posts, Slovenia's main ongoing macroeconomic challenge is to sustain stability and set the course of pro-growth policies to pursue stable and sustainable economic growth in the long-term perspective as well as to tackle the issue of aging population caused by PAYG pension system. Probably one of the best possible cures for the recession are productivity shocks. These shocks, such as R&D and innovation, increase the potential output and ease the impact of a rise in aggregate demand on possible inflation during output expansion or recession similar to oil shocks of 1970s. In the last two consecutive periods, Slovenian economy faced deflation.
The Slovenian government recently endorsed subsidies for companies to retain employees and avoid the possible layoff scenario. As an economist I have serious doubts whether the decision to launch subsidies is based on cost-benefit analysis. What subsidies of this kind create is a deadweight loss and diminishing productivity due to the problem of adverse selection caused by collective bargaining and a strong political power of unions. As the history of macroeconomic and financial crises teaches us, follow-up recessions are unavoidable while any kind of distortions levied on the economic activity only prolong the recession and decrease growth prospects in the future. Real convergence, sustainable long-run growth and catching-up to EU15 income per capita is the medium-term objective which could deteriorate if rigid regulation and government spending in the share of GDP increased.
Although 93 percent of economists believe that tariffs and import quotas reduce general economic welfare (link), ideas to propel protectionism to cure the current economic downturn have recently been proposed. Slovenia is a small and open economy. The gains from free trade with the EU27, European Economic Area and European Free Trade Area have been huge as well as benefits from membership in the European Monetary Union. Following the accession of EU in 2004, robust output expansion was encountered and quarterly output growth rates varied from 3,3 percent in Q3 (2005) to 7,6 percent in Q1 (2007) although some economists noted that the economy will encounter a significant rise in unemployment after the EU accession due to the loss of exchange rate. Tolar/euro exchange rate parity has been problematic mostly because the Bank of Slovenia propelled currency depreciation as an attempt to cure the export industry from a declining competitiveness in regional and global markets. As the basics of monetary economics teach, the main effect of a discretionary currency depreciation is an increase in the rate of inflation which follows the rise in aggregate demand in the absence of productivity shocks that could ease the inflationary impact of currency depreciation. Openness and international trade is one of the main engines of economic growth. It is empirically evident that countries with free trade experience higher economic growth and greater welfare respectively.
The reason for a particularly mild extent of recessionary impact in Slovenia is the fact that there has not been a high-mark decline in consumption expenditure which could deteriorate the stability of output growth. However, the fears of ongoing recession have been highlighted by Gorenje, one of Slovenia's major export companies, which reports a 25 percent slump in demand in Eastern Europe. The company immediately demanded government aid (link).
As every student of introductory macroeconomics can tell, recessions are unavoidable while government interference can only extend the length and pain of the recession as it during the Great Depression of 1930s together with president Hoover's infamous increase of top marginal tax rates and disastrous Smooth-Hawley tariff raise. This year's economic downturn will hopefully crunch the old belief that Slovenian economy is immune to recessions. As I wroted in earlier posts, Slovenia's main ongoing macroeconomic challenge is to sustain stability and set the course of pro-growth policies to pursue stable and sustainable economic growth in the long-term perspective as well as to tackle the issue of aging population caused by PAYG pension system. Probably one of the best possible cures for the recession are productivity shocks. These shocks, such as R&D and innovation, increase the potential output and ease the impact of a rise in aggregate demand on possible inflation during output expansion or recession similar to oil shocks of 1970s. In the last two consecutive periods, Slovenian economy faced deflation.
The Slovenian government recently endorsed subsidies for companies to retain employees and avoid the possible layoff scenario. As an economist I have serious doubts whether the decision to launch subsidies is based on cost-benefit analysis. What subsidies of this kind create is a deadweight loss and diminishing productivity due to the problem of adverse selection caused by collective bargaining and a strong political power of unions. As the history of macroeconomic and financial crises teaches us, follow-up recessions are unavoidable while any kind of distortions levied on the economic activity only prolong the recession and decrease growth prospects in the future. Real convergence, sustainable long-run growth and catching-up to EU15 income per capita is the medium-term objective which could deteriorate if rigid regulation and government spending in the share of GDP increased.
Wednesday, February 04, 2009
ECONOMIC FREEDOM IN 2009
WSJ and Heritage Foundation have released the annual 2009 Index of economic freedom (link). This year, countries with high score on economic freedom are Hong Kong, Singapore, Australia, Ireland, New Zealand, U.S and Canada. Out of the most developed transition countries, only Poland lacks behind Slovenia which improved this year's score by 2.7 basis points mostly due to marginal tax cuts, improved business conditions, reduction in corporate tax rate and a moderate improvement in the area of property rights protection. The overall standing (68th in the world and 30th out of 43 countries regionally) reflects Slovenia's high tax burden (top income tax rate is 41 percent which is more than 35 percent world average), high government spending (45.3 percent in 2008), stalled privatization and underdeveloped financial sector and inflexible labor market (link).
RUSSIA'S CREDIT RATING DOWNGRADED
Unsurprisingly, Fitch has slashed (link) Russia's credit rating to BBB, just two ranks above the junk grade. The main driver behind lower credit grade is a deteriorating shape of capital markets accelerated by a snip decline in commodity prices which, of course, left an open struggle for the financial sector to refinance the external debt which is a difficult task if the financial sector suffers from unstable macroeconomic environment with high and volatile inflation rate (14.1 percent in 2008) and possible exchange-rate overshooting.
GOOD NEWS FROM IRELAND
WSJ reports (link) that Ireland intends to curb public spending by €1.4 billion in response to widening budget deficit.
ASIA'S EMERGING ECONOMIES
The Economist discussed (link) the macroeconomic issues of emerging Asian economies.
"Asia has never before deployed its monetary and fiscal weapons with such force. Every country across the region has cut interest rates and announced a fiscal stimulus. In previous downturns, Asian governments were often constrained by dire public finances or the need to support currencies. But most countries entered this downturn with small budget deficits or even surpluses. All the main Asian emerging economies apart from India have relatively low ratios of public debt to GDP. Though the true size of the fiscal stimulus in some countries, notably China, is probably less than the headline-grabbing figures suggest, they are still impressive. After correcting for double counting and unrealistic measures, China, Singapore, South Korea and Taiwan will all enjoy a fiscal stimulus of at least 3% of GDP in 2009. China has signalled that more measures may follow over the next couple of months; it can certainly afford to spend more. On January 22nd, Singapore’s government announced a package of measures equivalent to 8% of GDP. For the first time, this will be financed partly by dipping into the government’s vast reserves...."
"Asia has never before deployed its monetary and fiscal weapons with such force. Every country across the region has cut interest rates and announced a fiscal stimulus. In previous downturns, Asian governments were often constrained by dire public finances or the need to support currencies. But most countries entered this downturn with small budget deficits or even surpluses. All the main Asian emerging economies apart from India have relatively low ratios of public debt to GDP. Though the true size of the fiscal stimulus in some countries, notably China, is probably less than the headline-grabbing figures suggest, they are still impressive. After correcting for double counting and unrealistic measures, China, Singapore, South Korea and Taiwan will all enjoy a fiscal stimulus of at least 3% of GDP in 2009. China has signalled that more measures may follow over the next couple of months; it can certainly afford to spend more. On January 22nd, Singapore’s government announced a package of measures equivalent to 8% of GDP. For the first time, this will be financed partly by dipping into the government’s vast reserves...."
Tuesday, February 03, 2009
ICELAND SOVEREIGN CREDIT REPORT
Moody has maintained Iceland's negative outlook on economic and financial crisis (link).
LESSONS FROM FINANCIAL CRISES
Carmen M. Reinhart and Kenneth Rogoff discussed the consequences of financial crises and the impact on output, prices and employment (link):
"Perhaps the most stunning message from crisis history is the simply staggering rise in government debt most countries experience. Central government debt tends to rise over 85% in real terms during the first three years after a banking crisis. This would mean another $8 trillion or $9 trillion in the case of the U.S. Interestingly, the main reason why debt explodes is not the much ballyhooed cost of bailing out the financial system, painful as that may be. Instead, the real culprit is the inevitable collapse of tax revenues that comes as countries sink into deep and prolonged recession. Aggressive countercyclical fiscal policies also play a role, as we are about to witness in spades here in the U.S. with the passage of a more than $800 billion stimulus bill."
UNIONS AND UNEMPLOYMENT
After an intensive debate about fiscal stimulus that would be utilized to cure the recessionary downturn of the current year, there is a wide debate whether President Obama would extend the role of unions in the U.S. While President Obama agreeably supports the extension of the role of labor unions (link), there are several doubts that need to be discussed.
First, there is a significant panel of empirical evidence showing that high level of unionzation tarnishes the growth of potential productivity which is essential to the long-term increase in the standard of living. In countries of the Continental Europe such as Austria, Germany and France, there is an obvious and firm evidence showing strongly negative correlation between the level of unionization and the rate of unemployment. The cost of unionzation is usually beared by grimmy prospects of future youth employment. Data provided by Eurostat (link) fosters the hypothesis that a somewhat negative correlation between unionization and employment rate exists. On the other hand, in Anglo-Saxon countries, where labor markets are more flexible and elastic, the rate of unionization is lower than in Norway, Sweden and Netherlands and the rate of unemployment is lower in all age groups. The difference can be explained by the fact that in Continental and Nordic countries, government fosters the bargaining network between government, employer associations and trade unions while there is significantly less government engineering of labor market in Anglo-Saxon countries such as the U.S., Canada and the UK. The OECD data (link) on hourly earnings are a strong evidence respectively.
Second, the bargaining framework of union negotiation depends on the elasticity of labor supply. If the labor supply curve is more inelastic, it is also more likely that unions will gain an advantage in seeking an anticipated rent and regulate the market for particular professions by restricting the entry and raising the wage ceiling. If unions bargain the rent, lower rate of employment will be an inevitable result of this act.
And third, president Obama says that "you cannot have a strong middle class without a strong labor movement." Unionization is indeed the long-term consequence of higher unemployment because higher union wages exceed competitive market wage rates which causes job losses and unemployment which is higher than hypothetical one. Larry Summers nicely outlined the consequences of unionization regarding welfare, employment and wages (link). It is also important to know the union membership has been declining. The union power of United Auto Workers in the U.S auto manufacturing industry is significant and it also contributes to the bailout problem given high labor cost. Since 1970s, the membership of UAW declined by more than one third. Consequently, foreign investors rather located the production activity in non-union plants in Southern U.S. Recently, professor Becker discussed the issue and perspectives of union membership (link). However, it should be noted that globalization and the rising mobility of labor has been slashing the bargaining power of unions significantly. Interestingly, union membership peaked in 1954 when it reached 28 percent of total employment and has had declined ever since with no reversal after president Reagan won the battle with PATCO (link).
Even though, president Obama's pro-union efforts may reverse the union membership trend, globalization and competitive regional and global labor markets will nonetheless diminish the power of domestic unions. While, in fact, there is no doubt that the long-term cost of unionization is higher rate of unemployment and employment rigidity that gives more economic power to the unions and derails productivity growth and freedom to choose.
First, there is a significant panel of empirical evidence showing that high level of unionzation tarnishes the growth of potential productivity which is essential to the long-term increase in the standard of living. In countries of the Continental Europe such as Austria, Germany and France, there is an obvious and firm evidence showing strongly negative correlation between the level of unionization and the rate of unemployment. The cost of unionzation is usually beared by grimmy prospects of future youth employment. Data provided by Eurostat (link) fosters the hypothesis that a somewhat negative correlation between unionization and employment rate exists. On the other hand, in Anglo-Saxon countries, where labor markets are more flexible and elastic, the rate of unionization is lower than in Norway, Sweden and Netherlands and the rate of unemployment is lower in all age groups. The difference can be explained by the fact that in Continental and Nordic countries, government fosters the bargaining network between government, employer associations and trade unions while there is significantly less government engineering of labor market in Anglo-Saxon countries such as the U.S., Canada and the UK. The OECD data (link) on hourly earnings are a strong evidence respectively.
Second, the bargaining framework of union negotiation depends on the elasticity of labor supply. If the labor supply curve is more inelastic, it is also more likely that unions will gain an advantage in seeking an anticipated rent and regulate the market for particular professions by restricting the entry and raising the wage ceiling. If unions bargain the rent, lower rate of employment will be an inevitable result of this act.
And third, president Obama says that "you cannot have a strong middle class without a strong labor movement." Unionization is indeed the long-term consequence of higher unemployment because higher union wages exceed competitive market wage rates which causes job losses and unemployment which is higher than hypothetical one. Larry Summers nicely outlined the consequences of unionization regarding welfare, employment and wages (link). It is also important to know the union membership has been declining. The union power of United Auto Workers in the U.S auto manufacturing industry is significant and it also contributes to the bailout problem given high labor cost. Since 1970s, the membership of UAW declined by more than one third. Consequently, foreign investors rather located the production activity in non-union plants in Southern U.S. Recently, professor Becker discussed the issue and perspectives of union membership (link). However, it should be noted that globalization and the rising mobility of labor has been slashing the bargaining power of unions significantly. Interestingly, union membership peaked in 1954 when it reached 28 percent of total employment and has had declined ever since with no reversal after president Reagan won the battle with PATCO (link).
Even though, president Obama's pro-union efforts may reverse the union membership trend, globalization and competitive regional and global labor markets will nonetheless diminish the power of domestic unions. While, in fact, there is no doubt that the long-term cost of unionization is higher rate of unemployment and employment rigidity that gives more economic power to the unions and derails productivity growth and freedom to choose.
Friday, January 23, 2009
THE MYTH OF GOVERNMENT SPENDING MULTIPLIER
Robert Barro makes (link) a strong case on why Keynesian spending multiplier is a theoretical illusion resulted from the fact that government purchases can be hardly separated from real fluctuations.
Monday, January 05, 2009
THE MOST EDUCATED TOWNS IN THE U.S
Here (link) is an interesting research conducted by Forbes. It is the list and specific charateristics of the most educated towns in the U.S.
Sunday, January 04, 2009
OIL SHOCKS AND RECESSION 2008
SLOVAKIA ADOPTS EURO
On January 1, 2009, Slovakia left ERM II and became the 16th country of the eurozone (here and here). While fiscal consolidation has been sustained through capped deficit spending, inflationary pressures have been normalized due to substantial currency appreciation which also capped import prices. Reviewing data and macroeconomic forecast (here, here and here), output growth is expected to outperform the average of the Euroarea. Until 2013, output is expected to grow at an annual 5 percent rate. Robust output growth is partly due to continuing real convergence in output per capita and partly as a result of koruna appreciation and inflow of foreign direct investment. However, it will be interesting to observe inflationary pressures over the medium term. It is also essential for policymakers to capture fiscal surplus and set medium-term public spending cap. Nonetheless, competitive labor market is required to soften the inflationary pressures which could deteriorate in case of expansionary monetary policy while output gap is expected to close until 2010 despite robust short-term fluctuations.
Thursday, December 18, 2008
FLAT TAX IN BELARUS
Belarus is another Eastern European economy joining the flat tax club. The Ministry of Finance has proposed the shift from progressive tax system (with 35 percent top tax rate) to 12 percent flat tax rate. Recently, Financial Times discussed (link) the state of Belarussian economy, focusing essentially on liberalization prospects, tax reform and regulatory reform. According to WB's Doing Business, Belarus's business climate is more favorable after liberalization efforts were endorsed (link).
RUSSIA'S ECONOMIC OUTLOOK
The Economist (link) has nicely discussed Russia's medium term macroeconomic outlook, focusing on energy prices, rubel's depreciation, inflation outlook and growth performance.
Wednesday, December 03, 2008
SLOVENIA'S ECONOMIC OUTLOOK IN 2009
As a candidate country, Slovenia has been under a detailed observation by the OECD, particulary in areas regarding macroeconomic outlook such as the stability of public finance, fiscal prudence and growth prospects in the short, medium and the long run. Recently, OECD published a preliminary edition of Slovenia's economic outlook in 2009 (link). As expected by estimates and short-term projections, output growth in 2009 will narrowly decline from this year's 4,8 percent to 2,1 percent. A detailed decomposition of growth contributions can be seen here.
Aside from curious structural analysis of the Slovene economy, this year has been accompanied by a turn in the election with center-left government being in charge of forming new coalition. Expectedly, the set of economic policies by the Ministry of Finance is fashioned in the light of this year's financial crisis and a lot of media attention has been devoted to the recovery from the financial crisis.
This year's financial crisis has affected the Slovene stock market. The annual return from SBITOP, Slovene blue-chip index, is -63,12 percent. The rate of return from SBI20, Slovene main stock market, hit -64,36 percent. The collapse of Lehman Brothers where the banking sector has put portfolio investment and mostly the stock market slump in the U.S, Asia and Europe has affected the Slovene economy respectively. Nonetheless, rachitic and inherent problems of the Slovene stock market are not a result of an integration with world capital markets but a harsh consequence of the prevailing insider trading and relative underdeveloped of Slovenia's capital market. The political opposition to the privatization of NKBM, Slovenia's second largest bank, resulted in a rapid decline in the rate of return of NKBM. From January to December, the share of NBKM yielded -73,48 percent respectively. While the correlation between annual yield trends for each enlisted share is very high for the entire SBI20 and SBITOP, the main structural weakness of the Slovene stock market is that stock prices have been heavily overrated as measured by the P/E ratio (link), reflecting the asymmetry of insider information with respect to the evaluation of share prices.
Macroeconomic outlook in 2009 is less favorable due to external shocks that would curb output activity and consequently restrain investment as well. The slowing of investment activity in construction sector, which contributed 1,7 percentage points to output growth in 2007, may curb output growth from medium-term trend line. While decreasing commodity prices boosted deflationary pressures in Q3, inflationary outlook, given ECB's accomodative monetary policy, will crucially depend on the nature of fiscal policy. A decrease in government spending or at least a neutral stance of fiscal policy is essential to the containment of inflationary pressures. Nonetheless, it is crucial to neutralize wage pressures that could boost the inflationary pressures and hinder macroeconomic stability.
Aside from curious structural analysis of the Slovene economy, this year has been accompanied by a turn in the election with center-left government being in charge of forming new coalition. Expectedly, the set of economic policies by the Ministry of Finance is fashioned in the light of this year's financial crisis and a lot of media attention has been devoted to the recovery from the financial crisis.
This year's financial crisis has affected the Slovene stock market. The annual return from SBITOP, Slovene blue-chip index, is -63,12 percent. The rate of return from SBI20, Slovene main stock market, hit -64,36 percent. The collapse of Lehman Brothers where the banking sector has put portfolio investment and mostly the stock market slump in the U.S, Asia and Europe has affected the Slovene economy respectively. Nonetheless, rachitic and inherent problems of the Slovene stock market are not a result of an integration with world capital markets but a harsh consequence of the prevailing insider trading and relative underdeveloped of Slovenia's capital market. The political opposition to the privatization of NKBM, Slovenia's second largest bank, resulted in a rapid decline in the rate of return of NKBM. From January to December, the share of NBKM yielded -73,48 percent respectively. While the correlation between annual yield trends for each enlisted share is very high for the entire SBI20 and SBITOP, the main structural weakness of the Slovene stock market is that stock prices have been heavily overrated as measured by the P/E ratio (link), reflecting the asymmetry of insider information with respect to the evaluation of share prices.
Macroeconomic outlook in 2009 is less favorable due to external shocks that would curb output activity and consequently restrain investment as well. The slowing of investment activity in construction sector, which contributed 1,7 percentage points to output growth in 2007, may curb output growth from medium-term trend line. While decreasing commodity prices boosted deflationary pressures in Q3, inflationary outlook, given ECB's accomodative monetary policy, will crucially depend on the nature of fiscal policy. A decrease in government spending or at least a neutral stance of fiscal policy is essential to the containment of inflationary pressures. Nonetheless, it is crucial to neutralize wage pressures that could boost the inflationary pressures and hinder macroeconomic stability.
Sunday, November 23, 2008
Friday, November 21, 2008
THE WORLD IN 2009 IN FIGURES
The Economist designed an interactive mapping with data, factsheet and forecast for 80 countries in the world (link).
INCOME TAX RATES ARE FALLING, BUT NOT IN SLOVENIA
SAVE TAXPAYERS BY DROPPING THE BAILOUT
IS KEYNES REALLY BACK?
Amity Shlaes nicely outlined (link) the upcoming return of Keynesian economic policy initiated by efforts to boost consumer spending despite the empirical evidence about the lifetime path of consumption pattern. While president Obama has a very smart and knowledgeable team of economic advisers such as Jason Furman, David Cutler and Jeff Liebman, he opposed free-trade agreements with South Korea and Columbia, while he supported the proposal to raise tariffs on Chinese goods in case Chinese government would not allow yuan to appreciate relative to the U.S dollar. There is an overwhelming evidence that an increase in government spending negatively affects output, employment and productivity while proposals to extend health care benefits over the boundaries of tax scheme are a worrying threat to growth and stability of the U.S economy and the overall fiscal stance of the United States.
WILL DEFLATION RESURGE?
Fed chairman says (link) deflation might resurge as a worrying threat to the U.S economy.
Friday, November 14, 2008
WHAT TO DO ABOUT HOUSING MARKET?
Allan Meltzer suggests an increase in demand for housing as a way to prevent mortgage defaults.
Friday, November 07, 2008
GLAESER ON EDUCATION
Ed Glaeser of Harvard University provides a detailed insight on the importance of human capital for economic growth (link):
"Schools can also attract more talent with an environment that welcomes talented outsiders instead of erecting bureaucratic barriers that prevent their success. The literature on teacher certification finds few benefits from that hurdle. By contrast, Teach for America has achieved remarkable results by putting capable young people, often with little formal training as teachers, in classrooms. The experience illustrates that it isn't easy to assess teacher quality with standard teaching credentials. If attracting a wave of good people into teaching is the first step, the second step is keeping the best teachers and redirecting the rest. Performance in the classroom is the best way to know if a teacher is a success. Teacher promotion and tenure needs to be based on clear performance measures, including student test scores. Perhaps teachers unions could start endorsing the use of test scores to evaluate their members and determine tenure."
"Schools can also attract more talent with an environment that welcomes talented outsiders instead of erecting bureaucratic barriers that prevent their success. The literature on teacher certification finds few benefits from that hurdle. By contrast, Teach for America has achieved remarkable results by putting capable young people, often with little formal training as teachers, in classrooms. The experience illustrates that it isn't easy to assess teacher quality with standard teaching credentials. If attracting a wave of good people into teaching is the first step, the second step is keeping the best teachers and redirecting the rest. Performance in the classroom is the best way to know if a teacher is a success. Teacher promotion and tenure needs to be based on clear performance measures, including student test scores. Perhaps teachers unions could start endorsing the use of test scores to evaluate their members and determine tenure."
Thursday, October 30, 2008
DEFLATION SPREAD?
Nouriel Roubini writes that deflation is likely to spread through the global economy (link).
Tuesday, October 28, 2008
HARVARD ECONOMISTS ON FINANCIAL CRISIS
FED'S LIQUIDITY TRAP?
FT reports that Fed is likely to endorse a further interest rate cut (link):
"The Federal Reserve will probably end up cutting interest rates by as much as 50 basis points by the end of its policy meeting on Wednesday, but it will do so without any great conviction.
Senior policymakers do not think that reducing the federal funds rate from its already low level of 1.5 per cent will have a big effect on financial markets or the US economy..."
"The Federal Reserve will probably end up cutting interest rates by as much as 50 basis points by the end of its policy meeting on Wednesday, but it will do so without any great conviction.
Senior policymakers do not think that reducing the federal funds rate from its already low level of 1.5 per cent will have a big effect on financial markets or the US economy..."
CHILLY NEWS FROM ICELAND
Iceland's central bank lifted the key interest rate to 18 percent from 12 percent after Icelandic krona lost 70 percent during this crisis (link). Secondly, Iceland's GDP is expected to contract by up to 10 percent, unemployment is expected to reach 8 percent or higher while inflation rate could hit as much as 20 percent. In fact, IMF recently predicted the rise in the inflation rate to 11,2 percent. Here (link) is a brief outline of Iceland's state of the economy, analyzing the macroeconomic background of country's current crisis as well as rapid expansion in the latter decade.
Wednesday, October 22, 2008
ARGENTINA'S STATIST SEIZURE OF PRIVATE PENSION FUNDS
Bloomberg reports that Argentina's president has announced a seizure of $29 billion of private pension funds (link).
Monday, October 20, 2008
ICELAND'S ECONOMY
The Economist has published an interesting insight into Iceland's recent economic crisis (link):
"Iceland has been growing smartly in recent years. The country has low unemployment and income per person is somewhat above the average in the European Union. Huge investments in green energy and aluminium smelting have drawn inflows of foreign investment and promise to underpin exports for years to come. But on these sound foundations, Iceland has also built a financial house of cards. The country’s three largest banks have expanded headlong abroad since two of them were privatised in 2003, amassing assets of about €125 billion ($180 billion) by the end of 2007, compared with an economy of just €14.5 billion. Many of these assets were funded by lenders in fickle wholesale markets. In early 2006 less than 30 cents in every loan issued was backed by deposits. Iceland’s households also racked up debts amounting to 213% of disposable income. Britons and Americans owed just 169% and 140% of disposable income respectively—figures that make them seem almost sober by comparison."
"Iceland has been growing smartly in recent years. The country has low unemployment and income per person is somewhat above the average in the European Union. Huge investments in green energy and aluminium smelting have drawn inflows of foreign investment and promise to underpin exports for years to come. But on these sound foundations, Iceland has also built a financial house of cards. The country’s three largest banks have expanded headlong abroad since two of them were privatised in 2003, amassing assets of about €125 billion ($180 billion) by the end of 2007, compared with an economy of just €14.5 billion. Many of these assets were funded by lenders in fickle wholesale markets. In early 2006 less than 30 cents in every loan issued was backed by deposits. Iceland’s households also racked up debts amounting to 213% of disposable income. Britons and Americans owed just 169% and 140% of disposable income respectively—figures that make them seem almost sober by comparison."
ICELAND'S RESCUE PACKAGE
Icelandic government announced $6 bn rescue package to stabilize the economy (link) after an increase in government debt which is expected to reach as much as 100 percent of the GDP. Here is some interesting insights into financial crisis in Iceland (link). Meanwhile, Fitch downgraded Iceland's long-term foreign currency rating to BBB- and long term IDR (issuer default rating) to A- (link). Here is also a brief factsheet of Iceland's economic indicators in this year's September (link). IMF's official inflation and output estimate for Iceland suggest output decline and inflation surge in 2009 (link).
INTERVIEW WITH ANNA SCHWARTZ
Wednesday, October 15, 2008
NOBEL PRIZE IN ECONOMICS 2008
The Nobel laureate in economics in 2008 is Paul Krugman (here):
"IT WAS widely expected that Paul Krugman, who won the the 2008 Nobel prize for economics on Monday October 13th, would claim the award one day. In 1991 he had received the John Bates Clark medal for the best young economist, which is widely seen as a stepping stone to a Nobel award. What is more of a surprise is that he was honoured rather sooner in his life than many other winners. Like most Nobel laureates in economics, Mr Krugman was recognised for research undertaken early in his career—in this case for his pioneering work on modelling trade between countries whose firms grow more profitable the bigger they become. At 55, he is only four years older than the youngest ever winner, Kenneth Arrow, who was 51 when he won in 1972. But he is a fresh-faced youngster in comparison with Leonid Hurwicz, one of last year’s winners, who was 90 when he shared the prize."
"IT WAS widely expected that Paul Krugman, who won the the 2008 Nobel prize for economics on Monday October 13th, would claim the award one day. In 1991 he had received the John Bates Clark medal for the best young economist, which is widely seen as a stepping stone to a Nobel award. What is more of a surprise is that he was honoured rather sooner in his life than many other winners. Like most Nobel laureates in economics, Mr Krugman was recognised for research undertaken early in his career—in this case for his pioneering work on modelling trade between countries whose firms grow more profitable the bigger they become. At 55, he is only four years older than the youngest ever winner, Kenneth Arrow, who was 51 when he won in 1972. But he is a fresh-faced youngster in comparison with Leonid Hurwicz, one of last year’s winners, who was 90 when he shared the prize."
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