Tag: economics

Closing the work gap

Be careful what you wish for. The top ten countries with the lowest male-female labor force participation gaps:

  1. Togo
  2. Rwanda
  3. Burundi
  4. Tanzania
  5. Congo
  6. Laos
  7. Myanmar
  8. Sierra Leone
  9. Malawi
  10. Uganda

This suggests advocates might like to do well to reconsider whether closing the wage gap is truly an objective worth pursuing.

“Gee, Jane, isn’t it swell that we both make exactly the same wages now?”

“Well, Bob, as you know, it’s tough to make it on five cents per day.”

“But we have this lovely mud hut! And each other!”

“Yeah, about that, Bob. Human Resources told me that all monoracial heterosex is rape. So I’m going to need you to move out. Shaneeqwa from Marketing is moving in, and, by the way, Payroll is going to send three cents of your daily wages to me starting tomorrow.

No income growth in two decades

Despite two stock market booms, there has been no real income growth since 1994:

Real Median Household Income Has Been Flat for 20 YearsDespite ultra-loose monetary policies over the past several years,
incomes adjusted for inflation have fallen for the median U.S. family.
With the benefits of monetary expansion going to a small share of the
population and wage growth stagnating, incomes have been essentially
flat over the past 20 years. In the long run, however, classical economics would tell us that the
pricing distortions created by the current global regimes of QE will
lead to a suboptimal allocation of capital and investment, which will
result in lower output and lower standards of living over time. In fact,
although U.S. equity prices are setting record highs, real median
household incomes are 9 percent lower than 1999 highs. The report from
Bank of America Merrill Lynch plainly supports the conclusion that QE
and the associated currency depreciation is not leading to higher global
output. The cost of QE is greater than the income lost to savers and
investors. The long-term consequence of the new monetary orthodoxy is
likely to permanently impair living standards for generations to come
while creating a false illusion of reviving prosperity.

Karl Denninger was among the first to point out that even if it worked, Quantitative Easing could not possibly do what was claimed of it. Thus demonstrating what I pointed out, which is that it was merely about buying more time for the bankers to make hay before the eventual crash of the global economy. We’re already seeing signs of the wars that conventionally accompany depressions, and depending upon your definition of depression, we’re only six years into this thing.

The inequality of austerity

For all the talk about the “idle poor” and lazy Greeks, let’s not forget that corporate welfare to the “idle rich” and politically connected Greeks is often rather substantial. That’s not just a left-wing talking point, in this age of banking bailouts, the subsidies to the very rich may actually exceed those to the overtly government dependent. It’s clear that the burden imposed by the IMF is not falling, like the rain, on the rich and poor alike.

Greece’s unbalanced austerity and drastic increase of poverty. The poorest households in the debt-ridden country lost nearly 86% of their income, while the richest lost only 17-20%.  The tax burden on the poor increased by 337% while the burden on upper-income classes increased by only 9% !!! This is the result of a study that has analyzed 260.000 tax and income data from the years 2008 – 2012.

According to the study commissioned by the German Institute for Macroeconomic Research (IMK) affiliated with the Hans Böckler Foundation:

– The nominal gross income of Greek households decreased by almost a quarter in only four years.

– The wages cuts caused nearly half of the decline.

– The net income fell further by almost 9 percent, because the tax burden was significantly increased

When you see statistics like that, you sort of assume that there will be some sort of revolution taking place, and frankly, it would be hard to blame them. Crony “capitalism” of the sort we’ve seen dominate the Western economies since 2008 is not something that any genuine capitalist should support.

Taleb corrects Pinker

He observes that Pinker has been fooled by randomness and The “Long Peace” is a Statistical Illusion:

When I finished writing The Black Swan, in 2006, I was confronted with ideas of “great moderation”, by people who did not realize that the process was getting fatter and fatter tails (from operational and financial, leverage, complexity, interdependence, etc.), meaning fewer but deeper departures from the mean. The fact that nuclear bombs explode less often that regular shells does not make them safer. Needless to say that with the arrival of the events of 2008, I did not have to explain myself too much. Nevertheless people in economics are still using the methods that led to the “great moderation” narrative, and Bernanke, the protagonist of the theory, had his mandate renewed.

Now to my horror I saw an identical theory of great moderation produced by Steven Pinker with the same naive statistically derived discussions (>700 pages of them!).

  1. I agree that diabetes is a bigger risk than murder –we are victims of sensationalism. But our suckerdom for overblown narratives of violence does not imply that the risks of large scale violent shocks have declined. (The same as in economics, people’s mapping of risks are out of sync and they underestimate large deviations). We are just bad at evaluating risks. 
  2. Pinker conflates nonscalable Mediocristan (death from encounters with simple weapons) with scalable Extremistan (death from heavy shells and nuclear weapons). The two have markedly distinct statistical properties. Yet he uses statistics of one to make inferences about the other. And the book does not realize the core difference between scalable/nonscalable (although he tried to define powerlaws). He claims that crime has dropped, which does not mean anything concerning casualties from violent conflict.
  3. Another way to see the conflation, Pinker works with a times series process without dealing with the notion of temporal homogeneity. Ancestral man had no nuclear weapons, so it is downright foolish to assume the statistics of conflicts in the 14th century can apply to the 21st. A mean person with a stick is categorically different from a mean person with a nuclear weapon, so the emphasis should be on the weapon and not exclusively on the psychological makup of the person.
  4. The statistical discussions are disturbingly amateurish, which would not be a problem except that the point of his book is statistical. Pinker misdefines fat tails by talking about probability not contribution of rare events to the higher moments; he somehow himself accepts powerlaws, with low exponents, but he does not connect the dots that, if true, statistics can allow no claim about the mean of the process. Further, he assumes that data reveals its properties without inferential errors. He talks about the process switching from 80/20 to 80/02, when the first has a tail exponent of 1.16, and the other 1.06, meaning they are statistically indistinguishable. (Errors in computation of tail exponents are at least .6, so this discussion is noise, and as shown in [1], [2], it is lower than 1. (It is an error to talk 80/20 and derive the statistics of cumulative contributions from samples rather than fit exponents; an 80/20 style statement is interpolative from the existing sample, hence biased to clip the tail, while exponents extrapolate.)
  5. He completely misses the survivorship biases (which I called the Casanova effect) that make an observation by an observer whose survival depends on the observation invalid probabilistically, or to the least, biased favorably. Had a nuclear event taken place Signor Pinker would not have been able to write the book.
  6. He calls John Gray’s critique “anecdotal”, yet it is more powerful statistically (argument of via negativa) than his >700 pages of pseudostats.
  7. Psychologically, he complains about the lurid leading people to make inferences about the state of the system, yet he uses lurid arguments to make his point.
  8. You can look at the data he presents and actually see a rise in war effects, comparing pre-1914 to post 1914.
  9. Recursing a Bit (Point added Nov 8): Had a book proclaiming The Long Peace been published in 1913-1934 it would carry similar arguments to those in Pinker’s book.

Taleb is using a different means to reach much the same conclusions I have. Again. Pinker is essentially applying the same “This Time It’s Different” argument to violence that the mainstream economists applied to the dot com bubble, the housing boom, and the post-2008 “recovery”.

Simplistic thinkers inevitably think in linear terms. They assume tomorrow will be like today because today was pretty much like yesterday. Both those who know history and those who understand probability understand that at some point in time, this will no longer be the case.

History is rife with long periods of peace and tranquility. Those are quite often the sections missing from the history books, because there was nothing much that was noteworthy to record. But human nature being what it is, sooner or later events always becoming more exciting, which usually means more bloody.

It’s not hard to understand why there are fewer wars these days. Nuclear weapons have put an end to the post-French Revolutionary progress towards Ludendorffian total war. But that doesn’t mean they will never be used or that Man will not find other means to fight cataclysmic wars. It’s rather remarkable that anyone would make such abysmally stupid claims about the prospects for the continuation of the “Long Peace” when the USA is moving rapidly towards ethnic civil war, Europe is preparing for extreme ethnic cleansing, and the Dar al-Islam is in the process of uniting under a new and aggressive Caliphate even as the USA attempts to instigate war with Russia.

Assuring mutual destruction

The “bad bank” concept only appears to have delayed the inevitable default, not prevented it:

It was the failure of Creditanstalt, a Viennese bank founded in 1855 by Anselm von Rothschild, that arguably sparked the Great Depression, setting off an unstoppable chain reaction of bankruptcies throughout Europe and America.

No-one would think that what happened last week at Austria’s failed Hypo Alpe-Adria Bank International falls into quite the same category; we are meant to be in the recovery phase of the latest global banking crisis, so this is more about re-setting the system than again bringing it to its knees, right?

Well, make up your own mind. I suspect neither financial markets nor policymakers have yet caught onto the full significance of the latest turn of events.

In a nutshell, the Austrian government has had enough of funding the bank’s losses, and announced plans to “bail-in” external creditors to the tune of €7.6bn instead. As such, this marks a test case of new European rules to make creditors pay for failing banks. About time too, you might say. What took them so long?

Only in this case, the bonds are notionally guaranteed by the Austrian state of Carinthia, which now theoretically becomes liable for the bail-in. It’s an echo of the mess Ireland got itself into at the height of the banking crisis, when it foolishly attempted to stem the panic by underwriting all Irish banking liabilities; the move very nearly ended up bankrupting the entire country. Hypo will bankrupt Carinthia.

What the central bankers and politicians are doing is trading risk for time. I, and other economic realists, have been repeatedly wrong about the timing of events; I thought both Greece and Ireland would go bankrupt by 2013. But the fact that the defaults have not begun yet does not mean that the crisis is over, in fact, it does not even mean that the crisis is less serious than before. Quite the opposite, actually.

While I understand if those who don’t pay much attention to international economics might simply assume at this point that I don’t know what I’m talking about because things don’t seem to necessarily be all that bad, it might be helpful to keep in mind that the current situation is unprecedented.

For example, in most previous historical situations, Austria’s Hypo Bank would have gone bankrupt back in 2009. Instead, it was nationalized and put Austrian taxpayers on the hook for up to $25 billion.  The assets were divided and a “bad bank” created, but now that bad bank is in such dire straits that the Austrian government isn’t willing to continue funding its ongoing operational losses. But instead of simply declaring it bankrupt, they have put the assets of the equivalent of a U.S. state behind it.

This may buy them as much as another five years. But it also assures the financial destruction of an entire region of the country. What the banks have successfully done is create a system of mutually-assured destruction, gambling that electorates would rather let them off the hook than risk their governments defaulting, with all the turmoil that would subsequently ensue.

Therein lies the problem

Zerohedge reports on a world engulfed in debt:

If anyone has stopped to ask just why global central banks are in such a rush to create inflation (but only controlled inflation, not runaway hyperinflation… of course when they fail with the “controlled” part the money paradrop is only a matter of time) over the past 5 years, and have printed over $12 trillion in credit-money since Lehman, the bulk of which has ended up in the stock market, and which for the first time ever are about to monetize all global sovereign debt issuance in 2015, the answer is simple, and can be seen on the chart below.

It also shows the biggest problem facing the world today, namely that at least 9 countries have debt/GDP above 300%, and that a whopping 39% countries have debt-to-GDP of over 100%!

The problem with this can be seen in one of the famous Reinhart-Rogoff papers, Growth in a Time of Debt:

Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. 

And before you cite the well-known Excel error, that changes nothing substantive. The core cause of the global depression is becoming increasingly obvious to everyone. The root of the problem, as I have been pointing out since about 2002, is that in a credit money system, the central banks cannot print borrowers.

This means their obvious next step will be the usual attempt to move the problem up a level by centralizing internationally and pushing for a global currency that will automatically devalue the currencies being replaced by a factor that will reduce debt/GDP below 90 percent.

This time it’s different again

No matter how many times they are wrong, stock market watchers are just going to keep throwing out the same old line out, looking to catch the little fishies.

The Nasdaq is rapidly approaching the 5,000 level and is less than 4% away from all-time highs that were set 15 years ago. These landmark levels are bringing back bad memories of the late 1990s, when people went crazy over money-losing tech stocks (and bad pop songs). The good times ended when the bubble popped in March 2000, causing huge losses for investors and making many tech companies to disappear.

All of this begs the question: Does the fact that Nasdaq has joined peers like the Dow in record territory signal another bubble is brewing in tech stocks?

No, this tech party doesn’t appear destined to end in tears. That’s because today’s tech stocks look all grown up. They’re more fundamentally sound than their 1999 peers, and their valuations are based on something the dotcom stocks of the past never had: real earnings.

“There’s no bubble when it comes to technology stocks,” said Scott Kessler, head of technology equity research at S&P Capital IQ.

Counterpoint: Twitter is valued at $31 billion. Facebook is valued at $223 billion. And the world is rapidly plunging into war from the Middle East to Eastern Europe.

Banking is bad for the economy

It’s amazing that people are talking about how excessive finance and credit money warp the economy to its detriment without ever managing to mention the vital Austrian concept of “malinvestment”. But at least they are starting to talk about it, as it will lead them there eventually.

A new study from the Bank for International Settlements (the central bankers’ central bank, as it is dubbed) shows exactly why rapid finance sector growth is bad for the rest of the economy.

The study, by Stephen Cecchetti and Enisse Kharroubi, is a follow-up to a 2012 paper which outlined the negative link between the finance sector and growth, after a certain point. When an economy is immature and the financial sector is small, then growth of the sector is helpful. Enterprising businessmen can get the capital they need to expand their companies; savers have a secure home for their money, making them more willing to provide finance to the business sector; and so on.

But you can have too much of a good thing. The 2012 paper suggests that when private sector debt passes 100% of GDP, that point is reached. Another way of looking at the same topic is the proportion of workers employed by the finance sector. Once that proportion passes 3.9%, the effect on productivity growth turns negative. Ireland and Spain are cases in point. During the five years beginning 2005, Irish and Spanish financial sector employment grew at an average annual rate of 4.1% and 1.4% respectively; output per worker fell by 2.7% and 1.4% a year over the same period.

The new paper examines why this might be. One part of the thesis is a familiar complaint, neatly summarised in the 2012 paper

people who might have become scientists, who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers

In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral to pledge.

I’m reading the paper now, and will review it once I’ve finished digesting it.

Detonating the EU

Greek has their finger on a bigger trigger than most people realize:

The political detonating pin for Greek contagion in Europe is an obscure mechanism used by the eurozone’s nexus of central banks to settle accounts. If Greece is forced out of the euro in acrimonious circumstances – a 50/50 risk given the continued refusal of the creditor core to acknowledge their own guilt and strategic errors – the country will not only default on its EMU rescue packages, but also on its “Target2” liabilities to the European Central Bank.

In normal times, Target2 adjustments are routine and self-correcting. They occur automatically as money is shifted around the currency bloc. The US Federal Reserve has a similar internal system to square books across regions. They turn nuclear if monetary union breaks up.

The Target2 “debts” owed by Greece’s central bank to the ECB jumped to €49bn in December as capital flight accelerated on fears of a Syriza victory. They may have reached €65bn or €70bn by now….

The Eurogroup insists that the primary budget surplus be raised from 1.5pc of
GDP in 2014, to 3pc this year and 4.5pc next year. As Nobel economist Paul
Krugman says, they want to force a country that is already reeling from six
years of depression – with the jobless rate still near 50pc – to triple its
surplus for no other purpose than paying off foreign creditors for decades
to come. They are doing to Greece what the Western allies did to a defeated
Germany at Versailles in 1919: imposing unpayable and mutually-destructive
reparations on a prostrate nation.

Combined with the fact that ISIS is planning to flood southern Italy with “immigrant” invaders, it becomes readily apparent that the EU may not last another eight years. The difference between 1933 and 2023 is that the enemy is no longer defined as other Europeans, but Islamic and African invaders.

Italians are already demanding that the Italian navy start sinking boats coming across the Mediterranean and attacking refugee holding centers. The Spanish are looking at the Greek situation and wondering why they should not do the same. The Front National is rising quickly in France; the rise of PEGIDA has been arrested but it will resume soon enough, along with support for AfD once the news of Germany being on the hook for up to €515 billion penetrates the electorate.

No wonder Juncker, the unelected Head of the European Commission has turned openly anti-democratic. But he is as delusional as Hitler in the bunker. Gunnar Beck from London University makes an equally apt comparison: “Germany’s leaders can’t let Greece leave the euro, and the Greeks know
it. They will die in a ditch to defend the euro. This is our Eastern Front,
our Battle of Kursk, and I’m afraid to say that it will end in unconditional
surrender by Germany,” he said. 

Like gravity, economics always wins in the end.

Mailvox: Marxism and the Shoe Event Horizon

DB asks about a past SmartPop essay:

I am an Italian university student, and at the moment I am writing my thesis, which is about Douglas Adams and The Hitchhiker’s Guide to the Galaxy. While gathering some material to work on, I found The Rough Guide to the Hitchhiker’s Guide to the Galaxy by Marcus O’Dair, in which he maintains that you stated that “the Shoe Event Horizon [is] a dig not at capitalism, but rather at the Marxist notion of capitalist crisis, which is pretty much its antithesis” (page 71).

I have been trying to find the original source of this idea, but I am not sure whether it is this one:

With this letter, I would ask you if you could briefly explain how the “Shoe Event Horizon theory” is to be considered a critique to Marxism rather than to capitalism itself (I am not an expert in the fields of philosophy and economics).

My essay in THE ANTHOLOGY AT THE END OF THE UNIVERSE was indeed the original source of the idea,  which I mentioned in a one-off line without explaining it. Neglecting to explain things is a time-honored personal tradition. I’m not usually doing it to be difficult, it’s just that I tend to have a very hard time grasping what is, and is not, obvious to other people.

Adams manages to mine this unlikely field, economics, for some of his most scathing barbs. The dismal science does not often figure into fictional plot lines and still less is it played for laughs, but nevertheless, it has an integral role in both the overall story and Adams’ underlying theme. Indeed, Adams betrays a remarkably sophisticated understanding of economics when he pokes fun at the Marxian concept of capitalist crisis in the Shoe Event Horizon that ruins the world of Frogstar World B.

Before I can explain why the Shoe Event Horizon is poking fun at the idea of a crisis in capitalism, I should probably cite the relevant event as recounted by Pizpot Gargravarr.

From The Restaurant at the End of the Universe:

Many years ago this was a thriving, happy planet—people, cities, shops, a normal world. Except that on the high streets of these cities there were slightly more shoe shops than one might have thought necessary. And slowly, insidiously, the numbers of these shoe shops were increasing. It’s a well-known economic phenomenon but tragic to see it in operation, for the more shoe shops there were, the more shoes they had to make and the worse and more unwearable they became. And the worse they were to wear, the more people had to buy to keep themselves shod, and the more the shops proliferated, until the whole economy of the place passed what I believe is termed the Shoe Event Horizon, and it became no longer economically possible to build anything other than shoe shops. Result—collapse, ruin and famine. Most of the population died out. Those few who had the right kind of genetic instability mutated into birds—you’ve seen one of them—who cursed their feet, cursed the ground and vowed that none should walk on it again.

There is no singular coherent theory of capitalist crisis, there are, in fact, several, but they are summarized more or less accurately on Wikipedia.

In Marxist terms, the economic crises are crises of overproduction and immiseration of the workers who, were it not for the capitalist control of the society, would be the determiners of both demand and production in the first place.

These systemic factors include:

  • Full employment profit squeeze. Capital accumulation can pull up the demand for labor power, raising wages. If wages rise “too high,” it hurts the rate of profit, causing a recession.
  • The tendency of the rate of profit to fall. The accumulation of capital, the general advancement of techniques and scale of production, and the inexorable trend to oligopoly by the victors of capitalist market competition, all involve a general tendency for the degree of capital intensity, i.e., the “organic composition of capital” of production to rise. All else constant, this is claimed to lead to a fall in the rate of profit, which would slow down accumulation.
  • Overproduction. If the capitalists win the class struggle to push wages down and labor effort up, raising the rate of surplus value, then a capitalist economy faces regular problems of excess producer supply and thus inadequate aggregate demand.

All such factors resolve to the synthetic viewpoint that all such crises are crises of over and/or misappropriated production relative to the ability and/or willingness of the workers who generate the bulk of demand to consume.

As he later does with the concept of Keynesian monetary policy still being pushed by the likes of Krugman and Abe today, Adams takes the concept of capitalist crisis stemming from overproduction to absurd and hilarious extremes. In the tragic case of the world of Frogstar B, the people actually reduced their aggregate demand by evolving into flying beings in order to escape the terrible results of the crisis caused by the overproduction of shoes.

The connection between the Shoe Event Horizon and capitalist crisis struck me as so obvious as to need no explanation, but then, it belatedly occurs to me that perhaps not everyone recognizes the implicit connection between capitalist crisis, overproduction, and inadequate aggregate demand, which in the case of Frogstar B, eventually plummeted all the way to zero.