Tag: economics

Anti-Americanism in Europe

It’s completely understandable why average Europeans are beginning to turn anti-American:

US intelligence has been operating a global network of 80 eavesdropping centres, including 19 European listening posts in cities such as Paris, Berlin, Rome and Madrid, the German magazine Spiegel has reported.

The new revelations, which Spiegel said were based on leaked American intelligence documents, are certain to fuel international outrage at the sweeping scale of US international surveillance operations.

Spiegel also reported that the telephone number of Angela Merkel, the German chancellor, has been a target of US surveillance since 2002, when she was leader of the opposition.

Mrs Merkel, who telephoned President Barack Obama on Wednesday to express her anger at reports that her phone had been hacked, was still under surveillance until a few weeks before the US leader Berlin in June, Spiegel said.

Even before the latest reports, Germany said that it would send a high-level delegation to the US this week to demand answer s at the White House and National Security Agency (NSA) about the reports that Mrs Merkel’s phone was tapped. The team will include spy chiefs, German media reported.

I had an interesting experience this weekend that exposed how many Europeans feel about the NSA revelations. My team was playing an away game and I got a little lost trying to find a soccer field. Most villages have signs clearly marking where their main field is, but this one didn’t, so I stopped at a small restaurant where several people were hanging out on the deck, smoking and drinking.

They were obviously locals, so I parked the car, got out, and asked them where the field was. I was wearing my team’s jacket, and as we are known to have a few Portuguese players, one of the men asked me if I was Portuguese, most likely because of my accent. The two women both laughed at that and said: “but come on, look at him, he’s clearly not Portuguese.”

When I explained I was originally from America, the man made a face, held his hand up to his ear like a telephone, and said, “USA? Why are you listening to my mobile phone? Why are you listening to my phone calls?” He was joking, of course, as he promptly laughed, slapped me on the shoulder, and provided directions to the field, but it really startled me to discover that in a tiny village in the middle of nowhere, the immediate reaction to an American would be to bring up the NSA.

And the more elite Europeans aren’t blind to the opportunities presented by the scandal either. I spoke to several high-level investment executives over the last few weeks, and to a man, they see the scandal as being a reason for Europe to make a serious effort to break away from the technology chains of Google, Microsoft, Oracle, Twitter, Facebook, and other American companies that have dominated the world. The larger the corporation, the more determined they are to keep the US out of their emails and servers.

As more and more revelations of tech-enabled spying come out, it wouldn’t surprise me to see nations deciding to subsidize national alternatives and perhaps even eventually banning the use of American software. And why shouldn’t they? How can they possibly accept the status quo? It’s not inconceivable that the long-term result of using the NSA to spy on everyone through international business and the consequential shattering of trust may be a factor in the material reduction of transnational trade.

This isn’t merely a diplomatic or political scandal, it is probably an economic one as well.

Everything is fine, the Krugman promised

And those four horsemen you see riding this way, they’re just out for an afternoon canter. Keep in mind these soothing assurances come from the same Nobel prize winner who, contra his ex post facto self-congratulatory posturing, didn’t see the 2008 financial crisis coming:

Once upon a time, walking around shouting “The end is nigh” got you labeled a kook, someone not to be taken seriously. These days, however, all the best people go around warning of looming disaster. In fact, you more or less have to subscribe to fantasies of fiscal apocalypse to be considered respectable.

And I do mean fantasies. Washington has spent the past three-plus years in terror of a debt crisis that keeps not happening, and, in fact, can’t happen to a country like the United States, which has its own currency and borrows in that currency. Yet the scaremongers can’t bring themselves to let go….

Look at Japan, a country that, like America, has its own currency and borrows in that currency, and has much higher debt relative to G.D.P. than we do. Since taking office, Prime Minister Shinzo Abe has, in effect, engineered exactly the kind of loss of confidence the debt worriers fear — that is, he has persuaded investors that deflation is over and inflation lies ahead, which reduces the attractiveness of Japanese bonds. And the effects on the Japanese economy have been entirely positive! Interest rates are still low, because people expect the Bank of Japan (the equivalent of our Federal Reserve) to keep them low; the yen has fallen, which is a good thing, because it make Japanese exports more competitive. And Japanese economic growth has actually accelerated.

Why, then, should we fear a debt apocalypse here? Surely, you may think, someone in the debt-apocalypse community has offered a clear explanation. But nobody has.

So the next time you see some serious-looking man in a suit declaring that we’re teetering on the precipice of fiscal doom, don’t be afraid. He and his friends have been wrong about everything so far, and they literally have no idea what they’re talking about. 

First, numerous clear explanations have been offered. It is well-known that Paul Krugman does literally no reading of economics outside his Neo-Keynesian paradigm, as evidenced by his disastrous attempt to criticize Austrian economic theory I addressed in RGD. His grasp on it wasn’t quite as bad as the guy who didn’t understand why such a small country’s economy was so important, but it wasn’t much better.

Second, if there isn’t a potential debt apocalypse on the horizon, then how does Mr. Krugman explain the 5-year anomaly in a 65-year period shown to the left?  I’m not going to bother producing a new graph, because the picture looks exactly the same from 1948 to 2013.

Total Credit (Z1) rose at a very steady rate from 1948 to 2008. Like clockwork, the 60-year quarterly growth rate averaged around 2.3 percent per quarter. In the 22 quarters since Q1 2008, the average quarterly Z1 growth rate has been 0.6 percent, leading to a current credit demand gap of $26 trillion with Zn, which is where Z1 would be now if it had simply continued to grow at its normal 60-year rate over the last five years.

And that $26 trillion gap is despite the Federal sector increasing its outstanding debt from $5.1 trillion to $11.9 trillion during those 22 quarters. The Federal sector now accounts for 20.7 percent of all outstanding debt, more than double its percentage in 2008.  Without the orgy of Federal borrowing and spending, (or in other words, if outstanding Federal debt was still only 10.24 percent of Z1) we would still be in credit deflation rather than the ongoing state of credit disinflation.

So what we are seeing is the gradual socialization of the credit markets. At this rate, if the Federal sector continues to double its share of Z1 every 16 quarters, 100 percent of the outstanding debt in the entire economy will be owed by the Federal government in the year 2023. This may not matter from the Neo-Keynesian perspective, where debt does not enter into the equations, and all spending counts the same and is equally efficient no matter the source or the recipient. But for those who understand the Austrian concept of malinvestment or are cognizant of the history of fully socialized economies, it should be troubling news indeed.

We are already in a state of debt deflation in the private economy. In Q4 2007, the private sector’s share of Z1 was $42.7 trillion. In Q2 2013, that share was $42.6 trillion. (NB: this does not count the large quantity of bad debt assets that have not yet been booked, which I estimate to be around 40 percent based on reported FDIC losses.) That is evidence that there has been no real growth in the economy despite the GDP numbers and the massive government attempts to kickstart it. One cannot push on a string, and as Ben Bernanke belatedly discovered, one cannot print private sector borrowers either.

Krugman is like a man standing in the rain on the banks of a flooding river, ignoring the frantic efforts of thousands of men piling sandbags higher and higher, calmly assuring everyone that no one has to worry about getting their feet wet. I have very little doubt that this is a column Krugman is going to regret having written in the future and very much look forward to reading his attempts to disavow it or otherwise explain it away.

Ask yourself this question

If credit isn’t money and cannot affect prices, then why is managing the growth of credit a specified aspect of the Fed’s monetary policy? From the Federal Reserve charter:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

The reason the Fed tracks the various components of Z1 in the first place is that they know perfectly well that M2+credit is the effective money supply. Which means that they already know their can-kicking can’t possibly work indefinitely. Karl Denninger has more thoughts on this as well as Alan Greenspan’s Mr. Magoo Problem.

Mailvox: the challenge of reading graphs

Phoenician attempts economics again, hilarity once more ensues:

Brief clue, Dipshit, if your argument is based on a discontinuity –

(” And in fact, the deleterious effects on wages of women entering the work force was largely hidden until 1973, when men finally stopped leaving the work force in numbers sufficient to conceal what was happening.”)
– and the actual data shows no such discontinuity but a fairly smooth and continuing trend instead, then your argument is disproven.

You’re
in the situation of someone who claims that rising icecream sales in
May are caused by the Easter Bunny and, when shown the Easter Bunny
doesn’t actually exists, goes out to prove that more icecream is being
sold than you originally stated.

Yes, that may be true – real
wages may be actually less than you stated before – but your
‘explanation” for that has been shown to be crap.

Because you’re a misogynist little dickhead who can’t let go of your bigotry, Dipshit.

Some readers don’t understand why I often respond directly to Phony and would prefer that I simply ban him from commenting. But he serves a useful purpose, which is to illustrate the way people on the Left often communicate in a dismissive, superior, and insulting tone that is meant to convince people that they know what they are talking about.

It’s related to the way that they are forever claiming that their opponents are stupid without providing any evidence for it, thereby implying that they themselves are much more intelligent. But the fact of the matter, as Phony often demonstrates, their level of knowledge doesn’t even rise to the level of Wikipedia and it is usually quite easy to show that they don’t understand what the evidence they have mustered in a brief Google search actually means.

What Phony was attempting to do here is try to salvage his incorrect position that “if women are producing more value than they get paid for, as seems
reasonable in a capitalist society, then the wages paid will go up”.  This is exactly backward, as it happens, because increased productivity actually reduces wages, as it reduces the amount of labor required to produce the same amount of goods, thereby reducing demand for labor as well as its price.

And in his desperate flailing about to attempt to defend himself by prove both me and the law of supply and demand wrong, he cited this graph from the Federal Reserve while claiming it showed me to be “a liar AND a fool.”  Which is bizarre, since it shows exactly what I described, a continuing plunge in the male labor participation rate from 1950 to the present.

What Phony didn’t understand is that my argument isn’t based on any discontinuity and that to understand the net effect of female employment on wages, it isn’t enough to simply look at the declining male participation rate, however continuous, one has to take into account the increasing female participation rate and the population growth rate as well.  Or, better yet, do what I did back in 2006 and actually do the math rather than simply looking at the pretty pictures.

It’s not enough to note that the lines appear to cross, which they actually don’t. Wages didn’t stagnate from 1950 to 1975 because the number of men leaving the labor force in excess of the growth of the population was roughly equivalent to the number of women entering it. Consider: 45.8 percent of 65+ men worked in 1950. By 1980, only 19 percent did, a number that has remained basically flat ever since. With women, the biggest change was from the 25-34 demographic, as only 34 percent worked in 1950 compared to 65.5 percent in 1980.  In sum, by 1980, 27 million additional women had entered the labor force and the female percentage of the labor force rose from 29.6 percent to 42.5 percent. And don’t forget that inexperienced female workers tend to command considerably less salary than the most experienced male ones; a simple exchange of younger women for older men would tend to reduce wages in itself.

The current female share of the labor force is 46.9 percent. So, it is easy to see that the larger part of the male-to-female labor exchange took place prior to 1980. In fact, we can safely conclude that the crossover point was reached in 1973 because that’s when average wages peaked.  As the first chart indicates, men were still leaving the workforce, and women were still entering it at that time, but combined with the slowdown of economic growth that began in the 70s, the point at which the net wage-depressing effect had become statistically obvious had been reached.  If you look at the actual data, you can see that the crossover point was likely sometime between Q4 1972 and Q2 1973, when men temporarily stopped leaving the labor force for two years even as the pace of women entering it jumped up by two percentage points in a matter of months.

The Phonies of the world can point their finger and call names all they like. But it should be abundantly clear that what they call misogyny and bigotry is simply economic reality. The facts are what they are.  The addition of 55.3 million women to the labor force since 1950 has done exactly what one would expect a 315 percent increase in the supply of female labor to do in driving down its price. Whether one thinks that is a good thing or a bad thing depends upon one’s perspective, but what one cannot reasonably do is to deny that it happened.

UPDATE: Perhaps the graph below will help those who can’t seem to understand anything but pictures. Probably not, but if you still can’t get the concept after seeing this, I have to conclude you’re simply incapable of it. Note that these are based on the actual BLS numbers, adding the male and female participation rates as a percentage of the actual civilian population that year. The magic number with regards to wage rate growth appears to be around 60, as the 59.85 percent in January 1973 marked the very last time the total labor participation rate as a percentage of the civilian non-institutional population was below 60 percent.

It should be fascinating to hear Phoney and others attempt to explain the mysterious inverse correlation between the labor force participation rate and the weekly wages while simultaneously denying the law of supply and demand.

Forbes on falling wages

I always enjoy it when various anklebiters try to Beli-check me by attacking an economics post. Because I don’t make these things up, it’s always easy to cite others who are saying the same thing. In this case, Forbes is pointing out that real falling American wages are actually worse than they appear in dollar terms.

Today’s minimum wage employee works 12 percent longer to earn a gallon of milk compared to 1965, according to the Bureau of Labor Statistics. Today’s senior engineer works almost twice as long to buy a gallon of gasoline, according to the Department of Energy.

So, in real terms, wages have fallen. The drop is larger than it appears. Look at costs to see why.

Dairy farm statistics show that a cow produces two and a half times the milk compared to yesteryear’s cow and the Department of Commerce reports that labor per cow has fallen by two thirds. These two improvements alone—there are others—eliminate about 87 percent of the effort to make milk.

Efficiency is not the only way for companies to reduce costs. Businesses also remove certain features that consumers don’t want to pay for. For example, milk used to be delivered to a home in a glass bottle. Today it comes in cheap plastic containers that consumers pick up at the store. A more recent example is wine, which is moving from expensive corks to cheaper screw tops.

Yet as fewer labor hours go into producing goods, workers work longer to buy the goods. Using the hour as a measure of costs, we can calculate how much more work a wage earner must produce to buy milk today. But it’s harder to measure the reduction of work that goes into production. We know that it’s less by empirical evidence, but we only get a sense of it.

By switching to gold, we can measure both wages and prices on an absolute scale—in ounces—and we can make precise comparisons. To convert the price of anything to gold, just divide the price by the current gold price. For example, in 2011 if a big-screen TV was $785, then divide that by the gold price of that year; the television set cost half an ounce of gold.

The bottom line is that, in terms of gold, wages have fallen by about 87 percent. To get a stronger sense of what that means, consider that back in 1965, the minimum wage was 71 ounces of gold per year. In 2011, the senior engineer earned the equivalent of 63 ounces in gold. So, measured in gold, we see that senior engineers now earn less than what unskilled laborers earned back in 1965.

That’s right: today’s highly skilled professional is making less in real, comparative terms than yesterday’s unskilled worker.

Now, this is not entirely the result of women entering the labor force en masse. But that is one of the primary contributing factors.  One of these days, I’ll go through the issue and rank those factors.  But my guess is that it is probably number three, after increasingly free trade and the consequences of government fiscal and regulatory policies.

Hawks and doves at the Fed

Female managers tend to seek consensus, and it looks as if we can be certain that Yellen will have whatever organizational support she requires to keep the Fed’s monetary policy as expansionary as possible.  Notice that she is considered to be even more dovish than Helicopter Ben. And one of the newcomers, Kocherlakota, is arguably even worse.  In 2011, he claimed that the Federal Reserve didn’t cause the housing bubble, and worse, that he was “agnostic” with regards to what did cause it.

So, we not only have Tweedledim at the Fed, but Tweedledimmer voting to support her futile attempts to print credit in 2014.

Mailvox: econo-ignorati

I’m not sure which is more impressive, the ability of those who don’t wish to see the obvious to not see it, or the stubborn determination of the inept anklebiter to think that this time, for sure, he’s going to be able to prove me wrong.

Irish Farmer doesn’t appear to understand what is meant by either “wages” or “consumption”:

If women were consumers before they entered the workforce, then who’s money were they consuming with? Mens? Parents’? In that case, those wages were already practically depressed by the fact that men and/or parents were providing women with a sort of salary. 

No. Wages are not reduced by consumption. Wages are reduced by increased supply of labor or decreased demand for labor.  Because consumption tends to increase demand for labor, it tends to increase wages. He digs himself deeper by failing to understand that a consumer is a consumer regardless of whether the consumer is in the labor force or not:

I think it’s simplistic to say, “Women were still consumers.” I’ll admit I don’t have the answers to these questions, but they still come to mind: Isn’t it possible that women workers created new markets, created increase consumption in some way? Can you really just say, “It was the exact same level of consumption now as it was in the ’50s”?

It is not only not simplistic to point out that women were, and continued to be, consumers before, during, and after they entered the labor force, it is absolutely idiotic to attempt to claim otherwise. None of this is equivalent, in any way, to saying anything about “the exact same level of consumption as in the 1950s”.  In fact, a moment’s thought will make it apparent that an increased number of women entering the work force will tend to reduce consumption in the short term; perhaps the women here can help us out.  Do you do tend to do most of your shopping when you are at work or when you are not at work?

Moreover, the reduced number of children produced by working women has unquestionably meant less consumption and less demand for labor in the long term as well. The mitigating effect on the labor supply of fewer children will not suffice to counterbalance this, since children are consumers for 18+ years before they enter the labor force.

And Phony not only reveals that he doesn’t know anything about economics, but he’s a relative newbie here. He’s clearly unaware of the fact that I addressed his objection back in 2006 as well as again earlier this year.

You’re making the implicit assumption, Dipshit, that they don’t produce anything for the wages they get. If they *are* producing more value than they get paid for, as seems reasonable in a capitalist society, then the wages paid will go up but be spent purchasing even more goods.

By your “logic”, Dipshit, the best America could do would be to have one person working to produce goods for 300 million consumers – after all, if anyone else enters the workforce, it will lower wages…

You talk about the post-1950 rise in female employment. So tell us, Dipshit, how come real wages continued to rise (in line with productivity) between 1950 and 1975 or so?

First, I am quite obviously not making the implicit assumption that women don’t produce anything for the wages they receive.  Second, if we apply his own logic, then the fact that real wages have not gone up since 1973 forces us to conclude that women are not producing more value than they are paid for. Third, my logic doesn’t suggest anything of the sort.

And fourth, in answer to his question, I quote myself from seven years ago:

“In the perfect world of economic modeling, it would make no difference
if men or women were working. And in fact, the deleterious effects on
wages of women entering the work force was largely hidden until 1973,
when men finally stopped leaving the work force in numbers sufficient to
conceal what was happening. In fact, one could characterize the period
from 1950 to 1973 as women working so that men over 60 could play golf.
The BLS numbers make this clear.”

TL;DR

Ms Wolf could have saved herself considerable trouble had she simply titled her book: Supply and Demand: How Seventy Million Working Women Created a Lower-Paid Society. With a few simple graphs, she probably could have wrapped the whole thing up in less than 10 pages.

I always find it remarkable, and perhaps even a little depressing, how few people are able to grasp that the primary consequence of the addition of 70 million working women, all of whom were already consumers, to the labor force, could never have been anything else but to lower wages. 

One can debate whether female workers are more or less productive than male workers, and one can certainly debate whether the societal effects were beneficial or negative, but the one thing that cannot be denied, on logical, theoretical, historical, or empirical grounds, is that the post-1950 doubling of the female labor force has had a severely depressing effect on American wages.

Mailvox: what could possibly go wrong?

GV writes to observe that the USA is about to experiment with an economic application of Hultgreen-Curie Syndrome:

I was listing to the radio when I heard the news that Janet Yellen would be named the next fed chair.  I went online to confirm this story and found this news story by NBC News.

It appears you were right about what you wrote in your blog post on 9/16/2013 entitled The job no one wants.  You wrote that you assumed it would be Janet Yellen.  It’s funny how the link to the NBC news story talks about her being the first women to head the central bank and some of her accomplishment but it leaves out the quote you put at the end of that blog post were she said the following;

 “For my own part I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.”
– Janet Yellen, 2010

With someone like that in charge what could possibly go wrong.

Christine Lagarde at the IMF and Janet Yellen at the Fed. This should be an interesting test of whether putting women in charge will make it all better. I wouldn’t mind being wrong, for all of our sakes, but I’m not terribly sanguine about the probabilities here.

Ambrose Evans-Pritchard summarizes: “So there we have it. The next chairman of the Fed is going to track the labour participation rate. Money will stay loose.”

A lesson in channel

Ilya Somin doesn’t appear to understand how distribution and retail prices work:

This is a request to readers who may have contacts at Amazon, or
work there. Amazon recently inexplicably raised the price for the
Kindle version of my book Democracy
and Political Ignorance from the initial $15.37 to
20.19, even though (judging by Amazon’s own rankings) the Kindle
version was doing well at the initial price. The new price is way
too high, relative to the Kindle prices for comparable books. It
is in neither Amazon’s interest nor mine to charge a price so high
that hardly anyone will buy the Kindle version.

I have tried to contact Amazon about this. But it seems
impossible to reach anyone in authority through their website for
authors. I suspect that among our intrepid readers there could be
some who have contacts at Amazon who may be able to help. All I
need is to speak to a person who has the power to lower the price
for as little as 10-15 minutes or even just exchange e-mails with
him or her. The case for lowering the price is strong enough that
it won’t require any more time than that to explain it. However,
the issue does need to be addressed relatively quickly because the
official publication date for the book is approaching. 

I took a look at the book.  The issue is immediately apparent:

Digital List Price: $27.95
Kindle Price: $20.19
Print List Price: $90.00
        
Somin’s actual problem is that his publisher has set the list price too high.  Amazon has the right to decide whatever discount it wants to set below the list price; if Somin wants the price to the consumer to be around $15, then he should set the price around $17.99.  It’s simply not any of his business what Amazon’s margin is; since Amazon is trying to get their margins up, it should come as no surprise that they are not offering discounts quite as steep as they have historically offered.

And it’s ridiculous for him to complain that Amazon should be decreasing its profit margin while he and his publisher refuse to reduce their own.  If the case for lowering the price is strong, then he should be asking his publisher to lower its price, not expecting Amazon to slash its margins.