Stefan Karlsson
This file photo shows a pack of bills of Chinese yuan bills next to U.S. currency. Karlsson argues that recent data shows that China's economy may become bigger than the US economey sooner than previously expected. (EyePress/AP/File)
China's economy may surpass US before 2020
According to preliminary estimates, China's GDP in 2011 was 47.156 trillion yuan, which at the current exchange rate of 6.3138 translates into roughly $7.47 trillion.
By comparison, tomorrow's GDP report for the United States will likely show that 2011 GDP was roughly, or slightly over $15 trillion. That means that China's economy is now nearly half as big as the U.S. economy.
This in turn means that China's economy could become bigger even sooner than previously thought. If the economic growth gap is 6% per year(lower than the average rate the last decade) and real appreciation is 2.5% per year (again, a lot lower than the average rate the last decade) than that would be sufficient for China's economy to become bigger by 2020. If the growth gap and/or real appreciation is closer to the average rate for the last decade, it could happen even sooner.
It is true that per capita income in China would still be a lot lower since China's population is more than 4 times as big. And in per capita terms, China might never surpass America. However, the fact that average income is so low is reason to believe thatv the "catch up" effect will continue to fuel growth in China. And so note that per capita income of one fourth of the U.S. level means that it would still be a lot lower than in the other majority Chinese countries (Hong Kong, Macao, Taiwan and Singapore).
In this file photo, workers maintain the huge Euro logo in front of the headquarters of the European Central Bank. The S&P has downgraded the bond yields of several eurozone countries, which Karlsson argues has an unjust effect on how those countries do business. (Ralph Orlowski/Reuters/File)
Why the Euro debt downgrade matters (even though it shouldn't)
Given the fact that bond yields of most of the euro area countries that were downgraded by Standard & Poors actually fell (contrary to what one might expect), similar by the way to how U.S. treasury yields dropped after they got downgraded by S&P, one can ask if S&P and other credit rating agencies have become irrelevant.
The short answer is: no thay haven't, though they should.
First of all we must realize that the move was expected and therefore already more or less priced in before the formal announcement after Friday's closing, so big changes wasn't to be expected. And other factors, for example ECB bond buying was active in pushing down yields.
And secondly, we have a really good reason to expect ratings to matter: namely that regulation requires many fund managers to only hold bonds that have sufficiently high ratings. It was because of this that Portuguese bond yields (already the second highest after Greece's) soared, as the downgrade forced many bond holders to sell.
But this is clearly something that should be changed. The credit ratings of credit rating agencies shouldn't in any way be encouraged or be made a mandatory standard by governments. They shouldn't play any role in legal accounting rules, nor in rules of which securities funds should invest in. This is both because it is principally wrong for governments to give private institutes such priviligies and because of their awful track record (to the extent they've been "right" it has almost always been because of the self-fulfilling prophecy mechanism).
So unfortunately, the incompetent credit rating agencies matter. But they shouldn't.
The European Union flag. It would seem that countries with high deficits–like Europes' Spain, Italy, and Greece–would have low economic growth, but according to Karlsson that is not always the case. (Bogdan Cristel/Reuters/File)
Can an economy still grow with serious debt?
Currently, there seems to be a positive correlation between current account balances and economic growth. Countries with big deficits like Greece, Spain and Britain are performing really bad, while surplus countries like Hong Kong, Singapore, Germany and Sweden are performing really good. And China with its large surplus are outperforming India with its deficit.
There are exceptions to this rule, of course. While having roughly as large (proportionally) a current account surplus as its northern and northern neighbors growth in Denmark has been very weak, and another surplus country, Japan has also had weak growth. Similarly, Turkey's economy has had extremely high growth even as it has a very large current account deficit. But despite these exceptions, surplus nations seems to be generally doing better right now.
This might seemingly vindicate mercantilism against non-mercantilist economics that says that we should expect higher growth in deficit countries because they get to invest the savings of the surplus nations in in their economy, creating jobs and production in the deficit countries.
But as it happens, non-mercantilist economics doesn't say that that deficits, or more accurately the capital inflows that are the flip side of them, will necessarily strengthen an economy. It will if it goes to finance sound investments , but not if it finances excess consumption or malinvestments. Even in the latter cases it might provide a short-term boost to economic growth (Turkey's boom for example contain some unsound elements), but once the unsuatainablity of the excess consumption or malinvestments become evident for investors, it will weaken the economy.
So the lesson is not that it is good to have a surplus or bad to have a deficit in the current account balance. The lesson is that it is bad to have excess consumption or malinvestments while good to have sound investments. This is escpecially true considering that surplus countries during problems in deficit countries are hurt too. Though still stronger than the deficit countries, growth in the surplus countries have weakened too because of falling exports and furthermore the surplus countries are likely too lose much of their formal export earnings because of inflation, formal defaults or both.
Star V838 Monocerotis's (V838 Mon) light echo, which is about six light years in diameter, is seen from the Hubble Space Telescope in this handout photo released by NASA. Could extraterrestrials be the solution to our world's fiscal woes? (H.E. Bond/Reuters/NASA/File)
How space aliens could fix the economy
It has been suggested by some Keynesians that space aliens would solve economic problems because that would allow this world to run an aggregate current account surplus, something that is impossible without life on other planets. The problem is that (intelligent) space aliens might not exist, and even if they do exist they may not know of us, and even if they exist and know of us they seem to think (if they exist and know of us, given the fact that we're not being contacted) that it would be impossible or inappropriate to openly contact us.
However, the undeniable problem of unavailability (whether due to non-existence, ignorance, inability or unwillingness of the aliens) of space aliens can be solved using this scheme where we simply sell a lot of goods to an entity called "Space Alien" , goods that can then be shipped to say somewhere in the Pacific or Atlantic Oceans, where we then sink the ships (after having evacuated all human crew members, of course). The "Space Alien" entity will "pay us" with IOU's or something similar, providing us with whatever demand needed to prop up the economy according to Keynesian analysis.
Obviously, this entity will never ever pay back the money, but neither will for example war spending against perceived terrestrial or extraterrestrial threats, so there is really nothing that a Keynesian could object to this scheme.
A European, top, and a German national flag photographed near the German Reichstags building in Berlin in this file photo. While many countries are experiencing improved production rates and high unemployment, Germany is dealing with just the opposite (Michael Gottschalk/AP/dapd/File)
Germany: High on jobs, low on growth
One day we are told that the employment rate in Germany has reached a new all time high and that the unemployment rate is the lowest since the reunification, the other we see that industrial production continues to fall in Germany.
In part this could perhaps be explained by growth in the service sector, and in part it reflects a drop in Germany's working age population. Still, employment growth is extraordinarily high considering the production growth numbers.
Some talk of "jobless recovery" in some periods of times in some countries. But Germany by contrast seems to have a jobfull slump or at least a jobfull stagnation.
An employee works on an assembly line of Toyota Motor Corp's hybrid car "Prius" at its Tsutsumi plant in Toyota, central Japan in this file photo. Karlsson argues that mechanization, or machines doing jobs formerly done by human workers, has nothing to do with the high unemployment rate. (Kim Kyung-Hoon/Reuters/File)
No, machines aren't stealing our jobs
Despite a modest recovery the last few months, the U.S. labor market remains depressed as this chart over the employment to population ratio illustrates.
Now again the myth that this is caused by machines displacing human workers resurfaces.
Yet if that was true then productivity growth would have increased, whereas in reality it has decreased from the 1990s. when the employment rate reached an all time high. Between 1990 and 2000, average annual GDP growth was 3.4% while average employment growth was 1.45%. Between 2000 and 2010, average annual GDP growth was just 1.5% while average employment growth was 0.15% (that the employment rate has dropped is thus more than entirely due to population growth). This means that productivity growth fell from 1.95% in the 1990s to 1.35% in the 2000s. In the 2006 to 2010 period, productivity grew even slower (1.2%).
A Chinese clerk counts U.S. dollars in exchange for the Chinese renminbi at a bank in Hefei in central China's Anhui province in this file photo. The Chinese yuan gained 4.9 percent agains the dollar in 2011. (AP/File)
Yearly roundup of world currencies: The yen, the rupee, and everything in between
It has become something of an annual tradition at this blog to summarize the yearly movement of a number of important currencies. This year, most currencies didn't change very dramatically against the U.S. dollar for the year as a whole. 5 currencies rose, three of which (the Australian and New Zealand dollars and the U.K. pound) only marginally. Only the yen and the yuan rose significantly, but far from dramatically. The other fell, but it was only the Brazilian real and the Indian rupee that did so in a really significant way.
It should however be noted that this yearly change masks more dramatic intra-year changes, as the U.S. dollar fell, driven by QE2, against almost all other currencies and usually significantly so during the first half. During the second half, it rebounded as QE2 ended and as the dollar's "safe haven" status during the European debt crisis increased demand for it.
Yen:+6.1%
Yuan: +4.9%
New Zealand dollar: +1.5%
Australian dollar: +1.3%
U.K. pound:+0.9%
Swiss franc: -0.1%
Singapore dollar:-0.5%
Norwegian krone: -1.3%
Canadian dollar: -1.6%
Swedish krona: -1.7%
Euro: -2.3%
South Korean won:-2.4%
Brazilian real: -10.7%
Indian rupee: -15.5%
In this December 2011 file photo, President Barack Obama signs the payroll tax cut extension, in the Oval Office of the White House in Washington. Karlsson argues that critics of the payroll tax cut's temporary nature are overlooking the effect it can have in a short period of time. (Haraz N. Ghanbari/AP/File)
Permanent vs. temporary tax cuts
One criticism against the payroll tax cut that has frequently been made from conservative and libertarian economists is that it is temporary, and because people supposedly make decisions on permanent conditions it will have no effect.
This argument has a limited degree of truth in it as it is true that if taxation of investments are reduced by say 5 percentage points for one year, it will have less effect on investments that last more than a year than a "permanent" tax rate reduction of 5 percentage points. Just how great the difference is depends on how long the investment will last (the longer, the greater difference it makes).
However, because total after tax return still rises, it will still promote any investments that generates profits within a year.
Furthermore, the payroll tax reduction isn't about investments, at least not directly, it instead has a positive effect in the form of boosting labor supply, something that increases employment in part through a reduction in frictional unemployment and in part by lowering labor costs. Given the limited degree of wage rigidity that exists cutting the employer's share of the payroll tax cut would have been more effective, but
But don't businesses hire people based on long-term factors? Well, they often do, but there is no rational reason for them not take advantage of temporarily lower labor costs by hiring people temporarily given that America's flexible "hire and fire" laws makes it very easy and costless to fire employees.
Furthermore, it should be noted that no tax rate is really permanent (which is why I've put quotation marks around it except here) since they can, and very frequently have historically been change. While a "permanent" change is in the United States somewhat more difficult to change due to the fact that the two chambers of Congress and the President can usually block them if they want, that is as the historical record illustrates a difference of degree, not kind.
The real problem with temporary instead of "permanent" tax cuts isn't therefore so much that the short term effect is smaller. The real problem is that once the tax cuts expire, the positive effects will expire too, meaning that it will lower future growth, largely cancelling out the short term positive effect.
Wellesley College student Kiira Gustafson gives a presentation to a class in this file photo. More and more workers are dropping out of the labor force to go to school, but Karlsson argues that those workers would prefer better job opportunities. (John Nordell/The Christian Science Monitor/File)
Workers dropping out of the work force for school: Bad sign for the economy
Some analysts are trying to put a positive spin on the unprecedented drop in the labor force participation rate as simply being a question of more people seeking to get more education. I find it indeed quite likely too that a very large portion of those that have dropped out of the labor force have started in school again.
But that begs the question of why do they want to go back to school? Because it's fun or because it's interesting? Not likely, except perhaps for a small minority. Instead, the reason why they go back to school is because they're unable to find a job and thinks that additional education will enable them to get a job. That may perhaps be a good idea for the people in question, but that doesn't in anyway change their status as discouraged, hidden unemployed as almost all would quit school and immediately take a job if they could (at least assuming it's a steady job).
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