Stefan Karlsson
Republican presidential candidate, former Massachusetts Gov. Mitt Romney, left, speaks at a campaign event at Dubuque Regional Airport, before flying to Colorado, Saturday, in Dubuque, Iowa. Regardless of whether Obama or Romney wins, there will be won't be much of either bad or good changes implemented, Karlsson writes. (David Goldman/AP)
Why Mitt Romney is the lesser of two evils
Two days from now, there will be Presidential elections in the United States. The only two candidates with a chance of winning are of course incumbent President Barack Obama and Republican nominee Mitt Romney.
Which one of these should you root for, or perhaps even vote for if you're an American citizen (which I'm not)?
Personally, I root for Romney, because while he is unsatisfactory in many ways he is a somewhat lesser evil compared to Obama. He says he wants to reduce marginal tax rates and pay for those rate reductions by abolishing various deductions and loopholes, and wants to reduce non-military spending to close the deficit, while Obama is focused on tax increases. And in foreign policy he wants to end Obama's policy of apologizing and appeasing of the enemies of the West. ( Continue… )
Greece's Prime Minister Antonis Samaras (R) and Germany's Chancellor Angela Merkel speak before their meeting at the Maximos mansion in Athens, October 9, 2012. Germany is operating at a trading surplus, but it has taken a hit in trade with the more troubled eurozone countries on order to help reduce their deficits, Karlsson says. (Thanassis Stavrakis/Reuters)
Germany: taking a deficit for the team
Today Germany published its trade statistics for August. It showed that its overall trade surplus continued to increase, from €7.9 billion in August 2011 to €11.1 billion August this year.as exports increased 5.8% while imports rose only 0.7%.
However, if we look at trade with other euro area countries alone, we can see that last year's surplus of €300 million turned into a €1.1 billion deficit in August this year as exports to the rest of the euro area fell by 3.1% while imports from the rest of the euro area rose 1.1%. The rest of the euro area thus slightly increased its share of German imports while sharply decreasing its share of exports.
This means that Germany is in fact doing what others have called upon them to do: helping to reduce the deficits of the crisis struck countries in Southern Europe by selling less to and buying more from them. That however doesn't mean that Germany's overall surplus has to fall, it has in fact increased due to rising surpluses both with non-euro area EU countries like Britain and Sweden and to non-EU countries.
Women look at adverts in the window of an employment agency in Londonin this 2009 file photo. Despite the dire state of the British economy, Karlsson says, unemployment in the region has stayed relatively low. (Luke MacGregor/Reuters/File)
Why is British unemployment so low?
The last few years has been the by far worst for the British economy since the 1930s, in fact by some measures it has in fact been even worse than the 1930s, with GDP being 4% lower in Q2 2012 than in Q2 2008 (adjusted for terms of trade) and with per capita GDP being 7% lower as population has increased by 3%. Yet despite a drop in per capita GDP by a cumulative 7% in four years, unemployment is a relatively moderate 8.1%. While that is significantly above the roughly 4% it was at during the previous boom, it is far lower than in for example Ireland, Portugal, Greece and Spain. So how come British unemployment has risen so little?
Simply because productivity has been falling. Output per hour for the whole economy was 3.5% lower in Q2 .Output per worker, a variable that also depends on average hours per worker, fell slightly more, 3.9%. That number if of course basically the same as the 4% drop in GDP. So the drop in per capita GDP can be almost entirely attributed to two factors: the increase in population and a big drop in productivity, with a smaller part being due to a small drop in the average work week. However, the absolute number of employed are basically the same now as when the slump started. When the crisis began both employment and productivity fell. In 2010 and early 2011 there was a moderate recovery in both, but since the second half of 2011, the two has diverged as employment has continued to recover while productivity has started to drop again.
Children at Woodcrest Elementary watch a hot air balloon demonstration in Midland, Mich., in this September 2012 file photo. Karlsson writes that including both monthly changes and annual rates gives a better understanding of recent changes. (Jon Garcia/The Saginaw News/AP/File)
'Two Inflationary Days': A clarification
I have received a somewhat unexpected criticism regarding my previous post. It's not about any of the statistical facts in it, nor about the point that U.S. inflation is increasing and will likely continue to increase, but about the fact that I, in addition to stating the monthly changes in consumer- and producer prices, also "translated" those monthly changes in to annualized rates. The critics argued that such translation meant that I thought that this would be the yearly change during the coming year, something they argued was implausible, a forecast that I basically agree with as, while it is likely that inflation will increase sharply, it is unlikely to increase that much.
But that was not at all what I meant. The reason why I also stated it in annualized terms was that some people mainly or only think in terms of annual or annualized change, so that any change less than 2% is low inflation. By only stating it in terms of the actual change, such readers would get the wrong impression, so by stating both, you create a greater understanding of recent changes. Stating it in terms of the 12 month change would also create a misleading impression since it would include the relatively low inflation months of late last year and early this year.
Now,since I myself don't think that way, I would have otherwise prefered not to make that addition. But if I had simply disregarded the objective of making as many as possible understand and simply expressed it in the way I myself like best, I wouldn't have written any of this in English in the first place, då skulle jag ha skrivit det på svenska.
But since, unfortunately, few people outside of Sweden and certain parts of Finland (plus perhaps Norway and Denmark due to the similarity of their languages to Swedish) understand Swedish, I still write here in English (däremot kan det för svenskspråkiga läsare som eventuellt missat det påpekas att jag på detta ställe bloggar på svenska). Similarly, since some people think in annualized I also express it that way to make them understand, even though I don't think that way.
People help assemble helium balloons for John Ninomiya, to connect to using a harness, during the Alabama Jubilee Hot Air Balloon Classic in Decatur, Ala in this 2006 file photo. Karlsson argues that the Fed's actions are setting the US economy up for a serious bout of inflation. (Bob Gathany/The Huntsville Times/AP/File)
Two inflationary days
First we hear that U.S. producer prices rose 1.7% (annualized 22.4%) compared to the previous month in August.
Then Ben Bernanke said that wasn't enough, so he will take his helicopter, model QE3/QE5, out for a round.
Then the Fed stated that money supply rose 0.3% the latest week alone, causing the annualized 3 month gain to increase to 8.6% and the yearly gain to increase to 7%.
And then the U.S. consumer price index rose 0.6% (annualized 7.4%) in August.
And as a result of Bernanke's new Helicopter tour, the dollar has plunged, while commodity prices have soared while the yield spread between regular and inflation protected U.S. treasuries have soared. The yield on the 5-year inflation protected "security" is now by the way as of this writing -1.66% (do note the minus sign), illustrating the point I've repeatedly made that the only thing safe about them is that those who invest them will lose part of their savings.
So, it is clear that unless the European debt crisis again worsens and again causes a surge in demand for dollar assets, there will be a big increase in price inflation soon.
In this July 2012 file photo, Volvo Chief Executive Olof Persson is silhouetted as he attends a news conference in Stockholm. Karlsson writes that Sweden led the world in per capita economic growth between 1870 and 1950, when free-market policies dominated its economy. (Erik Martensson/Scanpix/Reuters/File)
Are free markets the secret to Sweden's success?
Nima Sanandaji has written an interesting paper about Sweden. It largely points to the same historical facts that I have mentioned in my previous writings, namely that Sweden during its most free market oriented era, from 1870 to 1950, had the highest rate of per capita economic growth in the world. After massive tax and spending increases during the 1950s and 1960s, Sweden stopped outperforming other countries, and after a dramatic leftist shift in economic policies implemented by Socialist Olof Palme after he became prime minister in 1969, Sweden started to seriously lagg other countries. However, free market reforms implemented in the 1990s, and in recent years, have enabled Sweden to once again outperform other Western countries in growth.
He also discusses possible cultural factors, and also points out that Sweden in 1920 had a relatively low level of economic inequality, despite the fact that government spending and taxation at that time was only 10% of GDP.
In this August 2012 file photo, job seekers fill out applications at a construction job fair in New York. Karlsson argues that the more widely reported household US unemployment report is a weaker indicator of the job market's health than the payroll report. (Seth Wenig/AP/File)
US unemployment is worse than the headlines say
As I've discussed repeatedly, unlike most other countries, the United States publishes two employment numbers: one based on a survey of employers ("the payroll survey") and one based on a survey of households. Since they in principle describe the same real world phenomenon, the number of people employed in the U.S., they should have the same result. As it happens, they usually don't meaning that at least one of them must be wrong.
Because the payroll survey result is less volatile on a monthly basis, economists usually consider it more reliable. I basically agree with that, with the reservation that if the household survey systematically (not necessarily all individual months, but on average) diverge in one direction then this is a hint that the payroll survey number likely underestimates or overestimates (depending on which direction the divergence is) employment growth.
And lately, we have seen that the household survey has in fact been systematically weaker. During the latest six months, between February 2012 and August 2012, payroll survey employment saw a gain of 580,000 jobs or about 0.45%. That is not exactly what one would call a vigorous boom, but at least it's in line with or even slightly above population growth. By contrast, household survey employment saw a gain of merely 36,000 jobs, less than 0.03%, far below population growth.
This means that total unemployment, counting not just those officially unemployed, but also discouraged job seekers, has in fact probably increased this year, despite the fact that the headline numbers cited by the financial press might give you the opposite impression
Republican vice presidential candidate,Paul Ryan speaks during a campaign event at East Carolina University, Monday, Sept. 3, 2012, in Greenville, N.C. (Mary Altaffer/AP)
Are attacks on the Romney/Ryan budget fair?
Ever since Paul Ryan was named vice president, he has been relentlessly attacked by leftists, especially fellow Paul, Krugman. Krugman has attacked Ryan with many arguments, but the one he has most frequently used is that Ryan's assertion that he is a deficit hawk is a lie as his specified tax cuts and military spending increases far exceeds his specified cuts in non-military spending.
Krugman has also recently pointed to how Mitt Romney is inconsistent as he claims that military government spending is good for the economy while non-military government spending is bad.
I actually mostly agree with Krugman on these points. Based on previous Republican presidents we know that they don't cut non-military spending enough (or even cut it at all, in the case of George W. Bush) to finance their tax cuts and military spending increases, and given the fact that they refuse to specify most of their proposed spending cuts, and also refuses to specify what loopholes in the tax system they want to close, it seems likely that a Romney-Ryan administration wouldn't be different and that the deficit would increase.
I have also made the same point about the inconsistency regarding the effects of government spending from some Republicans.
What Krugman leaves out is that some Democrats are simililarly inconsistent on the issue of government spending. And even more interestingly, Krugman himself is inconsistent when he uses the likely increase in the deficit that Republicans would bring as an argument against them. After all, Krugman has for the last few years repeatedly argued that what America desperately need is a bigger deficit. So given the fact that Krugman argues that Romney-Ryan would increase the deficit and given the fact that he also argues that a bigger deficit would strengthen the economy, it follows that Krugman without realizing it in effect argues that Romney-Ryan is better for the economy than Obama-Biden.
People walk past closed shops in downtown Rome earlier this month. Italy shrank its deficit by about two thirds in the past year. (Gregorio Borgia/AP/File)
Deficits fall in southern Europe. Progress?
Here are the first half current account balance numbers for the first half of this year for the main four Southern European euro area countries, with the balance for the first half of 2011 in ( ).
Italy : -€11.6 billion (-€35.9 billion)
Spain: -€17.1 billion (-€24.6 billion)
Greece: -€5.9 billion (-€13 billion)
Portugal: -€2.9 billion (-€7.8 billion)
As you can see, Italy and Portugal had the biggest improvements with their deficits falling by about two thirds while Greece saw its deficit fall by more than half too, Spain saw the smallest improvement, with its deficit falling by only about 30%. Given the current market mistrust of those countries, even a smaller deficit is too big, but at least it is moving in the right direction.
Britain's Prime Minister David Cameron speaks during a news conference in the garden of number 10 Downing Street in London earlier this month. Karlsson argues that blaming the British double dip recession on spending cuts is a falsehood. (Dan Kitwood/Reuters/File)
The fairy tale of British spending cuts
As we all know, Keynesians blame Britain's double dip recession on the Cameron governments allegedly savage austerity, and argues that the recession proves that he should reverse course. There's one big problem with that argument: those spending cuts are nowhere to be found. Below are central government spending in Britain for the first 7 months of 2012 and 2011. The number excluding interest is arguably the most interesting one since interest rates isn't something the governmment can directly decide upon. I'm asking you, do these numbers look like spending cuts to you?
Central Government spending 2011 Jan-July: £356.35 billion
Central Government spending 2012 Jan-July: £368.91 billion +3.5%
Excluding interest 2011: £327.81 billion
Excluding interest 2012: £342.22 billion +4.4%
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