Stefan Karlsson

A worker counts US dollar bills at a money changer in Manila. Dividend income jumped an annualized $268 billion in December compared to November, Karlsson writes, and by $302 billion compared to October (Romeo Ranoco/Reuters/File)

Incentives matter

By Stefan Karlsson, Guest blogger / 01.31.13

According to the first preliminary U.S. GDP report, nominal GDP increased at an annualized rate of just 0.5%-yet nominal disposable personal income rose at an annualized rate of 8.1%.
How is that possible? Well, in part it probably reflects so-called statistical discrepancy. Production- and income numbers are based on different data sources and this quarter, unlike previous quarters, the production numbers are probably weaker than the income numbers.
The second, and likely far more important, explanation is that companies made large advance payments of salaries and dividends because they expected a big increase in tax rates. The fact that dividend income jumped an annualized $268 billion in December compared to November, and by $302 billion compared to October illustrates the importance of this factor.

This will with near certainty be more or less entirely reversed during this quarter.

One of the lessons of this is that people do respond to incentives. If they hadn't, we wouldn't have seen these large advance payments of salaries to high income earners, and above all, dividends.

The word "Yen" is pictured on a Japanese bank note on top of a US dollar bill at Interbank Inc. Money exchange in Tokyo in this September 2010 file picture illustration. (Yuriko Nakao/Reuters/File)

Currency exchange rates: How did the dollar do in 2012?

By Stefan Karlsson, Guest blogger / 01.10.13

It has become an annual tradition here to summarize yearly exchange rate movements for some selected major currencies. 

In 2012, the U.S. dollar fell against most other currencies, with only the Indian rupee, the Brazilian real and the Japanese yen falling in value against it. The yen's big drop was the by far most dramatic change, followed interestingly by the big increase for the South Korean won. Since Japan's and South Korea's economies are specialiced on very similar things, like electronics, ships, and cars, and because they therefore are direct competitors to each other, this will create some problems for South Korean companies.

It should however be noted that the won's big increase in value relative to the yen comes after several years of big drops, and compared to a few years ago, the won is despite the big rebound in 2012, significantly weaker compared to the yen.  ( Continue… )

The National Debt Clock hangs from a building near Times Square in New York in this February 2011 file photo. If President Obama thinks the $1 trillion coin option is too unorthodox, he will be forced to agree to spending cuts, Karlsson writes. (Joshua Lott/Reuters/File)

Is a $1 trillion coin the solution to the debt crisis?

By Stefan Karlsson, Guest blogger / 01.08.13

Now that the U.S. debt limit has been reached again depite being raised by $2.1 trillion (to $16.4 trillion) less than 1½ years ago, the limit and possible ways for Obama to evade it if House Republicans refuse to raise it have been debated, so I will offer some thoughts on the issue here.
On the one hand, I sort of agree with those liberal critics who argue that it makes no sense for Congress to on the hand make certain taxation and spending decisions and then to make a decision about debt unrelated to that. Since the change in debt is an arithmetic result of the difference between spending and revenue, making two decisions could be seen as a denial of the laws of arithmetic.
'
However, this doesn't necessarily mean that the debt limit is illegitimate, it could just as well imply that the decisions authorizing unlimited deficit spending are illegitimate. After all, most people have actual or potential debt limits in terms of how much creditors are willing to lend them. This means that one has to try to increase one's incomes or reduce spending once one comes near the limit. Regardless of whether one thinks that would be a good policy for the government or not, it is certainly consistent with the laws of arithmetic to adjust revenue and spending policies instead of doing away with the debt limit.

And as it happens, the debt limit represents the best chance of achieving what the talks of the "fiscal cliff" utterly failed to achieve (indeed, they in fact quite to the contrary resulted in higher spending): namely lower spending in exchange for a higher debt limit. That was in fact what happened at the latest drama over the debt limit in 2011, though none of the cuts have actually been implemented yet.  ( Continue… )

French actor Gerard Depardieu, seen here entering his home in Paris earlier this month, says he is leaving France because 'success' is being punished with a 75 percent income tax on the rich. A French court has struck down the tax, but the ruling suggests it's only temporary. (Benoit Tessier/Reuters/File)

French court strikes down tax on rich, but it won't save France

By Stefan Karlsson, Guest blogger / 12.31.12

Apparently, a French court has struck down Socialist President Francois Hollande's new 75% tax rate on income above €1 million, something that some think means that there won't be punitive taxation of the richest in France. However, what the court actually objects to isn't the high tax rate, but that it will be applied to individuals, instead of households as has been the rule in France. By applying it to individuals while continuing to otherwise tax households, two households with the same total income could end up paying different rates depending on how incomes are divided among members of those households, something that the court finds violates the equal treatment rule in the French constitution.

This means that the Socialists are free to come up with a new tax proposal that applies a 75% tax on household income above €1 million, and the government has indeed already that it plans to quickly introduce a new proposal that doesn't violate the equal treatment rule.

It is a shame for France that the court in fact didn't strike down the punitive taxation, and only objected to some technical details in the enacted proposal. Even using unrealistic static analysis, where behavior isn't affected, the tax would have only brought in €210 million, a neglible sum (about 0.01% of GDP) in France's €2 trillion economy And considering how it has driven away hundreds of rich Frenchman, including famous actor Gerard Depardieu to Belgium and other countries, and created negative PR for the French business climate, the tax is in fact a lot more likely to lower tax revenue rather than increase it.

The U.S. Capitol building is pictured as lawmakers returned from the Christmas recess in Washington Thursday. Not stopping the fiscal cliff would represent a great leap toward ending the current unsustainable and unsound build up of debt, Karlsson writes. (Mary F. Calvert/Reuters/File)

Could going over the fiscal cliff be a good thing?

By Stefan Karlsson, Guest blogger / 12.28.12

Veronique de Rugy makes the case for "going over the cliff". As she correctly points, that has its negative side in the form of higher marginal tax rates, something that is bad for growth, but nevertheless, it is long overdue for Americans to decide whether they want big government or not, instead of continuing the current policy of small government when it comes to taxation and big government when it comes to spending. In the long run, the current deficits that the combination of low taxes and high spending means is both unsound, harmful and unsustainable.

So ultimately, they 'll have to choose between either raising taxes (and that means higher taxes not just for the rich, but for the middle class as well) or cutting popular spending programmes or do a combination of these two. What the so-called "fiscal cliff" means is in fact doing that third option of both raising taxes and cutting spending to cut the current deficit of more than $1 trillion a year by half. 

Not stopping it would therefore represent a great leap toward ending the current unsustainable and unsound build up of debt. The fact that the so-called debt ceiling (currently at $16.4 trillion, more than $2 trillion higher than 16 months ago) will be reached on the last day before "the cliff" could be viewed as a sign that the massive deficit reduction it means should be implemented, even though parts of it (the marginal tax rate increases) are bad for growth.

People exercise with wooden dumbbells during a health promotion event to mark Japan's "Respect for the Aged Day" at a temple in Tokyo in September. The population of Japan is expected to fall by 30 percent to less than 90 million by 2060, with 2 in 5 people being 65 or older, a government agency survey showed in January. (Kim Kyung-Hoon/Reuters/File)

Japan's new inflationary strategy: wrong target

By Stefan Karlsson, Guest blogger / 12.27.12

Japan has during the latest decade lagged most countries in GDP growth and it has also had low but relatively persistent price deflation. This has by some been interpreted as evidence that even low levels of deflation is harmful to the economy.

However, if you adjust for population growth, Japanese growth has actually been in line with U.S. growth and somewhat higher than the average for Western Europe. And if you further adjust for the fact that Japan's population is aging much faster than elsewhere, growth has actually been higher. Total GDP may have grown slower, but GDP relative to its working age population has been growing somewhat faster than the average for rich countries.

As a result, unlike both the U.S. and Western Europe it has a higher employment to population (in the 15 to 64 year age span) than a decade ago, and a lower unemployment rate. This clearly indicates that the source of Japan's economic stagnation is demographic, not monetary.

This didn't stop Japanese voters from electing a new government that promised to create at least 2% in yearly inflation and has threatened to remove the Bank of Japan's formal independence unless it does a lot more to inflate. Since an "independence" that depends on it following orders isn't really independence, this means that the Bank of Japan's independence has in effect already been abolished. ( Continue… )

Office workers look from windows as Britain's Queen Elizabeth arrives to meet with Ireland's Prime Minister Enda Kenny at Government Buildings in Dublin in this May 2011 file photo. (Darren Staples/Reuters/File)

Is Ireland's economy on the rebound?

By Stefan Karlsson, Guest blogger / 12.18.12

Ireland is often lumped together with the Southern European crisis countries. That was until recently justifiable since it too is a euro area country that has had a very weak economy and received a bailout due to soaring yields on its government bonds.

Yet Ireland has the recent year come to diverge in a positive way from Portugal, Spain, Italy and Greexe. Its borrowing costs have dropped dramatically so that they now potentially could return to the bond market. True, yields have dropped dramatically in Greece, Portugal and Italy too, but in Greece and Portugal they are still at punitive levels and Italy never saw yields rise high enough to force them to leave the bond market.  

And though current account deficits in Southern Europe has dropped dramatically in the latest year, particularly in Greece and Portugal, they still have external deficits. By contrast, Ireland now has a large and rapidly rising current account surplus, €6.9 billion, or more than 5% of GNP, up from a surplus of just about €1.5 billion a year earlier and a deficit of more than €10 billion at the height of its housing bubble in 2007.

Though domestic demand is still falling somewhat, the increase in its external surplus was big enough for GNP to increase 3.7%. Contrast this with the significant declines in economic activity in Southern Europe in general and Greece in particular. It is also in fact stronger than in all non-Baltic EU countries.  ( Continue… )

Christie's specialist Caitlin Graham poses for photographers with a dollar bill signed by Andy Warhol, during a photocall at the auction rooms in London, in this November 2012 file photo. Acknowledging that the dollar has been debased so much is perhaps something that many Americans don't want to do, Karlsson writes. (Kirsty Wigglesworth/AP/File)

Would a one-dollar coin save Americans money?

By Stefan Karlsson, Guest blogger / 11.28.12

Here is an article noting that the U.S. Treasury would save $147 million by switching its $1 note with a $1 coin, but that proposal faces opposition not only from the supplier of paper, but also from a majority of Americans.

From a Swedish perspective, changing to a $1 coin would seem natural considering that here the highest valued coin, the 10 krona coin, is worth more, roughly $1.5, 6 times more that of the highest valued U.S. coin and 1.5 times more than a $1 coin would be worth

Still, even stranger from a Swedish perspective is however the coins that are still around, especially the penny. The lowest valued coin here is the 1 krona coin, whose value is about 15 cents, 1.5 times more than the value of the dime , 3 times more than the value of the nickel and 15 times higher the value of the penny.

Now, it is true that it was only as recent as in October 2010 that the previously lowest valued coin, the 50 öre coin was abolished, but even that would have been worth 1.5 times the dime and 7.5 times the penny.  ( Continue… )

In this November 2012 file photo, Britain's Prime Minister David Cameron arrives at the EU council headquarters in Brussels for a European Union leaders summit discussing the European Union's long-term budget. Spending is up in Britain, despite talk of big cuts, Karlsson writes. (Yves Herman/Reuters/File)

Where are Britain's spending cuts?

By Stefan Karlsson, Guest blogger / 11.26.12

We've all heard the fairy tale of the big spending cuts and "austerity" in Britain. Yet there is no trace of that in the British budget statistics. During October for example, spending excluding interest payments was £48.3 billion, up by 9% compared to Ovtober 2011. That reflected largely calendar effects, but if you look at the August-October period as a whole, the increase was 3.7%.  And for the entire January-October 2012 period spending increased by 3.9% compared to January-October 2011. This is significantly above the rate of inflation (especially if you look at the GDP or domestic demand deflators) and also significantly above nominal GDP growth.

Because of that, and because of the fact that total tax revenue has been roughly unchanged in nominal termsm (which is to say they've fallen in real terms), the deficit has increased by about £10 billion. The increase would have been even larger if interest rates hadn't been so low due to Bank of  England QE and because of the irrational investor belief in British bonds as "safe havens"., something that has caused interest payments to decline despite a rising debt level.

It could also be noted that because of a misleading accounting trick, formal net borrowing is down. What they did was to transfer the Royal Mail pension fund to a government institution, and then subtract the assets of that fund from net borrowing and net debt, while ignoring the liabilities that the fund has. This didn't really reduce the real burden of debt, but it reduced formal net debt, and for this year, formal net borrowing.