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Stefan Karlsson

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?

By Guest blogger / 09.12.12

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

By Guest blogger / 09.10.12

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?

By Guest blogger / 09.05.12

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?

By Guest blogger / 08.31.12

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

By Guest blogger / 08.21.12

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%

Women operate mobile phones in front of the stock index display of a securities firm in Tokyo in this July 2012 file photo. A recent article in The Telegraph has Stefan Karlsson returning to the question of whether the US bubble was caused by a global savings glut created in Asia. (Koji Sasahara/AP)

The 'savings glut' question, resurrected

By Guest blogger / 08.16.12

A reader asked me to comment on this Telegraph-article where the author blames bubbles in both America and Europe on a global savings glut created in Asia, as opposed to central bank manipulation (it should be mentioned that the article acknowledges a role for central banks, but this is described as a secondary effect provoked by the savings glut). I have previously discussed the alleged role of the "savings glut" for the American bubble when advanced by Alan Greenspan, and here is what I wrote:

"This explanation really doesn't explain why the bubble started to inflate in 2001 and ended in 2006-07. Did the savings glut start in 2001 and then end in 2006? To the contrary, the external surplus of both China and oil-exporting nations fell in 2001, while they rose quickly in 2006-07. And, as explained below, given how the central bank sets interest rates, those flows will mainly affect money supply instead of interest rates. Greenspan himself makes this argument by pointing to how long-term interest rates did not rise after the rate increases in 2004-2005.

This is dishonest for more than one reason. First of all, the housing bubble started already in 2001, when he pushed through rate cuts of an unprecedented magnitude, from 6.5% to 1.75% in a mere year. Secondly, because of the increased popularity of adjustable-rate mortgages, short-term interest rates were just as important as long-term interest rates. Thirdly, movements in market interest rates always tend to precede movements in the federal-funds rate as market interest rates are really the future average federal-funds rate during the duration of the bond. If really long-term interest rates were determined only by global liquidity, then were long-term interest rates about 1.5% in Japan and 6.5% in Australia until only recently?

This is all the more telling given the fact that Japan has a very high budget deficit and a huge public debt, while Australia had a budget surplus and a very small public debt. And to further illustrate the point, after the Reserve Bank of Australia unexpectedly reversed its previous rate-hike policy and started to aggressively lower short-term interest rates, the 10-year yield has fallen some two percentage points, while the Japanese yield has stayed unchanged. And long-term interest rates did in fact rise from 3.3% in June 2003, when the deflation scare made everyone believe interest rates would stay low for long, to 4.7% in June 2004 when the Fed had already signaled the start of a series of rate increases. That long-term interest rates didn't rise further after that merely reflected that the series of rate increases after that was factored in by the markets."

In this June photo, Japanese office workers wait for their colleagues in front of a railway station in Tokyo. Japan's employment rate has fallen over the years, but the problem is demographic more than economic. The number of retirees is rising. (Koji Sasahara/AP/File)

Japan's employment: fewer people, fewer jobs

By Guest blogger / 08.08.12

Noah Smith has a chart showing a big decline in the employment rate in Japan:

Yet contrary to what he writes, this does not reflect an increase in unemployment, hidden or open. The reason is that this number refers to employment relative to total population older than 15. But if you look at 15-64 year olds alone, the employment rate has in fact increased, from 68.8% in 2001 to 70.2%, and increasing further to 71% in June 2012.  The unemployment rate has fallen from 5% in 2001 to 4.6% in 2011 and 4.3% in June 2012.

Unemployment is thus in fact lower than in a very long time. The reason why the ratio of workers to the total population has dropped is not that unemployment has increased -again, it has in fact dropped- but that Japan is rapidly becoming something of a nation of geezers.

Japan has, much like the other former leading World War II axis power, for decades had a very low birth rate something that together with Japan's "no gaijins allowed" immigration policy now results in a shrinking work force. Meanwhile, Japan's extremely high life expectancy means that the number of old people grows fast even as the number of young people shrinks fast.

Fans wave a British flag as they watch swimming competitions at the Aquatics Centre in the Olympic Park during the 2012 Summer Olympics in London last week. Britian's recent GDP growth has been more sluggish than it first appears, according to Karlsson. (Lee Jin-Man/AP/File)

British economic growth is weaker than it looks

By / 08.06.12

British population figures for 2011 were finally added to the Eurostat database, and they showed an increase  in population by about 0.8%, slightly higher than the previous year. Population growth has been remarkably resilient, as other countries with weak economies, including Iceland, Ireland and Spain has seen sharp reductions in population growth both because of a drop in birth rates and because large scale net immigration was turned into large scale net emigration. Yet in Britain the high birth rate has remained more or less unchanged while net immigration has increased somewhat.

However, the relatively high growth in population also means that development in per capita GDP has been even worse than the headline numbers suggests. In the 2008-2011 period GDP fell by a cumulative 2.5% while population increased by 3%, meaning that per capita income fell by 5.3%. By contrast Germany who saw a 3% increase in GDP and whose population dropped by 0.5% saw a 3.5% gain in per capita income.  After adjusting for population, Germany's relative gain increases from 5.6% to 9.3% in just 4 years.

In this Thursday, Aug. 2, 2012 photo, ironworkers James Brady, left, and Billy Geoghan release the cables from a steel beam after connecting it on the 104th floor of 1 World Trade Center, in New York. US employers added 163,000 jobs in July. (Mark Lennihan/AP)

US jobs added, but report details aren't so rosy

By Guest blogger / 08.03.12

Markets gained on news that employment according to the payroll survey rose by 163,000 in July. However, the other survey, the household survey, showed a drop in employment by 195,000. And while that survey is on a monthly basis more volatile and unreliable it can be an indicator that the payroll survey underestimates or overestimates labor market strength if it deviates systematically from it. And since February, household survey employment is only up by 0.1% compared to a 0.5% gain in the payroll survey, indicating that the payroll survey likely overestimates job growth in recent months.

Two police officers patrol at St. Pancras Station in London, Thursday, July 26, 2012. Karlsson argues that the influx of money from the London-histed Olympic games won't do much to help a declining UK economy. (Emilio Morenatti)

London Olympics won't save the UK's economy

By Guest blogger / 07.26.12

Second quarter U.K. GDP was even weaker than I, and almost all other analysts, thought it would be, contracting by 0.7% (2.8% at an annualized rate) compared to the first quarter and by 0.8% compared to Q2 2011. The drop reflected to some extent effects of the Queens Diamond Jubilee and could also to a small extent be an illusion reflecting a lack of adjustment for terms of trade improvements, but there is little doubt that there is a real underlying contraction.

The fact that the Queens Diamond Jubilee was a one time event that will be reversed will be positive for the third quarter number. But what about the soon upcoming Summer Olympics that will be held in London?

Well, that too will provide support as it will increase the number of tourists in the London area and also enable for example hotels and hostels to charge higher prices.  However while the Olympics and the reversal of the Queens Diamond Jubilee might provide enough support to push third quarter growth above zero they won't end the underlying decline especially as exports are hit by the reduction in demand from the debt crisis and by the overvalued pound.

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