Update, March 20th: Speaking of ideological biases concerning inflation, Paul Krugman nails it, as usual.
On today’s Financial Times, Phillip Hildebrand gives yet another proof of unwarranted inflation terror. His argument is not new: In spite of the consensus on a weak recovery, the US economy may be close to its potential , so that further monetary stimulus would eventually be inflationary.
He then deflects (?) the objection that decreasing unemployment reflects decreasing labour force participation rather than new employment, by suggesting that it is hard to know how many of the 13 millions jobs missing are structural, i.e.not linked to the crisis. I think it is worth quoting him, because otherwise it would be hard to believe:
However, an increasingly vocal group of observers, including within the Fed, posits that more of the fall in the participation rate appears to have been structural than cyclical, and it was even predictable – the result of factors such as an ageing workforce and the effect of technology on jobs.
(the emphasis is mine). Now look at this figure, quickly produced from FRED data: Read more
We have been distracted by many events in the past few days, and an important document by the Commission did not have the attention it deserves. In a Communication on the social dimension of the Economic and Monetary Union, sent to the Council on October 2nd, there are a number of very interesting elements. In general, what I find remarkable is the association of deeper social integration with the more general objective of macroeconomic rebalancing. It is never said explicitly, but the Commission stance is that stopping macroeconomic divergence requires more social cohesion and, ultimately, solidarity among Member States. It goes without saying that I find this important and welcome news.
Browsing national accounts may be an inexhaustible source of insight on the current debate about austerity. Take this figure, which shows the evolution of real GDP and of its components for the US and the EMU, making the first quarter of 2008 equal to 100.
I tracked in particular the evolution of private (consumption plus investment) and public expenditure on good and services.
Paul Krugman hits hard on one of the most cherished american myths, the golden years of Reaganomics. He shows that using the middle class as a benchmark (the median family income of the economy), the Reagan decade saw a disappointing performance; this, not only if compared to the longest expansion in post war history, during the Clinton presidency, but also with respect to the much less glorious 1970s.
But, maybe, Krugman is telling a story of inequality, and not of sluggish growth. The fact that median income did not grow much during the Reagan years may not mean that growth was not satisfactory, but simply that somebody else grasped the fruits.
For curiosity, I completed his figure with average yearly growth rates for two other series: Income of the top 5% of the population, and the growth rate of the economy.
Well, it turns out that Reaganomics yielded increasing inequality and unsatisfactory growth. And well beyond that, median income consistently under-performed economic growth in the past forty years.
What seems extremely robust is the performance of the top 5% of the population. Their income increased significantly more than output over the past decades. It is striking in particular, how the very wealthy managed to cruise through the current crisis, when income of the middle class was slashed.
Nothing new, Ken Loach in 1993 said it beautifully: it is always raining stones on the working class. But I guess it does no harm to remind it from time to time…
Last Friday the negotiations on the 2014-2020 EU budget were put on hold because of fundamental disagreements among Member States. Surprise, Surprise… I do not think it is a big deal anyway. There is not doubt that at the next meeting a last-minute- low-key compromise will materialize. A compromise that will most likely save the most controversial items of the EU budget, like agricultural policy, and cut the very few investment programs that had made it into the budget in the past. But who cares, after all; our leaders will be able to show the usual self complacency, and the rest of us will be left with the all-too familiar sentiment of yet another missed opportunity.
Most commentators blamed David Cameron, but his position was not new, and hardly surprising. The UK has always tried to extract as much as it could from the European process, while giving as little as possible; others did it, are doing it, and will do it. But rarely with the consistency and the single-mindedness of the UK. This was true with EFTA in the 1960s, then again with the infamous UK rebate negotiated by Margaret Thatcher in 1984. If England never played for the common good in the past, how could we expect it to do so at a times of crisis?
No, the real surprise of the failed budget negotiation was not England, but Germany, and the coalition of the fiscal hawks. Read More
Give a look at Dani Rodrick on Project Syndicate (in a number of languages). The scary thing is that it is not completely implausible…
The latest IMF World Economic Outlook came out last week. It has lots of interesting remarks on the European austerity. Remarkably enough, it poses the problem of timing: fiscal consolidation, if too hasty, may end up being counterproductive. I played a little with the data accompanying the report, including the forecasts.
Paul Krugman has an interesting piece on federal and local expenditure in the United States, where he shows that the consolidated fiscal stance has been considerably more restrictive with Obama than during the Reagan era. This is not what retained my attention, nevertheless. Krugman does not mention that most of the US states (the exception being Vermont) have some form of balanced budget amendment. Krugman himself had warned a while ago that this made the task of the federal government in fighting the recession particularly hard. But once again, this is not the point I want to make.
Yesterday I gave a short interview (in French) on the crisis. In particular, my take on the Italian crisis is that the fundamentals are not dramatic, and certainly not worse than they were before the summer. The new element is the increasing political weakness of the Italian government. The absence of political leadership leaves the path open to speculation. Tito Boeri links the spreads to political mismanagement. Without going that far, it is plain that Italy has a political problem far bigger than an economic one.
The EU situation is the same, on a bigger scale. There is a striking difference with the United States where the political system, even in a situation of divided government and economic crisis, can stand in front of speculation. In Europe, the political void leaves the field wide open for market primacy over governments.