China and Inflation Update

A lot of the concepts in macro-economics are relatively easy to define in broad, conceptual terms.  But when it comes to actually measuring them, things get very, very difficult.  Measurement requires precise, observable, countable definitions.  Inflation is one of the these concepts.  Conceptually it’s easy:  a general rise in all prices.  But it practice it’s very hard to measure.   Price indexes, even when done well with good input data are nothing but very rough guesstimates.  In emerging markets like China the data are even somewhat suspect.

One thing is clear though.  Inflation, a general rise in all prices, happens under similar circumstances to when a particular price increses.  In a particular single-product market, the price goes up if the demand keeps increasing beyond what the supply can produce.  A general rise in all prices then happens when the total or aggregate demand for goods grows or exceeds the ability of the society to produce (aggregate supply).  One way this happens is for aggregate demand to grow so much that one of the critical inputs to production hits capacity.  Usually, in more modern economies, this means full employment has been reached and there are no more workers to  be put to work producing more goods.  (another way it happens to suddenly restrict the supply of external oil to an economy, a la the 1970’s in the U.S.).   An early warning sign of that an economy is reaching full-capacity and cannot keep growing as fast is industrial wages.  When unemployment disappears and full employment is achieved, industrial workers become very valuable, scarce resources and the bidding begins (wage increases).

It appears that China may be reaching such a point.  We are starting to see significant increases in industrial worker wages. Or so it appears – we should always be careful about generalizations about an economy as large as China’s that produces weak and unreliable economic statistics.  If the great Chinese migration of rural agricultural population into new urban industrial workers is starting to run low on new workers, then the recent wage increases could be the early signs of significant inflation in China.  It will require policy changes.  Click to see more on what’s happening below the fold (thanks to Naked Capitalism): Continue reading

Europe Update: Strikes in Spain, UK Austerity, ECB Bond Purchases

European leaders (read banker-types) insist on austerity (read lower real wages and services for middle and lower classes) in the midst of 10% and rising unemployment.  Dangerous mix.  The one good sign is that the ECB is actually buying govt bonds, including Greek bonds, despite it’s public hard-line position.  From Calculated Risk:

Europe Update: Strikes in Spain, UK Austerity, ECB Bond Purchases

Form the NY Times: Spain Hit by Strike Over Austerity Measures

Spanish public workers went on strike on Tuesday against a cut in their wages in what could be the first of several union-led protests against the government’s latest austerity measures.

From The Times: Osborne’s four-year austerity programme

George Osborne braced the country for cuts in government spending of up to 20 per cent as he laid the ground for an austerity programme to last the whole parliament.

From Der Spiegel (a week ago): ECB Buying Up Greek Bonds (ht Chris)

Bonds worth about €3 billion are now being purchased on every trading day, with €2 billion of the bonds coming from Athens.

From Bloomberg: Greek Default Seen by Almost 75% in Poll Doubtful About Trichet

Global investors have little confidence in Europe’s efforts to contain its debt crisis or in European Central Bank President Jean-Claude Trichet, with 73 percent calling a default by Greece likely.

From the NY Times: E.U. Finance Ministers Agree on Tighter Oversight

Despite continuing tensions over economic policy, European Union finance ministers agreed Tuesday on far-reaching steps to tighten oversight of national governments’ budgets and crack down on falsification of economic data, in a concerted effort to avert a further loss of confidence in the euro.

Social Spending and Poverty – U.S Compared to Denmark & Sweden

Many people commonly assume that Nordic countries (Sweden, Denmark, Norway, Finland) spend a lot of money on extensive welfare-state systems, while the U.S. has a more “market-driven” system that economizes by not “wasting” money on welfare.  Like many assumptions, this one fails the fact-test.  Turns out the U.S. spends as much Denmark and Sweden, but we don’t get near as much for our money.  Why?  Because of how we do it.  In the U.S., we tend to alter the tax code to give tax breaks to people to help them with social needs.  Example: we want housing to be affordable so we provide tax-deductibility (a form of subsidy) for interest on mortgages. Of course only middle-class and upper-class people benefit from it because they’re the ones who own houses – renters don’t benefit.

In the Nordic countries, the policy approach tends toward providing direct subsidies or free goods to all citizens.  Of course that’s more expensive, so they count the subsidies/benefits as part of income to be taxed. On net, the government spends the same as the U.S. does per person (actually less), but it most benefits those who need it most.

Mark Thoma directs us to

Lane Kenworthy: Social Spending and Poverty

Recent research suggests that social spending in the US is similar to or exceeds the expenditures in Denmark and Sweden, all things considered. But where does this spending go? Who are the main beneficiaries? The disadvantaged, or other groups?:

Social spending and poverty, by Lane Kenworthy: It’s commonly thought that a market-liberal political economy is best for the rich while a social-democratic one is best for the poor. Some recent research suggests reason to question this. Analyses by Willem Adema of the OECD, by Adema and Maxime Ladaique, and by Price Fishback conclude that the quantity of social expenditures in the United States is similar to or greater than in Denmark and Sweden, two nations long considered large-welfare-state exemplars.*

How so? Government social transfers account for a much larger share of GDP in Sweden and Denmark. But the U.S. government distributes more benefits in the form of tax breaks rather than transfers than do the two Nordic countries; Denmark and Sweden tax back a larger portion of public transfers than the United States does; private social expenditures, such as those on employment-based health insurance and pensions, are greater in the U.S.; and America’s per capita GDP is larger.

via Economist’s View: Lane Kenworthy: Social Spending and Poverty.

The Great Deprivation: Decapitating Human Capital

Good article describing the long-term impacts of our short-term failure to address unemployment and jobs creation:

Everyone keeps calling it the Great Recession, as though they are not too depressed about the prolonged backslide in gross domestic product, which only recently resumed its upward climb.

Backslide may describe what happened to the market economy, but it doesn’t capture what’s happening now in families hit hardest by persistent unemployment.

They are suffering not a temporary setback, but a permanent reduction in their ability to develop their own and their children’s capabilities. Put in terms that economists are fond of, their human capital is being … decapitalized.

via The Great Deprivation – Economix Blog –

Scariest Thing You’ll See This Month

I know the BP spill is scary (oil now washing up in the Florida Keys!) and I know a new vampire movie is coming out this month. But put the following two things together.  First, let’s look at Friday’s unemployment report:

The economy has lost 0.6 million jobs over the last year, and 7.4 million jobs since the recession started in December 2007. Ex-Census hiring, the economy only added 20,000 jobs in May.

The unemployment rate decreased to 9.7 percent.

Percent Job Losses During Recessions The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

The dotted line is ex-Census hiring. The two lines will rejoin later this year when the Census hiring is unwound.

For the current recession, employment peaked in December 2007, and this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only early ’80s recession with a peak of 10.8 percent was worse).

That graph is by itself scary enough when you really look at it.  It compares all the post World War II recessions showing how deep they were (loss of employment and jobs) and long they were (length of time until we recovered all the jobs, not just started growing GDP).  Obviously, the current recession is the deepest and greatest loss since the Great Depression. But it’s also on track to take the longest period of time to recover, taking longer to recover than the nearly 4 years it took to recover from the “mild” 2001 recession.  To me this graph is like looking at some gross, scary, ugly monster in a horror movie, but it gets worse because…

Now we get this from the G20 Finance Ministers (via Financial Times and Calculated Risk):

First, from the Financial Times: G20 drops support for fiscal stimulus

Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday …

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances.
Excerpts with permission

This means that the leaders of the 20 largest economies have agreed to stop fighting unemployment and instead start tightening their budgets. No more stimulus – “austerity” instead. No more hope for the 10% unemployed in U.S., or the 8.7% unemployed in Canada, or 10% unemployed in Europe, etc, etc.
If the unemployment graph is a gross, ugly monster; the news from the G20 is an innocent, cute teenage girl deciding to enter the dark, abandoned house all alone while the soundtrack starts playing ominous sounding music. We know how that scene goes….

Address Unemployment and the Oil Slick

Mark Thoma agrees with Robert Reich and John Whitehead.  I’ll add my support too.  Let’s put unemployed teenagers to work NOW cleaning up the mess, even if we have BP has to pay to house them in the Gulf coast hotels that are rapidly losing business.

“Put Jobless Young People to Work Cleaning Up BP’s Mess”

Robert Reich has a wish:

Put Jobless Young People to Work Cleaning Up BP’s Mess and Order BP to Pay, Robert Reich Friday’s job report was awful. For most new high school and college grads finding a job is harder than ever. Meanwhile, states are cutting summer jobs for disadvantaged young people. What to do with this army of young unemployed? Send them to the Gulf to clean up beaches and wetlands, and send the bill to BP. …

[W]e’ve got hundreds of thousands of young people sitting on their hands right now because they can’t find jobs. Many are from affected coastal areas, where the tourist and fishing industries have been decimated by the spill.

The President should order BP to establish a $5 billion clean-up fund, and immediately put America’s army of unemployed young people to work saving the Gulf coast. Call it the new Civilian Conservation Corps.

(The old CCC — created by FDR at another time of massive unemployment and environmental stress — gave millions of young Americans jobs and training to reforest lands that had been degraded, provide emergency flood relief in the Ohio and Mississippi valleys, and build the infrastructure for our national parks.)

This isn’t exactly what he has in mind, but it’s along the same lines. John Whitehead:

Green jobs: “Unemployed Hired to Clean Affected Beaches”:

via The Unified Command in Mobile announced today the first deployment of the Qualified Community Responder (QCR) program that will put unemployed individuals to work in the counties that may be affected by the oil spill. Working closely with the Alabama, Mississippi, and Florida unemployment offices, unemployed workers have been hired to help with the cleanup effort.  A similar program exists in Louisiana.

Starting today some 400 QCR workers in Florida and Alabama began cleaning affected beaches….

The plan is to train more than 4,500 workers in the three states in the Mobile Sector (1,500 in Alabama, 1,500 in Mississippi, and 1,600 in Florida). To date there are 2,946 people trained and ready to be deployed (978 in Alabama, 1,500 in Mississippi, and 468 in Florida).

I’m assuming that these states will send a bill to BP, they should, and if they do then it is even closer to what Reich has in mind. With respect to Reich’s idea, if we go that route I’d prefer to have the government in charge of the clean-up rather than BP, with BP billed later. And I don’t see any reason to cap the bill at $5 billion. It will take whatever it takes to clean up after this mess (as though we can simply wash away the damage), and BP should pay the entire bill. If it bankrupts BP, too bad, they should still pay as much as possible with the government making up any shortfall in the amount needed to do the clean up job properly.