Wednesday 20 November 2013

Full circle

Economists of my generation, who had been more pessimistic about the end-of-war outlook, within six months after mid-1945 mostly realised that they had better cut their losses and work the other side of the street of high employment. 
Keynesianism as a tool of analysis superseded Keynesianism as a depression ideology. The old King is dead; long live the new King of the "neoclassical synthesis!" 
P.A. Samuelson 1988

I wish we will continue to circle and that Say's law will hold at least in the long run. (If you have not, read Krugman, Wolf on Summers intervention last week, might need subscriptions). There is something disturbing in the long term data. Here are the US (click to enlarge):

To understand how to connect the figures I will refer to the usual brilliant suspect. J.M. Keynes, who else? (here). We might need more clear thinking in connecting Long Run and Short Run saving glut varieties to identify the right set of policies.  

I plot the implicit rate of depreciation on fixed assets (an old acquaintance I might say), to distinguish net and replacement investment. You can also connect it to Keynes period of production. Yes, you can also interpret it as technological embodied progress. But most of it, is due to a composition effect.

By the way, my Phd thesis (2004) was (maybe) connected to the decrease in the depreciation rate you observe during the last recession. I had postulated that replacement investment had become an important margin of adjustment during cyclical fluctuations and studied some of the consequences on the aggregate economy (basically a more elastic aggregate supply).

Wednesday 13 November 2013

Feeling the Blues

Moral hazard and debt dilution in Eurobonds before 1914

In a recent paper with Coskun Tuncer from UCL, I use five historical case studies of debt mutualisation to investigate some of the potential implications of the issue of Eurobonds. The abstract is:

Debt mutualisation through Eurobonds has been proposed as a solution to the Euro. Although this proposal has found some support, it also attracted strong criticisms as it risks raising the spreads for strong countries, diluting legacy debt and promoting moral hazard by weak countries. Because Eurobonds are a new addition to the policy toolkit, there are many untested hypotheses in the literature about the counterfactual behaviour of markets and sovereigns. This paper offers some tests of the issues by drawing from the closest historical parallel–five guaranteed bonds issued in Europe between 1833 and 1913. The empirical evidence suggests that contemporary concerns about fiscal transfers and debt dilution may be overblown, whilst creditors’ moral hazard may be as much of a problem as debtors’.

And a version of the full paper can be found here.

Tuesday 12 November 2013

The Review: a dialogue between Germany and Europe

Germany’s current account surplus has been a subject of heated debate for some time… () …If Germany can take steps to lift domestic demand and investment, while France embraces reforms to its labour market, business environment and pension system to support competitiveness, they will together do a great service to the entire eurozone providing stronger growth, creating more jobs and reducing social tensions.
Olli Rehn, 11-11-2013

Eight European nations agreed today to realign their currencies after West Germany accepted French demands and agreed to a set of currency values that avoided the possible collapse of the European Monetary System…()...German officials said Mr. Delors had given assurances that France would reduce its budget deficit by cutting spending on social programs and welfare payments. Mr. Delors also reportedly said that France would try to reduce the deficits of its nationalized industries, another cause of inflation. The devaluation itself would cut the trade deficit by making imports more expensive and exports less costly to others.
New York Times, 21-3-1983

The EC will likely start an in-depth review of the German economy in the framework of the EU's Macroeconomic Imbalance Procedure. The persistent current account surplus of Germany stands above 6% of GDP since 2006 (according both to Eurostat and the IMF, see figure below) and is a serious imbalance that might have warranted a more timely identification than waiting for the US Treasury wake up call. (click to enlarge)

You could think better later than never, but the timing is not on Europe side. As the commissioner underlines in his piece, a government must still be formed in Germany. Let me add that the European elections are 6 months away (how optimistic I was ...). What I want to convey is that the publication of an official EC document that basically prescribes to Germany inflation must be well prepared and timed. Especially after the votes against the decrease in the ECB key interest rate last Thursday by the three central bankers of what was de facto the old mark block.
That takes me to the initial quotes.
There is narrative that says that going back to national currencies (and the ERM) could simplify realignments when they are needed. This narrative pleases the anti-euro fraction of society and UK civil servants. In the not too distant past, to have realignments, everybody had to agree. That was the case during the episode reported by the NYT in the introductory quote. Shortly after the realignment, Mitterrand initiated "Le Tournant de la Rigeur" (or was it the "Virage"?). At that time France started a process of internal devaluation that lasted a decade and was helped by a second realignment in 1986. It was tough on unemployment. In another occurrence, post Berlin Wall, agreement on realignment was not reached (click).
There is another narrative that says that the euro countries have reached a level of integration (for example the level of the external assets and liabilities, think of the underlying contracts, but also trade in services, supply chains, etc) that makes strengthening the architecture of the euro-zone a superior solution. Moreover, while the flaws in the euro architecture have helped the creation of imbalances, the global shocks and processes occurred during the last decade cannot be ignored. This narrative pleases the pro-european fraction of society.
I would suggest to both groups to abandon the narrative approach, useful, but prone to drama, and start a conversation with the objective to give a reasoned and detailed description of what are the outcomes and choices that the people will have to vote for or against in the next elections. The review could be an opportunity. In the trade-off between further integration and decentralisation I restricted my thoughts to the economic sphere as I believe that economic integration is compatible and subordinated both with cultural diversity and "decentrism" to use a word from my sharp follower uberwomen who deserves a better answer. But I need some time to articulate it.

Saturday 9 November 2013

The rise and demise of the Troika virtues: Portugal, 2011-2013

The Memorandum of Understanding on Specific Economic Policy Conditionality, signed between the Portuguese Government and the European Union, the IMF and ECB, on 3 May 2011, was praised by a large number of Portuguese politicians, economists, and a considerable share of the public, from socialists to social-democrats and Christian democrats. The 34-pages long document was declared by many as an amazing, in-depth and detailed exercise, imposing measures that would overhaul the Portuguese economy, the State or the judiciary, in order to put the country in the right track and never default again in the future. The first press conference of the Troika representatives, on 5 May 2011, was attended massively by the media, and received widespread attention by a thrusting public, eager for a definite solution for the domestic economic problems. Since then, all has changed. The Troika representatives do not appear in press conferences or under the public eyes any longer and the number of politicians and economists that still praise its role has been reduced to a few diehards of austerity. This talk argues that the initial popularity of the Memorandum and the Troika is the outcome of a long-standing misperception of Portugal’s growth potential and position in Europe, which has long roots back in History. The analysis of the Troika experience, however, may be a valuable contribute to a better understanding of the problems facing the Portuguese economy within the European Union. Here.

Friday 8 November 2013

Labour market in Portugal (take 2)

Yesterday, Francesco Franco posted a quick view of the recent numbers. I felt the need to have some extra information - more on the past (I propose for discussion to start on the first quarter of 2011), and add the movement in total population.
The picture below shows the relative evolution (all series normalized to 1 in the first moment; the unemployed index series is shown in the right-hand-side axis).

Adding to the good news noted by Francesco, we have the news that total population has a downward trend in 2012, becomes stronger in 2013, and the same occurs to the active population. Looking at the absolute change in numbers from previous trimester (second figure) is somewhat messy. And I suspect that full numbers of emigration may not be totally reflected yet.

Thursday 7 November 2013

Labor market in Portugal

Good news from the labor market front in Portugal. The unemployment rate in 3Q-2013 is estimated to be 15.6%. Still high but lower than expected. As the number of unemployed has decreased this is unambiguously good news both for people and for public finances. Nevertheless we need to stay objective and fully accept what the unemployment rate measures. Portugal labor force and employment have been shrinking since last year (but not in the last quarter). As an illustration consider the following thought exercise: what would be the unemployment rate if the labor force did not decrease an stayed at her 3Q-2012 value of 5,527.2 million persons. (click to enlarge)