Tuesday, May 21, 2019

21/5/19: 'Popping up everywhere' or not? Entrepreneurship and start ups


Much has been written, taught and said about the New Age of Entrepreneurship and the new generations of entrepreneurs, allegedly springing up across the modern economies. The problem is, for all the marketing hype and academic programs enthusiasm, entrepreneurship (new business formation) is actually running pretty low.

Here is the U.S. data on new business formation:


While other data, e.g. Kauffman Foundation, shows relatively stable and even higher rates of entrepreneurship over recent years, much of this data aggregates both incorporated and non-incorporated businesses, including sole traders and self-employed. This is reflected in the fact that entrepreneurship rates in recent years have been sustained solely by a massive increase in entrepreneurship uptake by individuals with less than high school education and of older age cohorts:

Source: https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf

Over the same time, cohorts with higher education have seen a decrease in their entrepreneurship rates, driven in part by their rising share of population, their rising numbers, and, well, yes, lower incentives to undertake entrepreneurial risks.

Now, as to the age of entrepreneurs we have.
Source: https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf 

In  summary, the above table shows that the rates of entrepreneurship amongst the Millennials have declined, the rates for GenX-ers (35-44 cohort) have risen, but are quite volatile, with significant increases (2009-2010) associated with greater involuntary entrepreneurship (high unemployment), while overall increases in entrepreneurship have ben sustained by entrepreneurs of ages 45 and older.

So, to that often repeated popular and academist 'truism' of the New Age of Entrepreneurship and the great entrepreneurial spirit of the younger generations... errr, not quite.

Note: caveats notwithstanding, good data on the subject is available here: https://www.kauffman.org/currents/2019/02/indicators-provides-early-stage-entrepreneurship-data.

Monday, May 20, 2019

19/519: FocusEconomics 75 Top Economics Influencers List


Delighted to make @FocusEconomics top 75 Economics Influencers to Follow list:


Honoured to be in the company of some really inspiring people talking about economics, economic policy and research!

See the full list here: https://www.focus-economics.com/blog/top-economics-influencers-to-follow.

Thursday, May 16, 2019

16/5/19: Identifying Debt Bubble 4.0


Having just posted on the debt supercycle-related comments from Gundlach (https://trueeconomics.blogspot.com/2019/05/16519-gundlach-on-us-economy-and-debt.html), here is a chart identifying these super-cycles in the U.S. economy:


The periods of significant leverage in the U.S. economy have been identified as follows:

  • First, I took nominal GDP growth rates (q/q) snd nominal total non-financial debt growth rates (also q/q) for the entire period of data coverage for which all data points are available (since 1Q 1966). 
  • Second, I adjusted nominal non-financial debt growth rates to reflect the evolving ratio of debt to U.S. GDP.
  • Third, I subtracted adjusted debt growth rates from nominal GDP growth rates to arrive at change in leverage risk direction. This is the difference figure shown in the chart below. Positive numbers reflect quarters when GDP growth rate exceeded growth in GDP-ratio-adjusted debt and are periods of deleveraging in the economy, and negative periods correspond to the situation where GDP growth rate was exceeded by GDP-ratio-adjusted growth rate in debt.
  • Fourth, I calculated 99% confidence interval for historical average difference (shown in the chart below).
  • Fifth, I identified three regimes of debt evolution: Regime 1 = "Deleveraging" corresponds to the Difference variable being non-negative (periods where the gap between growth rate in GDP and growth rate in debt is non-negative); Regime 2 = "Non-significant leveraging up" corresponds to periods where the gap (difference) between GDP growth rate and debt growth rate is between zero and the lower bound of the confidence interval for historical average difference; and Regime 3 = "Significant Leveraging up" corresponds to the periods where statistically-speaking, the negative gap between growth in GDP and growth in debt is statistically significantly below the historical average.
I highlighted in the above chart four periods of significant, persistent leveraging up, identified as Debt Bubbles 1-4. There is absolutely zero (statistical) doubt that the current period of economic recovery is yet another manifestation of a Debt Bubble. And, given the composition of the debt increases since the end of the Global Financial Crisis, this latest Bubble is evident across all three components of non-financial debt: the households, corporates and the U.S. Federal Government. 


16/5/19: Gundlach on the U.S. Economy and Debt Super-cycle


U.S. growth over the past five years is based “exclusively” on government, corporate and household debt, according to Jeffrey Gundlach, chief executive of DoubleLine Capital, as reported by Reuters (link below). This is hardly surprising. In my forthcoming article for Manning Financial (in print since last week), I am covering the shaky statistical nature of the U.S. GDP growth figures, and the readers of this blog would know my view on the role of leverage (debt) in the real economy as a drug of choice for boosting superficial medium term growth prospects in the U.S., Europe and elsewhere around the world. What is interesting in Gundlach's musings is that we now see mainstream WallStreet admitting the same.

Per Gundlach, the U.S. economy would have contracted in nominal GDP terms (excluding inflation effects) three out five last years if the United States had not added trillions in new government debt. Just government debt alone. “One thing everybody seems to miss when they look at these GDP numbers ... they seem to not understand that the growth in the GDP it looks pretty good on the screen is really based exclusively on debt - government debt, also corporate debt and even now some growth in mortgage debt.”

And if private sector debt did not expand, U.S. "GDP would have been very negative.” Per Reuters report, nominal GDP rose by 4.3%, but total public debt rose by 4.7% over the past five years, Gundlach noted. "Against this debt backdrop and financial markets “addicted to Federal Reserve stimulus,” these are “very, very dangerous times” for the next U.S. recession, Gundlach ...said."

Per CMBC report on the same speech, Gundlach said that “Any thoughtful person would be concerned... It’s sounding like a pretty bad cocktail of economic risk, and risk to the long end of the bond market.”

As reported by Reuters: https://www.reuters.com/article/us-funds-doubleline-gundlach/u-s-growth-would-have-contracted-without-trillions-in-government-consumer-debt-gundlach-idUSKCN1SK2KW and by CNBC https://www.cnbc.com/2019/05/14/doublelines-gundlach-warns-of-recession-cocktail-of-economic-risk.html

As the charts below show, Gundlach is correct: we are in a continued leverage risk super-cycle. While nominal debt to nominal GDP ratio remains below pre-GFC peak, nominal levels of debt are worrying and debt dynamics are showing sharpest or second sharpest speed of leveraging during the current recovery phase. Worse, since the start of the 1990s, all three non-financial debt sources, households, corporates and the Government, are drawing increasing leverage. 




Tuesday, May 14, 2019

14/5/19: Agent Trumpovich Fails to Deliver... Again...


In the months following China's retaliatory introduction of tariffs on U.S. soybean exports, both traditional and social media were abuzz with the screeching sound of 'analysts' claiming that Trump Administration trade war with China is a boon to Vladimir Putin's Russian economy.

Behold this from the




 Alas, given that Russia supplies less than 1% of Chinese imports of soybeans, it might take a major Congressional investigation and a few PoliSci 'Russia experts' to get serious imaginary beef on the Trump Administration's alleged Russia-benefiting policies. Here is the data from ... well... Bloomberg, via Global macro Monitor (https://global-macro-monitor.com/2019/05/14/who-pays-the-tariffs/) showing that Russia is hardly a major winner from Trump's Trade Wars when it comes to soybeans:


Let's put the thin blue line of 'Russia winning, thanks to Trump' through some analysis:
  1. There is no dramatic massive rise in Russian exports of soybeans to China in 2018, and some dip in 2019.
  2. 2018 increase - moderate - came in after 2017 moderate decrease.
  3. Russian exports of soybeans to China have been rising-falling-rising very gently since 2013.
Friendly Canada quietly dramatically increased its sales of soybeans to China in the wake of the Trade War, although its exports were rising since 2015. Argentina also acted as a substitute supplier to China during the Trade War period so far, but that increase came on foot of massive collapse in exports to China since the start of this decade. In fact, while the U.S. share of Chinese imports of soybeans fell 30 percentage points, Brazil's share rose 35 percentage points. Trump's Administration-triggered Trade War with China has helped Brazil first, followed by Canada and Argentina. Russia hardly featured in this dastardly plot to serve Vladimir Putin's interests by Agent Trumpovsky.

Sorry, my dear friends in American mass media. You've faked another factoid.

14/5/19: TrueEconomics makes Top 100 Blogs by the Intelligent Economist


Delighted to see TrueEconomics making it (for the fourth year running) into https://www.intelligenteconomist.com/economics-blogs/ Intelligent Economist's Top 100 Economics Blogs of 2019.


14/5/19: Monetary Policy at the edge of QE


My new column for the Cayman Financial Review on the current twists in global Monetary Policies is now available on line: https://www.caymanfinancialreview.com/2019/05/07/monetary-policy-at-the-edge-of-qe/.

14/5/19: Trump's Trade Wars and Global Growth Slowdown Put Pressure on Corporate Earnings


The combined impacts of rising dollar strength, reduced growth momentum in the global economy and President Trump's trade wars are driving down earnings growth across S&P500 companies with double-digit drop in earnings of companies with more global (>50% of sales outside the U.S.) as opposed to domestic (<50 exposures.="" of="" p="" sales="" the="" u.s.="" within="">
Per Factset data, released May 13, "The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for the S&P 500 for Q1 2019 is -0.5%. For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 6.2%. For companies that generate less than 50% of sales inside the U.S., the blended earnings decline is -12.8%."


Sunday, May 5, 2019

5/5/19: House Prices and Household Incomes


A recent note from Brookings on the nature of the ongoing housing crisis in America has opened up with a bombastic statement:
"Over the past five years, median housing prices have risen faster than median incomes (Figure 1). While that’s generally good news for homeowners, it puts additional pressure on renters. Because renters generally earn lower incomes than homeowners, rising housing costs have regressive wealth implications." 

It sounds plausible. And it sounds easy enough to understand for politicos of all hues to take up the claim and run with it. There is is even a handy chart to illustrate the argument:


Except the claim is not exactly consistent with the evidence presented in that chart.

For starters, Case-Shiller Index covers 20 largest metropolitan areas of the U.S., which is a sizeable chunk of population, but by far not the entire country. And rents, as the Brookings article correctly says, are rising across whole states (the article, for example referencing California, which is way larger than the largest urban areas of the state alone). Second point, the article is completely incorrectly uses nominal house prices inflation against real (inflation-adjusted) income growth figures. If the converse of the article claim held, and real incomes exceeded housing price inflation, it would mean rising purchasing power for American households shopping for houses. However, that is not what the housing markets are historically, longer-term about. They are more about hedging inflation. The third, and more important point is that the article refers to the last 5 years. Why? No reason provided. But even a glimpse at the chart supplied in Brookings paper is enough to say that the same problem persisted prior to the Great Recession, was reversed in the Great Recession, and then returned post-Great Recession.

What's really happening here?

Ok, let's take four time series:

  • House prices 1: Median Sales Price of Houses Sold for the United States, Dollars, Annual, Not Seasonally Adjusted;
  • House prices 2: S&P/Case-Shiller 20-City Composite Home Price Index, Index Jan 2000=100, Annual, Seasonally Adjusted (same as in Brookings article);
  • Income 1: Real Median Household Income in the United States, 2017 CPI-U-RS Adjusted Dollars, Annual, Not Seasonally Adjusted (same as in Brookings article); and 
  • Income 2: Nominal Median Household Income in the United States, Current Dollars, Annual, Not Seasonally Adjusted
Observe that we have data only through 2017 for the last two measures due to data reporting lags.

Now, compute annual rates of growth in all four and plot them:

Blue line is the reference point here. Notice that the grey line (real household income growth) is really underperforming house price growth over virtually all periods, except for one: the Great Recession. Yellow line, however, is less so. Nominal incomes have more benign relationship to nominal prices than real incomes do to nominal house prices. Why would that be surprising at all? I am not sure. It did surprise folks at the Brookings, though.

Let's compute some average rates of growth for all four series and calculate the difference between:
  1. Real Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points; and
  2. Nominal Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points.
Instead of using an arbitrary 5 years horizon, consider instead the business cycle and longer term averages. Here they are:

Historical averages are, respectively, -3.71 percent and -1.31 percent. Across the last Quantitative Easing cycle, -2.94 percent and -1.60%, ex-QE cycle, -4.05% and -1.19%. 

So what does the above tell us? Things are not as dramatic, using nationwide house prices, than the Brookings claim makes it sound, and, more importantly, there is no evidence of a significant departure in the current QE cycle from the past experiences. When it comes to property prices, hoses inflation seems to be much less divorced from real and nominal income growth rates in the last four years (the recovery period post-Great Recession) than in the periods prior to the GFC.

Friday, May 3, 2019

3/5/19: The Rich Get Richer when Central Banks Print Money



The Netherlands Central Bank has just published a fascinating new paper, titled "Monetary policy and the top one percent: Evidence from a century of modern economic history". Authored by Mehdi El Herradi and Aurélien Leroy, (Working Paper No. 632, De Nederlandsche Bank NV: https://www.dnb.nl/en/binaries/Working%20paper%20No.%20632_tcm47-383633.pdf), the paper "examines the distributional implications of monetary policy from a long-run perspective with data spanning a century of modern economic history in 12 advanced economies between 1920 and 2015, ...estimating the dynamic responses of the top 1% income share to a monetary policy shock." The authors "exploit the implications of the macroeconomic policy trilemma to identify exogenous variations in monetary conditions." Note: the macroeconomic policy trilemma "states that a country cannot simultaneously achieve free capital mobility, a fixed exchange rate and independent monetary policy".

Per authors, "The central idea that guided this paper’s argument is that the existing literature considers the distributional effects of monetary policy using data on inequality over a short period of time. However, inequalities tend to vary more in the medium-to-long run. We address this shortcoming by studying how changes in monetary policy stance over a century impacted the income distribution while controlling for the determinants of inequality."

They find that "loose monetary conditions strongly increase the top one percent’s income and vice versa. In fact, following an expansionary monetary policy shock, the share of national income held by the richest 1 percent increases by approximately 1 to 6 percentage points, according to estimates from the Panel VAR and Local Projections (LP). This effect is statistically significant in the medium run and economically considerable. We also demonstrate that the increase in top 1 percent’s share is arguably the result of higher asset prices. The baseline results hold under a battery of robustness checks, which (i) consider an alternative inequality measure, (ii) exclude the U.S. economy from the sample, (iii) specifically focus on the post-WWII period, (iv) remove control variables and (v) test different lag numbers. Furthermore, the regime-switching version of our model indicates that our conclusions are robust, regardless of the state of the economy."

In other words, accommodative monetary policies accommodate primarily those with significant starting wealth, and they do so via asset price inflation. Behold the summary of the last 10 years.

3/5/19: Global and BRIC Manufacturing PMIs signal ongoing growth declines


The latest data, released this week by Markit under their PMI headings, shows that manufacturing sector global slowdown has entered into its 6th consecutive quarter in the first month of 2Q 2019. In line with this momentum, BRIC economies overall, with exception (for now) of Russia and China have also posted slower growth in April compared to 1Q 2019 average:


Russia posted slightly more upbeat growth in April at 51.8 compared to 1Q 2019 average growth of 51.3. China has barely bounced back into growth in April 2019 compared to 1Q 2019 reading of 49.7. Brazil slowdown was marked, with PMI for Manufacturing down from 53.0 in 1Q 2019 to 51.5 in April, while India suffered an even more significant fall-off in activity, with Manufacturing PMI falling from 1Q 2019 average of 53.6 to April reading of 51.8.

Global Manufacturing sector PMI averaged 50.7 in 1Q 2019, and in April it fell to 50.3, statistically implying zero growth in the sector. One has to go back to 3Q 2013 to see a reading at or below April 2019 levels. 

Tuesday, April 30, 2019

30/4/19: Journal of Financial Transformation paper on cryptocurrencies pricing


Our paper with O’Loughlin, Daniel and Chlebowski, Bartosz, titled "Behavioral Basis of Cryptocurrencies Markets: Examining Effects of Public Sentiment, Fear and Uncertainty on Price Formation" is out in the new edition of the Journal of Financial Transformation Volume 49, April 2019. Available at SSRN: https://ssrn.com/abstract=3328205 or https://www.capco.com/Capco-Institute/Journal-49-Alternative-Capital-Markets.



Tuesday, April 23, 2019

23/4/19: Income per Capita and Middle Class


New research reported by the Deutsche Bank Research shows that, on average, there is a positive (albeit non-linear) relationship between the per capita income and the share of middle class in total population:
Source: https://pbs.twimg.com/media/D42GiWNXkAMpID2.png:large

There is an exception, however, although DB's data does not test formally for it being an outlier, and that exception is the U.S. Note, ignore daft comparative reported in chart, referencing 'levels' in the U.S. compared to Russia, Turkey and China: all three countries are much closer to the regression line than the U.S., which makes them 'normal', once the levels of income per capita are controlled for. In other words, it is the distance to the regression line that matters.

Another interesting aspect of the chart is the cluster of countries that appear to be statistically indistinguishable from Russia, aka Latvia, Estonia and Lithuania. All three are commonly presented as more viable success stories for economic development, contrasting, in popular media coverage, the 'underperforming' Russia. And yet, only Latvia (completely counter-intuitively to its relative standing to Estonia and Lithuania in popular perceptions) appears to be somewhat (weakly) better off than Russia in income per capita terms. None of the Baltic states compare favourably to Russia in size of the middle class (Latvia - statistically indifferent, Lithuania and Estonia - somewhat less favourably than Russia).

23/4/19: Property, Property and More Property: U.S. Household Wealth Bubble


According to the St. Luis Fed, U.S. household wealth has reached a historical high of 535% of the U.S. GDP (see: https://www.zerohedge.com/news/2019-04-16/where-inflation-hiding-asset-prices).


There is a problem, however, with the above data: it reflects some dodgy ways of counting 'household wealth'. For two primary reasons: firstly, it ignores concentration risk arising from wealth inequality, and secondly, it ignores concentration risk arising from households' exposure to property markets. A good measure of liquidity risk controlled allocation of wealth is ownership of liquid equities (note: equities, of course, and are subject to Fed-funded bubble dynamics). The chart below - via https://www.topdowncharts.com/single-post/2019/04/22/Weekly-SP-500-ChartStorm---21-April-2019 shows a pretty dire state of equity markets (the source of returns on asset demand side being swamped over the last decade by shares buybacks and M&As), but it also shows that households did not benefit materially from the equities bubble.


In other words, controlling for liquidity risk, the Fed's meme of historically high household wealth is seriously challenged. And controlling for wealth inequality (distributional features of wealth), it is probably dubious overall.

So here's the chart showing just how absurdly property-dependent (households' home equity valuations in red line, index starting at 100 at the end of the Global Financial Crisis) the Fed 'wealth' figures (blue line, same starting index) are:


In fact, dynamically, rates of growth in household home equity have been far in excess of the rates of growth in other assets since 2012.  In that, the dynamics of the current 'sound economy' are identical (and actually more dramatic) to the 2000-2006 bubble: property, property and more property.

Monday, April 22, 2019

22/4/19: At the end of QE line... there is nothing but QE left...


Monetary policy 'normalization' is over, folks. The idea that the Central Banks can end - cautiously or not - the spread of negative or ultra-low (near-zero) interest rates is about as balmy as the idea that the said negative or near-zero rates do anything materially distinct from simply inflating the assets bubbles.

Behold the numbers: the stock of negative yielding Government bonds traded in the markets is now in excess of USD10 trillion, once again, for the first time since September 2017


Over the last three months, the number of European economies with negative Government yields out to 2 years maturity has ranged between 15 and 16:


More than 20 percent of total outstanding Sovereign debt traded on the global Government bond markets is now yielding less than zero.

I have covered the signals that are being sent to us by the bond markets in my most recent column at the Cayman Financial Review (https://www.caymanfinancialreview.com/2019/02/04/leveraging-up-the-global-economy/).

Monday, April 15, 2019

15/4/19: One order of "Bull & Sh*t" for the U.S. Labor Market, please


The 'strongest economy, ever'...


Despite a decade-long experiment with record-low interest rates, despite trillions of dollars in deficit financing, and despite headline unemployment numbers staying at/near record lows, the U.S. economy is not in a rude health. In fact, by two key metrics of the labor force conditions, it is not even in a decent health.

As the chart above clearly shows, both in terms of period averages and in terms of current level readings, Employment to Population Ratio (for civilian population) has remained at abysmally low levels, comparable only to the readings attained back in 1986. Meanwhile, labor force participation rate is trending at the levels consistent with those observed in 1978.

Dire stuff.

Update: Here is a chart showing how the current recovery compares to past recoveries (hint: poorly):


Wednesday, April 10, 2019

10/4/19: Rewarding Reckless Risk Pricing, Again


Markets are supposed to be efficient. At least, on the timeline that allows to price in probabilistically plausible valuations of the firms. Markets failed to be efficient at the time of the dot.com bubble. And, it appears, they are back at the same game:


As the chart above shows, share of IPOs issued at negative earnings (companies losing money) is now at the levels last seen during the height of the dot.com bubble. What can possibly go wrong?

10/4/19: Russian Foreign Exchange Reserves and External Debt


As recently posted by me on Twitter, here are three charts showing the evolution of Russian foreign reserves and external debt:

Remember the incessant meme in the Western media about Russia eminently in danger of running out of sovereign wealth funds back at the start of the Western sanctions in late 2014? Well, the chart above puts that to rest. It turns out, Russia did not run out of the reserves, and instead quite prudentially used funds available to carefully support some economic adjustments (especially in agriculture and food sector), while simultaneously balancing out its fiscal deficits.

Do note that the reserves above exclude over USD 91 billion worth of Gold that Russia holds and continues to buy at rising clips.

The result of the prudentially balanced management of the reserves and the economy was deleveraging out of debt (a lot of this was done via restructuring of intracompany loans and affiliated enterprises refinancing), with a reduction in the external debt (chart below), without use of sovereign funds:


As of current, Russian foreign exchange reserves ex-gold are more than sufficient to cover the entirety of the country public and private sectors external debts.

If the above chart is not dramatic enough, here is a contrasting experience over the same years for the U.S. economy:


Nothing that CNN and the rest of the Western media pack ever managed to capture.

10/4/19: How US Tax Inversions Affect Shareholder Wealth


Our article on how corporate tax inversions impact shareholders' wealth is now available on Columbia Law School blog: http://clsbluesky.law.columbia.edu/2019/04/10/how-u-s-tax-inversions-affect-shareholder-wealth/.


Saturday, April 6, 2019

6/4/19: Industrial Production and Global Trade are Tanking


The great convergence of simultaneously declining global trade flows and industrial production:

Via topdowncharts.com

The trend is also evident from the global manufacturing and composite PMIs (see https://trueeconomics.blogspot.com/2019/04/4419-bric-manufacturing-pmis-for-1q.html and https://trueeconomics.blogspot.com/2019/04/6419-bric-services-lead-manufacturing.html).

Note the range bounds for two periods (pr-GFC and post-GFC) in the first chart above.

6/4/19: Student Loans: The Bubble Is Still Inflating


A neat chart from Bloomberg summarizing the plight of student debt overhang in the U.S. economy:


In effect, education is the most leveraged, over the recent cycle, form of household investment out there. Second to it, is only investment in health. Via https://www.healthsystemtracker.org/chart-collection/u-s-spending-healthcare-changed-time/#item-total-health-expenditures-have-increased-substantially-over-the-past-several-decades_2017:


6/4/19: BRIC Services Lead, Manufacturing Lag Global Growth Momentum


I have blogged recently on BRIC and global PMIs for manufacturing and services, covering the data for 1Q 2019, as well as monthly PMIs for BRIC economies. Here are the 1Q 2019 PMIs for composite economic activity across the same:


In 1Q 2019, only Brazil posted improving Composite PMI reading, with the rest of BRIC economies showing deteriorating growth conditions, in line with continued drop in Global Composite PMI. Over the last 5 quarters, Global Composite PMI has dropped from its peak of 54.23 in 1Q 2018 to 52.5 in 1Q 2019, with current reading at its lowest in 10 quarters.

Of all BRIC economies, India and Russia are outperforming the Global Composite PMI, with Russia posting the fastest growth at 54.1 of all BRIC economies in 1Q 2019. Brazil is statistically in line with Global Composite PMI, while China is a clear under-performer.

Sectorally, the main weakness amongst the BRICs is in Manufacturing, with Services outperforming Global Composite index:

6/4/19: U.S. Tax Compliance Costs and Lobbying


Not a fan of The Atlantic on a range of topics, especially geo-politics, but a great write up on the relationship between tax accounting industry, lobbying and U.S. tax codes (painfully and daftly complex) here: https://www.theatlantic.com/ideas/archive/2019/04/american-tax-returns-dont-need-be-painful/586369/. Worth a read:


Of course, the solution is to make tax filing for ordinary income taxes simple, and to make tax codes more streamlined. A flat tax would work. Charged across all income at one rate. Or a flatter tax, with a schedule of just two or three bands, applying, again, across all income.

Friday, April 5, 2019

5/4/19: Does Government Debt Matter? The Reality of Fiscal Multipliers


There has always been a lot of debate in economics about the effects of debt (especially sovereign debt) on growth and fiscal dynamics. And, despite numerous papers on the subject, the debate is far from settled.

Here is an interesting new study that looks at the effect high levels of government indebtedness have on the effectiveness of fiscal policy stimulus. The reason this topic is important is simple: fiscal policy can and is used to offset or smooth out recessionary shocks. The extent to which fiscal policy is effective in doing so (the impact expansionary fiscal policy may have on unemployment and output) can be varied across different economies and under different crises conditions. But, does this extent vary under different debt conditions?

In theory, the debt levels carried by a given sovereign can impact the size of fiscal multipliers (the effectiveness of fiscal policy) through two main channels:

  1. The so-called Ricardian channel: a government with a weak fiscal position (high debt) deploying fiscal stimulus (an increase in public spending) can cause households to expect future tax increases. The result is that in economies with high public debt levels, deploying fiscal stimulus can trigger increased savings by households, reducing consumption, and lowering the size of fiscal policy multiplier.
  2. An interest rate channel: when the government debt is high, so that the government fiscal position is weak, fiscal stimulus can increase concerns about sovereign credit risk amongst government bond holders and buyers. This can increase bond yields, raise borrowing costs, lower liquidity of bonds for the sovereign, but also increase cost of capital across the private sector. The result is the crowding out effect, whereby public spending crowds out private investment and credit-finance consumption.

In theory, both channels imply that fiscal policy is less effective when fiscal stimulus is implemented from a weak initial fiscal position (position of high starting government debt levels).

A new World Bank paper, authored by Huidrom, Raju and Kose, M. Ayhan and Lim, Jamus Jerome and Ohnsorge, Franziska, and titled "Why Do Fiscal Multipliers Depend on Fiscal Positions?" (March 2019, World Bank Policy Research Working Paper No. 8784: https://ssrn.com/abstract=3360142) considers the two theoretical channels operating simultaneously. Using data for 34 countries (19 advanced economies and 15 developing economies),  over 1Q 1980 through 1Q 2014, the authors show that "the fiscal position helps determine the size of the fiscal multipliers: estimated multipliers are systematically smaller when the fiscal position is weak (i.e. government debt is high).


Looking at the longer run panel in the chart above, fiscal multipliers rapidly reach into negative territory as Government debt rises to around 37-40 percent of GDP. Over a medium term horizon, of 2 years, multipliers hit negative values for debt levels above 75 percent of GDP.

Similar dynamics are confirmed in the chart below:


The authors subsequently "show that when a government with weak public finances conducts expansionary fiscal policy, the private sector scales back on consumption in anticipation of future tax pressures (Ricardian channel) and risk premia rise on mounting concerns about sovereign risk (interest rate channel)." In other words, high starting debt position does trigger both theoretical effects to reinforce each other.

This is an unpleasant arithmetic for uber-Keynesians who hold that fiscal policy is always effective in stimulating economic growth during periods of economic crises. The findings also support the view that the 'fiscal policy space' is indeed bounded by the reality of pre-crisis fiscal policy paths: there is no free lunch when it comes even to sovereign financing.

Thursday, April 4, 2019

4/4/2019: Debt Relief for Households: It Turns Out to be a Great Idea, Folks


The question of debt relief for households during the periods of financial crises has been a pressing one in the aftermath of the 2008 Global Financial Crisis. I have written a lot on the topic in topic in the past, but to sum the arguments here in a brief format:

  • Argument in favour of debt relief: households carrying unsustainable debt burden during the crisis are likely to substantially reduce current and future consumption and investment, including long term investment in education, health and other activities. The resulting decline in the aggregate demand is likely to be prolonged and extensive, with a positive correlation to the crisis-triggered recession. Thus, debt relief via direct debt forgiveness and/or generous bankruptcy writedowns can help ameliorate adverse shocks to employment, demand and investment during large scale crises;
  • Argument against debt relief: debt relief can lead to the emergence of moral hazard (inducing greater leveraging by households post-crises), and adversely impact balancesheets of the lending institutions.

I favour the first argument, based on my view that the economy is crucially dependent on households' financial health, and that moral hazard consideration does not apply ex post the crisis, but only ex ante, which means that policymakers can tackle adverse effects of moral hazard after debt forgiveness in the wake of the structural crises.

A new paper by Auclert, Adrien and Dobbie, Will and Goldsmith-Pinkham, Paul S., titled "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession" (CEPR Discussion Paper No. DP13598: https://ssrn.com/abstract=3360065) tries to settle the debate.

The paper argues that "the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession." The authors "document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states,... [showing that] the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent."

More specifically, the model of debt forgiveness effects developed by the authors "implies that ex-post debt relief had positive effects on employment in ...sectors and in ...regions. Ex-post debt relief directly increases spending and employment in both sectors [tradables and non-tradables] in the high--[debt]-exemption region, which increases tradable employment in the low-[debt]-exemption region through a demand spillover effect. The increase in tradable employment in the low-exemption
region then increases non-tradable spending and employment in that region. Calibrating the model
to the observed path of debt write-downs during the financial crisis, we find that average employment across regions in the second half of 2009 would have been almost 2 percent lower in both the
non-tradable and the tradable sector in the absence of the ex-post debt forgiveness provided by the
consumer bankruptcy system."

Furthermore, the authors "conclude by using the model to conduct three policy counterfactuals.

  • First, we ask how the effect of ex-post debt relief changes in normal times when the zero lower bound does not bind. We find that even with a relatively aggressive monetary policy response, debt relief continues to have positive effects in both regions and in both sectors. 
  • Second, we ask how the effect of debt relief changes with the size of the relief provided to borrowers. We find that the debt relief multiplier is initially invariant to the size of the relief provided to borrowers, but eventually falls as the size of debt relief grows large due to the concavity of borrowers’ consumption functions. [see chart]
  • Finally, we ask how the effect of ex-post debt relief changes with the location of the savers that pay for the relief provided to borrowers. We find that the debt relief multiplier is invariant to the location of these savers, as savers smooth consumption in response to wealth transfers no matter where they are located."

4/4/19: BRIC Services PMIs for 1Q 2019: Converging to Global Growth Momentum


Q1 2019 Services PMIs for BRIC economies came in signaling no change on 4Q 2018 and converging to the Global Services PMI reading.

Brazil Services PMI averaged 52.3 in 1Q 2019, a gain on 51.2 in 4Q 2018, and the highest quarterly reading since 1Q 2013 when it stood at exactly the same reading. 

Russia Services PMI average for 1Q 2019 was at 54.9, down from 55.6 in 4Q 2018, singling moderating, but still fast pace of growth in the Services sectors of the economy. 

China Services PMI was at 53.0 in 1Q 2019, a marginal improvement on 52.8 reading in 4Q 2018, but still substantially down on 53.7 reading in 1Q 2018.

India Services PMI was at 52.2- a slip on 53.0 recorded in 4Q 2018. Given past weakness in Services sector in the Indian economy, 52.2 reading is still respectably tied to the second fastest growth for any quarter since 4Q 2016.

GDP-weighted BRIC Services PMI averaged 53.0 in 1Q 2019, the same reading as in 4Q 2018 and singling marginally faster growth than 52.7 reading for 1Q 2018.

Meanwhile, Global Services PMI averaged 53.2 in 1Q 2019, down marginally on 53.4 in 4Q 2018 and marking the third consecutive quarter of declining growth in global services economy. 

CHART



4/4/19: BRIC Manufacturing PMIs for 1Q 2019: In Line With Global Growth Slowdown



Q1 2019 Manufacturing PMIs for BRIC economies came in as effectively flat on 4Q 2018 and relatively in line with the collapsing Global Manufacturing PMI.

Brazil Manufacturing PMI averaged 53.0 in 1Q 2019, a gain on 52.1 in 4Q 2018, and the highest quarterly reading since 1Q 2011. 

Russia Manufacturing PMI average for 1Q 2019 was at 51.3, down from 51.9 in 4Q 2018, but still the second highest in 5 quarters. 

China Manufacturing PMI was at 49.7 in 1Q 2019, the first sub-50 reading for a quarterly average since 2Q 2016, and the fourth consecutive quarter of declining PMIs.

India Manufacturing PMI was at 53.6 - a gain on 53.4 in 4Q 2018, and the highest reading since 4Q 2012.

GDP-weighted BRIC Manufacturing PMI averaged 51.0 in 1Q 2019, marginally down on 51.2 in 4Q 2018 and singling slower growth than 51.5 reading for 1Q 2018.

Meanwhile, Global Manufacturing PMI averaged 50.7 in 1Q 2019, down significantly on 51.8 in 4Q 2018 and marking the fourth consecutive quarter of declining growth in global manufacturing. 

CHART


4/4/19: BRIC PMIs for March Show Improved Growth Conditions


With March PMIs reported by Markit in, here are the monthly frequency trends for the BRIC economies activity, based on composite PMIs:


Overall BRIC activity as signalled by PMIs remains range-bound in the tight, low activity range over the last 6 years (second chart above). However, the composite activity is running close to the upper bound of the range, implying overall stronger performance in the recent month. This is confirmed by the first chart above, showing that both Russia and ex-Russia BRIC economies activity is accelerating on trend since July 2018.

More analysis, based on smoother quarterly data forthcoming, so stay tuned.

Wednesday, April 3, 2019

2/4/19: Brain Drain Reversed or Inverted?


Generally, we associate skilled emigration with the phenomenon of 'brain drain' or a zero sum game - the loss of human capital from the country of origin and a corresponding gain to the recipient country. However, as common, the real nature of these effects is more complex than the first order analysis implies.

A new paper by Fackler, Thomas, Giesing, Yvonne and Laurentsyeva, Nadzeya, titled "Knowledge Remittances: Does Emigration Foster Innovation?" (CESifo Working Paper No. 7420) accessible via https://ssrn.com/abstract=3338774, looks at the issue of knowledge flows relating to emigration. The authors find that based on "industry-level patenting and migration data from 32 European countries," "...emigration in fact positively contributes to innovation in source countries. ... While skilled migrants are not inventing in their home country anymore, they contribute to cross-border knowledge and technology diffusion and thus help less advanced countries to catch up to the technology frontier."

More specifically, authors show that "one percent increase in the number of emigrants increases patent applications by 0.64 percent in the following two years. This result is statistically significant at the one percent level and robust to controls, fixed effects, and varying lags. The effect is quantitatively more pronounced when we consider only the flows of migrants with patenting potential."

A picture worth a 1,000 words:


Notice, the above suggests that the positive effect of opening up migration channels on technological convergence is evident as early as two years prior to the EU Accession of 2004. The same is confirmed in the following chart:
In line with their findings, the authors suggest that

  • The EU "could benefit from further facilitating migration within Europe", by focusing on reducing cultural and social barriers to migration, such as "language and administrative barriers, ...ensuring the recognition of foreign qualifications and the promotion of language courses at all age levels."
  • "Another policy implication is to ease skilled migration to Europe from outside the European Union. This could be achieved by easing the access to European labour markets and the recruitment of highly qualified foreign workers. While the Blue Card has been a step in this direction, its scope could be increased to obtain a higher impact and administrative barriers should be reduced." 
Update: Similar findings are reported in Kim, Jisong and Lee, Nah Youn, High-Skilled Inventor Emigration as a Moderator for Increased Innovativeness and Growth in Sending Countries, East Asian Economic Review Vol. 23, No. 1 (March 2019) 3-26: https://ssrn.com/abstract=3360938. Their paper uses data from 154 countries to show that high-skilled inventor emigration rate has a positive growth effect on the country of origin (COO) by spurring "knowledge diffusion and technology transfer back to their COOs, which in turn affects innovation and growth in their home countries. The result indicates that the direct negative impact of the brain drain can be mitigated by the positive feedback effect generated by the high-skilled inventor emigrants abroad. When coupled with an active trade policy that reinforces growth, countries can partially recoup the direct effect of the human capital loss."