4/5/2013: European way?

Here's an interesting chart that summarises both, the source of European disease and the nature of the European response to the crisis:

Source

And the point is: during the current crisis, Europeans have opted not so much to reduce Government spending, as to hike taxes, state-controlled prices and charges. Transfer of income from households to banks and Government, exacerbated by the Great Recession and collapse of borrowing have meant a dramatic decline in households' contribution to the economy. End result: Europe is about to go into a Great Depression.

4/5/2013: Higher Income vs Higher Subjective Well-Being

A very interesting paper on the topic I had a chance to briefly discuss on twitter recently. Basically, does life satisfaction / happiness decline with income increases? In other words, is there a point at which people earning more are experiencing less happiness? Is there a point of saturation?

"Subjective Well-Being and Income: Is There Any Evidence of Satiation?" by Betsey Stevenson and Justin Wolfers, NBER Working Paper No. 18992 from April 2013 (http://www.nber.org/papers/w18992) attempts to shed some light on this question, often debated and subject of may research papers in the past.

Headline results [emphasis in italics is mine]: "Many scholars have argued that once “basic needs” have been met, higher income is no longer associated with higher in subjective well-being. We assess the validity of this claim in comparisons of both rich and poor countries, and also of rich and poor people within a country. Analyzing multiple datasets, multiple definitions of “basic needs” and multiple questions about well-being, we find no support for this claim. The relationship between well-being and income is roughly linear-log and does not diminish as incomes rise. If there is a satiation point, we are yet to reach it."

Some more beef from the paper (unfortunately - not available to general public, but here's a link to the authors more condensed article on it: http://www.brookings.edu/research/papers/2013/04/subjective-well-being-income).

"In 1974 Richard Easterlin famously posited that increasing average income did not raise average well-being, a claim that became known as the Easterlin Paradox." Needless to say, many scholars since then picked the idea and even advanced it to greater extremes.

Per authors, however, "in recent years new and more comprehensive data has allowed for greater testing of Easterlin’s claim. Studies by us and others have pointed to a robust positive relationship between well-being and income across countries and over time (Deaton, 2008; Stevenson and Wolfers, 2008; Sacks, Stevenson, and Wolfers, 2013).

"Yet, some researchers have argued for a modified version of Easterlin’s hypothesis, acknowledging the existence of a link between income and well-being among those whose basic needs have not been met, but claiming that beyond a certain income threshold, further income is unrelated to well-being. The existence of such a satiation point is claimed widely, although there has been no formal statistical evidence presented to support this view. For example Diener and Seligman (2004, p.5) state that “there are only small increases in well-being” above some threshold. While Clark, Frijters and Shields (2008, p.123) state more starkly that “greater economic prosperity at some point ceases to buy more happiness,” a similar claim is made by Di Tella and MacCulloch (2008, p.17): “once basic needs have been satisfied, there is full adaptation to further economic growth.”

"The income level beyond which further income no longer yields greater well-being is typically said to be somewhere between $8,000 and $25,000. Layard (2003, p.17) argues that “once a country has over $15,000 per head, its level of happiness appears to be independent of its income;” while in subsequent work he argued for a $20,000 threshold (Layard, 2005 p.32-33). Frey and Stutzer (2002, p.416) claim that “income provides happiness at low levels of development but once a threshold (around $10,000) is reached, the average income level in a country has little effect on average subjective well-being.”

It is worth noting the thresholds in income cited above - all are well below the median and mean incomes in the advanced economies today. The test carried out by the authors of the study cover incomes both below these thresholds and above, including to well above (multiples of almost 7 times the highest threshold mentioned).

"Many of these claims, of a critical level of GDP beyond which happiness and GDP are no longer linked, come from cursorily examining plots of well-being against the level of per capita GDP. Such graphs show clearly that increasing income yields diminishing marginal gains in subjective well-being.

"However this relationship need not reach a point of nirvana beyond which further gains in well-being are absent. For instance Deaton (2008) and Stevenson and Wolfers (2008) find that the well-being–income relationship is roughly a linear-log relationship, such that, while each additional dollar of income yields a greater increment to measured happiness for the poor than for the rich, there is no satiation point.

So now, to the paper itself. Some basics first:

"In this paper we provide a sustained examination of whether there is a critical income level beyond which the well-being–income relationship is qualitatively different, a claim referred to as the modified-Easterlin hypothesis.

"As a statistical claim, we shall test two versions of the hypothesis. The first, a stronger version, is that beyond some level of basic needs, income is uncorrelated with subjective well-being; the second, a weaker version, is that the well-being–income link estimated among the poor differs from that found among the rich.

"Claims of satiation have been made for comparisons between rich and poor people within a country, comparisons between rich and poor countries, and comparisons of average well-being in countries over time, as they grow. The time series analysis is complicated by the challenges of compiling comparable data over time and thus we focus in this short paper on the cross-sectional relationships seen within and between countries. Recent work by Sacks, Stevenson, and Wolfers (2013) provide evidence on the time series relationship that is consistent with the findings presented here.

"To preview, we find no evidence of a satiation point. The income–well-being link that one finds when examining only the poor, is similar to that found when examining only the rich. We show that this finding is robust across a variety of datasets, for various measures of subjective well-being, at various thresholds, and that it holds in roughly equal measure when making cross-national comparisons between rich and poor countries as when making comparisons between rich and poor people within a country."

Some actual results:

The above shows that the well-being-income gradient is strong for the rich countries and even stronger for the countries where income per capita exceed USD15,000 (GDP per capita). Per authors: "These data clearly reject both the weak and strong versions of the modified-Easterlin hypothesis." Authors attain qualitatively identical results for a number of other measures / surveys of well-being. "Each of these datasets strongly reject" the modified-Easterlin hypothesis. "Moreover, to
the extent that the well-being–income relationship changes, it appears stronger for rich countries."

Core conclusions: "While the idea that there is some critical level of income beyond which income no longer impacts well-being is intuitively appealing, it is at odds with the data. As we have shown, there is no major well-being dataset that supports this commonly made claim. To be clear, our analysis in this paper has been confined to the sorts of evaluative measures of life satisfaction and happiness that have been the focus of proponents of the (modified) Easterlin hypothesis. In an interesting recent contribution, Kahneman and Deaton (2010) have shown that in the United States, people earning above $75,000 do not appear to enjoy either more positive affect nor less negative affect than those earning just below that. We are intrigued by these findings, although we conclude by noting that they are based on very different measures of well-being, and so they are not necessarily in tension with our results. Indeed, those authors also find no satiation point for
evaluative measures of well-being."

Here is a slightly clearer chart from the blogpost by The Economist:

4/5/2013: Profit margins in Irish Services and Manufacturing: April 2013

Since I've been updating my database on PMI for Ireland (see Manufacturing PMI baseline results for April, as well as a post on Services PMI and a post on latest trends in employment as signalled by PMIs), it is also time to update dynamics analysis on profitability in both sectors.

Now, Services PMI survey covers profitability as a separate question, and it is reported in the post linked above. There is no comparative question in PMI for Manufacturing survey.

Over time, I have been tracking implied profitability changes in both sectors on a comparable basis as a difference between changes in input costs and output charges by the reporting firms. In a sense - it is a metric of profit margins dynamics that is comparable across both sectors.


Profit margins index for Services has declined from -14.29 in March 2013 to -16.39 in April. April reading was worse than -11.96 a year ago and worse than 12mo MA at -15.7. Dynamically, 3mo MA through April is at -15.0 which represents worsening in profitability conditions compared to -13.6 average for 3mo through January 2013 and is worse than -13.8 3mo average through April 2012.

Longer-term comparatives: since January 2012 through April 2013, Services profitability index averaged -15.31 - a rate of profit margins decline that is worse than the average rate recorded for 3 years period of January 2009-December 2011.

Profit margins in Manufacturing sectors have also deteriorated in April 2013 at -7.32, but the rate of deterioration was slower than in March 2013 when it stood at -12.04 and much slower than -22.86 rate of decline in profit margins recored in April 2012.

12mo MA is now at -11.1 and 3mo average rate was -15.2 for 3 months through January 2013, while 3mo average for February-April 2013 is at much more benign -9.9. In other words, there is moderation in the rate of margins decreases in recent months.

Longer-term dynamics are shown on the chart below in terms of 3 year averages. Since January 2012 through April 2013, Manufacturing profitability index averaged -13.83 - a rate of profit margins decline that is better than the average rate recorded for 3 years period of January 2009-December 2011 (-14.1). January 2012-April 2013, average rate of deterioration is still the second worst on the record.

An interesting aside: notice significant improvements in profitability in late 2008 - mid 2010 being exhausted in 2011-present in the Services sector and similar, but slightly differently timed changes in Manufacturing? These nicely coincide with the period of most dramatic unit labour costs declines and overall cost-competitiveness gains in the Irish economy. And, just as those gains virtually stopped in 2011-on, so did profit margins conditions improvements.

4/5/2013: Corporate tax rate Laffer Curve

A very interesting, albeit not too rigorous (econometrically) exercise on the relationship between corporate tax rates and corporate tax revenues (the Laffer Curve):
http://alephblog.com/2013/05/03/on-the-laffer-curve-regarding-marginal-corporate-tax-rates/

Worth a read.

Top of the line conclusion: ex-Norway, "...at a 5% level of significance, the equation is significant, with a prob-value of 1.4%, and all but one of the coefficients are significant, and the coefficient on the squared term has a prob value of 11.6%. The signs all go the right way, and the intercept is near zero."

So: "It looks like there is some validity to the idea that as marginal corporate tax rates rise, so do corporate taxes as a percentage of GDP, until the taxes get too high. I didn’t test anything else.  With both equations we learn two ideas:

• The tax take tops out at a 30% marginal rate
• You don’t give up much if you set the marginal rate at 20%"

3/5/2013: Basel 2.5 can lead to increased liquidity & contagion risks

Banca d'Italia research paper No. 159, "Basel 2.5: potential benefits and unintended consequences" (April 2013) by Giovanni Pepe looks at the Basel III framework from the risk-weighting perspective. Under previous Basel rules, since 1996, "…the Basel risk-weighting regime has been based on the distinction between the trading and the
banking book. For a long time credit items have been weighted less strictly if held in the trading book, on the assumption that they are easy to hedge or sell."

Alas, the assumption of lower liquidity risks associated with assets held on trading book proved to be rather faulty. "The Great Financial Crisis made evident that banks declared a trading intent on positions that proved difficult or impossible to sell quickly. The Basel 2.5 package was developed in 2009 to better align trading and banking books’ capital treatments." Yet, the question remains as to whether the Basel 2.5 response is adequate to properly realign risk pricing for liquidity risk, relating to assets held on trading book.

"Working on a number of hypothetical portfolios [the study shows] that the new rules fell short of reaching their target and instead merely reversed the incentives. A model bank can now achieve a material capital saving by allocating its credit securities to the banking book [as opposed to the trading book], irrespective of its real intention or capability of holding them until maturity. The advantage of doing so is particularly pronounced when the incremental investment increases the concentration profile of the trading book, as usually happens for exposures towards banks’ home government. Moreover, in these cases trading book requirements are exposed to powerful cliff-edge
effects triggered by rating changes."

In the nutshell, Basel 2.5 fails to get the poor quality assets risks properly priced and instead created incentives for the banks to shift such assets to the different section of the balance sheet. The impact of this is to superficially inflate values of sovereign debt (by reducing risk-weighted capital requirements on these assets). Added effect of this is that Basel 2.5 inadvertently increases the risk of sovereign-bank-sovereign contagion cycle.

The paper is available at: http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/qef159/QEF_159.pdf

3/5/2013: Irish Employment in Services & Manufacturing: April PMIs

On foot of both NCB Manufacturing PMI and NCB Services PMI for Ireland for April 2013, let's take a look at underlying employment conditions signals from the two core sectors of the economy.

From the top:

Manufacturing and Services PMI readings continued to diverge in April for the 5th consecutive month, with headline PMI readings for:

• Manufacturing PMI falling to 48.0 in April from 48.6 in March marking the second consecutive monthly sub-50 reading. 12mo MA is now at 51.3 and Q1 2013 average is at 50.1 so things are moving South for Manufacturing in recent months.
• Services PMI rising to 55.2 in April from 52.3 in March. 12mo MA is at 53.3 and Q1 2013 average is 54.2, implying PMI readings moving North for Services in recent months.

These trends in overall PMI readings were broadly repeated in the Employment sub-index dynamics:

• Employment index for Manufacturing slipped to 46.9 in which is significantly below 50.0 and marks second consecutive month of declines and sub-50 readings. In the last 6 months, index declined 4 times, but was below 50.0 only in two months. 12mo MA is at 51.3, but Q1 2013 average is 50.1 and this comes after 52.0 average for Q4 2012. So things are sliding and sliding rather fast.
• Employment index for Services, in contrast, posted a robust increase in April to 55.2 from 52.3 in March. April marked ninth consecutive month of employment increases being signaled by Services PMI, which is a good strong trend. Thus, 12mo MA is at robust 53.3 and Q1 2013 average is at 54.2 - a slower rate of growth on Q4 2012 average of 56.0, but statistically significant growth nonetheless.

Tables detailing employment indices changes below:

Manufacturing:

Services:

Now for the reminder: Employment in Services has far less tangible connection to actual sector activity than Employment in Manufacturing, with volatility-adjusted 1 point increase in respective headline PMI implying 0.67 units increase in employment index in Services against 0.87 units rise in manufacturing employment index over historical data horizons:

Click on the chart to see in detail the overall dynamics y/y for April in employment and PMI indices, clearly showing the switch between Services and Manufacturing in terms of the sectors' position relative to economic recovery. If in 2011 Services were a drag on growth and employment, while Manufacturing was experiencing strong gains, by 2013 Services became the core driver for positive momentum in both growth and employment, with Manufacturing pushing economic activity and employment down.

3/5/2013: Not a week goes by without a Tax Haven Ireland story?

More from the 'Tax Haven Island' newsflow, with a second story this week: "US firms paid an average tax rate of 8% profits in Ireland"
http://www.rte.ie/news/business/2013/0503/390280-us-corporations-tax/

I wonder if Michelle Obama's rumoured trip to Ireland will include a visit to such sunny tax haven locations as Barrow St, Dublin 2, or IFSC...


To track my posts on Irish Corporate Tax Haven, follow this link : http://trueeconomics.blogspot.ie/2013/05/252013-news-from-irish-tax-haven.html

Hat tip to:

Updated 08/05/2013: Two new links on the same subject:

http://www.ft.com/intl/cms/s/0/c638f73a-978f-11e2-97e0-00144feabdc0.html#axzz2SjL5Iq3z

and

http://treasureislands.org/the-capture-of-tax-haven-ireland-the-bankers-hedge-funds-got-virtually-everything-they-wanted/

Hat tip to: 

3/5/2013: Irish Services PMI April 2013: Some good, some make-believe news

For a change from the declining fortunes of Irish manufacturing (aka, production of at least some real tangible stuff by humans, albeit richly peppered with tax arbitrage), the accounting trick called Irish Services (aka, billing of services sold in Mongolia to Dublin by companies minimising tax exposures in the US) is booming.

Good news for GDP. Good or bad news (depending on capex cycle and financial engineering - as exhibited by Apple 'bond' offer this week, etc) for GNP. Even better news for the Government solemnly incapable of supporting growth at home, and thus solely reliant on Mongolian demand for 'Irish' services and Obama administration lag in realising that another corporate tax amnesty is long overdue (note to the White House: check out Ireland's IFSC deposits).

Latest NCB Services PMI for Ireland published today show continued expansion in Services sector:

• Headline Services PMI rose from 52.3 in March to 55.2 in April - statistically significantly above 50.0 for the first time since January 2013. This marks ninth consecutive monthly reading above 50.0, and sixth time the index is above 50 with statistically significant margin.
• Good news: this time around there was significant growth signaled in Transport, Travel, Tourism & Leisure sector (potentially due to twin effects of The Gathering and the EU Presidency - which should really count as subsidy activities this year). However, another significant driver in upside growth were Financial Services (aka IFSC). Business Services and Technology, Media & Telecoms services both recorded moderation in the rate of growth, as signaled by PMI.
• On dynamics side, 12mo MA through April 2013 for Business Activity headline index now stands at 53.3, with 3mo average at 53.7. Both are below 3mo average through January 2013 which stood at 56.2, so there is still some slowdown in the rate of growth. Latest 3mo average is ahead of same period 3mo averages for 2010-2012.

Per last chart above, 

• New Business sub-index remained practically unchanged at 54.2 in April, compared to March (54.1) with both months posting reading statistically above 50.0 - which is good news.
• On dynamics side, 12mo MA was at 53.7 in April 2013 - a healthy reading, with 3mo MA through April 2013 almost bang on at 12mo average level of activity at 53.8. Previous 3mo average through January 2013 was at blistering 56.5, so there is some marked slowdown in the rate of growth. Nonetheless, last 3 months marked the fastest growth for the same three months period for any year since 2010.
• April 2013 was the ninth consecutive month of New Business sub-index readings above 50.0, with seven of these months posting readings statistically significantly above 50.0.

I will blog separately on employment and profitability in both services and manufacturing so stay tuned for details on these.

Business confidence and New Export Business sub-indices both showed some slowdown in growth, but still remain in rude health. On foot of this, employment growth rate improved:

Overall, sarcasm aside, the Services sectors continued to support economic growth, even though much of this growth is coming from the make-believe tax arbitrage stuff. Still, better have make-believe dosh than none at all. And a welcomed reprieve from the past years' trials for the Travel & Toursim sector too.

One note of caution, though: Irish Services PMI have little to do with Irish Services actual activity levels... see here: http://trueeconomics.blogspot.ie/2013/04/742013-irish-services-activity-index.html

2/5/2013: ECB's message: "don't let the bed bugs bite..."

In light of today's 'historic' decision by the ECB to lower its refinancing rate to 0.50% from 0.75%, let's just not get too excited, folks.

Consider the historical perspective:

1) ECB rates are low. By ECB-own standards. But they are not low by pretty much anyone else's standards, save for countries, like Canada and Australia, which didn't really have a Great Recession. At least not yet.

2) ECB rates are low today, but they will be higher one day:

And when they do get to those averages, oh… the bond markets valuations are going to fly out of the window (leaving big black holes in banks balance sheets and pension funds assets ledgers), while equities are going to also suffer risk-repricing away from current dizzying expectations. Meanwhile, mortgages and credit costs will rise and rise faster than the ECB rates for 2 reasons: (a) legacy margins rebuilding that is not even started yet, and (b) see 'black hole' on the bonds valuations side. So when we do start heading toward that green dashed line (and above, as ECB averages are above that green line), things are going to go South fast.

3) And the ramp up back to the mean will have to be sustained and drastic:

We are clearly in an unconventional period when it comes to mean reversion. In all previous episodes, mean reversion took at most 40 months of deviation from the mean to deliver on (red lines). This time around we are already into month 53 and counting. The longer the duration of deviation, the greater the imbalance built up as the blue line above clearly shows.

Based on average overshooting of the mean in each reversion episode, we are currently 1.79 percentage points away from the mean target and are likely to see additional 1.71 percentage points overshooting of the target on adjustment, which means that the direction we are heading toward, if previous history of ECB rates were to be our guide (very imperfect, I must add) is 0.5%+1.79%+1.71%=4.0%

Close your eyes and imagine your mortgage bill with:
1) ECB rate at 4.0% and
2) Bank margin on ECB rate of x2 at least of pre-crisis levels.

Now, good luck sleeping.

But, hey, for now, there's more room for ECB to 'ease'…

And yet… things are already bad enough… ECB is running policy at massively above the G3 average rates and there is no real relief to the euro area economy in sight.

So what is really going on? My quick comment for Express today:

"ECB's 25 bps cut in the refinancing rate is the central bank's de facto admission of the limitations to its ability to have a meaningful impact on the ground, in the real economy. Let's start from the diagnosis. With previous rate cuts failing to stimulate credit flows and private sector investment, it is now painfully obvious that the euro area economy is suffering from a structural crisis, not a cyclical or a liquidity crisis.  going into today's rates decision the ECB had really just three choices: 1) Do nothing and keep pressure on the Euro area governments to introduce and implement real structural reforms, 2) Do marginally little to sustain some outward expression of monetary activism, and 3) Do something big to attempt unfreezing both demand and supply of credit. The latter would have entailed a cut in the refinancing rate of 70 basis points and setting up an LTRO- like 3- to 5- years programme for lending against collaterilised business and household loans. It would have been risky, but it would have stood a chance of possibly shifting increasing significantly new credit creation. even more dramatic would have been a programme for indefinite financing of the weaker banks - a super-LTRO - set against explicit targets for their writing down of some SMEs and household loans.

That, in the end, ECB has opted for the second option of providing token expressions of accommodative monetary policy using largely weak tools, speaks volumes about the ECB's inherent legal dilemma. The ECB is facing the problem of a structural crisis in the economy, while being armed with a mandate that forces it to explicitly ignore the real economy. Thus, as the result of the crisis, the ECB has consistently traded-down the reputational curve by continuously deploying 'extraordinary' measures of ever-increasing complexity, which are having little real impact in the private economy. ECB's most-lauded OMT, for example, has had zero positive effect outside the Government bonds markets. In short, much of what ECB is doing is providing backstop insurance for the crisis amplification, but little actual means for dealing with the crisis itself.

As the result, ECB's monetary policy decisions of late can be best viewed in the prism of the EUR foreign exchange rates and European stockmarkets valuations. Liquidity supply into the financial channels that are trapped outside the real economy so far have meant firming up of the euro and increased speculative inflows into European equities that stand contrasted with both the fortunes of the euro area economies and the realities of the European companies earnings. Today's decision simply reinforces this trend. yet, as the recent years have shown, the divergence between financial markets valuations and the real economic activity is the sign of systemic malfunctioning in the monetary, fiscal and economic environments. This is exactly the road down which we are traveling, guided by the ECB Governing Council."

And my tongue-in-cheek top of the line conclusion? "ECB's Council throws a wet napkin at Euro area's economic Chernobyl and rests for lunch… breathless from exhaustion..."

So for all of us in the eurozone, tune in at 00:59:
http://www.anyclip.com/movies/despicable-me/beddie-bye/#!quotes/

2/4/2013: MDH: Do as I imagine... not as I say or do...

So Irish President Michael D. Higgins has called for a “radical rethink” of the “single hegemonic model”, adding that a “pluralism of approaches” is needed in Europe. He also called for a more active ECB and debt pooling in the eurozone.

wait, what's that? Another statement of plausibly sounding populism with underlying internal contradictions so deep, the whole thing makes no sense? Well, yes.

MDH wants more 'pluralism' in policies then calls for 'more active ECB debt pooling' - which of course is anti-pluralist centralisation of policy. Oh, well, if only MDH actually had an idea what he speaks about beyond the cliches of 'bad capitalism, bad, bad, bad'.

And then to add a  self-insult to his self-injury. MDH penned his name to the IBRC bill which converts promissory notes (the 'pluralist' in nature instrument of quasi-governmental debt) into government bonds (the 'centralised' in nature instrument of pure sovereign liability standardised across all countries).

Is MDH no longer a 'do as I say, not as I do' leader but a 'do as I imagine, not as I say or do' leader?

2/5/2013: Gravy, door, windows... JobBridge

Here's something that can be described as a pricey exemplification of the 'Only in Ireland' policy approach to public institutions:
http://www.independent.ie/irish-news/consultant-report-into-controversial-jobbridge-scheme-recommends-more-reports-29236030.html

That's right: JobBridge 'internships' scheme (or rather 'free labour for few months' scam concocted by the Government to register further 'improvements' in 'labour costs competitiveness') has been assessed by the public sector captive research outfit Indecon (aka ESRI Junior).

And the conclusion of the already pricey report is that we need more and even pricier reports.

Gravy flooding through the door is apparently not enough... need windows access too...

2/5/2013: Austerity... savagely over-hyped?..

It was May 1 yesterday and in celebration of that great socialist holiday, "In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening".

Except, no one really asked them what did the mean by 'belt-tightening'. Some, correctly, meant by the term the concept of transfers from taxpayers (usually via higher taxes, rather than spending cuts) to the broken banks, but majority, undoubtedly, we decrying cuts in Government spending. You see, damned austerity is just that (or supposed to be just that): cuts in the levels of expenditure. These can mean reduction in absolute level of spending, or a reduction in spending as a proportion of GDP.

And, you see, not much of that is going on in Europe nowdays, despite all the fierce rhetoric about savage cuts.

Ok, let's do some exercises, using IMF data.

First, consider tax revenues:

In the chart above, I marked with darker columns countries where tax revenues as % of GDP have declined during the current crisis (more precisely, taking average tax revenues fior 2003-2007 pre-crisis boom days and comparing against 2012 outrun). Guess what?

• In % of GDP terms, savage austerity meant that Government revenues have declined by less than 1 percentage point in Cyprus (-0.89 ppt), Czech Republic (-0.64 ppt) and Portugal (-0.08 ppt), the revenues have fallen by between 1 and 2 percentage points in Ireland (-1.26 ppt) and the UK (-1.68 ppt) and have declined by more than 2 percentage points in Denmark (-2.50 ppt), Spain (-3.28 ppt) and Sweden (-3.15 ppt).
• All in, only 8 out of the 20 EU countries considered above (these are all advanced economies of the EU, excluding Luxembourg, where data is so dodgy, no meaningful analysis can be made) have managed to post any declines in Government revenues relative to GDP. All other countries have posted increases. Overall, sample average Government revenues as % of GDP stood at 43.04% in 2003-207 period and this has risen to 43.84% in 2012.
• Now, onto levels of revenues. The sample of countries shown above had combined annual Government revenues of EUR7,791.61 billion in 2003-2007 on average. In 2012 this number stood at a 17.96% premium or EUR9,190.96 billion.
• Of all 20 countries considered, only one - Ireland - had experienced level reduction in Government revenues, which dropped from an annual average of EUR57.896 billion in 2003-2007 period to EUR55.42 billion in 2012.
• As I said above, there is only one meaningful form of austerity in Europe today: austerity of higher tax burdens on people.

Now, let's check out expenditure side of Europe's 'savage austerity' story:

Again, chart above highlights in darker color countries where Government expenditure had declined in 2012 compared to 2003-2007 pre-crisis average in % of GDP terms. The picture hardly shows much of any 'savage cuts' anywhere in sight:

• Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003-2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.
• No peripheral country - where protestes are the loudest - or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.
• Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.
• In level terms, things are even uglier for the 'anti-austerians'. Total (for this sample of countries) Government annual spending averaged EUR8,002 billion in 2003-2004 period and this rose to EUR9,941 billion in 2012 a rise in Government spending of whooping 24.2%.
• In level terms, not a single country in the sample of 20 advanced EU economies posted a decline in Government spending from the pre-crisis period to 2012. All posted increases in overall spending ranging between 88% for Estonia, to 7.76% for Portugal. Of all peripheral countries, not one cut a single cent on 2003-20007 average spending levels, with Cyprus hiking spending by whooping 39.8% in 2012 compared to 2003-2007 averages, France delivering a massive increase of 24.9%, Greece raising it modestly by 8.73%, Ireland by a massive 22.01%, Italy by a relatively benign 14.67%, Portugal by the sample lowest rate of 7.76% and Spain by a jaw-dropping 38.67%.
• All in, there is no 'savage austerity' in spending levels or as % of GDP.

So what is going on, folks? May be we can find austerity in deficits? Afterall, Paul Krugman & Co are telling us that we need to run deficits in the economy during recessions and this is the leitmotif to all of the anti-austerian policies proposals?

Savage austerity thesis must find at least a significantly large number of countries where there is no deficit financing going on during the crisis compared to pre-crisis activity, or at least a very large number of countries where deficits have declined compared to pre-crisis activity. Is that the case?

Sorry to say it, folks, errr... No. That is not the case.

• Only three countries in the entire sample of 20 have posted decreases in Government deficits in level and as 5 of GDP terms.
• In level terms, deficits declined in Germany, Italy and Malta. They rose in all other countries. Overall level of deficits in 20 countries analysed rose from EUR40.07 billion in 2003-2007 (annual averages) to EUR127.79 billion in 2012. In other words, during 'savage austerity' deficits tripled, not shrunk.
• In terms of relative weight to GDP, deficits also declined only in three countries - the same three countries as above. 
• Savage austerity meant that deficits increased in all peripheral states save Italy and that across 20 economies, whereas average deficit stood at -1.315% of GDP in 2003-2007 period, that rose to -4.215% of GDP in 2012.

 

As I said above, there are really two reasons for protesting in Europe today against what can very loosely be termed 'austerity':

1. As taxpayers we should protest against higher taxes & charges levied against us by the States to pay for various banks rescue measures and for continued public spending inefficiencies and private sector subsidies (note: I am not saying that all public sector spending is inefficient, I am alleging that some of it remains inefficient today); and
2. As taxpayers and residents we should protest about misallocation of scarce resources (including some public spending) from necessities (e.g. social welfare and unemployment protection, health, education, etc) to rescuing insolvent banks and corporate cronies.

Aside from the above reasons, please spare yourselves the blind belief in various Social Partners-produced spin about 'savage cuts'. All they care for is to increase even more state spending on their pet projects.