12/5/2013: Much austerity? Not really... & not of the kind we needed

A week ago I published a blogpost exploring IMF data on austerity in Europe, based on a sample of 20 EU countries with advanced levels of economic development (excluding Luxembourg). You can read that post here. The broad conclusions of that post were:

1. There is basically no austerity in Europe, traceable to either changes in deficits, changes in Government spending or changes in debt. If anything, the European fiscal policies can be characterised by a varying degree of fiscal expansionism during the current crisis, relative to the pre-crisis 2003-2007 period.
2. This, of course, does not account for transfers between one set of expenditures (e.g. public investment reductions) and other lines of spending (e.g. banking sector measures).
3. The only area of fiscal policy where austerity is evident is on taxation burden side, which rose in the majority of sampled economies.

The numbers got me worried and in this post I am looking solely on deficits side of Government spending. If there is savage austerity in EU27, so savage it is killing European economies, surely it would show up in General Government deficit numbers. As before all data reported is based on averages and comparatives computed by me from IMF's WEO data as reported in April 2013 edition of the database.

Let's take a closer look.

Only 2 countries out of 20 have recorded a reduction in average deficits during the crisis period (2008-2012) compared to the pre-crisis average (2003-2007). These were Germany, where annual average deficits declined by 0.95 percentage points (pretty significant) and Malta, where annual average deficits fell 0.79 percentage points (also pretty sizeable drop).

On average, EU20 sample annual deficits have increased by a massive 3.44 percentage points over the pre-crisis period. In  non-Euro area states, the average increase was 3.16 percentage points. But in 'savagely austerian' Euro area, the increases averaged 3.51 percentage points.

So far, the Euro area analysts' rhetoric opposing austerity has been focused on 2012 as the year of highest - to-date - cuts. Was this so? Not really:

Again, as above, there is scantly any evidence of deficit reductions, and plenty of evidence that deficits are getting worse and worse. Again, the comparative is not to the absurd levels of spending during peak spending years of the crisis, but to pre-crisis averages. After all, stimulus is not measured by an ever-escalating public spending, but by increase in spending during the recession compared to pre-recession.

The same conclusion can be reached if we look at 2007 deficit compared to 2012 deficit.

In other words, folks, Europe has had, so far, only 3 measurable forms of austerity, none comfortable to the arguments we keep hearing from European Left:

1. Tax increases (remember, we want to soak the rich even more, right?)
2. Revenue re-allocations to banks measures (remember, no one on Europe's official Left has come out with a proposition that banks should not be bailed out) and to social welfare (clearly, the Left would have liked to spend even more on this)
3. Germany

Note: we must recognise the simple fact that social welfare spending will rise in a recession for a good reason. The argument here is not that it should not (that's a different matter for different debate), but that when it does increase, the resulting increase is a form of Government consumption stimulus.

So let's make the following argument: Euro area did not experience 'austerity' in any pure form in the reductions in deficits. Instead, it experienced a 'stimulus' that was simply wasted on programmes and policies that had nothing to do with growth stimulus (e.g. banks supports). Here are two charts to illustrate:

What the charts above clearly show is that Euro area can be divided into three types of member states:

• Type 1: states where cumulated 5 year surpluses over pre-crisis period gave way to cumulated 5 year deficits. These are: Estonia, Finland, Spain and Ireland.
• Type 2: states where cumulated 5 year deficits over the pre-crisis period were replaced by more benign deficits over the crisis period period. These are Germany and Malta.
• Type 3: all other euro area states where cumulated 5 year deficits over pre-crisis period were replaced by even deeper cumulated deficits over the 5 years of the crisis.

The only two types of fiscal policy that Euro area is missing in its entirety is the type where pre-crisis deficits gave way to crisis period cumulated surpluses (no state in the sample delivers on this) and the type where pre-crisis surpluses gave way to shallower crisis-period surpluses (only one European state - Sweden - qualifies here).

Oh, and one last bit relating to the chart above: all of the peripheral countries, save Italy, had a massive increase in deficits on cumulated basis during the crisis compared to pre-crisis period. Apparently this is the savage austerity that has been haunting their economies.


Updated:
An interesting issue raised by one of the readers:

And my response:

8/5/2013: Thomas Sowell on Language, Evidence & Inquiry

Thomas Sowell doing what he does best: asking uncomfortable questions. http://townhall.com/columnists/thomassowell/2013/05/08/words-that-replace-thought-n1588497?utm_source=thdaily&utm_medium=email&utm_campaign=nl

This got me thinking: there are, as Sowell puts it 'words that replace thought', but there are even more detrimental to inquiry 'words that prevent thought'. In fact, his example of word 'diversity' is one. It is virtually impossible to challenge anything relating to the thesis that 'diversity is intrinsically good' without being shut down on the grounds that any argument to the contrary of the thesis is automatically an argument in favour of some exclusion (racism, anti-semitism, sexism, and so on...).  The only possible by-pass to this problem is to argue that 'diversity has no effect'.

But this falls into the trap discussed briefly here http://andrewgelman.com/2013/05/06/against-optimism-about-social-science/
under the file-drawer bias in publishing.

8/5/2013: Blackrock Institute Survey: N. America and W. Europe, May 2013

Just as I published April update from Blackrock Investment Institute Economic Cycle surveys, here comes May one for North America and Western Europe:

 Now, note change in Ireland's position compared to April:

May summary:

And conclusions (italics are mine):
"This month’s North America and Western Europe Economic Cycle Survey presented a large shift on the outlook for global growth over the next 12 months – although a net proportion of respondents remains positive, this is now a figure of 41%, compared with a net 71% last month. [In other words, things are turning gloomier for global growth outlook]

With regards to the US, the proportion of respondents expecting recession over the next 6 months remains low, with the consensus view firmly that North America as whole is in mid-cycle expansion. [In other words, current growth rates are not expected to rise much as would have been consistent with early-cycle expansion]

In Europe, the view continues to be more disparate, with a generally stronger northern Europe contrasted by continuing weakness in Eurozone as a whole. Belgium, France, Greece, Italy, the Netherlands, Portugal and Spain in particular are described in a recessionary state, with the consensus view remaining in this phase at the 6 month horizon in each case."

8/5/2013: Olli Rehn Departs Reality Once Again

If one needs an example of out-of-touch, reality-denying and self-satisfied EU Commissioner, travel no further than Olli Rehn. Here's the latest instalment from Court's Favourite Entertainer of Things Surreal:
http://europa.eu/rapid/press-release_SPEECH-13-394_en.htm

The speech focuses on what went wrong in Cyprus.

In the speech, Mr Rehn commits gross omissions and conjures gross over-exaggerations.

Nowhere in his speech does Mr Rehn acknowledge that Cypriot banks were made insolvent overnight by the EU (including EU Commission, where Mr Rehn is in charge of Economic and Monetary affairs) mishandling of PSI in Greek government bonds.

Nowhere in his speech does Mr Rehn acknowledge that Cypriot banks were massively over-invested in 'core tier 1 capital' in the form of zero risk-weighted sovereign bonds (Greek bonds) on the basis of direct EU and Basel regulations that treated this junk as risk-free assets. Mr Rehn states that "The banking problems were aggravated by poor practices of risk management. Lacking adequate oversight, the largest Cypriot banks built up excessive risk exposures." But Cypriot banks largest risk mispricing took place on their Greek Government bond holdings and this was (a) blessed by the EU regulators and (b) made more egregious in terms of risks involved by the EU madness of Greek PSI.

Mr Rehn claims that "The problems of Cyprus built up over many years. At their origin was an oversized banking sector that thrived on attracting foreign deposits with very favourable conditions." Nowhere is Mr Rehn making a statement that the size of Cypriot banking sector was never an issue with the EU, neither at the point of Cyprus admission into the euro, nor at the accession to the EU, nor in any prudential reviews of Cypriot financial system. Mr Rehn flat out fails to relate his statement on deposits to the fact that the EU is currently pushing banks to hold higher deposits / loans ratios, not lower, and that higher deposits / loans ratio is normally seen to be a sign of banking system stability. Mr Rehn is also plain wrong on his claims about the nature of deposits in Cyprus. Chart below shows that Cypriot banks' deposits more than doubled in Q1 2008-Q1 2010 on foot of the EU-created mess in Greece and the rest of the periphery.

Source: @Steve_Hanke

And here's proof that Cypriot banks were running a shop with deposits well in excess of loans, implying low degree of risk leveraging, until Mr Rehn and his colleagues waltzed in with their botched 'rescue' efforts:

Source: Washington Post.

Olli Rehn could not be bothered to read IMF assessment of Cypriot economy from November 2011 (Article IV report) - despite him citing EU Commission June 2011 'warnings' - where IMF clearly states that the core problems faced by Cypriot banking system stem from Greece (page 14) and local commercial banks' loans, not depositors or foreign depositors. On deposits, IMF states (page 17 paragraph 21) "non-resident deposits (NRD) in Cypriot banks (excluding deposits raised abroad by foreign affiliates) are €23 billion (125 percent of GDP), most of which are short-term at low interest rates." Thus, IMF directly, explicitly and incontrovertibly contradicts Mr Rehn's statement about foreign deposits having been extended on "very favourable conditions".

IMF further states that when it comes to deposits, significant risk is also poised by "€17 billion in deposits collected in the Greek branches of the three largest Cypriot-owned banks could be subject to

outflows in response to difficult conditions in Greece. Outflows in the first half of 2011were close to €3 billion (nearly 15 percent of the total), although a portion of these returned to the Cypriot parents as NRD." ECB chart below confirms this risk materialising in the wake of Mr Rehn's structured disaster in Greece:

This outflow knocked out billions out of deposits cushion that Cypriot banks needed to reduce their financing needs. And Mr Rhen - the architect in charge of this disaster - has nothing to say about it.

I can go on and on. Virtually every paragraph of Mr Rehn's statement is open to critical examination. 

That is hardly news - Mr Rehn has made so many gaffes and outright bizarre statements in the past (including his assertions at every pre-bailout junction that each peripheral country heading into bailout was fully solvent, fiscally sustainable, etc), he became not just a laughing stock of the markets, but a contrarian indicator for reality. What is of concern is that Mr Rehn is still being given the task of speaking for the Commission on Monetary and Fiscal affairs.

Olli Rehn should read something more cogent than his own speeches on what has happened in Cyprus (e.g. business.financialpost.com/2013/03/28/seeds-of-cyprus-disaster-planted-months-ago-by-eu/ and www.reuters.com/article/2013/04/02/us-eurozone-cyprus-laiki-insight-idUSBRE9310GQ20130402 or http://online.wsj.com/article/SB10001424127887323501004578386762342123182.html) and preferably do so free of charge to European taxpayers, on his own time, while up-skilling for his next job.

7/5/2013: Irish Services Index, Q1 2013 data

Irish Services Index is out today for Q1 2013 and here are some details (monthly data analysis to follow). Keep in mind, data only starts from Q1 2009, so when referencing current levels of activity to peak, that refers to peak from Q1 2009 and not relative to pre-crisis activity.

• Value in Wholesale & Retail Trade, Repair of Motor Vehicles & Motorcycles sector declined in Q1 2013 to 105.2 q/q (down 3.22% from 108.7 in Q4 2012) and is down 5.40% y/y. Q4 2012 value index was down 1.36% y/y, so things are getting worse faster. Relative to peak (since 2009 Q1 data start) the index is now down 5.40%. 
• Value index for Transportation and Storage sector slipped marginally from 110.5 in Q4 2012 to 110.0 in Q1 2013 (-0.45% q/q) and is up 5.97% y/y. However, rate of annual growth declined in Q1 2013 compared to Q4 2012 when it stood at 8.97%. Relative to peak the index is still down 9.39%.
• Accommodation and food services activities index also slipped marginally from 104.7 in Q4 2012 to 104.3 in Q1 2013 (down 0.38% q/q). Y/y index is up 3.48% in Q1 2013 and this is a slight gain on 3.05% y/y growth in Q4 2012. However, relative to peak index reading is still down 14.86%.

• Information and communication sector index remained practically flat in Q1 2013 in q/q terms at 116.6 which is only 0.09% up on 116.5 in Q4 2012. Y/y index is up 3.83% and this shows deceleration in growth from +8.47% growth posted in Q4 2012. Despite this, Q1 2013 marks the peak of activity in this sector for any quarter since Q1 2009.
• In contrast with ICT sector activity, the knowledge economy core services sub-sector, Professional, scientific and technical activities index has suffered steep declines since 2009. In Q1 2013 the index stood at 91.2 (up 0.22% q/q) up only 0.55% y/y. This marks a minor reversal of a significant decline of -8.36% recorded in 12 month through Q4 2012. The index is down massive 29.14% on peak.

• Administrative and support service activities index has been a surprising performer during the crisis. In Q4 2012 it stood at 104.7 and Q1 2013 this increased to 110.4 a gain of 5.44% q/q. Index is now up 20.92% y/y and this compounds 11.38% y/y growth recorded in Q4 2012. Q1 2013 marks the peak quarter on record for the sub-sector.
• Overall services index slipped from 107.2 in Q4 2012 to 106.2 in Q1 2013 (-0.93% q/q), although activity is still up 0.85% y/y. Y/y growth in Q1 2013 marks a slowdown from 2.19% y/y expansion in Q4 2012. The index overall is 0.93% below the peak and is currently running slightly behind the level of activity recorded in Q1 2009.

Overall, quarterly data shows weakening in Services sectors performance, and stripping out the effects of ICT (dominated by tax transfers-booking MNCs), Services side of the economy is showing weaknesses that are alarming. Recall that exports of services growth in 2010-2012 acted to compensate for declines in domestic demand and weaker growth (turning negative) in exports of goods. Should Services activity continue to suffer even modest declines, our GDP and GNP growth will be impaired. 

To see more forward-looking data, read my analysis of Services PMI for April: http://trueeconomics.blogspot.ie/2013/05/352013-irish-services-pmi-april-2013.html

7/5/2013: Blackrock Institute: April 2013 Global Economic Conditions - 2

More updates from the Blackrock Investment Institute Economic Cycle surveys for April 2013. Here are core charts for regions not covered in the previous post.

Note of caution: some of the countries coverage in responses is thin, so data should be treated as only indicative. And the surveys are based on opinion of external experts, not Blackrock internal views.



EMEA:
"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a generally bearish outlook for the region. However, there has been a marked improvement in the outlook for Eastern European countries at the 12 month horizon, compared to earlier reports this year.

The majority of respondents for the Czech Republic, Croatia, Egypt, Hungary, Poland, Slovakia, Slovenia, and the Ukraine describe these countries in a recessionary state; however only half of these -- Croatia, Slovakia, Slovenia and the Ukraine -- are expected to remain so by the majority of economists, at the 6 month horizon. 

At a longer horizon of 12 months, the outlook becomes more positive within Eastern Europe, with only the economies of Slovenia and Slovakia expected to continue to weaken."

Asia Pacific:

"...continuing bullish outlook for the region. Out of the 14 countries covered, only Singapore and Vietnam are currently described to be in a recessionary state. Over next 6 months the balance of consensus opinion shifts back to expansion for these countries, while in Australia the proportion of economists expecting recession increases to 50%. Australia stands out as the only country in the region where respondents expect the economy will weaken over the next year."

Latin America: 

"With a caveat on the depth of country-level responses, which differs widely, this month’s Latin America Economic Cycle Survey presented a generally bullish outlook for the region. Brazil, Mexico, Colombia, Peru and Chile are described to be in expansionary phases of the cycle and expected to remain so over the next 2 quarters, while Brazil is expected to mature from early-expansion to mid-cycle expansion and Chile is expected to move from mid-cycle expansion to late-cycle expansion. 

The exceptions to this theme within the region were Venezuela and Argentina. Both are described by the consensus of economists to be in a recessionary state, with growing proportion respondents expecting this to continue at the 6 month horizon." 

7/5/2013: Blackrock Institute: April 2013 Global Economic Conditions - 1

A number of updates from the Blackrock Investment Institute Economic Cycle surveys for April 2013. Here are core charts.

Note of caution: some of the countries coverage in responses is thin, so data should be treated as only indicative. And the surveys are based on opinion of external experts, not Blackrock internal views.

Global outlook: 

"...a positive outlook on global growth, with a net 71% of 127 economists expecting the global economy will get stronger over the next year, (2% higher from the March report), based on North America and Western Europe panel."

For the EMEA panel, "Respondents remain positive on the global growth cycle, with a net 57% of 64 respondents expecting a strengthening world economy over the next 12 months – however this is large downward shift from the net 74% figure last month."

Asia Pacific panel: "The global growth outlook remains positive, with a net of 71% of participants expecting a stronger global economy over the next 12 months; however this is a large step down from the net 84% figure in last month’s report."

Latin American panel: "The global growth outlook remains positive, with a net 47% of 49 participants expecting a stronger global economy over the next 12 months; however this is a large step down from the net 62% in last month’s report."

North America and Western Europe:

"With regards to the US, the proportion of respondents expecting recession over the next 6 months remains low, with the consensus view firmly that North America as whole is in mid-cycle expansion. 

In Europe, the view continues to be more disparate, with the UK and Eurozone as a whole described in a recessionary state. With caveat that the depth of country coverage varies significantly, the consensus view remains recessionary at the 6 month horizon for France, Greece, Italy, the Netherlands, Portugal, Spain and Belgium."

Note: Ireland results are based on very 'thin' data. 

More regions to follow in the next post.

6/5/2013: Self-contradictions & EU Commission

Trapped in their own failures, EU 'leaders' are no longer simply contradicting each other - they are now contradicting themselves. And, I must add, via ever more apparent and bizarre statements.
Behold the latest instalment of absurdity from one of the multiple EU 'Presidents': the man in charge of the EU economic policies and performance, European Commission chief Jose Manuel Barroso. As reported in the EUObserver (http://euobserver.com/economic/120040), Mr Barroso stated that "What is happening in France and Portugal is not Merkel's or Germany's fault … The crisis and their problems are not a result of German policy or the fault of the EU. It is the result of excessive spending, lack of competitiveness and irresponsible trading in the financial markets."
Thus,

1. Loose monetary policy by the ECB that was custom-tailored to suit German needs during 2002-2007 period had nothing to do with the crisis in the peripheral states, despite the fact that it triggered vast inflows of capital from Germany (and other core states) into the euro area periphery, inflating assets bubbles left, right and centre, and leading to unsustainable debt accumulation in these economies.
2. ECB (heavily influenced by German ethos and political economy) and EU Commission and regulatory bodies' insistence on treating all sovereign bonds issued by the euro area states as risk-free assets on banks balance sheets (the main trigger for Cypriot crisis and the reason for massive transfers of banking sector costs onto taxpayers in Ireland and other member states) had nothing to do with Berlin or with Berlin's insistence on closing its eyes on what was happening in regulation / enforcement EU-wide.
3. Berlin's inability to reign in German (among other) banks' gross misplacing of risks in interbank lending to other euro area banks had nothing to do with the crisis.
4. Berlin's insistence, repeated parrot-like by Mr Barroso and his colleagues in the Commission, that the whole crisis can be addressed via fiscal adjustments (recall, that was the position the EU Commission occupied for the last 6 years) and current account rebalancing has nothing to do with mis-shaped economic policy responses across the EU since 2008 crisis onset.
5. Berlin's 'guidance' toward internecine and economically illiterate Fiscal Compact, eagerly endorsed by Mr Barroso and his colleagues in recent past, has nothing to do with the failure of Europe to respond to the crisis.
6. Berlin's opposition to the half-baked EU ideas about stimulating growth in euro periphery that shut the door on any real stimulus has nothing to do with the crisis.
7. Berlin's opposition to increasing domestic demand and abandoning contractionary pursuit of current account surpluses, also noted by Mr Barroso's Commission in the past, had nothing to do with the crisis duration or depth.

Mr Barroso also claimed that Chancellor Merkel is "one of the only [leaders], if not the only leader at the European level who best understands what is going on."

Really? Suppose so. In this case, Mr Barroso has either no clue what is going on, or simply doesn't care to be consistent with his own exhortations of the recent past, because he openly and directly contradicted Ms Merkel couple of weeks ago by claiming that 'austerity was overdone' and had "reached its limits."

Irony has reached so far in Mr. Barroso's waltzing across the ideological & economic policy landscape that according to the EU's 'President', Ms Merkel's brilliance also encompasses the fact she is presiding over German economy currently sliding toward a recession. IMF analysis shows real GDP growth in Germany will fall from 4.024% and 3.096% in 2010 and 2011 to 0.865% and 0.613% in 2012 and 2013. This might be better-than-average record for the euro area, but it is hardly an achievement worth praising.

Someone should point to Mr Barroso that eating one's cake (taking a populist position against austerity, and thus Ms Merkel) and having it (taking an appeasing position toward the major architect of all economic policy blunders so far deployed in Europe since the onset of the crisis) is just something that doesn't happen outside the make-belief world of Brussels.

5/5/2013: Things are going according to plan... in Italy & Germany

That euro area 'policy' for dealing with the crisis is working marvelously, yeah?

Source: Euromoney Country Risk
Note: lower ECR score = higher sovereign credit risk

Yes, Italy's bonds are trading at much lower yields, and the country is issuing new debt at lower costs... but how much of that has to do with something / anything that Italian Government has done, as opposed to the overall shifts in markets sentiment / liquidity flows, who knows? One thing is for sure, absent yields changes, Italian fundamentals are getting worse, not better. Ditto, between, for all other 'peripherals'.

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.