23/8/2014: WLASze: Weekend Links on Arts, Sciences & zero economics

This is WLASze: Weekend Links on Arts, Sciences and zero economics.

First to start with - a major scientific breakthrough in physics coming from Yale. As the official website claims, "It’s official. Yale physicists have chilled the world’s coolest molecules. The tiny titans in question are bits of strontium monofluoride, dropped to 2.5 thousandths of a degree above absolute zero through a laser cooling and isolating process called magneto-optical trapping (MOT). They are the coldest molecules ever achieved through direct cooling, and they represent a physics milestone likely to prompt new research in areas ranging from quantum chemistry to tests of the most basic theories in particle physics."

Link: http://news.yale.edu/2014/08/20/yale-s-cool-molecules-are-hot-item

MOT jargon - for those inclined - here: http://www.nature.com/nature/journal/v512/n7514/full/nature13634.html

Meanwhile, in Australia, same cooling method is reportedly being used to improve performance of super-high resolution microscopes: http://www.wallstreetotc.com/laser-microscopes-20-times-more-sensitive-and-advanced-scientists/27412/

All in one week of cooling… and it is still summer...


Super cooling in physics, is not as cool as super structures in architecture, especially nostalgically grandiose (even when small enough to be just a summer camp for kids) architecture of the USSR. Here's a site that compiled some of the lesser-known examples: http://geliopolis.su/data.shtml

My favourite: the said camp, built in Vladivostok in 1975… it's human and ambitious and unorthodox at the same time…

And while on the same site, check out their 'Timeline' page http://geliopolis.su/time.shtml it is simply brilliant.


While architectural relics of ideologically-anchored aesthetics might be heftily cool, and super cool particles might be air-like brilliant, sometimes merging science, tech and creativity produces flashes of brilliant horror. And more often than not these can be found on wordlessTech website where editors have a never ending penchant for grotesque, macabre and outlandish without a moderating dose of taste.

Here is an example: http://wordlesstech.com/2014/08/12/faraday-cage-dress/

She looks cool, she looks super-techy-geeky-beautiful in that sense that just might get the entire Dublin WebSummit stop scratching and tapping their iPads for a minute… but don't try wearing this outfit on your local bus, or to a date… unless you want to fry an entire neighbourhood.

There is no point of asking why on earth would anyone want to make a 1 million volt outfit statement. It is neither abstract nor conceptual enough to be art and it is certainly not forward-thinking enough to be haute couture. It is, in fact, like merging a DNA of a dinosaur with GM corn - it won't roar and it won't taste good either... not cool enough and over-laboured…

23/8/2014: Real Cost of Capital: Euro 'Periphery' Dilemma

Staying on the topic of debt (see earlier post: http://trueeconomics.blogspot.ie/2014/08/2382014-that-pesky-problem-of-real-debt.html) here is IMF research on real cost of corporate capital (linked to the cost of debt) in the Euro area 'periphery' (this is from an IMF July 2014 publication that accompanied its Article 4 paper on Euro Area).

I highlighted with the red the range of recent capital costs range in each country to trace out historical comparatives.

Starting with the Euro area as a whole:

Two points:

• Current real cost of capital across the euro area is relatively benign, compared to both 1990s - early 2000s period and shows low volatility in recent (crisis) years post 2009 peak
• 2009 peak is pronounced but moderate compared to the one found in some 'peripheral' countries.

In basic terms, this means that euro area's capital costs are benign - above the 2004-2007 trough, but historically well below those observed in the 1990s.

Spain:

 Two points:

• Current capital cost levels are consistent with crisis peak 
• Capital today is as expensive in real terms as in the pre-euro era.

Which means that Spanish real cost of capital is now as bad as in the pre-euro period and is much worse than during the credit boom of the late 1990s-early 2000s.

Italy:

 Two points:

• Just as in Spain, real capital costs in Italy are comparable with peak of the crisis and 
• Capital costs today are more expensive than in the 2000s, but less expensive than in pre-euro era.

Italy's overall real cost of capital is currently comparable to the one observed in the late 1990s, and is higher than the one experienced in the credit expansion period of the early 2000s. That said, the cost uplift on 2000s is relatively moderate.

Portugal:

Two points:

• Capital costs today is below the peak levels of the crisis in real terms, but is severely elevated relative to 2000s and on-par with pre-euro era costs;
• Capital cost volatility is high and it was high during the entire euro era.

Thus, Portugal's real cost of capital is highly volatile, but on average is higher today than in the entire period from 1997 through 2010.

Ireland:

Ireland is clearly 'unique' compared to both the Euro area and the rest of the 'periphery' when it comes to the real cost of capital.

• The crisis peak in real cost of capital is massively out of line with historical trends.
• Ignoring the crisis peak, current real cost of capital is running well above the pre-crisis historical levels;
• Since the introduction of the euro, real cost of capital in Ireland trended above the pre-euro period levels

In summary, real cost of capital across the euro area 'periphery' shows one simple thing: investment is still a very costly proposition for businesses, especially compared to the pre-crisis period. Worse, it is now as expensive than (or comparable to) the cost averages for the pre-euro area period.

The above puts stark contrast between the cost of funding the banks (low) and Governments (historically low today) and real businesses (high).

23/8/2014: That Pesky Problem of Real Debt...

Again, revisiting IMF's Article 4 consultation paper for Euro Area, published in July 2014, here is a summary of the Euro area 'peripheral' countries debt overhang.

First real economic debt (debt of non-financial companies, households and public sector):

 Points of note:

1. Ireland's debt overhang is severe. More severe than of any other 'peripheral' country. Bet you forgot that little bit with all the 'best-in-class' growth performance droning in the media. Ah, and worse, remember, not the level alone, but the rate of debt increases over time, also matters. And by this metric, we too are the worst in the group, both for debt increases on 2003 levels and debt increases on 2008 levels.
2. Ireland's households' debt has declined over 2008-2013, more so than in Portugal and Spain. But it remains second highest after the Netherlands' and this decline masks true extent of debt problem because 2013 figure no longer counts household debts issued by banks that left Ireland and books of loans sold to investment funds. This also excludes some securitised debt.
3. Ireland's corporate debt problem is potentially overstating true extent of real debt in the economy, as it includes a small share of MNCs debt - debt issued by Irish institutions. This is likely to be relatively minor, in my view, as MNCs largely do not do debt intermediation via Irish domestic institutions. 

Now on to our household debt deleveraging in more detail:

Good news is, when it comes to our households, we are aggressively deleveraging compared to pre-crisis debt peak. As aggressively (in rate terms) as the U.S. Caveats mentioned above apply.

But there is a problem with all the debt legacy:

In the above 'PS' stands for private sector, not public sector. So private sector debt legacy is associated with negative subsequent economic growth, in general. But as above shows, for the peripheral countries, including the basket case outside Troika capture, Slovenia, and the rarely mentioned case of Finland (see chart below) it is also compounding structurally weak fundamentals other than debt alone.

So a timely reminder: that debt problem - it has not gone away. Not by any measure and most certainly not for Ireland.

Note: to see the problem in Finland consider the following chart:

23/8/2014: Labour Costs and Euro area's myth of 'productivity' gains

Looking back at July 2014 IMF Article 4 paper on Euro area (most of which I covered back when it was published), here is an interesting chart mapping changes in the euro area countries' unit labour costs.

The chart is complex, so let me point out few things in it:

Firstly: improvements in the unit labour costs (ULCs) is reflected in the vertical distance between the black dot (accumulated change in ULCs over 2000-2007 period: higher level of the dot reflects lower competitiveness or higher ULCs compared to EA17 levels) and the black bar (accumulated change in ULCs over 2008-Q3 2013 period).

1. This shows that Ireland has delivered (a) the highest ULCs deterioration of the sample of countries reported over 2000-2007 period, and (b) since 2008, Ireland has delivered the largest improvement in competitiveness (ULCs drop) of the sample. 
2. Second largest improvement in ULCs was recorded in Greece and it is comparable to, but modestly shallower than in Ireland; third and virtually indistinguishable from the second - in Spain and fourth in Portugal.
3. The above two facts suggest that improvements in the ULCs are indeed related to the rates of increases in  unemployment: all countries with significant improvements have seen dramatic rises in unemployment. Jobs destruction 'helps' competitiveness.

Secondly, coloured bars show composition of gains over two periods. Here, the following points arise:

1. Labour costs declines have been responsible for the lion's share of ULCs gains in Greece, followed by Ireland, Italy, Portugal and Spain.
2. Labour costs declines are dramatic in the case of only two countries: Greece and Ireland.
3. The above two facts suggests that jobs destruction impacted dramatically in the sectors that were employment/labour-intensive, allowing for substantial moderation of labour costs across the remaining economy on average. So 'concentrated' jobs destruction 'helps' improve competitiveness a lot.
4. Meanwhile, productivity gains in economy were significant contributors to improved competitiveness in Spain, followed - by some margin of difference - by Ireland, and Portugal.
5. Points 1-2 and 4 together strongly suggest that in Ireland and Spain (and to a lesser extent Portugal) gains in competitiveness came about not because the remaining working population suddenly became more productive, but because the new jobless were working in sectors that were less productive, plus because remaining workers got paid less on average.

One more point: of course, our (and other euro area 'peripherals') gains here are measured not in absolute terms, but against EA17 aggregate levels of competitiveness, so to a large extent, our gains in the chart above are also down to their (other euro area countries') losses in competitiveness. This is exactly what the above figure shows for Austria, Germany, Belgium and the Netherlands.

That's happy times of productivity growth in the euro area 'periphery', then... down to throwing people off the employment bus and bragging about fabled improved productivity for the remaining passengers...

23/8/2014: Two charts: US Oil

Two charts for trend spotting:

First one shows US production of oil from 1983 through today:

This shows the reversal of the 45% decline in oil output suffered from 1984-1986 through 2008 in just a few years (2009-present).

The second one maps development of oil pipelines network in the US to match this expansion of production and re-orient infrastructure toward exports:

That's shale & sands impact in just two charts...

23/8/2014: BlackRock Institute Survey: EMEA, August 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe (covered here: http://trueeconomics.blogspot.ie/2014/08/2382014-blackrock-institute-survey-n.html). Here are the survey results for EMEA:

"…this month’s EMEA Economic Cycle Survey presented a mixed outlook for the region. The consensus of respondents describe Croatia and the Ukraine in a recessionary state, with an even split of economists gauging Russia, Hungary and Turkey to be in a recessionary or contraction phase."

6 months out: "Over the next two quarters, the consensus shifts toward expansion for Russia and Hungary and an even split between expansion or recession for Turkey."

12 month out: "At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia, Hungary, Turkey and the Ukraine."

Global: "Globally, respondents remain positive on the global growth cycle with a net 59% of 32 respondents expecting a strengthening world economy over the next 12 months – an 26% decrease from the net 85% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Two charts to illustrate:

Note: Red dot represents Czech Republic, Kazakhstan, Romania, Israel, Egypt, Poland, Slovenia and Slovakia.

Previous month results are here: http://trueeconomics.blogspot.ie/2014/07/1172014-blackrock-institute-survey-emea.html

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

23/8/2014: BlackRock Institute Survey: N. America & W. Europe, August 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe. Here are the main points (emphasis mine):

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 59% of 74 economists expecting the world economy will get stronger over the next year, compared to net 81% figure in last month’s report."

Global outlook: "The consensus of economists project mid-cycle expansion over the next 6 months for the global economy. At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or stay the same."

Regional outlook for Euro area: "Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents described Greece, Italy and France to be in a recessionary state, with the even split between contraction or recession for Portugal and Finland. Over the next 6 months, the consensus shifts toward expansion for Finland, France and Italy and an even split between contraction or recession for Greece and Portugal.

US and North America: "Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Two charts to illustrate:

Note: Red dot denotes Austria, Belgium, Canada, Denmark, Norway, Spain, Sweden and Switzerland.

Previous month results are here: http://trueeconomics.blogspot.ie/2014/07/1672014-blackrock-institute-survey-n.html

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

22/8/2014: Minimum Wage and Employment: Recent Study

The effects of minimum wage laws on employment levels and employment prospects for various categories of workers are subject of voluminous literature in economics. Still, little consensus exists on whether higher minimum wages impede new jobs creation or destroy existent jobs or suppress earnings growth for lower wage employees.

A recent paper by Meer, Jonathan and West, Jeremy, titled "Effects of the Minimum Wage on Employment Dynamics" (June 26, 2012, http://ssrn.com/abstract=2094726) offers estimates "how the minimum wage affects both employment levels and dynamics... To do so, we employ the Business Dynamics Statistics, a long (1977-2009) panel of administrative data on the aggregate population of non-agriculture private-sector employers in the United States, broken out based on establishment location. These data offer the ability to examine gross job creation and destruction separately, an important advantage."

The authors first discuss "why even a carefully-designed study may not find a statistically significant effect of the minimum wage on employment levels":

1) "…Newly hired employees within a company are more likely to be paid minimum wage than are more senior employees. …It follows that minimum wage employees are likely to be relatively recent hires. …A direct implication is that minimum wage increases are most likely to affect workers who are (or would be) recent hires."

2)"…any reduction in new employment should also be reflected in total employment, so theoretically the decision of which of these outcomes to analyze is arbitrary. However, for estimates using a finite panel of real-world data, the distinction becomes much more important because the impact of an unrelated shock to total employment may easily overwhelm an effect of the minimum wage. Furthermore, …relatively rapid transitions to higher wages are common for minimum wage workers; we… calculate that nearly two-thirds of minimum wage workers who remain employed after one year earn more than the minimum wage. This illustrates the policy importance of focusing on the job creation margin; if higher minimum wages reduce employment entry by these workers, they never have the opportunity to develop the skills or tenure to earn even higher wages."

3) "…inflation can inhibit identification of statistically significant employment effects,
especially in studies relying on data from the 1970s-1980s, which experienced relatively
high rates of inflation. Historically, minimum wages have been set in nominal dollars and not adjusted for inflation, so any nominal wage differential between two states will become economically less meaningful over time."

4) "…sooner or later every state experiences a nominal increase in its minimum wage, either due to a revision to a state law or because the federal minimum wage increases. Unlike the slow erosion of nominal minimum wage gaps brought about by inflation, a discrete increase to the counterfactual's minimum wage may quickly close or even reverse this gap. To put this another way: in the long run, there is no permanent control group. This situation would not be problematic if the minimum wage affected employment in an abrupt, discrete manner. But if the minimum wage primarily affects new employment, then it may take years to observe a statistically significant effect on total employment."

So the authors conclude that "considered together, we believe that examining employee hiring and job growth directly provides for a more accurate assessment of minimum wage effects than examining total
employment. There are also theoretical arguments for why minimum wages are more likely to impact employment dynamics than employment levels."

The authors find that "…the minimum wage significantly reduces rates of job growth, that this occurs primarily through reductions in job creation, and that this effect is somewhat more pronounced in continuing establishments than for establishment births. We also find that the reduction in job creation cannot be attributed to reductions in employee turnover, as well as no effects on the entry and exit of establishments."

21/8/2014: Capital v Labour Taxes: Time to Scratch that Cabbage Head, Mr. Politico

Ireland, like majority of other small open economies, runs a tax regime that is punitive to highly skilled workers and benign to capital owners. This, as I explain in part here (http://trueeconomics.blogspot.ie/2014/08/2182014-thomas-piketty-powerful.html), spells bad news for wealth distribution. It is simply a tax transfer from one form of capital (human capital) to other forms of capital (financial, IP and physical capital). Still, majority of small economies around the world continue to argue in favour of skinning alive their human capital and subsidising (in either relative or absolute terms) other forms of capital, based on a simple argument: in modern world, financial, IP and technological forms of capital are highly mobile (tax them and they will run for the border, goes the argument), even physical capital is mobile over the long run (tax it and investment will flow somewhere else), while labour is tied to its chair by the chains of visas, work permits etc (tax workers and they have nowhere to go).

Of course, in the real world, labour is mobile and highly skilled labour is highly mobile. That is something our outdated, outsmarted and out-of-touch political classes do not comprehend. But some academics do. Here's an example: Aghion, Philippe and Akcigit, Ufuk and Fernández-Villaverde, Jesús, paper, titled "Optimal Capital Versus Labor Taxation with Innovation-Led Growth" (May 31, 2013. PIER Working Paper No. 13-025. http://ssrn.com/abstract=2272651) shows that in presence of mobile labour force, capital subsidies are suboptimal from the revenue point off view. And worse, the more innovation-driven is your growth (the more reliant it is on human capital and the more mobile that human capital is), the lower is efficiency of capital supports.

"Chamley (1986) and Judd (1985) showed that, in a standard neoclassical growth model with capital accumulation and infinitely lived agents, either taxing or subsidizing capital cannot be optimal in the steady state. In this paper, we introduce innovation-led growth into the Chamley-Judd framework, using a Schumpeterian growth model where productivity-enhancing innovations result from pro.t-motivated R&D investment."

Enough of mumbo-jumbo. "Our main result is that, for a given required trend of public expenditure, a zero tax/subsidy on capital becomes suboptimal. In particular, the higher the level of public expenditure and the income elasticity of labor supply, the less should capital income be subsidized and the more it should be taxed. Not taxing capital implies that labor must be taxed at a higher rate. This in turn has a detrimental effect on labor supply and therefore on the market size for innovation. At the same time, for a given labor supply, taxing capital also reduces innovation incentives, so that for low levels of public expenditure and/or labor supply elasticity it becomes optimal to subsidize capital income."

Of course, labour supply is even more income elastic when it is related to high quality human capital (that can be marketed internationally), and worse, when it is related to innovation (the one that is sought after by dozens of advanced economies bidding over each other to attract the right talent in).

Now, give it a thought:
* Irish tax system literally destroys returns to human capital through punitive levels of taxation of returns on high skills;
* Irish labour markets are open to migration (including emigration of highly skilled);
* Irish economy competes for high skills with scores of other similar economies; and
* Irish state is subsidising in relative terms returns to physical and financial capital, while our tax codes also subsidise IP returns.

Time to scratch that cabbage head, Mr. Politico?

21/8/2014: G20: Does it matter?

To many analysts and observers, in recent years, G20 has emerged as a broader and more inclusive alternative to the restricted club of advanced super-economies of G7 or G8 (see my earlier note on G8 here: http://trueeconomics.blogspot.ie/2014/03/2332014-about-that-kicking-russia-out.html).

A new ECB paper by  Lo Duca, Marco and Stracca, Livio, titled "The Effect of G20 Summits on Global Financial Markets" (February 18, 2014, ECB Working Paper No. 1668: http://ssrn.com/abstract=2397893) acknowledges that "In the wake of the global financial crisis, the G20 has become the most important forum of global governance and cooperation, largely replacing the once powerful G7."

All good so far but the question is: does G20 matter to the financial markets? Do summits and new announcements coming from G20 move the markets? "In this paper we run an event study to test whether G20 meetings at ministerial and Leaders level have had an impact on global financial markets. We focus on the period from 2007 to 2013, looking at equity returns, bond yields and measures of market risk such as implied volatility, skewness and kurtosis. Our main finding is that G20 summits have not had a strong, consistent and durable effect on any of the markets that we consider, suggesting that the information and decision content of G20 summits is of limited relevance for market participants."

Of course, the sample covers primarily the period of the Global Financial Crisis and the Great Recession, so one might think that G20 announcements might be swamped by other, more market-linked news. The problem with this is that during the crises, information - any information - acquires more significant value: http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html (see box-out). So, no, the sample period is not at fault... 

21/8/2014: Consumption of Technology: Revolutions to Evolutions

Neat, although out of date by now, chart showing long-run evolution of consumer utilisation of technology:

Click on image to enlarge...

21/8/2014: Euro Area Construction Sector Activity: H1 2014

Euro area production in construction sector series are out for Q2 2014 (excluding a number of countries) and here is the latest data (you can see press release here: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-20082014-AP/EN/4-20082014-AP-EN.PDF)

First, EU28, EA18 compared to UK (non-euro) and Switzerland (non-EU):

Takeaways from the above:

• The latest euro area index performance (+3.47% y/y) is weak (this is seasonally-adjusted data) and q/q the index has fallen 0.56%. EU28 data is even worse: y/y up 2.90% and q/q it is down 0.57%.

Next: Euro area Big 4:

Again, key takeaways

• Germany: y/y activity is down 0.33% and q/q it is down massive 5.75%
• Spanish construction activity posted large 26.01% y/y rise and a q/q increase of 7.04%.
• French construction activity shrunk 0.78% y/y and was down 0.69% q/q
• Italy is yet to report Q2 2014 data, but in Q1 2014, country construction activity was down 5.51% y/y and down 2.56% q/q.

Euro 'periphery' remains the weak point of the sector activity in level terms, but improving and outperforming EA18 in growth terms:

Key takeaways:

• Having noted Spanish and Italian construction sectors performance above, Ireland's Q1 2014 activity was up 7.68% y/y and up 2.10% q/q
• Greece is a mixed bag: Q1 2014 activity was up 2.66% y/y but down 6.56% q/q
• Q2 2014 data for Portugal posted an 10.0% decrease in activity y/y and a rise of 0.77% in q/q terms.

Now, to summarise the problem, here is the rate of decline in Q1-Q2 2014 compared to pre-crisis peak:

Key takeaways:

• All 'peripheral' euro area economies remain deeply below water in terms of their construction sector activity in H1 2014.
• No euro area  advanced economy has regained pre-crisis levels of activity. 

The above hold even if we replace pre-crisis peak with 2000-2004 quarterly average: